message to shareholders
President's Message to Shareholders from 2009 Annual Report
Our industry continued to encounter significant challenges during 2009 that were particularly felt by our Bank. Although our disciplined approach to lending and investing kept us clear of asset backed securities or large loan losses, the market value of our holdings of other large Canadian financial institutions' preferred shares dropped significantly, reducing our regulatory capital. In addition, the rapid decline in interest rates hurt our spread income. To guard against the possibility of adverse affects of the liquidity crisis, in 2008 we issued a large number of medium term GICs. These GICs were issued when the prevailing interest rates were much higher than they eventually fell to during 2009. While this strategy ensured that our Bank would have a significant cushion of liquidity, it delayed the recovery of our lending margins. Although interest income continued to grow throughout the year to a record level of $81.7 million, representing a yield of 5.59%, increases in interest expenses more than offset the increase in interest income, resulting in our net interest income falling from $11.4 million earned the previous year to $7.6 million. During the fourth quarter of 2009, a majority of these higher priced GICs rolled over and were reset at much lower interest rates, resulting in a net savings to our Bank of approximately $2 million per month. Net interest income for the fourth quarter increased to $4.8 million representing approximately 63% of 2009's entire year's net interest income. The significant reduction in interest expense, of course, bodes well for our profitability in the months to come. Although, the unstable market conditions demand enhanced vigilance with respect to credit decisions, there is considerably less competition in our target markets and much better profit margins than in the past.
Our industry remains in uncertain times and we, like many other financial institutions, have made it a priority to strengthen our Bank's regulatory capital. We made significant progress in this area. During 2009 our Bank's regulatory capital increased by almost 30% from $101 million to $129 million. Our tier 1 and total capital ratios also increased accordingly from 8.9% and 11.1% to 9.38% and 13.84%.
Although 2010 will no doubt present new challenges, we believe that Pacific & Western, as a nimble well capitalized and innovative financial institution, is ideally positioned to deal with the challenges it will face and take advantage of the opportunities that will be presented.