Canadian Western Bank
TSX : CWB

Canadian Western Bank

June 02, 2016 07:00 ET

CWB Reports Second Quarter Financial Performance

Pre-Tax, Pre-Provision Earnings Up 8% Compared to Last Year

Results Reflect Previously Announced Provisions for Credit Losses on Oil and Gas Production Loans

EDMONTON, ALBERTA--(Marketwired - June 2, 2016) - Canadian Western Bank (TSX:CWB) -

"CWB's overall second quarter core operating performance was strong. We delivered 14% year-over-year loan growth, 8% growth in pre-tax, pre-provision earnings, and a stable ratio of costs to revenues," said Chris Fowler, President and CEO. "Our results reflect previously announced provisions for credit losses on oil and gas production loans. The impact of very low oil and gas prices on producer cash flows early in the calendar year, as well as subsequent borrowing base redeterminations, led to an increase in credit stress within this portfolio compared to prior quarters. We are maintaining a realistic outlook as we work with our clients through the difficult operating environment in Alberta."

"We expect the combination of our two recent acquisitions, CWB Maxium Financial and CWB Franchise Finance to be slightly accretive to adjusted net income this year, with accelerating contributions thereafter," Mr. Fowler continued. "Both businesses support CWB's established commercial banking strategy and offer specialized financing originations with attractive returns. They also bring experienced, motivated and highly respected management, and teams with demonstrated histories of delivering strong financial performance and solid credit quality. And with 80% of both portfolios based in Ontario, we look forward to these businesses accelerating the expansion of CWB's geographic footprint in Central and Eastern Canada. These are strategic acquisitions that position us to reach more clients with an expanded service offering across the country. We are well positioned to support this expansion with the recent launch of our new core banking system, which is itself a significant step in the continued execution of our relationship-focused strategic direction."

"Adding to what has already been a difficult year for Alberta, the wildfires in Fort McMurray and surrounding areas have caused extraordinary destruction and hardship for the people of that community. The impact can be felt across the province. Our top priorities are to take care of members of our CWB team who have friends and family affected by the fire, and to ensure our clients have the assistance they need. We are also committed to support immediate relief efforts, and have made a $25,000 donation to the Canadian Red Cross. CWB's business presence within Fort McMurray is limited. Notwithstanding the short-term economic impact of reduced output from the oil sands, we are confident the community and related activity will be fully restored in time."

Second Quarter 2016 Highlights(1), (2) for Continuing Operations (compared to the same period in the prior year)

  • Pre-tax, pre-provision earnings of $84.5 million, up 8%.
  • Very strong loan growth of 14% and strong branch-raised deposit growth of 9%.
  • Provision for credit losses as a percentage of average loans of 78 basis points, including $32.5 million of previously announced provisions on oil and gas production loans; gross impaired loans represented 0.68% of total loans, compared to 0.50% last year. Both credit quality metrics reflect the current impact of persistent low oil prices on CWB's oil and gas production clients.
  • Common shareholders' net income of $32.2 million, down 37%.
  • Adjusted cash earnings per common share of $0.41, down 37%.
  • Stable credit quality outside of the oil and gas production loan portfolio.
  • Net interest margin (teb) of 2.47%, down 10 basis points from last year and relatively stable compared to the prior quarter.
  • Strong Basel III regulatory capital ratios under the Standardized approach for calculating risk-weighted assets of 8.2% common equity Tier 1 (CET1), 10.1% Tier 1 and 12.2% total capital.
  • Tier 1 and Total capital strengthened through issuance of $140 million of Series 7 preferred shares.
  • Completed the acquisition of Maxium Group and announced the acquisition of the Canadian franchise finance platform of GE Capital; both support CWB's strategic objective to achieve further geographic and business diversification within targeted segments of the commercial banking industry.
  • Significantly enhanced CWB's capacity to broaden and deepen client relationships with the successful launch of our new core banking system subsequent to quarter end.
(1) Highlights include certain non-IFRS measures - refer to definitions page 22.
(2) As a result of the sales of Canadian Direct Insurance (CDI) and the stock transfer business of Valiant Trust Company (Valiant) on May 1, 2015, CWB has defined the contributions of these businesses as "Discontinued Operations", the remaining operations as "Continuing Operations", and the total Continuing Operations and Discontinued Operations as "Combined Operations".

Canadian Western Bank (CWB) today announced second quarter financial performance which included strong growth in pre-tax, pre-provision (PTPP) earnings and the significant negative impact of persistent low oil prices on the credit performance of oil and gas production loans. Common shareholders' net income from Continuing Operations of $32.2 million was down 37% compared to the same quarter in 2015, primarily due to total pre-tax provisions for credit losses of $39.7 million, up from $7.4 million last year. Diluted earnings per common share of $0.40 and adjusted cash earnings per common share of $0.41 were down 38% and 37%, respectively. PTPP earnings were up 8% to $84.5 million mainly due to the combined positive impact of very strong 14% year-over-year loan growth and 7% higher non-interest income. This was partially offset by a 10 basis point decrease in net interest margin and 10% increase in non-interest expenses.

Compared to the prior quarter, common shareholders' net income from Continuing Operations, diluted earnings per common share and adjusted cash earnings per common share were each down 38% primarily due to the impact of higher provisions for credit losses. PTPP earnings were 4% higher, reflecting the combined benefits of very strong 4% loan growth, a 32% increase in non-interest income and relatively stable net interest margin, partially offset by higher non-interest expenses.

The total year-to-date pre-tax provision for credit losses increased to $48.6 million from $14.4 million last year, contributing to 19% lower common shareholders' net income from Continuing Operations. Diluted and adjusted cash earnings per common share declined 19% and 18%, respectively. Year-to-date PTPP earnings of $165.9 million increased 6% as the positive impact of very strong 9% loan growth was partially offset by an 11 basis point decrease in net interest margin, an 8% increase in non-interest expenses and 6% lower non-interest income.

Medium-term Performance Target Ranges for Continuing Operations

Performance target ranges reflect the objectives embedded within CWB's strategic direction and a time horizon consistent with the longer-term interests of CWB shareholders. Target ranges for key financial metrics over a three- to five-year time horizon are presented in the following table:

Medium-term
Performance
Target Ranges

Current Context
Adjusted cash earnings per common share growth(1) (2) 7 - 12% Earnings growth and profitability for 2016 reflect the credit performance of CWB's oil and gas production loans and lower net interest margin.
Adjusted return on common shareholders' equity(3) 12 - 15%
Operating leverage(4) Positive Current operating leverage is positive adjusted for the impact of CWB Maxium.
Common equity Tier 1 capital ratio under the Standardized approach(5) Strong Q2 2016 ratio of 8.2% is strong.
Common share dividend payout ratio(6) ~30% Q2 2016 ratio of 39% includes the impact of credit performance of oil and gas production loans.
(1) Performance for adjusted cash earnings per common share is the current year results over the same period in the prior year.
(2) Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the acquisition-related after-tax amortization of intangible assets and the non-tax deductible change in fair value of contingent consideration, which represent non-cash charges that are not considered to be indicative of ongoing business performance.
(3) Adjusted return on common shareholders' equity is calculated as annualized common shareholders' net income excluding the acquisition-related after-tax amortization of intangible assets and the non-tax deductible change in fair value of contingent consideration, divided by average common shareholders' equity.
(4) Operating leverage is calculated as total revenue (teb) growth over the past twelve months, excluding the non-tax deductible change in fair value of acquisition-related contingent consideration, less non-interest expense growth over the past twelve months, excluding the pre-tax amortization of acquisition-related intangible assets.
(5) Common equity Tier 1 capital ratio is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) using the Standardized approach for credit risk.
(6) Common share dividend payout ratio is calculated as common share dividends declared during the past twelve months divided by common shareholders' net income from Continuing Operations earned over the same period.

Our medium-term performance target ranges are based on expectations for moderate economic growth in Canada over the three- to five-year forecast horizon. We are confident in our ability to achieve overall medium-term financial performance within these target ranges. We are committed to continue to deliver further business and geographic diversification; strong and profitable loan growth; a lower overall cost of funds through optimization of our funding mix; stable credit quality over a full economic cycle; effective expense management in consideration of revenue growth opportunities; and, prudent capital management.

Continuing Operations

Compared to the prior quarter, our outlook for 2016 now reflects expectations for significantly higher provisions for credit losses. As we disclosed on May 3, we now expect the annual provision to fall between 35 and 45 basis points as a percentage of average loans. This compares to our prior expectations for the provision to be at the high end of a range between 18 and 23 basis points. Within our oil and gas portfolio, the impact of very low commodity prices on producer cash flows early in the calendar year led to an increase in credit stress compared to prior quarters. The unusual level of provisioning this quarter directly reflects this development. Our expectations for near-term earnings growth are modest in view of this change to our credit outlook, the likelihood of further pressure on net interest margin, incremental increases in our expense base primarily related to implementation of our new core banking system, and further economic uncertainty within Alberta from the Fort McMurray wildfires.

One of our primary strategic objectives is to achieve further geographic and business diversification within targeted segments of the commercial banking industry in Canada. We completed an important step in support of this strategy with the Maxium Group (CWB Maxium) acquisition on March 1, 2016. Securitized assets originated by CWB Maxium prior to March 1, 2016 were not included in the transaction. This purchase structure will result in significant revenue contributions building over time.

Our acquisition of GE Capital's Canadian franchise finance platform is expected to close in the third quarter and represents another step in our commercial banking growth and geographic diversification strategy. This business, to be known as CWB Franchise Finance, provides financing across Canada to a diverse group of established companies in the franchised hospitality and restaurant industries, and the acquisition will include key employees required to complement our continued strategic commercial banking growth and geographic expansion. The balance of loans to be acquired is approximately $350 million. No goodwill or intangible assets were included in the purchase structure.

Strategic benefits of acquisitions and core banking implementation

CWB Maxium Financial and CWB Franchise Finance will both contribute to an expanded CWB presence outside of Western Canada as approximately 80% of their current business is in Ontario. We expect the combination of these two meaningful strategic acquisitions to be slightly accretive to adjusted net income this year, with accelerating contributions thereafter.

We also expect CWB's earnings growth and business diversification to benefit from ongoing success in key strategic initiatives to attract new clients and expand our existing client relationships. The successful launch of our new core banking system subsequent to quarter end will facilitate these initiatives and advance our efforts to build core funding sources, enhance product and service offerings, and leverage current and future investment in technology.

Our successful launch reflects several years of focused effort on the part of CWB's dedicated project team, as well as a tremendous team effort within our branches during and after the implementation period. We look forward to realizing the significant benefits of this improved technology going forward, including the ability to leverage a client-centric view of our branch-based relationships, and support for CWB's eventual transition to the Advanced Internal Ratings Based (AIRB) methodology for calculating risk weighted assets.

Loans and Deposits

Loan growth of 14% over the past twelve months, 4% compared to the prior quarter and 9% on a year-to-date basis was driven by strong activity within targeted portfolio segments. Combined loan growth within BC and Ontario accounted for more than two thirds of the increase from last year, compared to less than one third in the same quarter last year. Loan growth in Alberta and Saskatchewan has slowed compared to prior years due to the economic impact of low oil prices. Combined sequential loan growth in these two provinces of $143 million compares to combined growth in BC and Ontario of $736 million over the same period. We expect this trend of stronger relative growth in non-oil producing provinces to continue through the remainder of 2016.

Combined originations within CWB Maxium and CWB Franchise Finance are expected to exceed $500 million commencing in fiscal 2017. In consideration of very strong loan growth through the first half of the year and our current pipeline of new lending opportunities, we are confident we will achieve another year of double-digit loan growth in 2016, marking the 26th time in 27 years CWB has achieved this level of performance.

Deposit growth was 13% over the past twelve months, 2% compared to the prior quarter and 5% on a year-to-date basis. We remain committed to further enhance and diversify funding sources to support growth, manage the impact of competitive factors and mitigate pressure on net interest margin.

Year-over-year branch-raised deposit growth was 9%. Another long-term strategic objective is to increase the level of these deposits as they strengthen relationships by providing clients with relevant tools for managing their finances. Preferred types of branch-raised deposits also have attractive liquidity characteristics, are typically lower cost, and provide associated transactional fee income. As such, we place specific emphasis on growing personal and business deposits raised within the branch network, as well as through trust services and, given suitable market conditions, Canadian Direct Financial, CWB's Internet-based division.

Credit Quality

Credit quality outside of our portfolio of oil and gas production loans is consistent with prior expectations. Significantly higher provisions for credit losses within the oil and gas portfolio have resulted from further weakening of energy commodity prices to very low levels early in the calendar year. In view of this factor and borrowing base redeterminations that reflect current information, we recorded $32.5 million of second quarter provisions for credit losses on oil and gas production loans and a total second quarter provision for credit losses of $39.7 million. We now expect the annual provision to fall between 35 and 45 basis points as a percentage of average loans. This compares to our prior expectations for the provision to be at the high end of a range between 18 and 23 basis points. Total gross impaired loans of $145.0 million compare to $92.9 million in the second quarter last year and $111.5 million last quarter. The sequential increase was mainly due to a $32.1 million increase in gross impaired oil and gas production loans. Recent loss rates within this portfolio have exceeded those experienced during prior economic cycles. As we work with our clients through a challenging operating environment in Alberta, we continue to carefully monitor the entire loan portfolio for signs of weakness resulting from the first and second order impacts of lower oil prices. Although we expect further increases in the balance of impaired loans across the portfolio, we anticipate loss rates on impaired loans outside of oil and gas production lending to be more consistent with our prior experience, reflecting the combined positive impact of our disciplined underwriting, secured lending practices and proactive account management.

Based on the results of stress tests simulating severe economic conditions in Alberta and Saskatchewan, in combination with very challenging economic conditions throughout the rest of CWB's geographic footprint over a multi-year timeframe, management is confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a strong capital position.

Efficiency and Operating Leverage

In view of necessary investment underway to facilitate ongoing implementation of our client relationship-focused strategy, as well as the low probability of meaningful short-term improvement in net interest margin, we expect our efficiency ratio to fluctuate at levels moderately higher than the recent past. Combined amortization and sustainment costs related to the new core banking system will add to our expense base commencing in the third quarter. We expect this investment to facilitate both revenue growth and cost efficiencies over the medium-term, as well as help us achieve our strategic client relationship objectives.

Second quarter operating leverage was negative 1% as year-over-year growth of 10% in non-interest expenses moderately outpaced 9% growth in total revenues. Adjusted for the impact of CWB Maxium, operating leverage was positive 1%. We are committed to disciplined control of all discretionary expenses and expect to achieve positive operating leverage over the medium-term. However, in view of the above mentioned increases to our cost base and the likelihood for continued pressure on net interest margin to constrain revenue growth, we expect operating leverage to be slightly negative in fiscal 2016.

Capital Management and the Dividend Payout Ratio

CWB maintains a strong capital position under the more conservative Standardized approach for calculating risk-weighted assets. We strengthened Tier 1 and Total capital during the second quarter through the issuance of $140 million of Series 7 preferred shares.

The common share dividend declared yesterday of $0.23 per share is consistent with the prior quarter and 5% higher than the dividend declared one year ago. Common share dividend increases are evaluated every quarter against the dividend payout ratio target of approximately 30%. The second quarter dividend payout ratio was 39%, primarily reflecting the current impact of the credit performance of oil and gas loans on common shareholders' net income.

The timing of future common share dividend increases will be influenced by capital requirements to support expected asset growth under the Standardized approach for calculating risk-weighted assets, as well as the impacts on earnings growth from the change to our credit outlook, challenges related to persistent net interest margin pressure, incremental increases in our expense base and ongoing macroeconomic uncertainty. Yesterday CWB's Board of Directors also declared dividends on the Series 5 and Series 7 preferred shares.

About CWB Group

CWB Group (CWB) is a diversified financial services organization serving businesses and individuals across Canada. Operating from its headquarters in Edmonton, Alberta, CWB's key business lines include full-service business and personal banking offered through 41 branches of Canadian Western Bank and Internet banking services provided by Canadian Direct Financial (CDF). Highly responsive specialized financing is delivered under the banners of CWB Equipment Financing, National Leasing, CWB Maxium Financial and CWB Optimum Mortgage. Trust Services are offered through Canadian Western Trust. Comprehensive wealth management offerings are provided through CWB Wealth Management, which includes the businesses of Adroit Investment Management, McLean & Partners Wealth Management and Canadian Western Financial. As a public company on the Toronto Stock Exchange (TSX), CWB trades under the symbols "CWB" (common shares), "CWB.PR.B" (Series 5 Preferred Shares) and "CWB.PR.C" (Series 7 Preferred Shares). Learn more at www.cwb.com.

Fiscal 2016 Second Quarter Results Conference Call

CWB's second quarter results conference call is scheduled for Thursday, June 2, 2016, at 2:00 p.m. ET (12:00 noon MT). CWB's executives will comment on financial results and respond to questions from analysts and institutional investors.

The conference call may be accessed on a listen-only basis by dialing 647-788-4922 or toll-free 1-877-223-4471. The call will also be webcast live on CWB's website: www.cwb.com/investor-relations/webcasts-and-events.

A replay of the conference call will be available until June 16, 2016, by dialing 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 11374513.

Selected Financial Highlights(2)

For the three months ended For the six months ended
(unaudited)
($ thousands, except per share amounts)
April 30
2016
January 31
2016
April 30
2015
Change
from
April 30
2015
April 30
2016
April 30
2015
Change
from
April 30
2015
Results from Continuing Operations(1)
Net interest income (teb)(2) $ 145,106 $ 144,107 $ 133,064 9 % $ 289,213 $ 267,453 8 %
Less teb adjustment(2) 754 1,231 1,455 (48 ) 1,985 2,923 (32 )
Net interest income per financial statements 144,352 142,876 131,609 10 287,228 264,530 9
Non-interest income 19,378 14,626 18,097 7 34,004 36,092 (6 )
Pre-tax, pre-provision earnings (teb)(2) 84,487 81,462 78,050 8 165,949 156,786 6
Common shareholders' net income 32,213 52,132 51,520 (37 ) 84,345 103,925 (19 )
Earnings per common share
Basic 0.40 0.65 0.64 (38 ) 1.04 1.29 (19 )
Diluted 0.40 0.65 0.64 (38 ) 1.04 1.29 (19 )
Adjusted cash(2) 0.41 0.66 0.65 (37 ) 1.07 1.31 (18 )
Return on common shareholders' equity(2) 7.1 % 11.5 % 13.1 % (600) bp (3) 9.3 % 13.1 % (380) bp (3)
Adjusted return on common shareholders' equity(2) 7.4 11.7 13.3 (590 ) 9.6 13.4 (380 )
Return on assets(2) 0.55 0.90 1.00 (45 ) 0.72 1.00 (28 )
Efficiency ratio (teb)(2) 46.7 46.9 46.4 30 46.8 46.3 50
Efficiency ratio(2) 46.9 47.2 46.9 - 47.1 46.8 30
Net interest margin (teb)(2) 2.47 2.48 2.57 (10 ) 2.47 2.58 (11 )
Net interest margin(2) 2.45 2.46 2.54 (9 ) 2.45 2.55 (10 )
Provision for credit losses as a percentage of average loans 0.78 0.18 0.17 61 0.48 0.16 32
Results from Combined Operations(1)
Net interest income (teb)(2) $ 145,106 $ 144,107 $ 134,886 8 % $ 289,213 $ 271,328 7 %
Less teb adjustment(2) 754 1,231 1,650 (54 ) 1,985 3,336 (40 )
Net interest income 144,352 142,876 133,236 8 287,228 267,992 7
Non-interest income 19,378 14,626 25,024 (23 ) 34,004 48,446 (30 )
Common shareholders' net income 32,213 52,132 53,545 (40 ) 84,345 107,754 (22 )
Earnings per common share
Basic 0.40 0.65 0.67 (40 ) 1.04 1.34 (22 )
Diluted 0.40 0.65 0.67 (40 ) 1.04 1.34 (22 )
Adjusted cash(2) 0.41 0.66 0.68 (40 ) 1.07 1.36 (21 )
Return on common shareholders' equity(2) 7.1 % 11.5 % 13.6 % (650) bp (3) 9.3 % 13.6 % (430) bp (3)
Adjusted return on common shareholders equity(2) 7.4 11.7 13.9 (650 ) 9.6 13.9 (430 )
Return on assets(2) 0.55 0.90 1.02 (47 ) 0.72 1.03 (31 )
Efficiency ratio (teb)(2) 46.7 46.9 47.7 (100 ) 46.8 47.4 (60 )
Efficiency ratio(2) 46.9 47.2 48.1 (120 ) 47.1 47.9 (80 )
Net interest margin (teb)(2) 2.47 2.48 2.58 (11 ) 2.47 2.59 (12 )
Net interest margin(2) 2.45 2.46 2.55 (10 ) 2.45 2.56 (11 )
Results of Discontinued Operations(1)
Common shareholders' net income $ - $ - $ 2,025 (100 )% - $ 3,829 (100 )%
Earnings per common share
Basic - - 0.03 (100 ) - 0.05 (100 )
Diluted - - 0.03 (100 ) - 0.05 (100 )
Adjusted cash(2) - - 0.03 (100 ) - 0.05 (100 )
Per Common Share
Cash dividends $ 0.23 $ 0.23 $ 0.21 10 % 0.46 $ 0.42 10 %
Book value 22.62 22.53 20.19 12 22.62 20.19 12
Closing market value 27.68 22.96 31.37 (12 ) 27.68 31.37 (12 )
Common shares outstanding (thousands) 81,882 80,560 80,451 2 81,882 80,451 2
Balance Sheet and Off-Balance Sheet Summary (Combined Operations)
Assets $ 24,236,901 $ 23,472,553 $ 21,544,657 12 %
Loans 21,248,005 20,350,739 18,586,764 14
Deposits 20,340,925 19,859,768 17,977,674 13
Debt 1,210,202 1,189,581 1,175,201 3
Shareholders' equity 2,117,409 1,940,037 1,749,008 21
Assets under administration 10,287,891 9,500,573 9,490,378 8
Assets under management 1,834,203 1,825,280 1,910,863 (4 )
Capital Adequacy(2)
Common equity Tier 1 ratio 8.2 % 8.6 % 7.9 % 30 bp (3)
Tier 1 ratio 10.1 9.8 9.1 100
Total ratio 12.2 12.0 12.1 10
(1) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB's stock transfer business as described in the 2015 Annual Report. The 2015 contributions of both the insurance and stock transfer businesses, including gains on sale, are defined as "Discontinued Operations", the remaining operations are defined as "Continuing Operations", and the total Continuing Operations and Discontinued Operations are defined All other measures reflect either Continuing or Combined Operations as indicated. as "Combined Operations". Return on shareholders' equity reflects equity from Combined Operations.
(2) See definitions on page 22.
(3) bp - basis point change.

Management's Discussion and Analysis

This management's discussion and analysis (MD&A), dated June 1, 2016, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended April 30, 2016, and the audited consolidated financial statements and MD&A for the year ended October 31, 2015, available on SEDAR at www.sedar.com and CWB's website at www.cwb.com.

Continuing and Discontinued Operations

On May 1, 2015, CWB completed the divestitures of its property and casualty insurance subsidiary, Canadian Direct Insurance (CDI), and the stock transfer business of its subsidiary, Valiant Trust Company (Valiant), ("Discontinued Operations"). The remaining operations are defined as "Continuing Operations" and the total Discontinued Operations and Continuing Operations are defined as "Combined Operations". In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, revenue, expenses and gains on sale associated with the businesses sold have been classified as Discontinued Operations in CWB's interim consolidated statements of income for all periods presented. Associated assets and liabilities were classified as held for sale in CWB's interim consolidated balance sheets prospectively from January 31, 2015 until their sale on May 1, 2015. Return on common shareholders' equity reflects equity from Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated. The proceeds of sale may be subject to further post-closing adjustments and costs.

Forward-looking Statements

From time to time, CWB makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about CWB's objectives and strategies, targeted and expected financial results and the outlook for CWB's businesses or for the Canadian economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact", "goal", "focus", "potential", "proposed" and other similar expressions, or future or conditional verbs such as "will", "should", "would" and "could".

By their very nature, forward-looking statements involve numerous assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that management's predictions, forecasts, projections, expectations and conclusions will not prove to be accurate, that its assumptions may not be correct and that its strategic goals will not be achieved.

A variety of factors, many of which are beyond CWB's control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, general business and economic conditions in Canada, including the volatility and level of liquidity in financial markets, fluctuations in interest rates and currency values, the volatility and level of various commodity prices, changes in monetary policy, changes in economic and political conditions, legislative and regulatory developments, legal developments, the level of competition, the occurrence of natural catastrophes, changes in accounting standards and policies, the accuracy and completeness of information CWB receives about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and management's ability to anticipate and manage the risks associated with these factors. It is important to note that the preceding list is not exhaustive of possible factors.

Additional information about these factors can be found in the Risk Management section of CWB's annual Management's Discussion and Analysis (MD&A). These and other factors should be considered carefully, and readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause CWB's actual results to differ materially from the expectations expressed in such forward-looking statements. Unless required by securities law, CWB does not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by it or on its behalf.

Assumptions about the performance of the Canadian economy over the forecast horizon and how it will affect CWB's businesses are material factors considered when setting organizational objectives and targets. In determining expectations for economic growth, CWB primarily considers economic data and forecasts provided by the Canadian government and its agencies, as well as an average of certain private sector forecasts. These forecasts are subject to inherent risks and uncertainties that may be general or specific. Where relevant, material economic assumptions underlying forward looking statements are disclosed within the Outlook sections of this MD&A.

Acquisitions of CWB Maxium Financial and CWB Franchise Finance

On March 1, 2016, CWB acquired the non-securitized lending assets and other net business assets of Maxium Financial Services Inc. and Desante Financial Services Inc., now referred to as "CWB Maxium Financial" (CWB Maxium). CWB Maxium provides loans, equipment leases and structured financing solutions to more than 35,000 clients, mainly in Ontario. Specialized financing solutions are primarily provided in the areas of health care, golf, transportation, real estate, and general corporate financing. Securitized assets that were originated prior to March 1, 2016 were not included in the transaction. The purchase agreement is structured over three years with maximum total consideration of up to $120 million. The acquisition was funded at closing with 1,250,312 common shares valued at $25.6 million and $19.5 million in cash. Remaining consideration consists of contingent payments to the vendors that could total up to $70.5 million, with an estimated fair value at the acquisition date of $16.4 million. Contingent payment installments will be made annually with determination of the total amount payable based on CWB Maxium's cumulative business performance over a 36-month purchase price adjustment period. Up to 50% of the total contingent consideration may be settled with CWB shares at the vendors' option, provided the average share price over the 20 days preceding issuance exceeds $30.00, with the remainder to be paid in cash. Full disclosure of the accounting treatment of the transaction is provided in Note 3 of the unaudited interim financial statements. CWB Maxium's revenue and net loss for the quarter ended April 30, 2016 were $1.0 million and $0.4 million, respectively, and its total assets and total liabilities at April 30, 2016 were $168.4 million and $136.5 million, respectively. Other than the contingent consideration payable to the vendors, there were no other contingent liabilities or commitments arising from the acquisition.

On April 7, 2016, CWB announced the signing of an asset purchase agreement to acquire GE Capital's Canadian Franchise Finance platform, to be referred to as "CWB Franchise Finance". The business provides financing across Canada to a diverse group of established companies in the franchised hospitality and restaurant industries. The acquisition will include key employees to support CWB's continued strategic commercial banking growth and geographic expansion. The balance of loans to be acquired is approximately $350 million. No goodwill or intangible assets are included in the purchase structure. The transaction is expected to close in CWB's third quarter of fiscal 2016, subject to customary approvals.

In combination, these two strategic acquisitions are expected to be slightly accretive to adjusted net income this year, with accelerating contributions thereafter.

Overview of Continuing Operations

Q2 2016 vs. Q2 2015

Common shareholders' net income of $32.2 million was down 37%, primarily due to the impact of $33 million of previously announced pre-tax energy-related provisions for credit losses. Net interest income (teb) of $145.1 million was up 9% as the benefits of very strong 14% loan growth and one additional revenue earning day were partially offset by a 10 basis point decrease in net interest margin (teb). Non-interest income increased 7% to $19.4 million reflecting growth in most categories with the exception of slightly lower wealth management revenues. Diluted earnings per common share of $0.40 and adjusted cash earnings per common share, which excludes the acquisition-related after-tax amortization of intangible assets and non-tax deductible changes in fair value of contingent consideration, of $0.41 were down 38% and 37%, respectively. Excluding provisions for credit losses and income taxes in all periods, pre-tax, pre-provision (PTPP) earnings were up 8% to $84.5 million.

Q2 2016 vs. Q1 2016

Common shareholders' net income was down 38% due to the impact of energy-related provisions for credit losses. Net interest income increased 1%, reflecting the positive impact of 4% loan growth and relatively stable net interest margin, partially offset by two fewer revenue earning days. Non-interest income was 32% higher, primarily due to nil net gains on securities, compared to net losses of $2.9 million last quarter, and higher 'other' non-interest income. PTPP earnings were 4% higher.

YTD 2016 vs. YTD 2015

Common shareholders' net income of $84.3 million was down 19% as provisions for credit losses of $48.6 million compared to $14.4 million last year. Net interest income (teb) increased 8% to $289.2 million, as the positive impact of very strong 9% loan growth and one additional revenue earning day offset an 11 basis point decline in net interest margin (teb).

Non-interest income of $34.0 million was 6% lower. Gains in most categories were more than offset by lower net gains/losses on securities. Net losses on securities of $2.9 million compared to gains of $0.7 million last year. Diluted earnings per common share of $1.04 and adjusted cash earnings per common share of $1.07 were down 19% and 18%, respectively. Year-to-date PTPP earnings of $165.9 million increased 6%.

ROE and ROA

To adjust for the impact of acquisition-related accounting items which represent non-cash charges not considered indicative of ongoing business performance, CWB calculates an adjusted return on common shareholders' equity which excludes the acquisition-related after-tax amortization of intangible assets and the non-tax deductible change in fair value of contingent consideration from common shareholders' net income.

Second quarter adjusted return on common shareholders' equity (adjusted ROE) was 7.4%, compared to 13.3% last year and 11.7% in the previous quarter. Year-to-date adjusted ROE was 9.6%, compared to 13.4% last year. Return on assets (ROA) of 0.55% was down from 1.00% a year earlier and 0.90% last quarter. Lower profitability ratios primarily resulted from higher provisions for credit losses compared to prior periods.

Outlook for Profitability Ratios

Our expectations for near-term earnings growth are modest in view of the previously announced change to our credit outlook, ongoing pressure on net interest margin, incremental increases in CWB's expense base, and further economic uncertainty within Alberta from the Fort McMurray wildfires. Common shares issued in support of the CWB Maxium acquisition will result in higher levels of common shareholders' equity this year and have a moderate negative impact on profitability ratios.

Total Revenues (teb) from Continuing Operations

Second quarter total revenues of $164.5 million, comprised of both net interest income (teb) and non-interest income, grew 9% compared to the same quarter in 2015 and 4% from the prior quarter, reflecting strong core operating performance. Year-to-date total revenues of $323.2 million were up 6% from last year.

Net Interest Income (teb)

Q2 2016 vs. Q2 2015

Net interest income (teb) of $145.1 million was up 9% primarily reflecting the benefit of very strong 14% loan growth and one additional revenue earning day, partially offset by a 10 basis point decrease in net interest margin (teb) to 2.47%. The Bank of Canada's July 2015 interest rate cuts and the corresponding 15 basis point decrease in CWB's prime lending interest rate had a negative impact on loan yields. Corresponding reductions in the cost of various deposits did not fully offset the impact of this change on net interest margin. As such, various positive factors, including more favourable deposit costs, and strong growth in both higher yielding loan portfolios and preferred types of branch-raised demand and notice deposits, were more than offset by the impact of significantly lower loan yields, resulting in lower net interest margin.

Q2 2016 vs. Q1 2016

Net interest income was up 1% reflecting the benefit of 4% loan growth and relatively stable net interest margin (teb), partially offset by two fewer revenue earning days. Net interest margin (teb) was relatively consistent with the prior quarter, as well as the fourth quarter of 2015.

YTD 2016 vs. YTD 2015

Net interest income (teb) of $289.2 million increased 8% due to the combined benefits of very strong 9% loan growth, partially offset by an 11 basis point reduction in net interest margin (teb) to 2.47%. The change in net interest margin (teb) reflects factors similar to those discussed above, with an additional negative impact from the Bank of Canada's January and July 2015 interest rate cuts and corresponding 15 basis point decreases in CWB's prime lending interest rate on both occasions.

Interest rate sensitivity

Note 13 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at April 30, 2016. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income that would result over the following 12 months from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:

  • a constant structure in the interest sensitive asset and liability portfolios;
  • interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount, except floor levels for various deposit liabilities and certain floating rate loans, and applied at the appropriate repricing dates; and,
  • no early redemptions.
($ thousands) April 30
2016
January 31
2016
April 30
2015
Estimated impact on net interest income of a 1% increase in interest rates
1 year $ 8,032 $ 5,689 $ 1,976
1 year percentage change 1.39 % 1.12 % 0.4 %
Estimated impact on net interest income of a 1% decrease in interest rates
1 year $ (6,981 ) $ (7,084 ) $ 1,660
1 year percentage change (1.21 )% (1.40 )% 0.3 %

In addition to the projected changes in net interest income noted above, it is estimated that a one-percentage point increase in all interest rates at April 30, 2016 would increase unrealized losses related to available-for-sale securities and the fair value of interest rate swaps designated as hedges, and result in a reduction in other comprehensive income of approximately $65.2 million, net of tax (April 30, 2015 - $50.7 million). It is estimated that a one-percentage point decrease in all interest rates at April 30, 2016 would have the opposite effect, increasing other comprehensive income by approximately $66.2 million, net of tax (April 30, 2015 - $51.2 million). Management maintains the asset liability structure and interest rate sensitivity within CWB's established policies through pricing and product initiatives, as well as the use of interest rate swaps.

Outlook for net interest margin (teb)

Continued pressure on net interest margin is expected to result from the combined impact of the current low interest rate environment, competitive factors and the persistently flat yield curve, as well as the likelihood that CWB may carry moderately higher average balances of cash and securities. CWB will maintain its strategic focus on mitigating the earnings impact of ongoing margin pressure through efforts to achieve stronger relative growth in higher yielding loan portfolios with an acceptable risk profile, as well as managing the funding mix to optimize the overall cost of funds and liquidity adequacy requirements.

Provision for Credit Losses

The quarterly provision for credit losses measured against average loans, inclusive of previously announced energy-related provisions for credit losses, was 78 basis points, compared to 17 basis points in the same period last year and 18 basis points in the prior quarter. The year-to-date provision for credit losses was 48 basis points, compared to 16 basis points last year. Within the oil and gas portfolio, the impact of very low commodity prices on producer cash flows early in the calendar year, as well as subsequent borrowing base redeterminations, led to an increase in credit stress compared to prior quarters. The unusual level of provisioning this quarter directly reflects these developments. Credit quality outside of the oil and gas portfolio, is consistent with prior expectations. Management now expects the annual provision to fall between 35 and 45 basis points as a percentage of average loans. This compares to prior expectations for the provision to be at the high end of a range between 18 and 23 basis points.

Non-interest Income from Continuing Operations

Q2 2016 vs. Q2 2015

Non-interest income increased 7% to $19.4 million reflecting growth in most categories with the exception of slightly lower wealth management revenues.

Q2 2016 vs. Q1 2016

Non-interest income was 32% higher, primarily due to nil net gains/losses on securities compared to net losses of $2.9 million last quarter, and higher 'other' non-interest income.

YTD 2016 vs. YTD 2015

Non-interest income of $34.0 million was 6% lower, as gains in most categories were more than offset by lower net gains/losses on securities. Net losses on securities of $2.9 million compare to gains of $0.7 million last year and primarily reflect the impact of volatile financial market conditions on previous holdings of common equities.

Outlook for non-interest income from Continuing Operations

The outlook for growth in banking-related fee income is relatively consistent with anticipated loan and deposit growth. Trust services and CWB Wealth Management are also expected to continue to provide consistent contributions. CWB has liquidated its holdings of common equities and has no plans to re-establish this portfolio. In view of this change, and based on the current composition of the securities portfolio, net gains/losses on securities through the remainder of 2016 are not expected to have a material impact on non-interest income although financial market conditions are inherently unpredictable in the short-term. Management will realize gains on the sale of residential mortgage portfolios as opportunities become available. Such gains are anticipated to be a recurring, although sporadic, source of 'other' non-interest income.

Non-interest Expenses from Continuing Operations

Q2 2016 vs. Q2 2015

Quarterly non-interest expenses of $78.5 million were up 10% ($7.1 million) due to 10% ($4.7 million) higher salaries and benefits, a 10% ($1.3 million) increase in general expenses, and 9% ($1.0 million) higher premises and equipment expenses. The change in salaries and benefits mainly resulted from annual salary increments and modest increases in staff complement to support ongoing growth across all businesses. CWB Maxium contributed $1.5 million, or 21%, of the overall increase in non-interest expenses.

Q2 2016 vs. Q1 2016

Non-interest expenses were up 4% ($2.9 million) from the prior quarter, due mainly to incremental increases in both salaries and benefits, and general expenses. CWB Maxium accounted for approximately 52% of this change.

YTD 2016 vs. YTD 2015

Non-interest expenses of $154.0 million increased 8% ($10.8 million) due to 8% ($7.6 million) higher salaries and benefits, an 8% ($2.1 million) increase in general expenses, and a 5% ($1.1 million) increase in premises and equipment expense. The change in salaries and benefits reflects the factors discussed above. CWB Maxium accounted for approximately 14% of the year-to-date increase in non-interest expenses.

Outlook for non-interest expenses from Continuing Operations

A key priority for CWB is to deliver strong long-term growth in earnings per share through strategic investment while maintaining effective control of costs. CWB's current investments in people, technology and infrastructure are expected to contribute to long-term shareholder value through improved financial performance in future periods. In view of level of investment currently underway, non-interest expense growth is expected to increase moderately over the near term compared to the recent past. Combined amortization and sustainment costs related to the new core banking system will add to non-interest expenses commencing in the third quarter. Upgrades and expansion of branch infrastructure continue, including work toward the addition of a new full-service branch location in Lloydminster, Saskatchewan, scheduled to open in the third quarter of 2016. Compliance with an increasing level of regulatory rules and oversight for all Canadian banks requires the investment of both time and resources, which further contributes to higher non-interest expenses.

Core banking system implementation

CWB's new core banking system was successfully launched on May 2, 2016. Total investment was consistent with estimated total costs of up to $71 million. The successful implementation of this important new technology reflects several years of focused effort on the part of CWB's dedicated project team as well as a tremendous team effort within CWB's branches during and after the implementation period. Management expects CWB to realize significant benefits related to this improved technology going forward, including the ability to leverage a client-centric view of CWB's branch-based client relationships, and support for CWB's eventual transition to the Advanced Internal Ratings Based (AIRB) methodology for calculating risk weighted assets.

Efficiency ratio and operating leverage

To adjust for the impact of acquisition-related accounting items which represent non-cash charges not considered indicative of ongoing business performance, CWB calculates its efficiency ratio excluding the pre-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration. All periods have been recalculated to conform to the current period presentation.

The second quarter efficiency ratio (teb) was 46.7%, up slightly from 46.4% last year. The positive impact on total revenues of very strong loan growth and slightly higher non-interest income was more than offset by the impact of lower net interest margin (teb) and higher expenses. Adjusted for the impact of CWB Maxium on revenues and expenses, the second quarter efficiency ratio (teb) was lower than last year, at 46.0%.

The efficiency ratio improved from 46.9% in the previous quarter. Higher non-interest income and the combined benefits of very strong 4% loan growth and relatively stable net interest margin (teb) more than offset the increase in non-interest expenses. Adjusted for the impact of CWB Maxium, sequential improvement in the efficiency ratio was even more significant.

The year-to-date efficiency ratio (teb) of 46.8% was up from 46.3%, as the benefit of very strong 9% loan growth was more than offset by the impact of lower net interest margin (teb), higher non-interest expenses and lower non-interest income. Adjusted for the impact of CWB Maxium, the year-to-date efficiency ratio (teb) was relatively stable, at 46.4%.

Second quarter operating leverage was negative 1% as year-over-year growth of 10% in non-interest expenses moderately outpaced 9% growth in total revenues. Adjusted for the impact of CWB Maxium, operating leverage was positive 1%.

Outlook for the efficiency ratio and operating leverage

Ongoing pressure on net interest margin has constrained revenue growth compared to expectations. In view of the level of necessary investment, as discussed above, as well as the low probability of meaningful short-term improvement in net interest margin, management expects CWB's efficiency ratio to fluctuate at levels moderately higher than the recent past, and operating leverage is likely to be slightly negative in fiscal 2016.

Income Taxes

The second quarter effective income tax rate (teb) for Continuing Operations was 27.2%, compared to 26.4% last year. The year-to-date effective income tax rate (teb) for Continuing Operations was 27.4% compared to 26.4% last year. The 20% increase in Alberta's provincial corporate income tax rate, from 10% to 12%, effective July 1, 2015, had a negative impact on year-to-date adjusted cash earnings per share of approximately $0.01 compared to the same period last year.

Outlook for income taxes

CWB's expected income tax rate (teb) for 2016 is approximately 27.5%.

Overview of Discontinued Operations

The components of net income from Discontinued Operations included in the interim consolidated statements of income, which are attributable entirely to CWB common shareholders, follow:

For the three months ended For the six months ended
April 30
2016
January 31
2016
April 30
2015
Change
from
April 30
2015
April 30
2016
April 30
2015
Change
from
April 30
2015
Net interest income (teb) $ - $ - $ 1,822 (100 )% $ - $ 3,875 (100 )%
Non-interest income - - 6,927 (100 ) - 12,354 (100 )
Total revenue (teb) - - 8,749 (100 ) - 16,229 (100 )
Non-interest expenses - - 6,036 (100 ) - 11,104 (100 )
Net income before income taxes - - 2,713 (100 ) - 5,125 (100 )
Income taxes (teb) - - 688 (100 ) - 1,296 (100 )
Net income before gain on sale - - 2,025 (100 ) - 3,829 (100 )
Gain on sale, net of tax - - - - - - -
Common shareholders' net income $ - $ - $ 2,025 (100 )% $ - $ 3,829 (100 )%
Earnings per common Share
Basic $ - $ - $ 0.03 (100 )% $ - $ 0.05 (100 )%
Diluted - - 0.03 (100 ) - 0.05 (100 )
Adjusted cash - - 0.03 (100 ) - 0.05 (100 )

Second quarter and year-to-date common shareholders' net income from Discontinued Operations was nil compared to $2.0 million and $3.8 million, respectively, in 2015. Second quarter and year-to-date adjusted cash earnings per common share were nil compared to $0.03 and $0.05, respectively, in 2015.

Overview of Combined Operations

Q2 2016 vs. Q2 2015

Common shareholders' net income of $32.2 million was down 40% primarily reflecting the factors discussed above within the overview of Continuing Operations, along with the absence of current year earnings contributions from Discontinued Operations. Diluted earnings per common share of $0.40 and adjusted cash earnings per common share of $0.41 both decreased 40%.

Q2 2016 vs. Q1 2016

Common shareholders' net income decreased 38% reflecting the factors discussed above within the overview of Continuing Operations.

YTD 2016 vs. YTD 2015

Common shareholders' net income decreased 22% to $84.3 million primarily reflecting the factors discussed above within the overview of Continuing Operations, along with the absence of current year earnings contributions from Discontinued Operations. Diluted earnings per common share of $1.04 and adjusted cash earnings per common share of $1.07 were down 22% and 21%, respectively.

ROE and ROA

Second quarter adjusted return on common shareholders' equity (adjusted ROE) was 7.4%, compared to 13.9% last year and 11.7% last quarter. Return on assets (ROA) of 0.55% compares to 1.02% a year earlier and 0.90% last quarter. Year-to-date adjusted ROE of 9.6% compares to 13.9% last year, and ROA of 0.72% was down from 1.03%.

Comprehensive Income

Comprehensive income is comprised of common shareholders' net income from Combined Operations and other comprehensive income (OCI), all net of income taxes.

Q2 2016 vs. Q2 2015

Comprehensive income of $33.2 million was relatively unchanged from $33.3 million in the same period last year. A decrease of $21.5 million in net income, due to the combined impact of energy-related provisions for credit losses on net income from Continuing Operations and the absence of contributions from Discontinued Operations this year, was offset by a $21.4 million increase in OCI.

Changes in OCI, all net of tax, resulted from an increase in fair value of available-for-sale securities, partially offset by a reduction in the fair value of derivatives designated as cash flow hedges. CWB has liquidated its holdings of common shares. With liquidation of the common shares, CWB's portfolio of available-for-sale securities is now comprised of debt securities and investment grade preferred shares. While the combined dollar investment in the portfolios of preferred shares is relatively small in relation to total assets, volatility in the market value of these securities increases the potential for comparatively larger fluctuations in OCI.

YTD 2016 vs. YTD 2015

Comprehensive income of $81.0 million was down from $88.3 million last year as lower common shareholders' net income was only partially offset by higher OCI. Net income of $87.6 million compared to $111.3 million last year, with the decrease reflecting the combined impact of energy-related provisions for credit losses on net income from Continuing Operations and the absence of 2016 contributions from Discontinued Operations. OCI losses decreased from $23.0 million to $6.6 million as fair value losses related to available-for-sale securities were $30.7 million lower than prior year, partially offset by fair value losses of $8.7 million related to derivatives designated as cash flow hedges compared to $5.7 million fair value gains in the prior year.

Balance Sheet

Total assets increased 12% in the past year, 3% in the quarter and 6% on a year-to-date basis to reach $24,237 million at April 30, 2016.

Cash and Securities

Cash, securities and securities purchased and sold under resale and repurchase agreements totaled $2,247 million at April 30, 2016, compared to $2,241 million a year earlier and $2,636 million at the end of last quarter.

The cash and securities portfolio is comprised of high quality debt instruments, and investment grade preferred shares that are not held for trading purposes and, where applicable, are typically held until maturity. CWB's holdings of common equities have been liquidated. Net unrealized losses on cash and securities from Continuing Operations recorded on the balance sheet of $72.5 million were up from $39.8 million as at April 30, 2015, and down from $84.9 million last quarter. Fluctuations in value are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve.

The difference compared to last year primarily reflects decreases in the market value of preferred shares and fixed income securities. The change from last quarter reflects higher market values for preferred shares, partially offset by higher unrealized losses on fixed income securities.

Net realized gains/losses on securities of nil in the second quarter were relatively consistent with the same period last year and compare to net losses of $2.9 million in the previous quarter. Year-to-date net losses on securities of $2.9 million primarily reflected the impact of volatile financial market conditions on CWB's portfolio of common equities. These holdings have been liquidated and management does not intend to re-establish this portfolio. Based on the current composition of the securities portfolio, net gains/losses on securities through the remainder of 2016 are not expected to have a material impact on non-interest income although financial market conditions are inherently unpredictable in the short-term.

Treasury Management

Average balances of cash and securities were relatively consistent with the same quarter last year and lower than the prior quarter. CWB held liquidity for the first several months of the last quarter in preparation for the November 30, 2015 redemption of $300 million of subordinated debentures. Management expects to maintain a conservative level of liquid assets as a percentage of total assets. CWB remains compliant with the Office of the Superintendent of Financial Institutions' (OSFI) Liquidity Adequacy Requirements guideline.

Loans

Total loans, excluding the allowance for credit losses, grew 14% ($2,704 million) in the past twelve months, 4% ($924 million) in the quarter and 9% ($1,806 million) year-to-date to reach $21,376 million. In dollar terms, year-over-year growth by lending sector was led by real estate project loans ($996 million) as CWB continued to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels. Growth in personal loans and mortgages ($695 million) was also strong, as was the increase in general commercial loans ($535 million). Commercial mortgages were up $318 million, and equipment financing and leasing grew $223 million. Corporate lending declined by $56 million and exposure to oil and gas production loans decreased $7 million to $327 million.

On a sequential basis, second quarter growth was led by real estate project loans ($498 million) and general commercial loans ($219 million), followed by personal loans and mortgages ($138 million), and commercial mortgages ($86 million). Equipment financing and leasing was down $10 million, corporate lending contracted by $5 million, and the balance of outstanding oil and gas production loans declined $2 million.

(unaudited)
(millions)
April 30
2016
January 31
2016
April 30
2015
Change from
April 30
2015
General commercial loans $ 4,167 $ 3,948 $ 3,632 15 %
Real estate project loans 4,138 3,640 3,142 32
Commercial mortgages 4,066 3,980 3,748 8
Equipment financing and leasing 3,761 3,771 3,538 6
Personal loans and mortgages 3,700 3,562 3,005 23
Corporate lending(1) 1,217 1,222 1,273 (4 )
Oil and gas production loans 327 329 334 (2 )
Total loans outstanding(2) $ 21,376 $ 20,452 $ 18,672 14 %
(1) Corporate lending represents a diversified portfolio that is centrally sourced and administered through a designated lending group located in Edmonton. These loans include participation in select syndications that are structured and led primarily by the major Canadian banks, but exclude participation in various other syndicated facilities sourced through relationships developed at CWB branches.
(2) Total loans outstanding by lending sector exclude the allowance for credit losses.

Lending activity in British Columbia showed the highest growth in dollar terms on a year-over-year basis, followed by Alberta and Ontario. Combined second quarter loan growth within BC and Ontario accounted for two thirds of the increase from April 30, 2015, compared to one third last year. In contrast, Alberta accounted for only one fifth of CWB's year-over-year loan growth in the second quarter this year compared to approximately 50% last year.

(unaudited)
(millions)
April 30
2016
January 31
2016
April 30
2015
Change from
April 30
2015
Alberta $ 8,441 $ 8,322 $ 7,861 7 %
British Columbia 7,532 6,969 6,234 21
Ontario 2,661 2,488 2,186 22
Saskatchewan 1,335 1,311 1,243 7
Manitoba 619 583 480 29
Other 788 779 668 18
Total loans outstanding(1) $ 21,376 $ 20,452 $ 18,672 14 %
(1) Total loans outstanding by province exclude the allowance for credit losses.

Optimum Mortgage

Net of portfolio sales, total loans of $2,122 million within Optimum increased 31% ($501 million) year-over-year, 6% ($122 million) compared to the prior quarter and 10% ($197 million) year-to-date. Growth for the quarter was driven almost exclusively by alternative mortgages secured via first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 70%. The book value of alternative mortgages represented 89% of Optimum's total portfolio at quarter end, compared to 88% last year and 89% in the prior quarter. Ontario continues to account for more than half of all new originations. At approximately 45% of the total, Ontario also represents the largest geographic exposure by province within Optimum's portfolio, followed by Alberta at 26% and British Columbia at 16%. The average size of Optimum mortgages originated in the second quarter was approximately $298,000, and the average size of mortgage outstanding at April 30, 2016 was approximately $267,000.

Outlook for Optimum Mortgage

Optimum is expected to continue to deliver very strong performance with an attractive risk profile based on the ongoing addition of business development staff to new markets and maintenance of selective underwriting criteria at all times. This includes manual adjudication of each loan application and reduced loans-to-value at initiation within markets perceived to be more vulnerable to price correction. Canadian residential real estate markets have been resilient and affordability in most geographic areas outside of certain neighborhoods in Toronto and Vancouver remains within historical ranges, largely reflecting very low interest rates. Reduced housing sector activity and softer pricing is apparent in Alberta and Saskatchewan, and the combination of historically high price levels and sentiment related to potential economic headwinds caused by low energy prices could lead to further moderation of housing sector activity in these and other markets.

Outlook for loans

CWB will continue to support high quality borrowers operating within targeted industry segments and selectively pursue opportunities for profitable growth across Canada. Very strong loan growth through the first half of the year was the result of higher relative contributions from non-oil producing provinces across CWB's growing geographic footprint. Continued economic strength in the U.S. and a lower Canadian dollar are expected to support an escalation of manufacturing and exporting activity in all provinces, especially BC, Ontario and Manitoba. Taken together, these three provinces account for greater than half of CWB's geographic exposure. Alberta and Saskatchewan are currently assumed to be in recession and are generally expected to continue to underperform the rest of Canada over the near term. This is primarily based on the recognition of diminished resource-related activity resulting from persistent low oil prices and, more recently, further economic uncertainty from the Fort McMurray wildfires. As such, loan growth in these two provinces is expected to remain slow through the second half of 2016 as compared to the levels achieved in recent years.

Approximately 80% of the current business of both CWB Maxium and CWB Franchise Finance is in Ontario, and combined annual commercial lending originations from these sources are expected to exceed $500 million commencing in fiscal 2017. In consideration of very strong loan growth through the first half of the year and CWB's current pipeline of new lending opportunities, including the expected impact of acquisition-related growth, management is confident CWB will achieve another year of double-digit loan growth in 2016, marking the 26th time in 27 years CWB has achieved this level of performance.

Credit Quality

Credit quality outside of the oil and gas production loans portfolio is consistent with prior expectations. This reflects CWB's secured lending business model and continued strong underwriting practices, proactive loan management and the management experience and financial stability of CWB's client base. CWB has no material exposure to unsecured personal borrowing, including credit cards.

Within the oil and gas portfolio, the impact of very low commodity prices on producer cash flows early in the calendar year led to an increase in credit stress compared to prior quarters. In view of this factor and borrowing base redeterminations that reflect current information, CWB recorded $32.5 million of previously announced second quarter pre-tax provisions for credit losses on the oil and gas production portfolio and a second quarter total provision for credit losses of $39.7 million, or 78 basis points as a percentage of average loans. This compares to 17 basis points in the second quarter last year and 18 basis points last quarter. Year-to-date provisions for credit losses of 48 basis points compare to 16 basis points last year.

CWB's direct exposure to the energy industry is relatively small at approximately 5% of total loans outstanding, comprised of loans to exploration and production companies representing approximately 2%, and loans to energy service companies representing approximately 3%. Nearly three quarters of CWB's direct exposure to exploration and production companies is comprised of syndicated advances to borrowers with strong balance sheets and substantial proven, developed and producing resources. Previously announced provisions primarily relate to CWB's non-syndicated exposures.

Loans to service companies are primarily comprised of term-reducing advances against standard industrial equipment, as opposed to operating lines of credit or loans secured against receivables and/or inventory. These factors mitigate the risk of CWB's limited exposures to the energy services sector. Management continues to proactively monitor all accounts with a particular focus on those located within the oil-exporting provinces as the full impact of lower oil prices continues to work its way through all facets of the economy.

For the three months ended
(unaudited)
($ thousands)
April 30
2016
January 31
2016
April 30
2015
Change from
April 30
2015
Gross impaired loans, beginning of period $ 111,507 $ 94,905 $ 79,798 40 %
New formations 69,905 29,895 29,442 137
Reductions, impaired accounts paid down or returned to performing status (20,741 ) (8,972 ) (13,969 ) (48 )
Write-offs (15,708 ) (4,321 ) (2,416 ) (550 )
Total(1) $ 144,963 $ 111,507 $ 92,855 56 %
Balance of the ten largest impaired accounts $ 85,756 $ 60,820 $ 57,629 49 %
Total number of accounts classified as impaired(3) 166 137 122 36
Gross impaired loans as a percentage of total loans 0.68 % 0.55 % 0.50 % 18 bp(2)
(1) Gross impaired loans include foreclosed assets held for sale (primarily residential mortgages) with a carrying value of $3,392 (January 31, 2016 - $1,482 and April 30, 2015 - $2,262).
(2) bp - basis point change.
(3) Total number of accounts excludes National Leasing.

The dollar level of gross impaired loans at April 30, 2016 totalled $145.0 million, up from $92.9 million last year and $111.5 million in the prior quarter. Total gross impaired loans within Alberta of $80.4 million at April 30, 2016 increased from $36.2 million in the second quarter last year, and $45.2 million in the prior quarter. Gross impaired loans within the oil and gas production lending portfolio totalled $53.8 million at April 30, 2016, compared to $14.5 million in the second quarter last year and $21.7 million last quarter. Total second quarter gross impaired loans related to CWB's equipment financing and leasing exposures were $34.3 million, compared to $15.3 million last year and $27.1 million in the prior quarter, with approximately half of the balance in all periods represented by Alberta loans and leases.

The dollar level of gross impaired loans represented 0.68% of total loans at quarter end, compared to 0.50% last year and 0.55% at January 31, 2016. The increase in gross impaired loans is consistent with management's expectations. The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved, and does not directly reflect the dollar value of expected write-offs given tangible security held in support of lending exposures. The overall loan portfolio is reviewed regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends.

Loans that have become impaired are monitored closely by a specialized team with regular quarterly, or more frequent, reviews of each loan and its realization plan. Specific allowances for expected write-offs are established through detailed analyses of both the overall quality and ultimate marketability of security held against each impaired account. Specific allowances accounted for substantially all of the $39.7 million quarterly provision for credit losses, with $32.5 million attributed to oil and gas production loans.

As at April 30, 2016, the collective allowance for credit losses exceeded the balance of impaired loans, net of specific allowances. The total allowance for credit losses (collective and specific) was $145.8 million at April 30, 2016, compared to $107.9 million a year earlier and $120.6 million last quarter. The total allowance for credit losses represented 101% of gross impaired loans at quarter end, compared to 116% one year ago and 108% last quarter. The collective allowance grew 6% over the past twelve months.

Outlook for credit quality

Credit quality outside of CWB's portfolio of oil and gas production loans is consistent with prior expectations. However, recent loss rates related to impaired loans within the oil and gas portfolio have exceeded those experienced during prior economic cycles. As such, management now expects the annual provision to fall between 35 and 45 basis points as a percentage of average loans. This compares to prior expectations for the provision to be at the high end of a range between 18 and 23 basis points. As CWB works with clients through a challenging operating environment in Alberta, management continues to carefully monitor the entire loan portfolio for signs of weakness resulting from the first and second order impacts of lower oil prices.

Notwithstanding the ongoing migration from unsustainably low levels in prior periods, gross impaired loans remain low as a percentage of total loans, with the current level of 0.68% comparing to a peak during the prior credit cycle of 1.68% in the second quarter of 2010. Although we expect further increases in the balance of impaired loans across the portfolio, we anticipate loss rates on impaired loans outside of oil and gas production lending to reflect the combined positive impact of our disciplined underwriting, secured lending practices and proactive account management, and to be more consistent with our prior experience. In support of CWB's loan management processes, experienced credit adjudicators have been activated in the field to help branches and credit teams proactively identify and address higher risk loans.

Based on the results of stress tests simulating severe economic conditions in Alberta and Saskatchewan, in combination with very challenging economic conditions throughout the rest of CWB's geographic footprint over a multi-year timeframe, management is confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a strong capital position. This expectation is supported through stress tests which incorporate multiple dimensions of artificially intensified severity, including: the simultaneous application of 200% of CWB's historical peak loss rates within each portfolio segment to all exposures within Alberta and Saskatchewan, including the loss rate related to oil and gas production loans experienced this quarter; the simultaneous application of 100% of peak loss rates to all exposures in all other regions; an average 2.00% net interest margin reflecting a persistent low interest rate environment, increased competition for core deposits and much higher levels of gross impaired loans; materially slower loan growth to reflect lower assumed levels of economic activity that may be attributed to protracted period of very low oil prices; and, all stressed conditions persisting over a three year period. The assumed consolidated annual loss rate in each year of the stress test is approximately 65 basis points.

Deposits and Funding

Total deposits were up 13% over the past year ($2,363 million), 2% ($481 million) from the previous quarter and 5% ($976 million) year-to-date. Total deposits by type and source are summarized below:

As at
(unaudited)
($ millions)
April 30
2016
January 31
2016
April 30
2015
Change from
April 30
2015
Deposits by type
Demand and notice deposits $ 6,941 $ 6,872 $ 6,484 7 %
Term deposits 11,480 11,053 9,454 21
Capital markets 1,920 1,935 2,040 (6 )
Total Deposits $ 20,341 $ 19,860 $ 17,978 13 %
As at
(unaudited)
($ millions)
April 30
2016
January 31
2016
April 30
2015
Change from
April 30
2015
Deposits by source
CWB Group branch-raised $ 10,701 $ 10,616 $ 9,778 9 %
Deposit brokers 7,720 7,309 6,160 25
Capital markets 1,920 1,935 2,040 (6 )
Total Deposits $ 20,341 $ 19,860 $ 17,978 13 %

Personal deposits represented 61% of total deposits at April 30, 2016, consistent with the prior quarter and up from 59% one year ago. Total branch-raised deposits, including trust services deposits, grew 9% from the second quarter last year and represent 53% of total deposits at April 30, 2016. This was down slightly from 54% one year ago and consistent with the previous quarter.

Lower cost demand and notice deposits increased 7% from the same quarter last year and now comprise 34% of total deposits, down slightly from 36% one year ago and relatively consistent with the previous quarter. Term deposits raised through debt capital markets were $1,920 million at quarter end, representing 9% of total deposits, down from 11% last year reflecting the redemption of certain deposit notes. The level of capital markets deposits was relatively consistent with the prior quarter.

Securitization

Securitized leases and mortgages are reported on-balance sheet with total loans. The gross amount of securitized leases at April 30, 2016 was $969 million, compared to $621 million one year ago and relatively consistent with last quarter. No mortgages were securitized under the NHA MBS program in the second quarter. The gross amount of mortgages securitized under this program on a year-to-date basis is $171 million (2015 - nil). Year-to-date funding from the securitization of leases was $465 million (2015 - $234 million). Increased utilization of securitization reflects the relative cost-effectiveness of this funding channel, as well as initiatives finalized earlier this year which resulted in lower overall capital requirements for CWB's existing pool of securitized leases.

Outlook for deposits and funding

A key long-term strategic objective for CWB is to increase the level of branch-raised deposits which strengthen relationships by providing clients with relevant tools for managing their business and personal finances. These deposits also have attractive liquidity characteristics, are typically lower cost, and provide associated transactional fee income.

Specific emphasis is placed on growing personal and business deposits raised within the branch network, trust services and, given suitable market conditions, Canadian Direct Financial, the Internet-based division of CWB. CWB's expanding market presence, including ongoing expansion and upgrades to existing branches, also supports the generation of branch-raised deposits.

Management remains committed to further enhance and diversify funding sources to support growth, manage the impact of competitive factors and mitigate pressure on net interest margin. The deposit broker network remains a valued channel for raising insured fixed term retail deposits and has proven to be an effective and efficient way to access funding and liquidity over a wide geographic base. Participation in the NHA MBS program provides liquidity in the near term and will provide an additional source of incremental funding over the medium term. Increased use of securitization and utilization of debt capital markets are also incorporated within management's strategy to further diversify the funding base. In the absence of accommodative pricing in capital markets, management will continue to utilize the broker deposit network to supplement branch-raised deposits.

Other Assets and Other Liabilities

Other assets totaled $462 million at April 30, 2016, compared to $564 million one year ago and $352 million last quarter. Other liabilities were $568 million at quarter end, compared to $641 million a year earlier and $483 million the previous quarter. The decrease in other assets compared to last year reflects the elimination of assets held for sale resulting from closing the transactions involving CDI and the stock transfer business of Valiant Trust, partially offset by an increase in goodwill and intangible assets related to the Maxium acquisition. The decrease in other liabilities from one year ago mainly relates to the elimination of liabilities held for sale resulting from closing of the divestitures discussed above.

Off-Balance Sheet

Off-balance sheet items include assets under administration and assets under management. Total assets under administration, which are comprised of trust assets and third-party leases under administration, and mortgages under service agreements, totaled $10,288 million at April 30, 2016, compared to $9,490 million one year ago and $9,501 million last quarter. Assets under management were $1,834 million at quarter end, compared to $1,911 million a year earlier and $1,825 million last quarter.

Other off-balance sheet items are comprised of standard industry credit instruments (guarantees, standby letters of credit and commitments to extend credit). CWB does not utilize, nor does it have exposure to, collateralized debt obligations or credit default swaps.

For additional information regarding other off-balance sheet items refer to Note 11 of the unaudited interim consolidated financial statements for the period ended April 30, 2016, as well as Note 20 of the audited consolidated financial statements in CWB's 2015 Annual Report.

Capital Management

OSFI requires federally regulated Canadian financial institutions to manage and report regulatory capital in accordance with the Basel III capital management framework. CWB's required minimum regulatory capital ratios, including a 250 basis point capital conservation buffer, are 7.0% common equity Tier 1 (CET1), 8.5% Tier 1 and 10.5% total capital.

At April 30, 2016, CWB's capital ratios were 8.2% CET1, 10.1% Tier 1 and 12.2% total capital. The increase in CWB's CET1 capital ratio to 8.6% at January 31, 2016 primarily reflected the impact of divestiture gains. The subsequent decrease was mainly due to the impact of closing the CWB Maxium acquisition. Higher Tier 1 and Total capital ratios primarily reflect the issuance on March 31, 2016 of $140 million of non-cumulative 5-year rate reset First Preferred Shares Series 7 (Non-Viability Contingent Capital). At 8.0%, the Basel III leverage ratio remains very conservative.

Further details regarding CWB's regulatory capital and capital adequacy ratios are included in the following table:

(unaudited)
($ millions)
As at
April 30
2016
As at
January 31
2016
As at
April 30
2015
Regulatory capital
CET1 capital before deductions $ 1,849 $ 1,802 $ 1,615
Net CET1 deductions (209 ) (147 ) (132 )
CET1 capital 1,640 1,655 1,483
Tier 1 capital(1) 2,010 1,885 1,713
Total capital(1) 2,435 2,309 2,280
Risk-weighted assets $ 19,934 $ 19,186 $ 18,789
Capital adequacy ratios CET1 8.2 % 8.6 % 7.9 %
Tier 1 10.1 9.8 9.1
Total 12.2 12.0 12.1
(1) The 2016 inclusion of non-common equity instruments that do not include non-viability contingent capital clauses is capped at 60% of the January 1, 2013 outstanding balances (2015 - 70%). The balance of subordinated debentures outstanding at April 30, 2016 was within the inclusion threshold and no amounts were excluded from regulatory capital (April 30, 2015 - $153 million excluded). For all periods, there was no exclusion from regulatory capital related to the Innovative Tier 1 capital (disclosed in deposits).

CWB currently reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, which requires CWB to carry significantly more capital for certain credit exposures compared to requirements under the AIRB methodology. For this reason, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks and other financial institutions which utilize the AIRB methodology.

CWB continues to monitor changes proposed to both the Standardized and AIRB approaches for credit risk by the Basel Committee on Banking Supervision. CWB's multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets continues, including preparation of a detailed plan and preliminary development of quantitative credit risk models specific to certain portfolios, as well as evaluation of resource requirements. Implementation of CWB's new core banking system, successfully completed subsequent to quarter end, is a critical component for a number of requirements necessary for AIRB compliance, including the collection and analysis of certain types of data.

Further information relating to CWB's capital position is provided in Note 14 of the unaudited interim consolidated financial statements for the period ended April 30, 2016 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2015.

Book value per common share at April 30, 2016 was $22.62, compared to $20.19 last year and $22.53 last quarter. The modest sequential increase reflects both the impact of higher provisions for credit losses on growth of retained earnings, as well as the issuance of common shares associated with the CWB Maxium acquisition. The increase from a year ago reflects both the gain on sale from the strategic transactions involving CDI and Valiant as well as strong business growth.

Common shareholders received a quarterly cash dividend of $0.23 per common share on March 31, 2016. On June 1, 2016, CWB's Board of Directors declared a cash dividend of $0.23 per common share, payable on June 30, 2016 to shareholders of record on June 20, 2016. This quarterly dividend is consistent with the prior quarter and up 5% from the dividend declared one year ago.

Common share dividend increases are evaluated every quarter against the dividend payout ratio target of approximately 30%. The second quarter dividend payout ratio was 39%. The timing of future dividend increases will be influenced by capital requirements under the Standardized approach to support expected asset growth, as well as the impacts on earnings growth from the change to our credit outlook, challenges related to persistent net interest margin pressure, incremental increases in CWB's expense base, and ongoing macroeconomic uncertainty.

Series 5 preferred shareholders received a quarterly cash dividend of $0.275 on April 30, 2016. On June 1, 2016, the Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share, and an initial cash dividend of $0.5223 per Series 7 Preferred Share, both payable on July 31, 2016 to shareholders of record on July 21, 2016.

Significant Changes in Accounting Policies and Financial Statement Presentation

The unaudited interim consolidated financial statements for the quarter were prepared using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2015.

Future Accounting Changes

A number of standards and amendments have been issued by the International Accounting Standards Board (IASB) and are described in further detail on page 49 of CWB's 2015 Annual Report. These standards and amendments may impact the presentation of financial statements in the future and management is currently reviewing these changes to determine the impact, if any.

IFRS 16 - Leases

In the first quarter of 2016, the IASB issued IFRS 16, requiring most leases to be recorded on the balance sheet. For lessees, most operating leases other than short-term or low-value leases will be capitalized, and will result in a balance sheet increase in lease assets and lease liabilities, and a decrease in operating lease expenses and increase in financing costs on the income statement. The new standard will not impact lessor accounting beyond additional disclosures. The new standard is effective for CWB's fiscal year beginning November 1, 2019 with early adoption permitted if IFRS 15 Revenue from Contracts with Customers is also applied. CWB is currently reviewing IFRS 16 to determine the impact of adoption on its consolidated financial statements.

CWB continues to monitor the IASB's proposed changes to IFRS.

Controls and Procedures

CWB's certifying officers have limited the scope of the design of disclosure controls and procedures and internal controls over financial reporting to exclude the controls, policies and procedures of CWB Maxium, acquired on March 1, 2016. This limitation will be removed no later than January 31, 2017.

There were no changes in CWB's ongoing internal controls over financial reporting that occurred during the quarter ended April 30, 2016 that have materially affected, or are reasonably likely to materially affect, CWB's internal controls over financial reporting. Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of CWB.

Third-party Credit Ratings

DBRS Limited (DBRS) maintains published credit ratings on CWB's senior debt (deposits), short-term debt, subordinated debentures, both series of First Preferred Shares of "A (low)", "R1 (low)", "BBB (high)" and "Pfd-3", respectively, all with a stable outlook. Credit ratings do not consider market price or address the suitability of any financial instrument for a particular investor and are not recommendations to purchase, sell or hold securities. Ratings are subject to revision or withdrawal at any time by the rating organization. Management believes the ratings widen the base of clients and investors who can participate in CWB's offerings, while also lowering overall funding costs and the cost of capital.

Updated Share Information

As at May 26, 2016, there were 81,882,115 common shares and 5,471,797 stock options outstanding. For additional information on share capital and stock options, see Notes 17 and 18 of the audited annual consolidated financial statements for the year ended October 31, 2015 and Notes 9 and 10 to the interim consolidated financial statements for this quarter.

Dividend Reinvestment Plan

CWB common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.B; CWB.PR.C) are deemed eligible to participate in CWB's dividend reinvestment plan (the Plan). The Plan provides holders of eligible shares of CWB the opportunity to direct cash dividends toward the purchase of CWB common shares. CWB has elected to issue common shares for the Plan at the average market price (as defined in the Plan). Further details for the Plan are available on CWB's website.

Summary of Quarterly Financial Information

2016 2015 2014
($ thousands) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Continuing Operations
Common shareholders' net income $ 32,213 $ 52,132 $ 52,969 $ 51,170 $ 51,520 $ 52,405 $ 56,859 $ 52,690
Earnings per common share
Basic 0.40 0.65 0.66 0.64 0.64 0.65 0.71 0.66
Diluted 0.40 0.65 0.66 0.64 0.64 0.65 0.70 0.65
Adjusted cash 0.41 0.66 0.67 0.65 0.65 0.66 0.71 0.67
Combined Operations
Common shareholders' net income $ 32,213 $ 52,132 $ 53,138 $ 158,809 $ 53,545 $ 54,209 $ 58,150 $ 56,580
Earnings per common share
Basic 0.40 0.65 0.66 1.97 0.67 0.67 0.72 0.71
Diluted 0.40 0.65 0.66 1.97 0.67 0.67 0.72 0.70
Adjusted cash 0.41 0.66 0.67 1.98 0.68 0.69 0.73 0.71
Total assets ($ millions) 24,237 23,473 22,839 22,280 21,545 21,285 20,635 20,552
Discontinued Operations
Common shareholders' net income (loss) $
-
$
-
$
169
$ 107,639 $ 2,025 $ 1,804 $ 1,291 $ 3,890
Earnings per common share
Basic - - - 1.33 0.03 0.02 0.01 0.05
Diluted - - - 1.33 0.03 0.02 0.02 0.05
Adjusted cash - - - 1.33 0.03 0.03 0.02 0.04

The financial results for each of the last eight quarters are summarized above. In general, CWB's performance reflects a relatively consistent trend, although the second quarter contains three fewer revenue-earning days in non-leap years, and two fewer days in leap years such as 2016. Common shareholders' net income in the second quarter of 2016 reflects the impact of the credit performance of oil and gas production loans. Results of Discontinued and Combined Operations for the third quarter of fiscal 2015 include divestiture gains.

CWB's past quarterly financial results were subject to some fluctuation due to its exposure to property and casualty insurance. Insurance operations, which are reflected in total revenues of Discontinued Operations up to and including the second quarter of fiscal 2015, are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes. Among other things, quarterly results can also fluctuate from the recognition of periodic income tax items.

For additional details on variations between the prior quarters, refer to the summary of quarterly results section of CWB's MD&A for the year ended October 31, 2015 and the individual quarterly reports to shareholders which are available on SEDAR at www.sedar.com and on CWB's website at www.cwb.com.

Taxable Equivalent Basis (teb)

Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the Consolidated Statement of Income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this quarterly report to shareholders.

Non-IFRS Measures

CWB uses a number of financial measures to assess its performance. These measures provide readers with an enhanced understanding of how management views the results. Non-IFRS measures may also provide readers the ability to analyze trends and provide comparisons with our competitors. Taxable equivalent basis, adjusted cash earnings per common share, return on common shareholders' equity, adjusted return on common shareholders' equity, return on assets, efficiency ratio, net interest margin, common equity Tier 1, Tier 1 and total capital adequacy ratios, and average balances do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other financial institutions. The non-IFRS measures used in this MD&A are calculated as follows:

  • taxable equivalent basis - described above;
  • pre-tax, pre-provision earnings - common shareholders' net income plus the provision for credit losses and income taxes (teb) (see calculation below);
  • adjusted cash earnings per common share - diluted earnings per common share excluding the acquisition-related after-tax amortization of intangible assets and the non-tax deductible change in fair value of contingent consideration (see calculation below). These exclusions represent non-cash charges and are not considered to be indicative of ongoing business performance;
  • return on common shareholders' equity - annualized common shareholders' net income divided by average common shareholders' equity;
  • adjusted return on common shareholders' equity - annualized common shareholders' net income excluding the acquisition-related after-tax amortization of intangible assets and the non-tax deductible change in fair value of contingent consideration (see calculation below), divided by average common shareholders' equity.
  • return on assets - annualized common shareholders' net income divided by average total assets;
  • efficiency ratio - non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets (see calculation below), divided by total revenues, including the net gain related to the sales of the property and casualty insurance subsidiary and CWB's stock transfer business and excluding the non-tax deductible change in fair value of contingent consideration (see calculation below);
  • net interest margin - annualized net interest income divided by average total assets;
  • Basel III common equity Tier 1, Tier 1 and total capital ratios - in accordance with Basel III guidelines issued by OSFI;
  • operating leverage - total revenue (teb) growth, excluding the non-tax deductible change in fair value of acquisition-related contingent consideration, less non-interest expense growth, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months;
  • common share dividend payout ratio - common share dividends declared during the past twelve months divided by common shareholders' net income earned over the same period; and
  • average balances - average daily balances.
Adjusted Financial Measures
(Continuing Operations)

For the three months ended

For the six months ended
(unaudited)
($ thousands)
April 30
2016
January 31
2016
April 30
2015
Change
from
April 30
2015
April 30
2016
April 30
2015
Change
from
April 30
2015
Total Revenues (teb) $ 164,484 $ 158,733 $ 151,161 9 % $ 323,217 $ 303,545 6 %
Adjustments:
Contingent consideration fair value change - - 338 (100 ) - 638 (100 )
Adjusted total revenues (teb) $ 164,484 $ 158,733 $ 151,499 9 % $ 323,217 $ 304,183 6 %
Non-interest expenses $ 78,461 $ 75,553 $ 71,373 10 % $ 154,014 $ 143,243 8 %
Adjustments:
Amortization of acquisition-related intangible assets (pre-tax) (1,605 ) (1,178 ) (1,048 ) 53 (2,783 ) (2,344 ) 19
Adjusted non-interest expenses $ 76,856 $ 74,375 $ 70,325 9 % $ 151,231 $ 140,899 7 %
Common shareholders' net income from Continuing Operations $ 32,213 $ 52,132 $ 51,520 (37 )% $ 84,345 $ 103,925 (19 )%
Adjustments:
Amortization of acquisition-related intangible assets (after tax) 1,182 869 696 70 2,051 1,573 30
Contingent consideration fair value change - - 338 (100 ) - 638 (100 )
Adjusted common shareholders' net income from Continuing Operations $ 33,395 $ 53,001 $ 52,554 (36 )% $ 86,396 $ 106,136 (19 )%
Adjusted Financial Measures (Combined Operations) For the three months ended For the six months ended
(unaudited)
($ thousands)
April 30
2016
January 31
2016
April 30 2015 Change
from
April 30
2015
April 30
2016
April 30
2015
Change
from
April 30
2015
Total Revenues (teb) $ 164,484 $ 158,733 $ 159,910 3 % $ 323,217 $ 319,774 1 %
Adjustments:
Contingent consideration fair value change - - 338 (100 ) - 638 (100 )
Adjusted total revenues (teb) $ 164,484 $ 158,733 $ 160,248 3 % $ 323,217 $ 320,412 1 %
Non-interest expenses $ 78,461 $ 75,553 $ 77,409 1 % $ 154,014 $ 154,347 - %
Adjustments:
Amortization of acquisition-related intangible assets (pre-tax) (1,605 ) (1,178 ) (1,048 ) 53 (2,783 ) (2,344 ) 19
Adjusted non-interest expenses $ 76,856 $ 74,375 $ 76,361 1 % $ 151,231 $ 152,003 (1 )%
Common shareholders' net income from Combined Operations $ 32,213 $ 52,132 $ 53,545 (40 )% $ 84,345 $ 107,754 (22 )%
Adjustments:
Amortization of acquisition-related intangible assets (after tax) 1,182 869 696 70 $ 2,051 1,573 30
Contingent consideration fair value change - - 338 (100 ) - 638 (100 )
Adjusted common shareholders' net income from Combined Operations $ 33,395 $ 53,001 $ 54,579 (39 )% $ 86,396 $ 109,965 21 %
Pre-tax, pre-provision (PTPP) earnings (Continuing Operations) For the three months ended For the six months ended
(unaudited)
($ thousands)
April 30
2016
January 31
2016
April 30
2015
Change
from
April 30
2015
April 30
2016
April 30
2015
Change
from
April 30
2015
Common shareholders' net income from Continuing Operations $ 32,213 $ 52,132 $ 51,520 (37 )% $ 84,345 $ 103,925 (19 )%
Adjustments:
Provision for credit losses 39,671 8,932 7,386 437 48,603 14,355 239
Income taxes (teb) 12,603 20,398 19,144 (34 ) 33,001 38,506 (14 )
Pre-tax, pre-provision earnings $ 84,487 $ 81,462 $ 78,050 8 % $ 165,949 $ 156,786 6 %

Consolidated Balance Sheets


(unaudited)
($ thousands)
As at
April 30
2016
As at
January 31
2016
As at
October 31
2015
As at
April 30
2015 (1)
Change
from
April 30
2015
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions $ 6,271 $ 20,275 $ 23,949 $ 65,395 (90 )%
Interest bearing deposits with regulated financial institutions (Note 4) 169,997 403,620 412,768 104,793 62
Cheques and other items in transit 19,844 10,905 6,705 1,790 nm
196,112 434,800 443,422 171,978 14
Securities (Note 4)
Issued or guaranteed by Canada 1,522,143 1,112,901 1,364,862 610,263 149
Issued or guaranteed by a province or municipality 360,837 517,640 620,904 1,101,000 (67 )
Other debt securities 173,040 540,506 346,299 133,262 30
Preferred shares 131,437 121,859 143,868 228,575 (42 )
Common shares - 42,247 75,179 148,349 (100 )
2,187,457 2,335,153 2,551,112 2,221,449 (2 )
Securities Purchased Under Resale Agreements 142,915 - - - 100
Loans (Notes 5 and 7)
Personal 3,699,902 3,562,362 3,318,254 3,005,075 23
Business 17,675,776 16,889,985 16,251,530 15,666,951 13
21,375,678 20,452,347 19,569,784 18,672,026 14
Allowance for credit losses (Note 6) (127,673 ) (101,608 ) (94,401 ) (85,262 ) 50
21,248,005 20,350,739 19,475,383 18,586,764 14
Other
Property and equipment 59,053 59,896 61,356 61,052 (3 )
Goodwill 84,488 45,619 43,781 43,475 94
Intangible assets 143,580 115,467 106,103 91,539 57
Derivative related (Note 8) 28,308 21,498 23,245 15,116 87
Other assets 146,983 109,381 134,125 119,637 23
Assets held for sale - - - 233,647 (100 )
462,412 351,861 368,610 564,466 (18 )
Total Assets $ 24,236,901 $ 23,472,553 $ 22,838,527 $ 21,544,657 12 %
Liabilities and Equity
Deposits
Personal $ 12,463,248 $ 12,105,617 $ 11,416,621 $ 10,628,959 17 %
Business and government 7,877,677 7,754,151 7,948,786 7,348,715 7
20,340,925 19,859,768 19,365,407 17,977,674 13
Other
Cheques and other items in transit 122,309 66,339 60,258 60,797 101
Securities sold under repurchase agreements 99,003 133,765 - 152,663 (35 )
Derivative related (Note 8) 7,757 19,092 4,503 3,021 157
Other liabilities 338,938 263,655 308,837 264,869 28
Liabilities held for sale - - - 159,684 (100 )
568,007 482,851 373,598 641,034 (11 )
Debt
Debt securities 885,202 864,581 562,623 550,201 61
Subordinated debentures 325,000 325,000 625,000 625,000 (48 )
1,210,202 1,189,581 1,187,623 1,175,201 3
Equity
Preferred shares (Note 9) 265,000 125,000 125,000 125,000 112
Common shares (Note 9) 565,927 538,312 537,511 535,453 6
Retained earnings 1,305,522 1,295,288 1,261,678 1,085,136 20
Share-based payment reserve 30,014 29,927 29,210 27,399 10
Other reserves (49,054 ) (48,490 ) (42,492 ) (23,980 ) 105
Total Shareholders' Equity 2,117,409 1,940,037 1,910,907 1,749,008 21
Non-controlling interests 358 316 992 1,740 (79 )
Total Equity 2,117,767 1,940,353 1,911,899 1,750,748 21
Total Liabilities and Equity $ 24,236,901 $ 23,472,553 $ 22,838,527 $ 21,544,657 12 %
(1) During the fourth quarter of 2015, the collective allowance for credit losses related to committed but undrawn exposures was reclassified from Loans to Other Liabilities. This reclassification is reflected for all periods (see Note 6).
nm - not meaningful

The accompanying notes are an integral part of the interim consolidated financial statements.

Consolidated Statements of Income

For the three months ended For the six months ended
(unaudited)
($ thousands, except per share amounts)
April 30
2016
January 31
2016
April 30
2015
Change
from
April 30
2015
April 30
2016
April 30
2015
Change
from
April 30
2015
Interest Income
Loans $ 227,569 $ 222,697 $ 207,918 9 % $ 450,266 $ 419,305 7 %
Securities 7,122 9,161 10,462 (32 ) 16,283 20,792 (22 )
Deposits with regulated financial institutions 787 832 184 328 1,619 1,235 31
235,478 232,690 218,564 8 468,168 441,332 6
Interest Expense
Deposits 83,970 82,155 77,599 8 166,125 158,190 5
Debt 7,156 7,659 9,356 (24 ) 14,815 18,612 (20 )
91,126 89,814 86,955 5 180,940 176,802 2
Net Interest Income 144,352 142,876 131,609 10 287,228 264,530 9
Provision for Credit Losses (Note 6) 39,671 8,932 7,386 437 48,603 14,355 239
Net Interest Income after Provision for Credit Losses 104,681 133,944 124,223 (16 ) 238,625 250,175 (5 )
Non-interest Income
Credit related 7,173 7,168 6,654 8 14,341 13,416 7
Wealth management services 3,453 3,597 3,565 (3 ) 7,050 7,282 (3 )
Retail services 3,890 3,280 3,520 11 7,170 6,695 7
Trust services 2,997 2,827 2,818 6 5,824 5,633 3
Gains (losses) on securities, net - (2,884 ) 46 (100 ) (2,884 ) 689 nm
Other 1,865 638 1,494 25 2,503 2,377 5
19,378 14,626 18,097 7 34,004 36,092 (6 )
Net Interest and Non-interest Income 124,059 148,570 142,320 (13 ) 272,629 286,267 (5 )
Non-interest Expenses
Salaries and employee benefits 51,939 50,024 47,223 10 101,963 94,397 8
Premises and equipment 12,460 12,046 11,414 9 24,506 23,393 5
Other expenses 14,062 13,483 12,736 10 27,545 25,453 8
78,461 75,553 71,373 10 154,014 143,243 8
Net Income before Income Taxes from Continuing Operations 45,598 73,017 70,947 (36 ) 118,615 143,024 (17 )
Income Taxes 11,849 19,167 17,689 (33 ) 31,016 35,583 (13 )
Net Income from Continuing Operations 33,749 53,850 53,258 (37 ) 87,599 107,441 (18 )
Net Income Attributable to Non-Controlling Interests 161 343 363 (56 ) 504 766 (34 )
Shareholders' Net Income from Continuing Operations 33,588 53,507 52,895 (37 ) 87,095 106,675 (18 )
Preferred share dividends 1,375 1,375 1,375 - 2,750 2,750 -
Common Shareholders' Net Income from Continuing Operations 32,213 52,132 51,520 (37 ) 84,345 103,925 (19 )
Common Shareholders' Net Income from Discontinued Operations - - 2,025 (100 ) - 3,829 (100 )
Common Shareholders' Net Income $ 32,213 $ 52,132 $ 53,545 (40 )% $ 84,345 $ 107,754 (22 )%
Average number of common shares (in thousands) 81,429 80,536 80,424 1 % 80,978 80,402 1 %
Average number of diluted common shares (in thousands) 81,444 80,536 80,565 1 80,993 80,692 -
Earnings Per Common Share
Basic - Continuing Operations $ 0.40 $ 0.65 $ 0.64 (38 )% $ 1.04 $ 1.29 (19 )%
- Combined Operations 0.40 0.65 0.67 (40 ) 1.04 1.34 (22 )
- Discontinued Operations - - 0.03 (100 ) - 0.05 (100 )
Diluted - Continuing Operations 0.40 0.65 0.64 (38 ) 1.04 1.29 (19 )
- Combined Operations 0.40 0.65 0.67 (40 ) 1.04 1.34 (22 )
- Discontinued Operations - - 0.03 (100 ) - 0.05 (100 )

nm - not meaningful

The accompanying notes are an integral part of the interim consolidated financial statements.

Consolidated Statements of Comprehensive Income

For the three months ended For the six months ended
(unaudited)
($ thousands)
April 30
2016
April 30
2015
April 30
2016
April 30
2015
Net Income from Continuing Operations $ 33,749 $ 53,258 $ 87,599 $ 107,441
Common Shareholders' Net Income from Discontinued Operations - 2,025 - 3,829
Net Income 33,749 55,283 87,599 111,270
Other Comprehensive Income (Loss), net of tax
Available-for-sale securities:
Gains (losses) from change in fair value(1) 9,013 (17,132 ) 470 (30,224 )
Reclassification to net income(2) - 196 2,198 (266 )
9,013 (16,936 ) 2,668 (30,490 )
Derivatives designated as cash flow hedges:
Gains (losses) from change in fair value(3) (8,248 ) (3,445 ) (8,664 ) 5,706
Reclassification to net income(4) (1,329 ) (1,611 ) (566 ) 1,801
(9,577 ) (5,056 ) (9,230 ) 7,507
(564 ) (21,992 ) (6,562 ) (22,983 )
Comprehensive Income for the Period $ 33,185 $ 33,291 $ 81,037 $ 88,287
Comprehensive income for the period attributable to:
Shareholders of CWB $ 33,024 $ 32,928 $ 80,533 $ 87,521
Non-controlling interests 161 363 504 766
Comprehensive Income for the Period $ 33,185 $ 33,291 $ 81,037 $ 88,287
(1) Net of income tax of $3,335 and $191 for the three and six months ended April 30, 2016, respectively (2015 - $5,370 and $10,293).
(2) Net of income tax of nil and $810 for the three and six months ended April 30, 2016, respectively (2015 - $67 and $91).
(3) Net of income tax of $3,035 and $3,188 for the three and six months ended April 30, 2016, respectively (2015 - $1,164 and $1,927).
(4) Net of income tax of $489 and $208 for the three and six months ended April 30, 2016, respectively (2015 - $544 and $608).

Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statement of Income when specific conditions are met.

The accompanying notes are an integral part of the interim consolidated financial statements.

Consolidated Statements of Changes in Equity

For the six months ended
(unaudited)
($ thousands)
April 30
2016
April 30
2015
Retained Earnings
Balance at beginning of period $ 1,261,678 $ 1,011,147
Shareholders' net income from continuing operations 87,095 106,675
Common shareholders' net income from discontinued operations - 3,829
Dividends
- Preferred shares (2,750 ) (2,750 )
- Common shares (37,339 ) (33,765 )
Issuance costs on preferred shares (3,162 ) -
Balance at end of period 1,305,522 1,085,136
Other Reserves
Balance at beginning of period (42,492 ) (997 )
Changes in available-for-sale securities 2,668 (30,490 )
Changes in derivatives designated as cash flow hedges (9,230 ) 7,507
Balance at end of period (49,054 ) (23,980 )
Preferred Shares (Note 9)
Balance at beginning of period 125,000 125,000
Issued 140,000 -
Balance at end of period 265,000 125,000
Common Shares (Note 9)
Balance at beginning of period 537,511 533,038
Issued under dividend reinvestment plan 2,125 1,938
Issued on acquisition of subsidiary (Note 3) 25,606 -
Transferred from share-based payment reserve on the exercise or exchange of options 685 477
Balance at end of period 565,927 535,453
Share-based Payment Reserve
Balance at beginning of period 29,210 25,339
Amortization of fair value of options (Note 10) 1,489 2,537
Transferred to common shares on the exercise or exchange of options (685 ) (477 )
Balance at end of period 30,014 27,399
Total Shareholders' Equity 2,117,409 1,749,008
Non-Controlling Interests
Balance at beginning of period 992 1,066
Net income attributable to non-controlling interests 504 766
Dividends to non-controlling interests (785 ) (92 )
Partial ownership increase (353 ) -
Balance at end of period 358 1,740
Total Equity $ 2,117,767 $ 1,750,748

The accompanying notes are an integral part of the interim consolidated financial statements.

Consolidated Statements of Cash Flow

For the six months ended
(unaudited)
($ thousands)
April 30
2016
April 30
2015
Cash Flows from Operating Activities
Net income from continuing operations $ 87,599 $ 107,441
Common shareholders' net income from discontinued operations - 3,829
Adjustments to determine net cash flows:
Provision for credit losses 48,603 14,355
Depreciation and amortization 10,627 11,266
Current income taxes receivable and payable (23,241 ) (20,768 )
Amortization of fair value of employee stock options (Note 10) 1,489 2,537
Accrued interest receivable and payable, net 1,736 (7,485 )
Deferred income taxes, net (1,023 ) (952 )
Gains (losses) on securities, net 2,884 (406 )
Change in operating assets and liabilities:
Deposits, net 975,518 604,660
Loans, net (1,821,225 ) (1,068,424 )
Securities sold under repurchase agreements, net 99,003 152,663
Securities purchased under resale agreements, net (142,915 ) 99,566
Other items, net 32,848 (9,863 )
(728,097 ) (111,581 )
Cash Flows from Financing Activities
Common shares issued (Note 9) 2,125 1,938
Preferred shares issued, net of issuance costs 136,838 -
Debt securities issued 464,534 233,960
Debt securities repaid (141,955 ) (95,749 )
Debentures redeemed (300,000 ) -
Dividends (40,089 ) (36,515 )
Dividends to non-controlling interests (785 ) (92 )
120,668 103,542
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net 243,169 358,992
Securities, purchased (3,717,090 ) (2,869,156 )
Securities, sale proceeds 3,320,097 2,143,897
Securities, matured 740,272 435,017
Property, equipment and intangible assets (25,756 ) (16,656 )
Partial ownership increase (353 ) -
Acquisition of subsidiary (Note 3) (19,500 ) -
540,839 52,094
Change in Cash and Cash Equivalents (66,590 ) 44,055
Cash and Cash Equivalents at Beginning of Period (29,604 ) (37,667 )
Cash and Cash Equivalents at End of Period * $ (96,194 ) $ 6,388
* Represented by:
Cash and non-interest bearing deposits with financial institutions $ 6,271 $ 65,395
Cheques and other items in transit (included in Cash Resources) 19,844 1,790
Cheques and other items in transit (included in Other Liabilities) (122,309 ) (60,797 )
Cash and Cash Equivalents at End of Period $ (96,194 ) $ 6,388
Supplemental Disclosure of Cash Flow Information (Combined Operations)
Interest and dividends received $ 481,097 $ 450,111
Interest paid 181,226 181,528
Income taxes paid 54,839 58,186

The accompanying notes are an integral part of the interim consolidated financial statements.

Notes to Interim Consolidated Financial Statements

(unaudited)

($ thousands, unless otherwise noted)

  1. Basis of Presentation and Significant Accounting Policies

These unaudited condensed interim consolidated financial statements of Canadian Western Bank (CWB) have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2015, except as noted below. These interim consolidated financial statements of CWB, domiciled in Canada, have also been prepared in accordance with subsection 308 (4) of the Bank Act and the accounting requirements of the Office of the Superintendent of Financial Institutions Canada (OSFI). Under International Financial Reporting Standards (IFRS), additional disclosures are required in annual financial statements and accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2015 as set out on pages 68 to 108 of CWB's 2015 Annual Report.

The interim consolidated financial statements were authorized for issue by the Board of Directors on June 1, 2016.

  1. Future Accounting Changes

CWB continues to monitor the IASB's proposed changes to accounting standards. Although not expected to materially impact CWB's 2016 consolidated financial statements, these proposed changes may have a significant impact on future financial statements. Additional discussion on certain accounting standards that may impact CWB is included in the audited consolidated financial statements within CWB's 2015 Annual Report.

IFRS 16 - Leases

In January 2016, the IASB issued IFRS 16, which requires most leases to be recorded on the balance sheet. For lessees, most operating leases other than short-term or low-value leases will be capitalized, and will result in a balance sheet increase in lease assets and lease liabilities, and a decrease in operating lease expenses and an increase in financing costs on the income statement. The new standard will not impact lessor accounting beyond additional disclosures. The new standard is effective for CWB's fiscal year beginning November 1, 2019 with early adoption permitted if IFRS 15 Revenue from Contracts with Customers is applied. CWB continues to review IFRS 16 to determine the impact of adoption on its consolidated financial statements.

  1. Business and Other Acquisitions

Maxium Financial Services Inc. and Desante Financial Services Inc.

On March 1, 2016, CWB acquired the non-securitized lending assets and other business assets of the privately held Maxium Financial Services Inc. and Desante Financial Services Inc., now referred to as "CWB Maxium Financial" (CWB Maxium) in exchange for $19,500 in cash, as well as 1,250,312 common shares of CWB and contingent consideration with fair values on the acquisition date of $25,606 and $16,400, respectively, for a total initial acquisition cost of $61,506. Contingent consideration, to a maximum of $70,500, will be paid in annual installments with determination of the total amount payable based on CWB Maxium's cumulative business performance over a 36-month purchase price adjustment period. Up to 50% of the total contingent consideration may be settled with CWB shares at the vendors' option, provided the average share price over the 20 days preceding issuance exceeds $30.00, with the remainder to be paid in cash. Any required adjustment to the contingent consideration after the acquisition date will be recognized in non-interest income. The results of operations from CWB Maxium have been included in CWB's consolidated financial statements since the acquisition date.

CWB Maxium provides loans, equipment leases and structured financing solutions to more than 35,000 clients, mainly in Ontario. Specialized financing solutions are primarily provided in the areas of health care, golf, transportation, real estate, and general corporate financing. Securitized assets that were originated prior to March 1, 2016 were not included in the transaction.

The following table summarizes the fair value of the assets acquired and liabilities assumed:

Fair value of initial consideration transferred $ 61,506
Assets and liabilities acquired at fair values
Intangible assets 21,700
Deferred income tax asset 723
Other items, net 214
Goodwill $ 38,869

Intangible assets include customer relationships, trademarks, proprietary technology, and non-competition agreements. The trademark, which has an estimated value of $3,680, is not subject to amortization. The total amount of goodwill and intangible assets are deductible over time for income tax purposes.

Franchise Finance

During the second quarter, CWB entered into an asset purchase agreement with GE Canada Equipment Financing G.P. to acquire a portfolio of Franchise Finance loan assets, valued at approximately $350 million, providing financing across Canada to a diverse group of established companies in the hospitality and restaurant industries. The transaction is expected to close in CWB's fiscal 2016 third quarter.

  1. Securities

Net unrealized gains (losses) reflected on the consolidated balance sheets follow:

As at
April 30
2016
As at
January 31
2016
As at
October 31
2015
Interest bearing deposits with regulated financial institutions $ 21 $ (183 ) $ (377 )
Securities issued or guaranteed by
Canada (7,814 ) (2,685 ) (8,614 )
A province or municipality (2,025 ) (2,480 ) (5,396 )
Other debt securities 902 652 (1,023 )
Preferred shares (63,583 ) (76,466 ) (54,457 )
Common shares - (3,718 ) (6,349 )
Unrealized losses, net $ (72,499 ) $ (84,880 ) $ (76,216 )

The securities portfolio is primarily comprised of high quality debt and equity instruments that are not held for trading purposes and, where applicable, are typically held until maturity. Fluctuations in value are generally attributed to changes in interest rates, market credit spreads and shifts in the interest rate curve. As at April 30, 2016, CWB assessed the securities with unrealized losses and based on available objective evidence, including a review of the creditworthiness of the issuers, no impairment charges were included in gains (losses) on securities, net (January 31, 2016 - nil).

  1. Loans

The composition of CWB's loan portfolio by geographic region and industry sector follow:

Composition Percentage
($ millions) AB BC ON SK MB Other Total April 30
2016
January 31
2016
October 31
2015
Personal(1) $ 1,248 $ 1,032 $ 1,060 $ 191 $ 98 $ 71 $ 3,700 17 % 17 % 17 %
Business
Real estate 3,502 3,961 346 491 154 22 8,476 40 39 38
Commercial 2,114 1,880 502 255 207 121 5,079 24 24 24
Equipment financing(2) 1,270 659 753 378 160 574 3,794 17 18 19
Energy 307 - - 20 - - 327 2 2 2
7,193 6,500 1,601 1,144 521 717 17,676 83 83 83
Total Loans(3) $ 8,441 $ 7,532 $ 2,661 $ 1,335 $ 619 $ 788 $ 21,376 100 % 100 % 100 %
Composition Percentage
April 30, 2016 40 % 35 % 12 % 6 % 3 % 4 % 100 %
January 31, 2016 41 % 34 % 12 % 6 % 3 % 4 % 100 %
October 31, 2015 41 % 33 % 12 % 7 % 3 % 4 % 100 %
(1) Includes securitized mortgages reported on-balance sheet of $171 (January 31, 2016 - $173 and October 31, 2015 - nil) that were not transferred to external parties.
(2) Includes securitized leases reported on-balance sheet of $969 (January 31, 2016 - $947 and October 31, 2015 - $635).
(3) This table does not include an allocation for credit losses.
  1. Allowance for Credit Losses

The following table shows the changes in the allowance for credit losses:

For the three months ended
April 30, 2016
For the three months ended
January 31, 2016


Specific Allowance
Collective Allowance for Credit Losses Total

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 20,881 $ 99,729 $ 120,610 $ 15,806 $ 99,613 $ 115,419
Provision for credit losses 39,510 161 39,671 8,816 116 8,932
Write-offs (15,708 ) - (15,708 ) (4,321 ) - (4,321 )
Recoveries 1,244 - 1,244 580 - 580
Balance at end of period $ 45,927 $ 99,890 $ 145,817 $ 20,881 $ 99,729 $ 120,610
Represented by:
Loans $ 45,927 $ 81,746 $ 127,673 $ 20,881 $ 80,727 $ 101,608
Committed but undrawn exposures - 18,144 18,144 - 19,002 19,002
Total allowance $ 45,927 $ 99,890 $ 145,817 $ 20,881 $ 99,729 $ 120,610
For the three months ended
April 30, 2015(1)

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 10,418 $ 90,129 $ 100,547
Provision for credit losses 2,976 4,410 7,386
Write-offs (2,416 ) - (2,416 )
Recoveries 2,341 - 2,341
Balance at end of period $ 13,319 $ 94,539 $ 107,858
Represented by:
Loans $ 13,319 $ 71,943 $ 85,262
Committed but undrawn exposures(1) - 22,596 22,596
Total allowance $ 13,319 $ 94,539 $ 107,858
For the six months ended
April 30, 2016
For the six months ended
April 30, 2015


Specific Allowance
Collective Allowance for Credit Losses Total

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 15,806 $ 99,613 $ 115,419 $ 5,523 $ 90,075 $ 95,598
Provision for credit losses 48,326 277 48,603 9,891 4,464 14,355
Write-offs (20,029 ) - (20,029 ) (4,854 ) - (4,854 )
Recoveries 1,824 - 1,824 2,759 - 2,759
Balance at end of period $ 45,927 $ 99,890 $ 145,817 $ 13,319 $ 94,539 $ 107,858
(1) Comparative information has been restated to reflect the presentation of the allowance for credit losses related to committed but undrawn credit exposures.
  1. Impaired and Past Due Loans

Outstanding gross loans and impaired loans, net of allowance for credit losses, by loan type, follow:

As at April 30, 2016 As at January 31, 2016
Gross Amount Gross Impaired Amount Specific Allowance Net Impaired Loans Gross Amount Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Personal $ 3,699,902 $ 17,058 $ 435 $ 16,623 $ 3,562,362 $ 19,100 $ 280 $ 18,820
Business
Real estate(1) 8,476,151 37,026 4,950 32,076 7,935,392 38,180 3,650 34,530
Commercial 5,079,166 2,863 718 2,145 4,810,060 5,441 728 4,713
Equipment financing 3,793,828 34,258 6,953 27,305 3,816,207 27,120 5,332 21,788
Energy 326,631 53,758 32,871 20,887 328,326 21,666 10,891 10,775
Total(2) $ 21,375,678 $ 144,963 $ 45,927 99,036 $ 20,452,347 $ 111,507 $ 20,881 90,626
Collective allowance(3) (99,890 ) (99,729 )
Net impaired loans after collective allowance $ (854 ) $ (9,103 )
As at October 31, 2015
Gross Amount Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Personal $ 3,318,254 $ 16,145 $ 262 $ 15,883
Business
Real estate(1) 7,460,414 32,541 1,770 30,771
Commercial 4,658,219 3,870 128 3,742
Equipment financing 3,819,966 19,573 4,346 15,227
Energy 312,931 22,776 9,300 13,476
Total(2) $ 19,569,784 $ 94,905 $ 15,806 79,099
Collective allowance(3) (99,613 )
Net impaired loans after collective allowance $ (20,514 )
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans include foreclosed assets with a carrying value of $3,392 (January 31, 2016 - $1,482; and October 31, 2015 - $979) which are held for sale. CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(3) The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and is not allocated by loan type.

Outstanding impaired loans, net of allowance for credit losses, by provincial location of security, follow:

As at April 30, 2016 As at January 31, 2016
Gross Impaired Amount Specific Allowance Net
Impaired Loans
Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Alberta $ 80,391 $ 34,821 $ 45,570 $ 45,239 $ 12,796 $ 32,443
British Columbia 34,341 5,348 28,993 30,862 4,369 26,493
Ontario 14,393 2,657 11,736 20,022 1,233 18,789
Saskatchewan 8,332 987 7,345 8,291 761 7,530
Manitoba 2,048 523 1,525 2,334 484 1,850
Other 5,458 1,591 3,867 4,759 1,238 3,521
Total $ 144,963 $ 45,927 99,036 $ 111,507 $ 20,881 90,626
Collective allowance(1) (99,890 ) (99,729 )
Net impaired loans after collective allowance $ (854 ) $ (9,103 )
As at October 31, 2015
Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Alberta $ 41,749 $ 11,020 $ 30,729
British Columbia 30,539 1,932 28,607
Ontario 9,256 1,019 8,237
Saskatchewan 8,437 606 7,831
Manitoba 1,539 240 1,299
Other 3,385 989 2,396
Total $ 94,905 $ 15,806 79,099
Collective allowance(1) (99,613 )
Net impaired loans after collective allowance $ (20,514 )
(1) The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and is not allocated by province.

Gross impaired loans exclude certain past due loans where payment of interest or principal is contractually in arrears. Details of such past due loans that have not been included in the gross impaired amount follow:

As at April 30, 2016
1 - 30
days
31 - 60
days
61 - 90
days
More than
90 days
Total
Personal $ 41,482 $ 5,559 $ 1,813 $ 473 $ 49,327
Business 83,387 30,719 22,787 3 136,896
$ 124,869 $ 36,278 $ 24,600 $ 476 $ 186,223
Total as at January 31, 2016 $ 88,131 $ 71,150 $ 14,896 $ 1,224 $ 175,401
Total as at October 31, 2015 $ 81,469 $ 46,723 $ 8,874 $ 3,495 $ 140,561
  1. Derivative Financial Instruments

When designated as accounting hedges by CWB, certain derivative financial instruments are designated as either a hedge of the fair value of recognized assets or liabilities or firm commitments (fair value hedges), or a hedge of highly probable future cash flows attributable to a recognized asset or liability or a forecasted transaction (cash flow hedges). Changes in fair value attributed to both the interest rate swaps designated as fair value hedges and the associated hedged risk are included in non-interest income. Any difference between the two represents hedge ineffectiveness. When a fair value hedge is discontinued, the hedged item is no longer adjusted to reflect changes in fair value. Any cumulative fair value adjustment recorded up to the point of discontinuation to the hedged item is amortized to net interest income over its remaining useful life. Changes in fair value of the effective portion of equity and interest rate swap derivatives designated as cash flow hedges are recorded in other comprehensive income and are reclassified to net income in the same period that the hedged item affects income. On an ongoing basis, the derivatives used in hedging transactions are assessed to determine whether they are effective in offsetting changes in fair values or cash flows of the hedged items. If a designated cash flow hedging transaction becomes ineffective, any subsequent change in the fair value of the hedging instrument is recognized in net income.

The notional value outstanding and related fair value for derivative financial instruments follow:

As at April 30, 2016 As at January 31, 2016
Notional
Amount
Positive
Fair
Value
Negative
Fair
Value
Notional
Amount
Positive
Fair
Value
Negative
Fair
Value
Cash flow hedges
Interest rate swaps(1) $ 3,280,000 $ 11,580 $ 5,981 $ 3,030,000 $ 20,734 $ 735
Equity swaps(2) 19,860 263 1,690 19,860 - 4,544
Fair value hedges
Interest rate swaps(3) - - - 452,250 - 4,499
Not designated in a hedging relationship
Equity swaps(4) 3,024 24 - 3,024 - 511
Foreign exchange contracts(5) 247,380 16,441 86 253,032 764 8,803
Derivative related amounts $ 3,550,264 $ 28,308 $ 7,757 $ 3,758,166 $ 21,498 $ 19,092
As at October 31, 2015
Notional
Amount
Positive
Fair Value
Negative
Fair Value
Cash flow hedges
Interest rate swaps $ 2,805,000 $ 20,073 $ 733
Equity swaps 19,860 - 3,317
Not designated in a hedging relationship
Equity swaps 3,024 - 307
Foreign exchange contracts 233,129 3,172 146
Derivative related amounts $ 3,061,013 $ 23,245 $ 4,503
(1) Interest rate swaps designated as cash flow hedges outstanding at April 30, 2016 mature between May 2016 and April 2021.
(2) Equity swaps designated as cash flow hedges outstanding at April 30, 2016 mature between June 2016 and June 2018.
(3) Interest rate swaps designated as fair value hedges outstanding at January 31, 2016 were unwound in April 2016.
(4) Equity swaps not designated as hedges outstanding at April 30, 2016 mature in June 2016 and December 2017.
(5) Foreign exchange contracts outstanding at April 30, 2016 mature between May 2016 and October 2016.

The impact of gains related to hedge ineffectiveness recognized in other non-interest income within the consolidated statements of income follow:

For the three months ended For the six months ended
April 30
2016
April 30
2015
April 30
2016
April 30
2015
Fair value hedges
Change in fair value of the hedging instruments $ 5,634 $ - $ 1,135 $ -
Change in fair value of the hedged items attributable to hedged risk (4,794 ) - (501 ) -
$ 840 $ - $ 634 $ -
Cash flow hedges $ - $ - $ - $ -

At April 30, 2016, hedged cash flows are expected to occur and affect profit or loss within the next five years.

CWB limits its exposure to credit losses related to derivative financial instruments by dealing with creditworthy counterparties and entering into contracts that provide for the exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed upon threshold. At April 30, 2016, the Bank held $17,001 (January 31, 2016 - $11,799 and October 31, 2015 - $9,870) of collateral related to derivative financial instruments with a positive fair value and pledged $2,200 (January 31, 2016 - $7,870 and October 31, 2015 - nil) of cash collateral related to derivative financial instruments with a negative fair value.

There were no forecasted transactions that failed to occur during the three and six months ended April 30, 2016.

  1. Capital Stock

Share Capital

For the six months ended
April 30, 2016 April 30, 2015
Number of
Shares
Amount Number of
Shares
Amount
Preferred Shares - Series 5
Outstanding at beginning and end of period 5,000,000 $ 125,000 5,000,000 $ 125,000
Preferred Shares - Series 7
Outstanding at beginning of period - - - -
Issued 5,600,000 140,000 - -
Outstanding at end of period 5,600,000 140,000 - -
Common Shares
Outstanding at beginning of period 80,526,069 537,511 80,369,305 533,038
Issued under dividend reinvestment plan 88,820 2,125 66,178 1,938
Issued on exercise or exchange of options (Note 10) 16,427 685 15,647 477
Issued on acquisition of subsidiary (Note 3) 1,250,312 25,606 - -
Outstanding at end of period 81,881,628 565,927 80,451,130 535,453
Share Capital $ 830,927 $ 660,453

On March 31, 2016, CWB issued 5,600,000 non-cumulative, five year rate reset First Preferred Shares Series 7 (Non-Viability Contingent Capital (NVCC)) (Series 7 Preferred Shares) at $25.00 per share, for gross proceeds of $140,000. Holders of Series 7 Preferred Shares are entitled to receive a non-cumulative fixed dividend in the amount of $0.5223 on July 31, 2016 and thereafter, dividends will be at an annual rate of $1.5625 per share, payable quarterly, when declared by the Board of Directors of CWB, for the initial period ending July 31, 2021. The quarterly dividend represents an annual yield of 6.25% based on the stated issue price per share. Thereafter, the dividend rate will reset every five years at a level of 547 basis points over the then five year Government of Canada bond yield.

CWB maintains the right to redeem, subject to the approval of OSFI, up to all of the then outstanding Series 7 Preferred Shares on July 31, 2021, and on July 31 every five years thereafter at a price of $25.00 per share. Should CWB choose not to exercise its right to redeem the Series 7 Preferred Shares, holders of these shares will have the right to convert their shares into an equal number of non-cumulative, floating rate First Preferred Shares Series 8 (Series 8 Preferred Shares), subject to certain conditions, on July 31, 2021, and on July 31 every five years thereafter. Holders of the Series 8 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of CWB, equal to the 90-day Government of Canada Treasury Bill rate plus 547 basis points.

Upon the occurrence of a trigger event (as defined by OSFI), each Series 7 or 8 Preferred Share will be automatically converted, without the consent of the holders, into CWB common shares. Conversion to common shares will be determined by dividing the preferred share conversion value ($25.00 per preferred share plus any declared but unpaid dividends) by the common share value (the greater of (i) the floor price of $5.00 and (ii) the current market price calculated as the volume-weighted average trading price for the ten consecutive trading days ending on the day immediately prior to the date of the conversion).