CWB reports strong second quarter financial performance
Positive loan growth and strong growth of relationship-based branch-raised deposits Higher net interest margin compared to last year and last quarter Adjusted cash earnings per common share of $0.59
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E-mailEDMONTON, ALBERTA -- (Marketwired) -- 06/01/17 -- "Strong second quarter results from CWB Financial Group demonstrate continued success in executing our balanced growth strategy. Highlights this quarter include very strong annual earnings growth, positive loan growth and strong growth of stable, relationship-based branch-raised deposits. We continue to support our solid operating performance with a very strong capital position, and credit quality remains stable with loan impairments and provisions for credit losses consistent with expectations," said Chris Fowler, President and CEO. "We recently celebrated the one year anniversary of our successful core banking system implementation. I'm pleased to report we are starting to realize the benefits of this transformative investment in progress toward both improved client offerings and enhanced capital and liability management."
"We have clearly defined strategic objectives. They include balanced growth of both loans and funding sources, a more balanced geographic footprint and broader diversification within targeted sectors of Canada's banking industry," continued Mr. Fowler. "The growing contributions of our businesses in Ontario are very important in this respect. Strong performance within CWB Optimum Mortgage, National Leasing, CWB Maxium and the addition of CWB Franchise Finance contributed to a notable 42% increase in CWB's Ontario-based lending exposures over the past year, as well as our strategic industry diversification."
"CWB's focus is to deliver unique, full-service commercial and personal banking experiences to business owners. We are strategically diversifying outside of Western Canada to significantly expand our addressable market without compromising the competitive advantage conferred through our focused approach. Notwithstanding our purposeful expansion strategy, personal relationships tied to our network of 42 branches continue to represent the heart of our business. We are broadening these relationships with the help of our new core banking system to go beyond highly-valued lending solutions. Our client relationships increasingly incorporate flexible cash management and business savings arrangements, as well as the opportunity to provide complementary personal banking and wealth management solutions. Going forward, we will continue to execute on our strategy and capitalize on both our broader reach and the ongoing transformation of the financial services landscape. This will increasingly leverage our technology investments and related initiatives to deliver exceptional client experiences and build full banking relationships both within and beyond our branch footprint. Our dedicated, caring teams across the organization are excited about the future, and ready to help clients grow."
Second Quarter 2017 Highlights(1)(compared to the same period in the prior year)
-- Strong operating performance, with pre-tax, pre-provision income (teb)
of $90.8 million, up 4% and common shareholders' net income of $47.6
million, up 48%; strong growth of net income partly reflects the impact
of energy-related credit provisions last year.
-- Diluted and adjusted cash earnings per common share of $0.54 and $0.59,
up 35% and 44%, respectively, with changes reflecting factors noted
above and the issuance of common shares in July 2016.
-- Loan growth of 5%. Sequential loan growth was 2% and included increases
in all provinces.
-- Stable deposits, with strong, 9% growth of relationship-based branch-
raised funding including a very strong 15% increase in lower-cost demand
and notice deposits.
-- Net interest margin (teb) of 2.55%, up eight basis points from both last
year and last quarter.
-- Provision for credit losses as a percentage of average loans of 25 basis
points, down from 78 basis points last year and 27 basis points last
quarter.
-- Stable gross impaired loans as a percentage of total loans of 0.62%,
compared to 0.68% last year and 0.57% last quarter.
-- Very strong Basel III regulatory capital ratios under the Standardized
approach for calculating risk-weighted assets of 9.6% common equity Tier
1 (CET1), 10.9% Tier 1 and 12.7% Total capital.
1. Highlights include certain non-IFRS measures - refer to definitions
following the table of Selected Financial Highlights on page 22.
Canadian Western Bank (TSX: CWB) (CWB) today announced strong second quarter financial performance including very strong earnings growth from the same quarter last year, positive loan growth, strong growth of relationship-based branch-raised deposits, higher net interest margin, stable credit quality and very strong regulatory capital ratios. Pre-tax, pre-provision income (teb) of $90.8 million was up 4% and common shareholders' net income of $47.6 million was 48% higher. The significant increase in net income was driven by a 67% decline in the provision for credit losses, primarily reflecting the impact of specific allowances recorded against energy loans last year. Growth of total revenues also contributed to the bottom line, with net interest income and non-interest income both up 5%. These factors were partially offset by increased non-interest expenses, acquisition-related fair value changes and higher preferred share dividends. Average loan balances were up 5% from the second quarter last year, and net interest margin (teb) of 2.55% was up eight basis points. Higher net interest margin partly reflects CWB's improved funding mix, including the benefit of very strong 15% growth of lower-cost demand and notice deposits within branch-raised funding. Diluted earnings per common share of $0.54 and adjusted cash earnings per common share of $0.59 were up 35% and 44%, respectively, with growth driven by the factors noted above, partially offset by the 2016 issuance of common shares.
Compared to the prior quarter, pre-tax, pre-provision income and common shareholders' net income were both 4% lower. Net interest income (teb) was down 2% as the positive impacts of 1% growth of average loans and an eight basis point increase in net interest margin (teb) were more than offset by three fewer interest-earning days. Non-interest income was up 4% and the provision for credit losses was 12% lower. Non-interest expenses were up 2% during the quarter. Diluted earnings per common share and adjusted cash earnings per common share were down 4% and 3% on a sequential basis, respectively.
Year-to-date pre-tax, pre-provision income (teb) of $185.7 million was 8% higher and common shareholders' net income of $97.1 million was up 15% from last year. Both metrics benefitted from the 7% increase in net interest income and 17% higher non-interest income. Higher net interest income reflects 7% growth of average loans and a four basis point increase in net interest margin (teb). The higher growth rate of common shareholders' net income as compared to pre-tax, pre-provision income primarily reflects the 42% decrease in the provision for credit losses. These factors were partially offset within common shareholders' net income by increased non-interest expenses, acquisition-related fair value changes, and higher preferred share dividends. Diluted earnings per common share and adjusted cash earnings per common share of $1.10 and $1.20, respectively, were up 6% and 12%, from last year.
Positive loan growth with continued strategic diversification and strong growth of lower-cost, relationship-based branch-raised deposits
Total loans at April 30, 2017 were up 5% from the same period last year and 2% higher than the prior quarter. Of note, the sequential increase included positive growth across all provinces. The composition of year-over-year growth by portfolio segment and geography was in line with our expectations. Growth within personal loans and mortgages continued to be very strong with a 21% increase from a year ago driven by ongoing strong performance within CWB Optimum Mortgage. General commercial loans also delivered double-digit growth with a 10% year-over-year increase. This included contributions from CWB Maxium and the CWB Franchise Finance portfolio, both acquired in fiscal 2016. Growth within these categories contributed to a 42% annual increase in CWB's Ontario-based lending exposures and a greater proportion of total loans represented by our general commercial and personal mortgages segments.
These developments are fully aligned with the strategic diversification objectives embedded within CWB's balanced growth strategy. Along with ongoing strong growth of both loans and funding sources, our balanced growth objectives include further geographic and business sector diversification within targeted lending segments. We remain committed to delivering double-digit annual loan growth whenever prudent. Due to relatively moderate growth in the first half of the year, it will likely be challenging to deliver double digit growth on a consolidated basis in fiscal 2017. Net loan growth within Alberta and Saskatchewan is expected to remain moderate this year due to the lagging impact of the 2015 - 2016 regional recession. However, our pipeline of new lending opportunities in these provinces is expanding as the economic backdrop improves. On this basis, and with continued strong performance from CWB's business lines with a national footprint, we expect that overall loan growth will continue to accelerate in the second half of this year. Regardless of economic factors, we will continue to focus on growth of secured loans that offer an appropriate return and acceptable risk profile.
Another key strategic objective, supported by the capabilities of our new core banking system, is to increase the level of relationship-based branch-raised deposits. These core funding products are typically lower cost than non-branch-raised sources. Branch-raised deposit products include various business savings, cash management, and bare trustee accounts. With the exception of bare trustee accounts, these are tools which help our banking clients conveniently manage their business and personal finances.
We consider growth within these product categories to demonstrate success in strengthening key, full-service client relationships, primarily tied to our network of 42 branches within Western Canada. Second quarter branch-raised deposits were up 9% from the same period last year, and 3% higher than the prior quarter. The year-over-year and sequential increases in branch-raised deposits included very strong growth within lower-cost demand and notice deposits of 15% and 5%, respectively.
Ongoing enhancements to CWB's client experience in support of full-service client relationships
Implementation of the new banking system has enabled CWB to upgrade our client experience through a number of targeted initiatives. For example, we have improved our digital banking experience through strategic improvements to CWB Direct Online Banking. The updated design provides a more consistent visual experience across CWB's digital platforms and complements new financial and communication tools within CWB's mobile banking app. We also recently renewed our processing agreement with Everlink and expanded the scope of services to enable CWB to offer tap-enabled debit cards to our clients for the first time. The release of CWB PayHQ, in partnership with Payfirma, on May 1, 2017, represents the addition of a fully integrated, omni-channel payment technology platform to our growing portfolio of business services products, and another step forward to enhance CWB's full-service banking experience for business owners. We also launched Motive Financial, a new brand for CWB's on-line bank, with a focus on creating valuable savings opportunities for clients from coast-to-coast. Together these initiatives are expected to improve the convenience and overall user experience of our suite of business and personal banking tools, and support development of broader, multi-product client relationships.
Stable impaired loans and provision for credit losses consistent with expectations
Overall credit quality is consistent with expectations. Gross impaired loans totaled $137.8 million and represented 0.62% of total loans, compared to $145.0 million or 0.68% last year, and $124.4 million or 0.57% last quarter. The second quarter provision for credit losses of 25 basis points of average loans was at the low end of our expected full-year range of 25 to 35 basis points. This was down from 78 basis points in the same period last year and 27 basis points last quarter. On a year-to-date basis, the provision for credit losses as a percentage of average loans was 26 basis points, down from 48 basis points a year ago. Abnormally high second quarter and year-to-date provisions last year reflect specific allowances related to energy loans, as we took a proactive approach to resolve positions within CWB's small portfolio of loans to oil and gas producers. This portfolio now represents less than 1% of our total loans, and we do not expect material credit impacts related to remaining oil and gas loans.
We continue to carefully monitor the loan portfolio for signs of weakness resulting from the lagging impact of the 2015 - 2016 regional recession. While Alberta-based loans represent 35% of CWB's overall portfolio, gross impaired loans within Alberta of $64.7 million represent 47% of total impairments at April 30, 2017. The level of impaired loans in Alberta as a percentage of total impairments was down from 55% last year and up from 41% in the prior quarter.
Although we expect periodic increases in the balance of impaired loans across the portfolio, we remain confident that our combination of disciplined underwriting, secured lending practices and proactive account management will continue to mitigate the financial impacts of further increases in impairments. Loss rates on current and future impaired loans are expected to be consistent with CWB's prior experience, where write-offs have been low as a percentage of impaired loans.
Efficient operations and operating leverage
The second quarter efficiency ratio (teb) was 47.5%, up from 46.7% last year and 46.0% in the previous quarter. The year-to-date efficiency ratio (teb) was stable at 46.8%. Operating leverage, which is calculated as total revenue (teb) growth less non-interest expense growth, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months, was negative 2.0% as 5% year-over-year growth in total revenues (teb) compared a 7% increase in non-interest expenses. Expense growth compared to the first half of last year was partly attributable to implementation of our new core banking system, as well as expenses related to CWB Maxium and CWB Franchise Finance, both acquired in fiscal 2016. On a year-to-date basis, operating leverage was flat.
One of our key priorities is to deliver consistent increases in adjusted cash earnings per share through business growth and strategic investment while maintaining effective control of costs. CWB's ongoing investment in people, technology and infrastructure is expected to contribute to long-term shareholder value through improved financial performance in future periods. In view of the level of necessary future investment to facilitate ongoing implementation of our strategic direction, we expect CWB's efficiency ratio to fluctuate at levels moderately higher than the recent past. We are committed to disciplined control of all discretionary expenses, and we expect to deliver positive operating leverage over the medium-term.
Prudent capital management and dividends
At April 30, 2017, CWB's capital ratios were 9.6% CET1, 10.9% Tier 1 and 12.7% Total capital. With a very strong capital position under the more conservative Standardized approach for calculating risk-weighted assets, CWB is well-positioned to continue to execute against our balanced growth strategy. Ongoing support and development of each of CWB's core businesses will remain a key priority, and we will continue to evaluate potential strategic acquisitions.
We evaluate common share dividend increases every quarter against our dividend payout ratio target of approximately 30% of common shareholders' net income. This quarter's common share dividend of $0.23 per share is consistent with the second quarter last year and the prior quarter. The dividend payout ratio this quarter was approximately 42%, partly reflecting the impact of a higher share count on total dividends paid. The timing of future dividend increases will also be influenced by capital requirements under the Standardized approach to support ongoing strong and balanced asset growth.
Impacts of publicity related to challenges faced by a competitor to CWB Optimum Mortgage
Recent publicity related to challenges faced by the largest originator of Alt-A mortgages in Canada has resulted in both higher-than-normal mortgage application volumes for CWB Optimum Mortgage, and increased deposit pricing within the broker deposit funding channel.
Term deposits raised through the broker network represented 34% of our total funding at April 30, 2017, down from 38% last year. As discussed above, our strategic focus is to increase relationship-based branch-raised deposits, with particular emphasis on lower cost demand and notice deposits. Total branch-raised deposits increased to 57% of total deposits this quarter, up from 53% last year. Demand and notice deposits now comprise 39% of total deposits, up from 34% one year ago. The broker deposit network remains an efficient source for raising insured fixed term retail deposits and has proven to be a reliable and effective way to supplement core funding over a wide geographic base. Of note, we raise only fixed-term deposits through this funding channel, with terms to maturity between one and five years, and we do not offer a High Interest Savings Account (HISA) product.
Pricing within the broker channel was disrupted late in the second quarter as the most active issuer came under pressure. As we move through our third quarter, the broker deposit market remains deep, liquid and highly accessible to CWB. Of note, the weighted average cost of funding for broker deposits issued by CWB across all maturities in May 2017 was lower than the same month in both of the last two years, despite the impact of recent price disruption.
We expect the increase in both mortgage application volumes and broker deposit pricing to be temporary. As we consider the increase in mortgage applications, our manual adjudication and underwriting processes remain consistent with our conservative risk appetite and we continue to be very selective in approving new loans.
Medium-term Performance Target Ranges
CWB's performance target ranges for key financial metrics reflect the objectives embedded within CWB's balanced growth strategy and a time horizon consistent with the longer-term interests of our shareholders. These targets are based on expectations for moderate economic growth and a relatively stable net interest margin environment in Canada over the three- to five-year forecast horizon. Our target ranges are presented in the following table:
Medium-term
Performance Target
Ranges
----------------------------------------------------------------------------
Adjusted cash earnings per common share growth(1) 7 - 12%
----------------------------------------------------------------------------
Adjusted return on common shareholders' equity(2) 12 - 15%
----------------------------------------------------------------------------
Operating leverage(3) Positive
----------------------------------------------------------------------------
Common equity Tier 1 capital ratio under the
Standardized approach(4) Strong
----------------------------------------------------------------------------
Common share dividend payout ratio(5) approx. 30%
----------------------------------------------------------------------------
1. Adjusted cash earnings per common share is calculated as diluted
earnings per common share excluding the acquisition-related amortization
of intangible assets and the contingent consideration fair value
changes, net of tax (see calculation below). Excluded items are not
considered to be indicative of ongoing operating performance.
Performance for adjusted cash earnings per common share is the current
year results over the same period in the year.
2. Adjusted return on common shareholders' equity is calculated as
annualized common shareholders' net income excluding the acquisition-
related amortization of intangible assets and the contingent
consideration fair value changes, net of tax (see calculation below),
divided by average common shareholders' equity.
3. Operating leverage is calculated as total revenue (teb) growth less non-
interest expense growth, excluding the pre-tax amortization of
acquisition-related intangible assets, over the past twelve months.
4. 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).
5. Common share dividend payout ratio is calculated as common share
dividends declared during the past twelve months divided by common
shareholders' net income earned over the same period.
We now expect earnings growth to fall within our medium-term target range in fiscal 2017; however, the adjusted return on common shareholders' equity will likely remain below 12%. This reflects a higher share count compared to last year, the lagging impact of the 2015 - 2016 regional recession on loan growth and credit quality, the potential for incremental pressure on net interest margin, and increases in CWB's expense base mainly related to the new core banking system. We continue to expect financial performance over a three- to five-year time frame to be consistent with our medium-term targets, and to benefit from an expanding geographic footprint with increased business diversification. We also expect ongoing success in key strategic initiatives to enhance client experiences, build core funding sources, and leverage current and future investment in technology to support CWB's strong financial performance over the medium-term.
About CWB Financial Group
CWB Financial 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 42 branches of Canadian Western Bank and Internet banking services provided by Motive Financial. Highly responsive specialized financing is delivered under the banners of CWB Equipment Financing, National Leasing, CWB Maxium Financial, CWB Franchise Finance 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 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 2017 Second Quarter Results Conference Call
CWB's second quarter results conference call is scheduled for Thursday, June 1, 2017, 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 (703) 736-7380 (Toronto) or (844) 400-1695 (toll free) and entering passcode: 21496571. 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 8, 2017, by dialing (404) 537-3406 (Toronto) or (855) 859-2056 (toll-free) and entering passcode 21496571.
Contents
Selected Financial Highlights 6
Management's Discussion and Analysis 7
Interim Consolidated Financial Statements 23
Shareholder Information 38
For the three months ended
--------------------------------------------
(unaudited) January 31
April 30 2017 2017 April 30 2016
($
thousands, Change
except per from
share April 30
amounts) 2016
------------------------------------------------------------------
Results
from
Operations
Net
interest
income
(teb)(1) $ 152,739 $ 156,365 $ 145,106 5
Less teb
adjustment
(1) 583 616 754 (23)
------------------------------------------------------------------
Net
interest
income per
financial
statements 152,156 155,749 144,352 5
Non-
interest
income 20,287 19,478 19,378 5
Pre-tax,
pre-
provision
income
(teb)(1) 90,786 94,880 87,628 4
Common
shareholde
rs' net
income 47,594 49,542 32,213 48
Earnings
per common
share
Basic 0.54 0.56 0.40 35
Diluted 0.54 0.56 0.40 35
Adjusted
cash(1) 0.59 0.61 0.41 44
Return on
common
shareholde
rs'
equity(1) 9.2% 9.5% 7.1% 210
Adjusted
return on
common
shareholde
rs'
equity(1) 10.1 10.4 7.4 270
Return on
assets(1) 0.79 0.78 0.55 24
Efficiency
ratio
(teb)(1) 47.5 46.0 46.7 80
Efficiency
ratio(1) 47.7 46.2 46.9 80
Net
interest
margin
(teb)(1) 2.55 2.47 2.47 8
Net
interest
margin(1) 2.54 2.46 2.45 9
Provision
for credit
losses as
a
percentage
of average
loans 0.25 0.27 0.78 (53)
Number of
full-time
equivalent
staff 1,993 1,977 2,015 (1)
------------------------------------------------------------------
Per Common
Share
Cash
dividends $ 0.23 $ 0.23 $ 0.23 -
Book value 24.27 23.77 22.62 7
Closing
market
value 26.83 29.59 27.68 (3)
Common
shares
outstandin
g
(thousands
) 88,300 88,253 81,882 8
------------------------------------------------------------------
Balance
Sheet and
Off-
Balance
Sheet
Assets $ 24,617,568 $ 24,814,678 $ 24,236,901 2
Loans 22,215,190 21,773,449 21,248,005 5
Deposits 20,473,739 20,683,360 20,340,925 1
Debt 1,167,217 1,234,050 1,210,202 (4)
Shareholder
s' equity 2,408,064 2,362,658 2,117,409 14
Assets
under
administra
tion 11,614,170 11,119,927 10,287,891 13
Assets
under
management 2,064,422 1,971,535 1,834,203 13
------------------------------------------------------------------
Capital
Adequacy(1
)
Common
equity
Tier 1
ratio 9.6% 9.5% 8.2% 140
Tier 1
ratio 10.9 10.8 10.1 80
Total ratio 12.7 13.0 12.2 50
------------------------------------------------------------------
For the six months ended
-----------------------------
(unaudited) April 30 2017 April 30 2016
($
thousands, Change
except per from
share April 30
amounts) 2016
----------------------------------------------------------------------------
Results
from
Operations
Net
interest
income
(teb)(1) % $ 309,104 $ 289,213 7%
Less teb
adjustment
(1) 1,199 1,985 (40)
----------------------------------------------------------------------------
Net
interest
income per
financial
statements 307,905 287,228 7
Non-
interest
income 39,765 34,004 17
Pre-tax,
pre-
provision
income
(teb)(1) 185,666 171,986 8
Common
shareholde
rs' net
income 97,136 84,345 15
Earnings
per common
share
Basic 1.10 1.04 6
Diluted 1.10 1.04 6
Adjusted
cash(1) 1.20 1.07 12
Return on
common
shareholde
rs'
equity(1) bp(2) 9.3% 9.3% -bp(2)
Adjusted
return on
common
shareholde
rs'
equity(1) 10.2 9.6 60
Return on
assets(1) 0.79 0.72 7
Efficiency
ratio
(teb)(1) 46.8 46.8 -
Efficiency
ratio(1) 46.9 47.1 (20)
Net
interest
margin
(teb)(1) 2.51 2.47 4
Net
interest
margin(1) 2.50 2.45 5
Provision
for credit
losses as
a
percentage
of average
loans 0.26 0.48 (22)
Number of
full-time
equivalent
staff % 1,993 2,015 (1)%
----------------------------------------------------------------------------
Per Common
Share
Cash
dividends % 0.46 $ 0.46 -%
Book value 24.27 22.62 7
Closing
market
value 26.83 27.68 (3)
Common
shares
outstandin
g
(thousands
) 88,300 81,882 8
----------------------------------------------------------------------------
Balance
Sheet and
Off-
Balance
Sheet
Assets %
Loans
Deposits
Debt
Shareholder
s' equity
Assets
under
administra
tion
Assets
under
management
----------------------------------------------------------------------------
Capital
Adequacy(1
)
Common
equity
Tier 1
ratio bp(2)
Tier 1
ratio
Total ratio
----------------------------------------------------------------------------
1. See definitions on page 22.
2. bp - basis point change.
Management's Discussion and Analysis
This management's discussion and analysis (MD&A), dated May 31, 2017, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended April 30, 2017, and the audited consolidated financial statements and MD&A for the year ended October 31, 2016, available on SEDAR at www.sedar.com and CWB's website at www.cwb.com.
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, including key employees, of 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. Under the terms of the purchase agreement, 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 period. CWB completed the first contingent instalment last quarter in cash, reflecting very strong operating performance.
On July 1, 2016, CWB acquired the portfolio now 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 included key employees to support CWB's continued strategic commercial banking growth and geographic expansion.
The performance of both acquisitions has been consistent with management's expectations.
Overview
Q2 2017 vs. Q2 2016
Pre-tax, pre-provision income (teb) of $90.8 million was up 4% and common shareholders' net income of $47.6 million was 48% higher. The significant increase in net income was driven by a 67% decline in the provision for credit losses, primarily reflecting the impact of specific allowances recorded against energy loans last year. Growth of total revenues also contributed to CWB's bottom line. Net interest income (teb) of $152.7 million grew 5%, reflecting 5% loan growth and an eight basis point increase in net interest margin (teb) to 2.55%. Non-interest income was also up 5% primarily due to higher wealth management and credit related fees. These factors were partially offset by moderate 7% growth of non-interest expenses, acquisition-related fair value changes and higher preferred share dividends. Diluted earnings per common share of $0.54 and adjusted cash earnings per common share of $0.59 were up 35% and 44%, respectively, with growth driven by the factors noted above, partially offset by the issuance of common shares in the third quarter last year.
Q2 2017 vs. Q1 2017
Pre-tax, pre-provision income and common shareholders' net income were both 4% lower. Total revenues decreased 2% from the record level achieved last quarter. Net interest income (teb) was down 2% as the positive impacts of 2% loan growth and an eight basis point increase in net interest margin (teb) were more than offset by three fewer interest-earning days. Non-interest income was up 4% and the provision for credit losses was 12% lower. Non-interest expenses were up 2% during the quarter. Diluted earnings per common share and adjusted cash earnings per common share were down 4% and 3% on a sequential basis, respectively.
YTD 2017 vs. YTD 2016
Pre-tax, pre-provision income (teb) of $185.7 million was 8% higher and common shareholders' net income of $97.1 million was up 15% from last year. Both metrics benefitted from the 7% increase in net interest income and 17% higher non-interest income. The higher growth rate of common shareholders' net income as compared to pre-tax, pre-provision income primarily reflects the 42% decrease in the provision for credit losses. Higher net interest income reflects 7% growth of average loan balances and a four basis point increase in net interest margin (teb). Growth of non-interest income was primarily attributable to $0.6 million of net gains on securities this year compared to $2.9 million of losses last year, 19% higher credit related fees, and a 20% increase in wealth management fees. These factors were partially offset within common shareholders' net income by 8% growth of non-interest expenses, acquisition-related fair value changes, and higher preferred share dividends. Diluted earnings per common share and adjusted cash earnings per common share of $1.10 and $1.20, respectively, were up 6% and 12%, from last year.
Adjusted ROE and ROA
The second quarter adjusted return on common shareholders' equity (ROE) of 10.1% increased 270 basis points from the same period last year. This was primarily due to higher common shareholders' net income this quarter, reflecting the impact of energy-related provisions one year ago.
Sequentially, adjusted ROE was down 30 basis points from 10.4% reflecting lower common shareholders' net income.
Year-to-date adjusted ROE of 10.2% was up 60 basis points, reflecting growth of common shareholders' net income partially offset by the impact of common shares issued in the third quarter last year.
Return on assets (ROA) was 0.79% in the second quarter, compared to 0.55% in the same period last year and 0.78% last quarter. Year-to-date ROA of 0.79% was up seven basis points from last year.
Outlook for Profitability Ratios
Management expects CWB's earnings growth and profitability to benefit from the expansion of existing client relationships through exceptional service and enhanced client experiences, and the attraction of new full-service clients over the medium-term. Common shares issued in the third quarter of 2016 support CWB's very strong capital position and continued execution against the balanced growth strategy. Primarily due to the impact of the common share issuance on shareholders' equity, adjusted return on common shareholders' equity in fiscal 2017 is expected to fall below CWB's medium-term target range.
Total Revenue (teb)
Second quarter total revenue of $173.0 million, comprised of both net interest income (teb) and non-interest income, grew 5% from the same quarter in 2016 and was down 2% from the record level achieved in the prior quarter. Year-to-date total revenue of $348.9 million was up 8% from last year.
Net Interest Income (teb)
Q2 2017 vs. Q2 2016
Net interest income (teb) of $152.7 million was up 5% ($7.6 million) primarily reflecting the benefits of 5% growth of average loan balances and an eight basis point increase in net interest margin (teb) to 2.55%, partially offset by the impact of one fewer interest earning day. Sustained favourable changes in funding mix and lower average balances of cash and securities positively impacted net interest margin (teb) during the quarter. CWB's deposit mix continued to shift towards lower-cost, relationship-based branch-raised deposits with very strong 15% growth in the demand and notice category, decreased utilization of higher-cost broker-sourced term deposits and redemption of certain higher-cost capital markets funding instruments. While competitive factors continue to impact loan yields, the growing contributions from the relatively higher-yielding CWB Maxium portfolio helps to mitigate the pressure on net interest margin (teb).
Q2 2017 vs. Q1 2017
Net interest income (teb) was down 2% ($3.6 million) as the positive impacts of an eight basis point improvement in net interest margin (teb) and stable average loan balances were more than offset by the impact of three fewer interest earning days. Higher net interest margin (teb) was mainly attributed to lower average balances of cash and securities and favourable changes in CWB's funding mix. Ongoing strong growth of lower-cost demand and notice deposits drove favourable changes in funding mix including lower utilization of higher-cost broker deposits.
YTD 2017 vs. YTD 2016
Net interest income (teb) of $309.1 million was up 7% ($19.9 million), primarily reflecting a 7% increase in average loan balances and a four basis point improvement in net interest margin (teb). Higher net interest margin resulted primarily from the favourable changes in funding mix discussed above.
Interest rate sensitivity
Note 14 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at April 30, 2017. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income that would result over the following 12 months from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:
-- a constant structure in the interest sensitive asset and liability
portfolios;
-- interest rate changes affecting interest sensitive assets and
liabilities by proportionally the same amount, except floor levels for
various deposit liabilities and certain floating rate loans, and applied
at the appropriate repricing dates; and,
-- no early redemptions
January 31 April 30
($ thousands) April 30 2017 2017 2016
----------------------------------------------------------------------------
Estimated impact on net
interest income of a 1%
increase in interest rates
1 year $ 8,755 $ 7,230 $ 8,032
----------------------------------------------------------------------------
1 year percentage change 1.41% 1.17% 1.39%
----------------------------------------------------------------------------
Estimated impact on net
interest income of a 1%
decrease in interest rates
1 year $ (9,810) $ (4,016) $ (6,981)
----------------------------------------------------------------------------
1 year percentage change (1.58)% (0.65)% (1.21)%
----------------------------------------------------------------------------
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, 2017 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 $61.1 million, net of tax (April 30, 2016 - $65.2 million). It is estimated that a one-percentage point decrease in all interest rates at April 30, 2017 would have the opposite effect, increasing other comprehensive income by approximately $62.4 million, net of tax (April 30, 2016 - $66.2 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)
CWB's strategic efforts to optimize the overall cost of funds will continue. These efforts are consistent with management's balanced growth strategy which targets growth of lower-cost funding sources, along with selective, geographically diversified growth in higher yielding loan portfolios with an acceptable risk profile. Ongoing successful execution of this strategy is expected to mitigate the earnings impact of margin pressure due to low interest rates and competitive factors over the medium-term. However, in the near-term, favourable changes in funding mix which have supported net interest margin through the first half of 2017 are expected to be less apparent. This is mainly due to expectations for loan growth to accelerate in the third and fourth quarters, which is likely to require increased usage of the relatively higher-cost broker deposit funding channel compared to the first half of the year. Management also expects to hold sequentially higher average balances of cash and securities with a lower average yield through the second half of the year. In view of these factors, incremental net interest margin pressure is likely to reappear.
Non-interest Income
Q2 2017 vs. Q2 2016
Non-interest income of $20.3 million was up 5% ($0.9 million), primarily due to higher wealth management fees, credit related fee income, and net gains on securities. These positive factors were partially offset by the $1.6 million decrease in 'other' non-interest income.
Q2 2017 vs. Q1 2017
Non-interest income was up 4% ($0.8 million), primarily due to higher wealth management fees and net gains on securities, partially offset by lower credit related fees and 'other' non-interest income.
YTD 2017 vs. YTD 2016
Non-interest income of $39.8 million increased 17% ($5.8 million) from last year, reflecting net gains on securities this year compared to net losses last year, higher credit related and wealth management fee income.
Outlook for non-interest income
Growth of non-interest income is expected to reflect CWB's strategy to extend and deepen relationships with both new and existing clients. Increases are expected across most categories of non-interest income reflecting CWB's continued strategic focus on strong, high quality loan growth with associated fee income, as well as enhanced transactional capabilities in cash management and other retail services, including CWB's relationship-based, branch-raised deposit franchise.
Based on the current composition of the securities portfolio, net gains/losses on securities on a full-year basis are not expected to contribute materially to non-interest income in 2017; however, the magnitude and timing of gains or losses are dependent on market factors that are difficult to predict. CWB liquidated its holdings of common equities in 2016 and has no plans to re-establish this portfolio.
Management expects further increases in wealth management revenues to result over the medium-term from solid performance within CWB Wealth Management, including organic growth of discretionary investment services, and further growth of proprietary investment products introduced last year. 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.
Acquisition-related Fair Value Changes
The estimated change in fair value of contingent consideration related to the acquisition of CWB Maxium was $4.6 million, compared to nil in the second quarter last year and $4.4 million last quarter. Reflecting very strong operating performance since the acquisition, this brings the year-to-date change in estimated fair value of contingent consideration to $9.0 million compared to nil in the first half of fiscal 2016. Quarterly contingent consideration fair value changes approximately similar in magnitude through the remainder of the three-year earn out period would represent the maximum amount available through the purchase agreement. CWB completed the first contingent instalment, paid in cash, last quarter.
Non-interest Expenses
Q2 2017 vs. Q2 2016
Non-interest expenses of $84.1 million were up 7% ($5.7 million), primarily due to an 18% ($2.3 million) increase in premises and equipment expenses, as well as 4% ($2.1 million) growth in salaries and employee benefits. Growth in premises and equipment expense primarily relate to the new core banking system implemented on May 2, 2016. The acquisition of CWB Maxium and CWB Franchise Finance contributed $1.6 million, or 76%, to the increase in salaries and employee benefits.
Q2 2017 vs. Q1 2017
Non-interest expenses grew moderately by 2% ($1.3 million) from the prior quarter, mainly attributed to higher 'other' non-interest expenses ($1.2 million) and rental of real estate ($0.4 million), partially offset by lower salaries and employee benefits.
YTD 2017 vs. YTD 2016
Year-to-date non-interest expenses of $167.0 million increased by 8% ($12.9 million) partly due to a 6% increase in salaries and employee benefits ($6.5 million). The addition of CWB Maxium and CWB Franchise Finance contributed $4.7 million, or 72%, to the increase in salaries and benefits, with the remainder attributed to annual salary increments and increases in staff complement to support business growth. Premises and equipment expenses were up 19% ($4.6 million), primarily due to costs associated with the new core banking system, and other expenses increased 7% ($1.9 million).
Efficiency ratio and operating leverage
The second quarter efficiency ratio (teb) of 47.5%, which measures non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, divided by total revenues (teb), was up slightly from 46.7% in the same period last year and 46.0% last quarter. The combined revenue benefits of 5% year-over-year growth of average loan balances, higher net interest margin and growth of non-interest income were more than offset by higher non-interest expenses.
On a year-to-date basis, the efficiency ratio (teb) was stable at 46.8%, as the positive impacts of 7% growth of average loan balances, higher net interest margin (teb), and increased non-interest income offset growth of non-interest expenses.
Operating leverage, which is calculated as total revenue (teb) growth less non-interest expense growth, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months, was negative 2.0% as 5% year-over-year growth in total revenues (teb) compared to a 7% increase in non-interest expenses. On a year-to-date basis, operating leverage was flat.
Outlook for the efficiency ratio and operating leverage
A key priority for CWB is to deliver consistent increases in adjusted cash earnings per share through business growth and strategic investment while maintaining effective control of costs. CWB's ongoing investment in people, technology and infrastructure is expected to contribute to long-term shareholder value through improved financial performance in future periods. CWB has delivered an annual average efficiency ratio (teb) of 46.0% over the past three years. In view of the level of necessary future investment to facilitate ongoing implementation of CWB's strategic direction, as well as the potential for incremental pressure on net interest margin from current levels, management expects CWB's efficiency ratio to fluctuate at levels moderately higher than 46.0% going forward. Management is committed to maintaining efficient operations through disciplined control of all discretionary expenses, and positive operating leverage is expected over the medium-term.
Income Taxes
The second quarter effective income tax rate (teb) was 27.6%, compared to 27.2% last year. On a year-to-date basis, effective tax rate (teb) was 27.6%, compared to 27.4% last year.
Outlook for income taxes
CWB's expected income tax rate (teb) for 2017 is approximately 27.5%.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes.
Q2 2017 vs. Q2 2016
Comprehensive income for the second quarter of $66.2 million was up from $33.2 million in the same period last year. Growth is mainly attributed to the $17.7 million increase in net income, reflecting both the significantly lower provision for credit losses and strong business growth, as well as the $15.3 million increase in OCI.
Changes in OCI, all net of tax, resulted from increases in the fair value of both derivatives designated as cash flow hedges ($13.8 million) and available-for-sale securities ($1.5 million). CWB's portfolio of available-for-sale securities is 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 2017 vs. YTD 2016
On a year-to-date basis, comprehensive income of $109.4 million was up from $81.0 million last year. The increase is primarily attributable to net income growth of $17.3 million, resulting from both the substantial decrease in the energy-related provision for credit losses and business growth, as well as the $11.1 million increase in OCI.
Changes in OCI, all net of tax, primarily reflect an increase in the fair value of both available-for-sale securities ($9.3 million) and derivatives designated as cash flow hedges ($1.8 million).
Balance Sheet
The quarter end balance of total assets of $24,618 million was up 2% from last year and was down 1% from last quarter.
Cash and Securities
Cash, securities and securities purchased under resale agreements totaled $1,935 million at April 30, 2017, compared to $2,526 million a year earlier and $2,552 million last quarter. CWB will maintain prudent liquidity levels in 2017 while remaining compliant with the Liquidity Adequacy Requirements guideline established by the Office of the Superintendent of Financial Institutions Canada (OSFI).
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 are typically held until maturity. Net unrealized losses on cash and securities recorded on the balance sheet of $28.3 million were down from $72.5 million last year and $42.7 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. Differences compared to both last year and the prior quarter primarily reflect higher market values of preferred shares and debt securities.
Net realized gains on securities in the second quarter were $0.5 million, compared to nil in the same period last year and last quarter. Year-to-date net realized gains on securities were $0.6 million, compared to net losses of $2.9 million last year. Based on the current composition of the securities portfolio, net gains/losses on securities through the remainder of 2017 are not expected to have a material impact on non-interest income although debt security and preferred share market conditions are inherently unpredictable in the short-term.
Loans
Total loans, excluding allowance for credit losses, of $22,328 million increased 4% ($952 million) from last year and 2% ($445 million) from the prior quarter. Including the allowance for credit losses, loan growth from the second quarter last year was 5%. In dollar terms, year-over-year growth by lending sector was led by personal loans and mortgages ($776 million). General commercial loans increased $526 million, including contributions from CWB Maxium and CWB Franchise Finance. CWB's portfolio of commercial mortgages and the equipment financing and leasing portfolio both returned to positive net growth with increases of $18 million and $3 million, respectively. Outstanding balances of real estate project loans contracted $195 million, primarily reflecting the successful completion of development projects along with reduced new activity within Alberta. CWB maintained a proactive approach to resolving positions within its small portfolio of oil and gas production loans over the past year, reducing outstanding balances by $176 million.
Sequentially, the increase in personal loans and mortgages of $298 million and general commercial loans of $105 million accounted for 91% of this quarter's growth ($445 million). Growth within equipment financing and leasing exposures and commercial mortgages picked up this quarter, with increases of $86 million and $25 million, respectively. The contraction in real estate project loans ($47 million) was concentrated within Alberta and British Columbia, while oil and gas production loans were down $22 million.
Change from
(unaudited) April 30 January 31 April 30 April 30
(millions) 2017 2017 2016 2016
----------------------------------------------------------------------------
General commercial loans $ 5,605 $ 5,500 $ 5,079 10%
Real estate project loans 4,148 4,195 4,343 (4)
Personal loans and
mortgages 4,476 4,178 3,700 21
Commercial mortgages 4,151 4,126 4,133 -
Equipment financing and
leasing 3,797 3,711 3,794 -
Oil and gas production
loans 151 173 327 (54)
----------------------------------------------------------------------------
Total loans
outstanding(1) $ 22,328 $ 21,883 $ 21,376 4%
----------------------------------------------------------------------------
1. Total loans outstanding by lending sector exclude the allowance for
credit losses.
Lending activity in Ontario continued to show the highest growth in dollar terms on a year-over-year basis ($1,116 million), followed by British Columbia ($195 million). Strong loan growth in Ontario reflects the geographic diversification objectives embedded within CWB's balanced growth strategy, with strong contributions from CWB's businesses that have a national footprint, including CWB Maxium, CWB Optimum Mortgage, National Leasing, and the addition of the CWB Franchise Finance portfolio. Outstanding loan balances within Alberta and Saskatchewan contracted 7% and 1%, respectively, year-over-year, primarily reflecting the lagging impact of the 2015 - 2016 regional recession on new lending opportunities in these provinces.
Loan balances increased across all provinces sequentially with Ontario accounting for 72% of the overall increase, primarily driven by continued strong growth in personal loans and mortgages.
(unaudited) April 30 January 31 April 30 Change from
(millions) 2017 2017 2016 April 30 2016
----------------------------------------------------------------------------
Alberta $ 7,858 $ 7,822 $ 8,441 (7)%
British Columbia 7,727 7,691 7,532 3
Ontario 3,777 3,458 2,661 42
Saskatchewan 1,327 1,319 1,335 (1)
Manitoba 726 716 619 17
Other 913 877 788 16
----------------------------------------------------------------------------
Total loans
outstanding(1) $ 22,328 $ 21,883 $ 21,376 4%
----------------------------------------------------------------------------
1. Total loans outstanding by province exclude the allowance for credit
losses.
Optimum Mortgage
Net of portfolio sales, total loans of $2,511 million within CWB Optimum increased 18% ($389 million) year-over-year, 5% ($112 million) compared to the prior quarter and 10% ($228 million) year-to-date. Total loans within CWB Optimum comprise approximately 11% of CWB's total outstanding lending exposures. 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 68%. The book value of alternative mortgages represented 93% of CWB Optimum's total portfolio at quarter end, compared to 92% both last year and in the prior quarter. Ontario continues to account for more than half of all new originations. At approximately 52% of the total, Ontario also represents the largest geographic exposure by province within CWB Optimum's portfolio, followed by Alberta at 21% and British Columbia at 17%. The average size of CWB Optimum mortgages originated in the second quarter was approximately $337,000 and the average size of all mortgages outstanding at April 30, 2017 was $231,000.
Outlook for loans
Constrained recent growth in Alberta and Saskatchewan due to the 2015 - 2016 recession is consistent with management's stated expectations. Business sentiment within regions affected by the recession has improved, and CWB's pipeline of new lending opportunities across all provinces continues to expand. On this basis, and in view of expectations for ongoing strong performance from CWB's business lines with a national footprint, loan growth is expected to accelerate in the second half of 2017. CWB will continue to focus on prudent growth of secured loans that offer an appropriate return and acceptable risk profile, and remains committed to its objective to deliver double-digit annual loan growth whenever prudent. Notwithstanding expectations for growth to accelerate in the third and fourth quarters, it will likely be challenging to deliver double-digit growth in fiscal 2017 due to moderate growth in the first half of the year.
With the exception of the Greater Toronto Area and certain parts of Greater Vancouver, Canadian residential real estate markets remain affordable, largely reflecting very low interest rates. A material increase in the supply of homes for sale has recently become apparent within Greater Toronto and the surrounding area as sellers react to the Ontario Fair Housing Plan. A moderate decline in the value of higher-priced homes in these markets is evident within the last 30 days, and consensus indicates market conditions may be trending toward a more balanced state. Within Greater Vancouver, a general supply shortage of detached single family homes remains apparent, and home prices have held relatively firm.
The combination of counter-cyclical measures undertaken by the federal government, historically high price levels concentrated in the Greater Toronto Area and parts of Greater Vancouver, policy changes introduced by provincial governments in Ontario and British Columbia and the lagging impacts of the 2015 - 2016 recession in Alberta and Saskatchewan could lead to a general moderation of Canadian housing sector activity. That said, regulatory changes at the federal level have primarily targeted insured mortgages and mortgages funded through securitization, neither of which represents a core business focus for CWB. In isolation, management expects these changes will have no material impact to CWB's outlook for residential mortgage originations.
CWB Optimum has recently experienced higher-than-normal mortgage application volumes as a result of challenges faced by its largest competitor. CWB Optimum's manual adjudication and underwriting processes remain consistent with CWB's conservative risk appetite and management continues to be very selective in approving new loans.
Credit Quality
Overall credit quality is consistent with expectations and continues to reflect CWB's secured lending business model, disciplined underwriting practices and proactive loan management. CWB has no material exposure to unsecured personal borrowing, including credit cards. Last year management took a proactive approach to resolve positions within CWB's small portfolio of loans to oil and gas producers.
Remaining direct exposure to borrowers in this category represents less than 1% of the overall portfolio. 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 direct exposures to the energy sector. Management continues to proactively monitor all accounts with a particular focus on those located within Alberta and Saskatchewan as the lagging impacts of the 2015 - 2016 regional recession continue to work through all facets of the affected economies.
For the three months ended
------------------------------------------
(unaudited) Change from
($ thousands) April 30 January 31 April 30 April 30
2017 2017 2016 2016
----------------------------------------------------------------------------
Gross impaired
loans,
beginning of
period $ 124,439 $ 127,212 $ 111,507 12%
New formations 37,705 31,486 69,905 (46)
Reductions,
impaired
accounts paid
down or
returned to
performing
status (16,538) (20,554) (20,741) (20)
Write-offs (7,772) (13,705) (15,708) (51)
----------------------------------------------------------------------------
Total(1) $ 137,834 $ 124,439 $ 144,963 (5)%
----------------------------------------------------------------------------
Balance of the
ten largest
impaired
accounts $ 67,402 $ 55,544 $ 85,756 (21)%
Total number
of accounts
classified as
impaired(3) 234 228 166 40
Gross impaired
loans as a
percentage of
total loans 0.62% 0.57% 0.68% (6)bp(2)(2)
1. Gross impaired loans include foreclosed assets held for sale (primarily
residential mortgages) with a carrying value of $3,436 (January 31, 2017
- $2,419 and April 30, 2016 - $3,392).
2. bp - basis point change.
3. Total number of accounts excludes National Leasing.
The dollar level of gross impaired loans at April 30, 2017 totaled $137.8 million, down from $145.0 last year and up from $124.4 million in the prior quarter. Gross impaired loans within Alberta of $64.7 million accounted for 47% of total impairments. This percentage share was down from 55% last year and up from 41% in the prior quarter.
The dollar level of gross impaired loans represented 0.62% of total loans at quarter end, compared to 0.68% last year and 0.57% at January 31, 2017. 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 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 marketability of security held against each impaired account. Within total specific allowances of $18.3 million this quarter are specific allowances of $4.5 million on loans with Alberta-based security, down from $34.8 million last year and $5.1 million last quarter. Unusually high specific allowances last year were primarily related to energy loans.
As at April 30, 2017, the total allowance for credit losses (collective and specific) was $136.4 million, compared to $145.8 million a year ago and $129.5 million last quarter. The total allowance for credit losses represented 99% of gross impaired loans at quarter end, compared to 101% last year and 104% in the prior quarter. The collective allowance for credit losses increased 18% over the past twelve months and 2% from last quarter.
Provision for Credit Losses
The second quarter provision for credit losses of 25 basis points of average loans compares to 78 basis points in the same quarter last year and 27 basis points in the prior quarter.
On a year-to-date basis, the provision for credit losses as a percentage of average loans was 26 basis points, down from 48 basis points a year ago. The full-year provision is expected to fall toward the lower end of a range between 25 and 35 basis points.
Outlook for credit quality
Gross impaired loans remain low as a percentage of total loans, with the current level of 0.62% comparing to a peak during the prior credit cycle of 1.68% in the second quarter of 2010. Partially due to the lagging impacts of the regional 2015 - 2016 recession, management expects periodic further increases in the balance of impaired loans across the portfolio; however, material credit impacts related to the small balance of remaining oil and gas loans are not expected. Loss rates on current and future impaired loans are expected to reflect the combined positive impact of CWB's disciplined underwriting, secured lending practices and proactive account management, and to be more consistent with our prior experience where write-offs have been low as a percentage of impairments. Ongoing loan management processes include assignment of experienced credit adjudicators to assist branches and credit teams proactively identify and address higher risk loans. Gross impaired loans within CWB Optimum Mortgage are expected to increase in view of softer housing market conditions, particularly in Alberta. Management remains confident in the strength, diversity and underwriting structure of the overall loan portfolio and lending exposures continue to be closely monitored. CWB continues to carefully monitor the entire portfolio for signs of weakness.
Based on the results of stress tests simulating severe economic conditions across CWB's geographic footprint over a multi-year timeframe, including consideration for the impact of a severe housing market correction, management is confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a strong capital position. Stress test assumptions include severe credit losses, a persistent low interest rate environment and significantly slower loan growth to reflect lower assumed levels of economic activity, as well as increased competition for deposits and much higher levels of gross impaired loans that could combine to result in significant compression of net interest margin.
Deposits and Funding
Total deposits were up 1% over the past year ($133 million) and down 1% ($209 million) from the previous quarter. Relationship-based branch-raised funding increased 9%, including very strong 15% growth of lower-cost demand and notice deposits. Total deposits by type and source are summarized below:
As at
---------------------------------------------
(unaudited) Change from
January 31 April 30
April 30 2017 2017 April 30 2016 2016
($ millions)
----------------------------------------------------------------------------
Deposits by type
Demand and notice
deposits $ 8,012 $ 7,615 $ 6,941 15%
Term deposits 10,697 11,292 11,480 (7)
Capital markets 1,765 1,776 1,920 (8)
----------------------------------------------------------------------------
Total Deposits $ 20,474 $ 20,683 $ 20,341 1%
----------------------------------------------------------------------------
As at
---------------------------------------------
(unaudited) Change from
January 31 April 30
April 30 2017 2017 April 30 2016 2016
($ millions)
----------------------------------------------------------------------------
Deposits by
source
CWB Group branch-
raised $ 11,714 $ 11,414 $ 10,701 9%
Deposit brokers 6,995 7,493 7,720 (9)
Capital markets 1,765 1,776 1,920 (8)
----------------------------------------------------------------------------
Total Deposits $ 20,474 $ 20,683 $ 20,341 1%
----------------------------------------------------------------------------
Personal deposits represented 62% of total deposits at April 30, 2017, compared to 61% last year and 63% last quarter. Total branch-raised deposits, including trust services deposits, represented 57% of total deposits at April 30, 2017, up from 53% last year and 55% last quarter. Demand and notice deposits now comprise 39% of total deposits, up from 34% one year ago and 37% last quarter. The deposit broker network remains an efficient source for raising insured fixed term retail deposits and has proven to be a reliable and effective way to access funding and liquidity over a wide geographic base. CWB raises only fixed-term broker deposits, with terms to maturity between one and five years, and does not offer a High Interest Savings Account (HISA) product. Term deposits raised through the broker network represented 34% of total funding at quarter end, compared to 38% last year and 36% last quarter. Term deposits raised through debt capital markets of $1,765 million represented 9% of total deposits this quarter, consistent with last year and last quarter.
Securitization
Securitized leases and mortgages are reported on-balance sheet with total loans. The gross amount of securitized leases at April 30, 2017 was $906 million, compared to $969 million last year and $996 million last quarter. The gross amount of mortgages securitized under the National Housing Act Mortgage Backed Securities (NHA MBS) program was $373 million (January 31, 2017 - $381 million; April 30, 2016 - $171 million). Year-to-date funding from the securitization of leases and mortgages was $190 million (2016 - $465 million).
Outlook for deposits and funding
CWB's strategic focus to increase relationship-based branch-raised deposits will continue, with particular emphasis on demand and notice deposits. This funding segment is typically lower cost and provides associated transactional fee income. Continued growth in the proportion of branch-raised funding is also a key strategic objective because it reflects success in strengthening targeted multi-product client relationships. CWB's growing market presence, which includes the periodic expansion of full-service branches, supports objectives to generate branch-raised deposits, and the capabilities of CWB's new core banking system are expected to support various growth initiatives related to branch-raised funding over the medium term.
For example, implementation of the new banking system enabled CWB to upgrade its client digital banking experience during the second quarter through targeted improvements to CWB Direct Online Banking. The updated design provides a more consistent visual experience across CWB's digital platforms and complements new financial and communication tools within CWB's mobile banking app. CWB also renewed its processing agreement with Everlink Payment Services Inc. and expanded the scope of services to enable CWB to offer tap-enabled debit cards to CWB clients for the first time. The release of CWB PayHQ, in partnership with Payfirma, on May 1, 2017, represents the addition of a fully integrated, omni-channel payment technology platform to CWB's growing portfolio of business services products, and another step forward to enhance CWB's banking experience for business owners. Together these initiatives are expected to improve the convenience and user experience of CWB's overall suite of business and personal banking tools, and support development of broader, multi-product client relationships.
On April 18, 2017, CWB launched Motive Financial (Motive), a new brand for its on-line bank. The switch to Motive reflects a renewed focus on creating valuable savings opportunities for clients from coast-to-coast, and is expected to re-position CWB's on-line bank as an effective channel for funding growth.
Pricing of term deposits raised through the broker market was disrupted beginning in late April, primarily due to publicity related to challenges faced by the most active issuer in this market, a non-bank mortgage originator. The broker deposit market remains deep, liquid and highly accessible to CWB. Despite the impact of recent price disruption, the weighted average cost of funding for broker deposits issued by CWB across all maturities in May 2017 was lower than the same month in both of the last two years. In view of expectations for accelerating loan growth in the second half of the year, management expects to increase usage of the broker deposit channel relative to the first half of the year.
Selectively utilizing the debt capital markets remains part of management's strategy to further augment and diversify both the long- and short-term funding base over time.
Ongoing utilization of lease securitization is expected in view of the addition of a second lease securitization funding partner last quarter and the relative cost-effectiveness of these funding channels. CWB commenced securitization of residential mortgages in 2016 through the NHA MBS program, and was approved by the Canada Mortgage and Housing Corporation (CMHC) as an issuer of Canada Mortgage Bonds (CMB) subsequent to quarter end. Management expects to initiate participation in the CMB Program in 2017.
Other Assets and Other Liabilities
Other assets totaled $467 million at April 30, 2017, compared to $462 million one year ago and $490 million last quarter. Other liabilities were $567 million at quarter end, relatively unchanged from a year earlier and up from $534 million the previous quarter.
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, as well as mortgages under service agreements, totaled $11,614 million at April 30, 2017, compared to $10,288 million one year ago and $11,120 million last quarter. Assets under management were $2,064 million at quarter end, compared to $1,834 million a year earlier and $1,972 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 12 of the unaudited interim consolidated financial statements for the period ended April 30, 2017, as well as Note 20 of the audited consolidated financial statements in CWB's 2016 Annual Report.
Capital Management
OSFI requires Canadian financial institutions to manage and report regulatory capital in accordance with the Basel III capital management framework. 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 Advanced Internal Ratings Based (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'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.
CWB is well-positioned to continue to execute against its balanced growth strategy with very strong capital ratios of 9.6% CET1, 10.9% Tier 1 and 12.7% Total capital at April 30, 2017. The increase of 140 basis points in CWB's CET1 capital ratio from last year was driven by both earnings growth and the common share issuance in July 2016. On December 31, 2016, CWB redeemed both the $105 million senior deposit note held by CWB Capital Trust and all outstanding CWB Capital Trust Capital Securities Series 1 (WesTS), which did not qualify as non-viability contingent capital (NVCC) under the Basel III regulatory capital requirements. The redemption resulted in a $105 million reduction in CWB's Tier 1 regulatory capital and reduced both the Tier 1 and Total capital ratios by approximately 50 basis points. CWB redeemed all $75 million outstanding 5.571% subordinated debentures on March 22, 2017. This redemption reduced the Total capital ratio by approximately 40 basis points. At 8.7%, the Basel III leverage ratio remains very conservative.
Further details regarding CWB's regulatory capital and capital adequacy ratios are included in the following table:
As at As at As at
(unaudited) April 30 January 31 April 30
($ millions) 2017 2017 2016
----------------------------------------------------------------------------
Regulatory capital
CET1 capital before deductions $ 2,145 $ 2,104 $ 1,849
Net CET1 deductions (207) (207) (209)
----------------------------------------------------------------------------
CET1 capital 1,938 1,897 1,640
Tier 1 capital(1) 2,204 2,162 2,010
Total capital(1) 2,572 2,602 2,435
----------------------------------------------------------------------------
Risk-weighted assets $ 20,239 $ 20,028 $ 19,934
----------------------------------------------------------------------------
Capital adequacy ratios CET1
9.6% 9.5% 8.2%
Tier 1 10.9 10.8 10.1
Total 12.7 13.0 12.2
1. The 2017 inclusion of non-common equity instruments that do not include
NVCC clauses is capped at 50% of the January 1, 2013 outstanding
balances (2016 - 60%). For all periods, there were no exclusion from
regulatory capital related to NVCC instruments.
Book value per common share at April 30, 2017 was $24.27, compared to $22.62 last year and $23.77 last quarter. The change from last year reflects both earnings growth and the issuance of common shares.
Common shareholders received a quarterly cash dividend of $0.23 per common share on March 31, 2017. On May 31, 2017, CWB's Board of Directors declared a cash dividend of $0.23 per common share, payable on June 30, 2017 to shareholders of record on June 16, 2017. This quarterly dividend is consistent with the prior quarter and the dividend declared one year ago. Series 5 and Series 7 preferred shareholders received quarterly cash dividends of $0.275 and $0.390625 on April 30, 2017. On May 31, 2017, the Board of Directors also declared cash dividends on Series 5 and Series 7 Preferred Shares in amounts unchanged from the prior quarter, both payable on July 31, 2017 to shareholders of record on July 21, 2017.
Common share dividend increases are evaluated every quarter against the dividend payout ratio target of approximately 30%, and capital requirements under the Standardized approach to support ongoing strong and balanced asset growth. The second quarter dividend payout ratio was 42%.
Outlook for Capital Management
CWB continues to operate from a very strong capital position. Management will maintain strong capital ratios under the Standardized approach for calculating risk-weighted assets, above CWB's target thresholds and OSFI's required minimums. Target capital ratios, including an appropriate capital buffer over the prescribed OSFI minimums, are reconfirmed regularly through CWB's Regulatory Capital Plan.
The ongoing retention of earnings, net of expected common and preferred share dividends, is expected to support capital requirements associated with the anticipated achievement of CWB's medium-term performance target for a strong common equity Tier 1 ratio. CWB continues to monitor changes proposed to the Standardized approach for credit risk by the Basel Committee on Banking Supervision.
AIRB transition plan
CWB's project continues in support of an application to OSFI for transition to the AIRB methodology for managing credit risk and calculating risk-weighted assets, including an anticipated three-year time frame ending in fiscal 2019. The AIRB approach will put CWB on more equal footing with its competition. It will add risk sensitivity to CWB's framework for capital management, increase risk quantification processes, improve risk based pricing capabilities and economic capital estimations, and enhance CWB's ability to comply with new accounting standards. These improved risk management capabilities will better equip CWB to target business segments that generate the most attractive risk-adjusted returns and allocate resources accordingly.
CWB's AIRB transition project is separated into several discrete phases, including: establishment of formalized project governance; creation of models including data collection, development, validation, deployment, operationalization and use test; commencement of model validation; implementation of risk-weighted asset calculator; and, submission of final application to OSFI.
Work continues toward development of an enhanced enterprise data warehouse to serve as the repository for required data. AIRB models have now been developed for Optimum Mortgage, National Leasing, small- and medium-sized enterprises, and branch-based residential mortgages, representing approximately one third of CWB's overall portfolio. These models have been deployed in a pilot phase within the business. Management expects all models to be developed and deployed with operational testing underway by the end of 2017.
Further information relating to CWB's capital position is provided in Note 15 of the unaudited interim consolidated financial statements for the period ended April 30, 2017 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 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, 2016.
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 52 of CWB's 2016 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 9 - Financial Instruments
In March 2017, the Basel Committee on Banking Supervision (BCBS) issued Standards, Regulatory treatment of accounting provisions - interim and transitional arrangements, which addresses the regulatory impact of transitioning to IFRS 9. The standard confirms the retention of current regulatory treatment of accounting provisions under both the Standardized and AIRB approaches for calculating regulatory capital and outlines potential transitional arrangements. The BCBS recommended each national regulator further define the regulatory treatment of collective and specific allowances in the context of IFRS 9-based expected credit loss calculations and determine an appropriate transition approach.
CWB continues to monitor the IASB's proposed changes to IFRS.
Controls and Procedures
There were no significant changes in CWB's disclosure controls and procedures and internal controls over financial reporting that occurred during the quarter ended April 30, 2017 that have materially affected, or are reasonably likely to materially affect, CWB's disclosures of required information and 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 25, 2017, there were 88,300,249 common shares and 4,243,957 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, 2016 and Notes 10 and 11 to the interim consolidated financial statements for this quarter.
Dividend Reinvestment Plan
CWB common shares (TSX: CWB) and preferred shares (TSX: CWB.PR.B) (TSX: 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
2017
----------------
($ thousands) Q2 Q1
----------------------------------------------------------------------------
Continuing Operations(1)
Common shareholders' net income
$47,594 $49,542
Earnings per common share
Basic 0.54 0.56
Diluted 0.54 0.56
Adjusted cash 0.59 0.61
Combined Operations(1)
Common shareholders' net income
$47,594 $49,542
Earnings per common share
Basic 0.54 0.56
Diluted 0.54 0.56
Adjusted cash 0.59 0.61
Total assets ($ millions) 24,618 24,815
Discontinued Operations(1)
Common shareholders' net income
$ - $ -
Earnings per common share
Basic - -
Diluted - -
Adjusted cash - -
----------------------------------------------------------------------------
2016
--------------------------------
($ thousands) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Continuing Operations(1)
Common shareholders' net income
$47,834 $45,582 $32,213 $52,132
Earnings per common share
Basic 0.54 0.55 0.40 0.65
Diluted 0.54 0.55 0.40 0.65
Adjusted cash 0.59 0.60 0.41 0.66
Combined Operations(1)
Common shareholders' net income
$47,834 $45,582 $32,213 $52,132
Earnings per common share
Basic 0.54 0.55 0.40 0.65
Diluted 0.54 0.55 0.40 0.65
Adjusted cash 0.59 0.60 0.41 0.66
Total assets ($ millions) 25,223 25,185 24,237 23,473
Discontinued Operations(1)
Common shareholders' net income
$ - $ - $ - $ -
Earnings per common share
Basic - - - -
Diluted - - - -
Adjusted cash - - - -
----------------------------------------------------------------------------
2015
--------------------------------
($ thousands) Q4 Q3
----------------------------------------------------------------------------
Continuing Operations(1)
Common shareholders' net income
$52,969 $ 51,170
Earnings per common share
Basic 0.66 0.64
Diluted 0.66 0.64
Adjusted cash 0.67 0.65
Combined Operations(1)
Common shareholders' net income
$53,138 $158,809
Earnings per common share
Basic 0.66 1.97
Diluted 0.66 1.97
Adjusted cash 0.67 1.98
Total assets ($ millions) 22,839 22,280
Discontinued Operations(1)
Common shareholders' net income
$ 169 $107,639
Earnings per common share
Basic - 1.33
Diluted - 1.33
Adjusted cash - 1.33
----------------------------------------------------------------------------
1. On May 1, 2015, CWB sold its property and casualty insurance subsidiary
and CWB's stock transfer business as described in the 2015 and 2016
Annual Reports. 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 as "Combined Operations". Return on
shareholders' equity reflects equity from Combined Operations. All other
measures reflect either Continuing or Combined Operations as indicated.
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.
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, 2016 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 income - total revenue (teb) less non-interest
expenses, excluding the pre-tax amortization of acquisition-related
intangible assets (see calculation below);
-- adjusted cash earnings per common share - diluted earnings per common
share excluding the acquisition-related amortization of intangible
assets and contingent consideration fair value changes, net of tax (see
calculation below). Excluded items 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 amortization
of intangible assets and contingent consideration fair value changes,
net of tax (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, divided by total
revenues, (see calculation below);
-- net interest margin - net interest income divided by average total
assets;
-- operating leverage - total revenue (teb) growth less growth of non-
interest expenses, excluding the pre-tax amortization of acquisition-
related intangible assets;
-- 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;
-- Basel III common equity Tier 1, Tier 1, Total capital, and leverage
ratios - in accordance with guidelines issued by OSFI; and
-- average balances - average daily balances.
Adjusted Financial
Measures
For the three months ended
----------------------------------------
Change from
April 30 January 31 April 30 April 30 2016
(unaudited) 2017 2017 2016
($ thousands)
----------------------------------------------------------------------------
Non-interest
expenses $ 84,139 $ 82,815 $ 78,461 7%
Adjustments (before
tax):
Amortization of
acquisition-
related
intangible assets (1,899) (1,852) (1,605) 18
----------------------------------------------------------------------------
Adjusted non-
interest expenses $ 82,240 $ 80,963 $ 76,856 7%
----------------------------------------------------------------------------
Common
shareholders' net
income $ 47,594 $ 49,542 $ 32,213 48%
Adjustments (after-
tax)
Amortization of
acquisition-
related
intangible assets 1,399 1,364 1,182 18
Contingent
consideration
fair value change 3,392 3,184 - 100
----------------------------------------------------------------------------
Adjusted common
shareholders' net
income $ 52,385 $ 54,090 $ 33,395 57%
----------------------------------------------------------------------------
Adjusted Financial
Measures
For the six months ended
--------------------------
Change from
April 30 April 30April 30 2016
(unaudited) 2017 2016
($ thousands)
----------------------------------------------------------------------------
Non-interest
expenses $ 166,954 $ 154,014 8%
Adjustments (before
tax):
Amortization of
acquisition-
related
intangible assets (3,751) (2,783) 35
----------------------------------------------------------------------------
Adjusted non-
interest expenses $ 163,203 $ 151,231 8%
----------------------------------------------------------------------------
Common
shareholders' net
income $ 97,136 $ 84,345 15%
Adjustments (after-
tax)
Amortization of
acquisition-
related
intangible assets 2,763 2,051 35
Contingent
consideration
fair value change 6,576 - 100
----------------------------------------------------------------------------
Adjusted common
shareholders' net
income $ 106,475 $ 86,396 23%
----------------------------------------------------------------------------
Pre-tax, pre-provision (PTPP) income
For the three months ended
------------------------------------------
(unaudited) January 31 April 30 Change from
April 30 2017 2017 2016 April 30 2016
($ thousands)
----------------------------------------------------------------------------
Total revenue (teb)$ 173,026 $ 175,843 $ 164,484 5%
Less:
Adjusted non-
interest
expenses 82,240 80,963 76,856 7
----------------------------------------------------------------------------
Pre-tax, pre-
provision income $ 90,786 $ 94,880 $ 87,628 4%
----------------------------------------------------------------------------
For the six months ended
----------------------------
(unaudited) April 30 April 30 Change from
2017 2016 April 30 2016
($ thousands)
----------------------------------------------------------------------------
Total revenue (teb) $ 348,869 $ 323,217 8%
Less:
Adjusted non-
interest
expenses 163,203 151,231 8
----------------------------------------------------------------------------
Pre-tax, pre-
provision income 185,666 $ 171,986 8%
----------------------------------------------------------------------------
Consolidated
Balance Sheets
As at As at As at As at Change
(unaudited) April 30 January 31 October 31 April 30 from April
($ thousands) 2017 2017 2016 2016 30 2016
----------------------------------------------------------------------------
Assets
Cash Resources
Cash and non-
interest
bearing
deposits with
financial
institutions $ 67,963 $ 46,778 $ 11,490 $ 6,271 nm%
Interest
bearing
deposits with
regulated
financial
institutions
(Note 3) 722,075 403,925 890,516 169,997 325
Cheques and
other items in
transit 15,708 - 18,050 19,844 (21)
----------------------------------------------------------------------------
805,746 450,703 920,056 196,112 311
----------------------------------------------------------------------------
Securities
(Note 3)
Issued or
guaranteed by
Canada 725,527 1,330,814 1,142,798 1,522,143 (52)
Issued or
guaranteed by
a province or
municipality 173,268 349,646 291,947 360,837 (52)
Other debt
securities 88,614 275,628 154,648 173,040 (49)
Preferred
shares 141,925 144,921 119,201 131,437 8
----------------------------------------------------------------------------
1,129,334 2,101,009 1,708,594 2,187,457 (48)
----------------------------------------------------------------------------
Securities
Purchased
Under Resale
Agreements - - 163,318 142,915 (100)
----------------------------------------------------------------------------
Loans (Notes 4
and 6)
Personal 4,475,620 4,177,551 4,063,552 3,699,902 21
Business 17,852,517 17,705,173 18,001,584 17,675,776 1
----------------------------------------------------------------------------
22,328,137 21,882,724 22,065,136 21,375,678 4
Allowance for
credit losses
(Note 5) (112,947) (109,275) (103,788) (127,673) (12)
----------------------------------------------------------------------------
22,215,190 21,773,449 21,961,348 21,248,005 5
----------------------------------------------------------------------------
Other
Property and
equipment 56,131 56,557 57,330 59,053 (5)
Goodwill 85,669 85,669 84,762 84,488 1
Intangible
assets 149,134 148,901 149,312 143,580 4
Derivative
related (Note
8) 5,437 8,456 10,370 28,308 (81)
Other assets 170,927 189,934 167,459 146,983 16
----------------------------------------------------------------------------
467,298 489,517 469,233 462,412 1
----------------------------------------------------------------------------
Total Assets $24,617,568 $24,814,678 $25,222,549 $24,236,901 2%
----------------------------------------------------------------------------
Liabilities and
Equity
Deposits
Personal $12,694,328 $13,096,585 $13,223,702 $12,463,248 2%
Business and
government 7,779,411 7,586,775 7,970,851 7,877,677 (1)
----------------------------------------------------------------------------
20,473,739 20,683,360 21,194,553 20,340,925 1
----------------------------------------------------------------------------
Other
Cheques and
other items in
transit 54,192 49,444 27,683 122,309 (56)
Securities sold
under
repurchase
agreements
(Note 7) 102,553 108,480 - 99,003 4
Derivative
related (Note
8) 9,470 13,243 7,172 7,757 22
Other
liabilities 401,228 363,029 382,130 338,938 18
----------------------------------------------------------------------------
567,443 534,196 416,985 568,007 -
----------------------------------------------------------------------------
Debt
Debt securities
(Note 7) 917,217 909,050 943,198 885,202 4
Subordinated
debentures 250,000 325,000 325,000 325,000 (23)
----------------------------------------------------------------------------
1,167,217 1,234,050 1,268,198 1,210,202 (4)
----------------------------------------------------------------------------
Equity
Preferred
shares (Note
10) 265,000 265,000 265,000 265,000 -
Common shares
(Note 10) 725,912 724,252 718,377 565,927 28
Retained
earnings 1,413,324 1,384,221 1,354,966 1,305,522 8
Share-based
payment
reserve 26,878 26,932 31,276 30,014 (10)
Other reserves (23,050) (37,747) (27,579) (49,054) (53)
----------------------------------------------------------------------------
Total
Shareholders'
Equity 2,408,064 2,362,658 2,342,040 2,117,409 14
Non-controlling
interests 1,105 414 773 358 209
----------------------------------------------------------------------------
Total Equity 2,409,169 2,363,072 2,342,813 2,117,767 14
----------------------------------------------------------------------------
Total
Liabilities
and Equity $24,617,568 $24,814,678 $25,222,549 $24,236,901 2%
----------------------------------------------------------------------------
nm - not meaningful
The accompanying notes are an integral part of the interim consolidated financial statements.
Consolidated Statements of Income
For the three months ended
-----------------------------------------
(unaudited) January 31 Change from
April 30 2017 2017 April 30 2016April 30 2016
($ thousands, except
per share amounts)
----------------------------------------------------------------------------
Interest Income
Loans $ 235,249$ 243,800$ 227,569 3%
Securities 5,255 7,030 7,122 (26)
Deposits with
regulated
financial
institutions 2,447 2,069 787 211
----------------------------------------------------------------------------
242,951 252,899 235,478 3
----------------------------------------------------------------------------
Interest Expense
Deposits 83,860 89,474 83,970 -
Debt 6,935 7,676 7,156 (3)
----------------------------------------------------------------------------
90,795 97,150 91,126 -
----------------------------------------------------------------------------
Net Interest Income 152,156 155,749 144,352 5
----------------------------------------------------------------------------
Non-interest Income
Credit related 8,324 8,769 7,173 16
Wealth management
services 4,822 3,636 3,453 40
Retail services 3,361 3,413 3,890 (14)
Trust services 3,016 2,949 2,997 1
Gains (losses) on
securities, net 539 70 - 100
Other 225 641 1,865 (88)
----------------------------------------------------------------------------
20,287 19,478 19,378 5
----------------------------------------------------------------------------
Total Revenue 172,443 175,227 163,730 5
----------------------------------------------------------------------------
Provision for Credit
Losses (Note 5) 13,159 14,992 39,671 (67)
----------------------------------------------------------------------------
Acquisition-related
Fair Value Changes 4,647 4,361 - 100
----------------------------------------------------------------------------
Non-interest
Expenses
Salaries and
employee benefits 54,082 54,364 51,939 4
Premises and
equipment 14,747 14,348 12,460 18
Other expenses 15,310 14,103 14,062 9
----------------------------------------------------------------------------
84,139 82,815 78,461 7
----------------------------------------------------------------------------
Net Income before
Income Taxes 70,498 73,059 45,598 55
Income taxes 19,009 19,695 11,849 60
----------------------------------------------------------------------------
Net Income 51,489 53,364 33,749 53
Net income
attributable to
non-controlling
interests 333 259 161 107
----------------------------------------------------------------------------
Shareholders' Net
Income 51,156 53,105 33,588 52
Preferred share
dividends 3,562 3,563 1,375 159
----------------------------------------------------------------------------
Common Shareholders'
Net Income $ 47,594$ 49,542$ 32,213 48%
----------------------------------------------------------------------------
Average number of
common
shares (in
thousands) 88,271 88,185 81,429 8%
Average number of
diluted common
shares (in
thousands) 88,490 88,492 81,444 9
----------------------------------------------------------------------------
Earnings Per Common
Share
Basic $ 0.54$ 0.56$ 0.40 35%
Diluted 0.54 0.56 0.40 35
Consolidated Statements of Income
For the six months ended
---------------------------
(unaudited) Change from
April 30 2017 April 30 2016April 30 2016
($ thousands, except
per share amounts)
----------------------------------------------------------------------------
Interest Income
Loans $ 479,049$ 450,266 6%
Securities 12,285 16,283 (25)
Deposits with
regulated
financial
institutions 4,516 1,619 179
----------------------------------------------------------------------------
495,850 468,168 6
----------------------------------------------------------------------------
Interest Expense
Deposits 173,334 166,125 4
Debt 14,611 14,815 (1)
----------------------------------------------------------------------------
187,945 180,940 4
----------------------------------------------------------------------------
Net Interest Income 307,905 287,228 7
----------------------------------------------------------------------------
Non-interest Income
Credit related 17,093 14,341 19
Wealth management
services 8,458 7,050 20
Retail services 6,774 7,170 (6)
Trust services 5,965 5,824 2
Gains (losses) on
securities, net 609 (2,884) nm
Other 866 2,503 (65)
----------------------------------------------------------------------------
39,765 34,004 17
----------------------------------------------------------------------------
Total Revenue 347,670 321,232 8
----------------------------------------------------------------------------
Provision for Credit
Losses (Note 5) 28,151 48,603 (42)
----------------------------------------------------------------------------
Acquisition-related
Fair Value Changes 9,008 - 100
----------------------------------------------------------------------------
Non-interest
Expenses
Salaries and
employee benefits 108,446 101,963 6
Premises and
equipment 29,095 24,506 19
Other expenses 29,413 27,545 7
----------------------------------------------------------------------------
166,954 154,014 8
----------------------------------------------------------------------------
Net Income before
Income Taxes 143,557 118,615 21
Income taxes 38,704 31,016 25
----------------------------------------------------------------------------
Net Income 104,853 87,599 20
Net income
attributable to
non-controlling
interests 592 504 17
----------------------------------------------------------------------------
Shareholders' Net
Income 104,261 87,095 20
Preferred share
dividends 7,125 2,750 159
----------------------------------------------------------------------------
Common Shareholders'
Net Income $ 97,136$ 84,345 15%
----------------------------------------------------------------------------
Average number of
common
shares (in
thousands) 88,227 80,978 9%
Average number of
diluted common
shares (in
thousands) 88,500 80,993 9
----------------------------------------------------------------------------
Earnings Per Common
Share
Basic $ 1.10$ 1.04 6%
Diluted 1.10 1.04 6
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)($ April 30 April 30 April 30 April 30
thousands) 2017 2016 2017 2016
----------------------------------------------------------------------------
Net Income $ 51,489 $ 33,749 $ 104,853 $ 87,599
----------------------------------------------------------------------------
Other Comprehensive
Income (Loss), net
of tax
Available-for-sale
securities:
Gains from change in
fair value(1) 10,902 9,013 12,442 470
Reclassification to
net income(2) (395) - (446) 2,198
----------------------------------------------------------------------------
10,507 9,013 11,996 2,668
----------------------------------------------------------------------------
Derivatives
designated as cash
flow hedges:
Gains (losses) from
change in fair
value(3) 3,366 (8,248) (6,881) (8,664)
Reclassification to
net income(4) 824 (1,329) (586) (566)
----------------------------------------------------------------------------
4,190 (9,577) (7,467) (9,230)
----------------------------------------------------------------------------
14,697 (564) 4,529 (6,562)
----------------------------------------------------------------------------
Comprehensive Income
for the Period $ 66,186 $ 33,185 $ 109,382 $ 81,037
----------------------------------------------------------------------------
Comprehensive income
for the period
attributable to:
Shareholders of CWB $ 65,853 $ 33,024 $ 108,790 $ 80,533
Non-controlling
interests 333 161 592 504
----------------------------------------------------------------------------
Comprehensive Income
for the Period $ 66,186 $ 33,185 $ 109,382 $ 81,037
----------------------------------------------------------------------------
1. Net of income tax of $4,031 and $4,554 for the three and six months
ended April 30, 2017, respectively (2016 - $3,335 and $191).
2. Net of income tax of $149 and $163 for the three and six months ended
April 30, 2017, respectively (2016 - nil and $810).
3. Net of income tax of $1,239 and $2,532 for the three and six months
ended April 30, 2017, respectively (2016 - $3,035 and $3,188).
4. Net of income tax of $303 and $216 for the three and six months ended
April 30, 2017, respectively (2016 - $489 and $208).
Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statement of Income when specific conditions are met.
The accompanying notes are an integral part of the interim consolidated financial statements.
Consolidated Statements of Changes in Equity
For the six months ended
-------------------------------
(unaudited) April 30 2017 April 30 2016
($ thousands)
----------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period $ 1,354,966 $ 1,261,678
Shareholders' net income 104,261 87,095
Dividends - Preferred shares (7,125) (2,750)
- Common shares (40,587) (37,339)
Increase in equity attributable to non-
controlling interests ownership change 1,809 -
Issuance costs on preferred shares - (3,162)
----------------------------------------------------------------------------
Balance at end of period 1,413,324 1,305,522
----------------------------------------------------------------------------
Other Reserves
Balance at beginning of period (27,579) (42,492)
Changes in available-for-sale securities 11,996 2,668
Changes in derivatives designated as cash
flow hedges (7,467) (9,230)
----------------------------------------------------------------------------
Balance at end of period (23,050) (49,054)
----------------------------------------------------------------------------
Preferred Shares (Note 10)
Balance at beginning of period 265,000 125,000
Issued - 140,000
----------------------------------------------------------------------------
Balance at end of period 265,000 265,000
----------------------------------------------------------------------------
Common Shares (Note 10)
Balance at beginning of period 718,377 537,511
Issued under dividend reinvestment plan 2,057 2,125
Issued on acquisition of subsidiary - 25,606
Transferred from share-based payment reserve
on the exercise or exchange of options 5,478 685
----------------------------------------------------------------------------
Balance at end of period 725,912 565,927
----------------------------------------------------------------------------
Share-based Payment Reserve
Balance at beginning of period 31,276 29,210
Amortization of fair value of options (Note
11) 1,080 1,489
Transferred to common shares on the exercise
or exchange of options (5,478) (685)
----------------------------------------------------------------------------
Balance at end of period 26,878 30,014
----------------------------------------------------------------------------
Total Shareholders' Equity 2,408,064 2,117,409
----------------------------------------------------------------------------
Non-Controlling Interests
Balance at beginning of period 773 992
Net income attributable to non-controlling
interests 592 504
Dividends to non-controlling interests (554) (785)
Increase in equity attributable to non-
controlling interests 411 -
Partial ownership increase (117) (353)
----------------------------------------------------------------------------
Balance at end of period 1,105 358
----------------------------------------------------------------------------
Total Equity $ 2,409,169 $ 2,117,767
----------------------------------------------------------------------------
The accompanying notes are an integral part of the interim consolidated financial statements.
Consolidated Statements of Cash
Flow
For the six months ended
--------------------------------
April 30 2017 April 30
(unaudited) 2016
($ thousands)
----------------------------------------------------------------------------
Cash Flows from Operating
Activities
Net income $ 104,853 $ 87,599
Adjustments to determine net cash
flows:
Provision for credit losses 28,151 48,603
Depreciation and amortization 14,428 10,627
Current income taxes receivable
and payable 6,394 (23,241)
Amortization of fair value of (Note
employee stock options 11) 1,080 1,489
Accrued interest receivable and
payable, net (11,523) 1,736
Deferred income taxes, net (1,460) (1,023)
(Gains) losses on securities,
net (609) 2,884
Fair value change in contingent
consideration 9,008 -
Change in operating assets and
liabilities:
Deposits, net (720,814) 975,518
Loans, net (281,971) (1,821,225)
Securities sold under
repurchase agreements, net 102,553 99,003
Securities purchased under
resale agreements, net 163,318 (142,915)
Other items, net 14,484 32,848
----------------------------------------------------------------------------
(572,108) (728,097)
----------------------------------------------------------------------------
Cash Flows from Financing
Activities
Preferred shares issued, net of
issuance costs - 136,838
Contributions by non-controlling
interests 2,220 -
Debt securities issued 189,682 464,534
Debt securities repaid (215,663) (141,955)
Debentures redeemed (75,000) (300,000)
Dividends (45,655) (37,964)
Dividends to non-controlling
interests (554) (785)
----------------------------------------------------------------------------
(144,970) 120,668
----------------------------------------------------------------------------
Cash Flows from Investing
Activities
Interest bearing deposits with
regulated financial
institutions, net 168,441 243,169
Securities, purchased (2,916,115) (3,717,090)
Securities, sale proceeds 2,907,865 3,320,097
Securities, matured 608,482 740,272
Property, equipment and
intangible assets (12,003) (25,756)
Partial ownership increase (1,838) (353)
Acquisitions - (19,500)
Contingent consideration
instalment payment (10,132) -
----------------------------------------------------------------------------
744,700 540,839
----------------------------------------------------------------------------
Change in Cash and Cash Equivalents 27,622 (66,590)
Cash and Cash Equivalents at
Beginning of Period 1,857 (29,604)
----------------------------------------------------------------------------
Cash and Cash Equivalents at End of $
Period (i) 29,479 $ (96,194)
----------------------------------------------------------------------------
(i) Represented by:
Cash and non-interest bearing $
deposits with financial
institutions 67,963 $ 6,271
Cheques and other items in
transit (included in Cash
Resources) 15,708 19,844
Cheques and other items in
transit (included in Other
Liabilities) (54,192) (122,309)
----------------------------------------------------------------------------
Cash and Cash Equivalents at End of $
Period 29,479 $ (96,194)
----------------------------------------------------------------------------
Supplemental Disclosure of Cash
Flow Information
Interest and dividends received $ 505,327 $ 481,097
Interest paid 201,797 181,226
Income taxes paid 35,372 54,839
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, 2016. 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, 2016 as set out on pages 71 to 110 of CWB's 2016 Annual Report.
The interim consolidated financial statements were authorized for issue by the Board of Directors on May 31, 2017.
2. Future Accounting Changes
CWB continues to monitor the IASB's proposed changes to accounting standards. Although not expected to materially impact CWB's 2017 consolidated financial statements, 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 2016 Annual Report and the Future Accounting Changes section of the Q2 2017 Management's Discussion and Analysis.
3. Securities
Net unrealized gains (losses) reflected on the consolidated balance sheets follow:
As at As at As at
April 30 January 31 October 31
2017 2017 2016
----------------------------------------------------------------------------
Interest bearing deposits with
regulated financial
institutions $ (510) $ (2) $ (81)
Securities issued or guaranteed
by
Canada (4,692) (11,570) 147
A province or municipality 38 (597) 133
Other debt securities 2,349 1,465 1,522
Preferred shares (25,479) (31,960) (46,405)
----------------------------------------------------------------------------
Unrealized losses, net $ (28,294) $ (42,664) $ (44,684)
----------------------------------------------------------------------------
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 well as volatility in equity markets. As at April 30, 2017, CWB assessed the securities with unrealized losses and, based on available objective evidence, concluded that unrealized losses resulted from changes in interest rates and not from deterioration in creditworthiness of the issuers. No impairment losses were included in gains (losses) on securities, net during the three and six months ended April 30, 2017 (2016 - nil).
4. Loans
The composition of CWB's loan portfolio by geographic region and industry sector follow:
($ millions) AB BC ON SK MB Other Total
----------------------------------------------------------------------------
Personal(1) $1,226 $1,219 $1,639 $ 193 $ 108 $ 91 $ 4,476
----------------------------------------------------------------------------
Business
Real estate 3,219 4,035 377 487 180 1 8,299
Commercial 2,144 1,864 908 252 260 177 5,605
Equipment financing(2) 1,132 609 853 381 178 644 3,797
Energy 137 - - 14 - - 151
----------------------------------------------------------------------------
6,632 6,508 2,138 1,134 618 822 17,852
----------------------------------------------------------------------------
Total Loans(3) $7,858 $7,727 $3,777 $1,327 $ 726 $ 913 $22,328
----------------------------------------------------------------------------
Composition Percentage
April 30, 2017 35% 35% 17% 6% 3% 4 % 100%
January 31, 2017 35% 36% 16% 6% 3% 4 % 100%
October 31, 2016 36% 36% 15% 6% 3% 4 % 100%
Composition Percentage
---------------------------------------------------
($ millions) April 30 2017 January 31 2017 October 31 2016
----------------------------------------------------------------------------
Personal(1) 20% 19% 18%
----------------------------------------------------------------------------
Business
Real estate 37 38 38
Commercial 25 25 26
Equipment financing(2) 17 17 17
Energy 1 1 1
----------------------------------------------------------------------------
80 81 82
----------------------------------------------------------------------------
Total Loans(3) 100% 100% 100%
----------------------------------------------------------------------------
Composition Percentage
April 30, 2017
January 31, 2017
October 31, 2016
1. Includes mortgages securitized through the National Housing Act
Mortgage-backed Securities program reported on-balance sheet of $373
(January 31, 2017 - $381, October 31, 2016 - $391).
2. Includes securitized leases reported on-balance sheet of $906 (January
31, 2017 - $996, October 31, 2016 - $1,030).
3. This table does not include an allocation for credit losses.
5. Allowance for Credit Losses
The following table shows the changes in the allowance for credit losses:
For the three months ended
April 30, 2017
-------------------------------------------
Collective
Specific Allowance for
Allowance Credit Losses Total
----------------------------------------------------------------------------
Balance at beginning of period $ 14,168 $ 115,348 $ 129,516
Provision for credit losses 10,388 2,771 13,159
Write-offs (7,772) - (7,772)
Recoveries 1,490 - 1,490
----------------------------------------------------------------------------
Balance at end of period $ 18,274 $ 118,119 $ 136,393
----------------------------------------------------------------------------
Represented by:
Loans $ 18,274 $ 94,673 $ 112,947
Committed but undrawn exposures - 23,446 23,446
----------------------------------------------------------------------------
Total allowance $ 18,274 $ 118,119 $ 136,393
----------------------------------------------------------------------------
For the three months ended
January 31, 2017
---------------------------------------------
Collective
Specific Allowance for
Allowance Credit Losses Total
----------------------------------------------------------------------------
Balance at beginning of period $ 16,269 $ 110,943 $ 127,212
Provision for credit losses 10,587 4,405 14,992
Write-offs (13,705) - (13,705)
Recoveries 1,017 - 1,017
----------------------------------------------------------------------------
Balance at end of period $ 14,168 $ 115,348 $ 129,516
----------------------------------------------------------------------------
Represented by:
Loans $ 14,168 $ 95,107 $ 109,275
Committed but undrawn exposures - 20,241 20,241
----------------------------------------------------------------------------
Total allowance $ 14,168 $ 115,348 $ 129,516
----------------------------------------------------------------------------
For the three months ended
April 30, 2016
----------------------------------------------
Collective
Specific Allowance for
Allowance Credit Losses Total
----------------------------------------------------------------------------
Balance at beginning of
period $ 20,881 $ 99,729 $ 120,610
Provision for credit losses 39,510 161 39,671
Write-offs (15,708) - (15,708)
Recoveries 1,244 - 1,244
----------------------------------------------------------------------------
Balance at end of period $ 45,927 $ 99,890 $ 145,817
----------------------------------------------------------------------------
Represented by:
Loans $ 45,927 $ 81,746 $ 127,673
Committed but undrawn
exposures - 18,144 18,144
----------------------------------------------------------------------------
Total allowance $ 45,927 $ 99,890 $ 145,817
----------------------------------------------------------------------------
For the six months ended
April 30, 2017
-------------------------------------------
Collective
Specific Allowance for
Allowance Credit Losses Total
----------------------------------------------------------------------------
Balance at beginning of period $ 16,269 $ 110,943 $ 127,212
Provision for credit losses 20,975 7,176 28,151
Write-offs (21,477) - (21,477)
Recoveries 2,507 - 2,507
----------------------------------------------------------------------------
Balance at end of period $ 18,274 $ 118,119 $ 136,393
----------------------------------------------------------------------------
For the six months ended
April 30, 2016
---------------------------------------------
Collective
Specific Allowance for
Allowance Credit Losses Total
----------------------------------------------------------------------------
Balance at beginning of period $ 15,806 $ 99,613 $ 115,419
Provision for credit losses 48,326 277 48,603
Write-offs (20,029) - (20,029)
Recoveries 1,824 - 1,824
----------------------------------------------------------------------------
Balance at end of period $ 45,927 $ 99,890 $ 145,817
----------------------------------------------------------------------------
6. Impaired and Past Due Loans
Outstanding impaired loans, net of allowance for credit losses, by loan type, follow:
As at April 30, 2017
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
----------------------------------------------------------------------------
Personal $4,475,620 $ 21,732 $ 353 $ 21,379
Business
Real estate(1) 8,298,740 37,015 2,700 34,315
Commercial 5,605,488 32,406 5,790 26,616
Equipment financing 3,797,098 46,108 8,858 37,250
Energy 151,191 573 573 -
----------------------------------------------------------------------------
Total(2) 22,328,13
$ 7 $ 137,834 $ 18,274 119,560
-----------------------------------------------------------------
Collective Allowance(3) (118,119)
----------------------------------------------------------------------------
Net Impaired Loans After
Collective Allowance $ 1,441
----------------------------------------------------------------------------
As at January 31, 2017
--------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
----------------------------------------------------------------------------
Personal $4,177,551 $ 21,988 $ 202 $ 21,786
Business
Real estate(1) 8,320,920 27,191 2,700 24,491
Commercial 5,499,699 34,988 1,835 33,153
Equipment financing 3,711,113 38,803 8,531 30,272
Energy 173,441 1,469 900 569
----------------------------------------------------------------------------
Total(2) 21,882,72
$ 4 $ 124,439 $ 14,168 110,271
-----------------------------------------------------------------
Collective Allowance(3) (115,348)
----------------------------------------------------------------------------
Net Impaired Loans After
Collective Allowance $ (5,077)
----------------------------------------------------------------------------
As at October 31, 2016
------------------------------------------
Gross Net
Gross Impaired Specific Impaired
Amount Amount Allowance Loans
----------------------------------------------------------------------------
Personal $4,063,552 $ 21,968 $ 204 $ 21,764
Business
Real estate(1) 8,424,777 29,784 2,989 26,795
Commercial 5,644,231 18,363 1,370 16,993
Equipment financing 3,711,504 40,201 9,563 30,638
Energy 221,072 16,896 2,143 14,753
----------------------------------------------------------------------------
Total(2) 22,065,13
$ 6 $ 127,212 $ 16,269 110,943
-----------------------------------------------------------------
Collective Allowance(3) (110,943)
----------------------------------------------------------------------------
Net Impaired Loans After
Collective Allowance $ -
----------------------------------------------------------------------------
1. Multi-family residential mortgages are included in real estate loans.
2. Gross impaired loans include foreclosed assets with a carrying value of
$3,436 (January 31, 2017 - $2,419; and October 31, 2016 - $3,876) 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 by 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, 2017
-------------------------------------------
Gross Net
Impaired Specific Impaired
Amount Allowance Loans
----------------------------------------------------------------------------
Alberta $ 64,660 $ 4,524 $ 60,136
British Columbia 22,778 2,160 20,618
Ontario 24,314 6,077 18,237
Saskatchewan 9,959 1,592 8,367
Manitoba 3,336 1,031 2,305
Other 12,787 2,890 9,897
----------------------------------------------------------------------------
Total $ 137,834 $ 18,274 119,560
-------------------------------------------------------------
Collective Allowance(1) (118,119)
----------------------------------------------------------------------------
Net Impaired Loans After
Collective Allowance $ 1,441
----------------------------------------------------------------------------
As at January 31, 2017
---------------------------------------------
Gross
Impaired Specific Net Impaired
Amount Allowance Loans
----------------------------------------------------------------------------
Alberta $ 51,443 $ 5,114 $ 46,329
British Columbia 29,860 2,689 27,171
Ontario 24,476 3,606 20,870
Saskatchewan 10,684 894 9,790
Manitoba 3,698 1,004 2,694
Other 4,278 861 3,417
----------------------------------------------------------------------------
Total $ 124,439 $ 14,168 110,271
-------------------------------------------------------------
Collective Allowance(1) (115,348)
----------------------------------------------------------------------------
Net Impaired Loans After
Collective Allowance $ (5,077)
----------------------------------------------------------------------------
As at October 31, 2016
---------------------------------------------
Gross
Impaired Specific Net Impaired
Amount Allowance Loans
----------------------------------------------------------------------------
Alberta $ 64,751 $ 6,137 $ 58,614
British Columbia 29,074 2,868 26,206
Ontario 16,596 4,680 11,916
Saskatchewan 8,688 712 7,976
Manitoba 3,903 543 3,360
Other 4,200 1,329 2,871
----------------------------------------------------------------------------
Total $ 127,212 $ 16,269 110,943
-------------------------------------------------------------
Collective Allowance(1) (110,943)
----------------------------------------------------------------------------
Net Impaired Loans After
Collective Allowance $ -
----------------------------------------------------------------------------
1. The collective allowance for credit loss includes amounts related to
committed by 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, 2017
--------------------------------------------------
More
1 - 30 31 - 60 61 - 90 than
days days days 90 days Total
----------------------------------------------------------------------------
Personal $ 72,714 $ 20,125 $ 1,379 $ 2,583 $ 96,801
Business 98,570 23,271 8,641 240 130,722
----------------------------------------------------------------------------
Total $ 171,284 $ 43,396 $ 10,020 $ 2,823 $ 227,523
----------------------------------------------------------------------------
Total as at January 31,
2017 $ 153,998 $ 37,420 $ 31,060 $ 5,021 $ 227,499
----------------------------------------------------------------------------
Total as at October 31,
2016 $ 168,153 $ 47,136 $ 9,309 $ 4,491 $ 229,089
----------------------------------------------------------------------------
7. Financial Assets Transferred But Not Derecognized
Securitization of leases
CWB securitizes leases to third parties. These securitizations do not qualify for derecognition as CWB continues to be exposed to certain risks associated with the leases, including an obligation to remit contractual cash flow payments regardless of whether the cash flows are collected from lessees and, therefore, has not transferred substantially all of the risk and rewards of ownership. As the leases do not qualify for derecognition, the assets are not removed from the consolidated balance sheet and a securitization liability is recognized within debt securities for the cash proceeds received.
Securitization of residential mortgages
CWB securitizes insured residential mortgages through the creation of mortgage-backed securities (MBS) under the National Housing Act (NHA) MBS program sponsored by Canada Mortgage Housing Corporation (CMHC). The MBS that are created through the NHA MBS program can be sold directly to third party investors or held by CWB.
In April 2017, CWB sold $88 million of securitized residential mortgages to a third party investor for cash proceeds of $90 million (2016 - nil).
The third party sale of the mortgage pools that comprise the NHA MBS do not qualify for derecognition as CWB retains the pre-payment and interest rate risks associated with the mortgages, which represent substantially all of the risks and rewards associated with the transferred assets. As a result, the mortgages remain on the consolidated balance sheet as personal loans and are carried at amortized cost. Cash proceeds from the third party sale of the mortgage pools are recognized within debt securities.
Securities sold under repurchase agreements
CWB enters into repurchase agreements under which it sells previously recognized securities, with a simultaneous agreement to purchase them back at a specific price on a future date, but retains substantially all of the credit, price, interest rate, and foreign exchange risks and rewards associated with the assets. These securities are not derecognized and the cash proceeds from the sale are recognized within other liabilities on the balance sheet.
The following table provides additional information about the nature of transferred financial assets that do not qualify for derecognition and the associated liabilities.
As at April 30, 2017 As at January 31, 2017
------------------------------------------------
Carrying Fair Carrying Fair
value Value value Value
----------------------------------------------------------------------------
Transferred assets that do
not qualify for
derecognition
Securities issued or
guaranteed by Canada $ 102,553 $ 102,553 $ 108,480 $ 108,480
Securitized leases 906,309 967,942 995,692 1,058,953
Securitized residential
mortgages 88,183 85,968 - -
----------------------------------------------------------------------------
1,097,045 1,156,463 1,104,172 1,167,433
Associated liabilities(1) 1,019,770 1,022,513 1,017,530 1,018,550
----------------------------------------------------------------------------
Net position $ 77,275 $ 133,950 $ 86,642 $ 148,883
----------------------------------------------------------------------------
As at October 31, 2016
------------------------------
Carrying Fair
value Value
----------------------------------------------------------------------------
Transferred assets that do not qualify for
derecognition
Securities issued or guaranteed by Canada $ - $ -
Securitized leases 1,030,499 1,099,240
Securitized residential mortgages - -
----------------------------------------------------------------------------
1,030,499 1,099,240
Associated liabilities(1) 943,198 942,171
----------------------------------------------------------------------------
Net position $ 87,301 $ 157,069
----------------------------------------------------------------------------
1. Associated liabilities consist of $102,553 related to securities sold
under repurchase agreements (January 31, 2017 - $108,480; October 31,
2016 - nil), $827,214 related to securitized leases (January 31, 2017 -
$909,050; October 31, 2016 - $943,198) and $90,003 related to
residential mortgages securitized through the NHA MBS program (January
31, 2017 - nil; October 31, 2016 - nil).
Additionally, CWB has securitized residential mortgages through the NHA MBS program totaling $285 million, with a fair value of $267 million (January 31, 2017 - $381 million with a fair value of $355 million; October 31, 2016 - $391 million with a fair value of $363 million), that were not transferred to third parties.
8. 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. 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, 2017
-------------------------------------------
Notional Positive Negative Fair
Amount Fair Value Value
----------------------------------------------------------------------------
Cash flow hedges
Interest rate swaps(1) $ 3,308,000 $ 4,625 $ 8,019
Equity swaps(2) 20,117 698 845
Not designated in a hedging
relationship
Equity swaps(3) 3,628 112 -
Foreign exchange contracts(4) 54,033 2 606
----------------------------------------------------------------------------
Derivative related amounts $ 3,385,778 $ 5,437 $ 9,470
----------------------------------------------------------------------------
As at January 31, 2017
---------------------------------------------
Notional Positive Negative Fair
Amount Fair Value Value
----------------------------------------------------------------------------
Cash flow hedges
Interest rate swaps(1) $ 3,683,000 $ 2,711 $ 12,574
Equity swaps(2) 20,117 2,338 621
Not designated in a hedging
relationship
Equity swaps(3) 3,628 465 -
Foreign exchange contracts(4) 127,290 2,942 48
----------------------------------------------------------------------------
Derivative related amounts $ 3,834,035 $ 8,456 $ 13,243
----------------------------------------------------------------------------
As at October 31, 2016
-------------------------------------------
Notional Positive Negative Fair
Amount Fair Value Value
----------------------------------------------------------------------------
Cash flow hedges
Interest rate swaps $ 3,698,000 $ 10,335 $ 3,014
Equity swaps 20,117 - 1,449
Not designated in a hedging
relationship
Equity swaps 3,628 - 134
Foreign exchange contracts 124,056 35 2,575
----------------------------------------------------------------------------
Derivative related amounts $ 3,845,801 $ 10,370 $ 7,172
----------------------------------------------------------------------------
1. Interest rate swaps designated as cash flow hedges outstanding at April
30, 2017 mature between June 2017 and September 2021.
2. Equity swaps designated as cash flow hedges outstanding at April 30,
2017 mature between June 2017 and June 2019.
3. Equity swaps not designated as hedges outstanding at April 30, 2017
mature in June and December 2017.
4. Foreign exchange contracts outstanding at April 30, 2017 mature between
May and June 2017.
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 For the six months
ended ended
------------------------------------------
April 30 April 30 April 30 April 30
2017 2016 2017 2016
----------------------------------------------------------------------------
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, 2017, hedged cash flows are expected to occur and affect profit or loss within the next five years. There were no forecasted transactions that failed to occur during the three and six months ended April 30, 2017.
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. The impact of pledged and received collateral is discussed in Note 9.
9. Financial Instruments - Offsetting
The following table provides a summary of financial assets and liabilities which are subject to enforceable master netting agreements and similar arrangements, as well as financial collateral received to mitigate credit exposures related to these financial instruments. The agreements do not meet the netting criteria required by IAS 32 Financial Instruments: Presentation as the right to set-off is only enforceable in the event of default or occurrence of other predetermined events.
Amounts not offset in the
consolidated balance sheet
--------------------------------------
Gross
amounts
reported on Securities
the Impact of received
consolidated master Cash as
As at April 30, balance netting collateral collateral Net
2017 sheets agreements (1) (1)(2) amount
----------------------------------------------------------------------------
Financial Assets
Derivative
instruments $ 5,437 $ 2,398 $ 3,021 $ - $ 18
----------------------------------------------------------------------------
Financial
Liabilities
Derivative
instruments $ 9,470 $ 2,398 $ 7,004 $ - $ 68
----------------------------------------------------------------------------
As at January 31,
2017
----------------------------------------------------------------------------
Financial Assets
Derivative
instruments $ 8,456 $ 4,198 $ 3,733 $ - $ 525
----------------------------------------------------------------------------
Financial
Liabilities
Derivative
instruments $ 13,243 $ 4,198 $ 8,528 $ - $ 517
----------------------------------------------------------------------------
As at October 31,
2016
----------------------------------------------------------------------------
Financial Assets
Derivative
instruments $ 10,370 $ 4,345 $ 5,730 $ 49 $ 246
----------------------------------------------------------------------------
Financial
Liabilities
Derivative
instruments $ 7,172 $ 4,345 $ 2,121 $ - $ 706
----------------------------------------------------------------------------
1. Financial collateral is reflected at fair value. The amount of financial
instruments and cash collateral disclosed is limited to the net balance
sheet exposure, and any over-collateralization is excluded from the
table.
2. Collateral received in the form of securities is not recognized on the
consolidated balance sheets.
10. Capital Stock
Share Capital
For the six months ended
--------------------------------------------
April 30, 2017 April 30, 2016
--------------------------------------------
Number of Number of
Shares Amount 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 5,600,000 140,000 - -
Issued - - 5,600,000 140,000
----------------------------------------------------------------------------
Outstanding at end of
period 5,600,000 140,000 5,600,000 140,000
----------------------------------------------------------------------------
10,600,000 265,000 10,600,000 265,000
----------------------------------------------------------------------------
Common Shares
Outstanding at
beginning of period 88,103,120 718,377 80,526,069 537,511
Issued under dividend
reinvestment plan 68,270 2,057 88,820 2,125
Issued on exercise or
exchange of (Note
options(1) 11) 128,463 5,478 16,427 685
Issued on acquisition
of subsidiary - - 1,250,312 25,606
----------------------------------------------------------------------------
Outstanding at end of
period 88,299,853 725,912 81,881,628 565,927
----------------------------------------------------------------------------
Share Capital $ 990,912 $ 830,927
----------------------------------------------------------------------------
1. Represents shares issued and amounts transferred from the share-based
payment reserve to share capital upon cashless settlement of option
exercises.
11. Share-based Payments
Stock Options
For the three months ended
--------------------------------------------
April 30, 2017 April 30, 2016
--------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Options
Balance at beginning of period 4,146,363 $ 30.40 5,031,705 $ 30.30
Granted 339,630 30.84 610,731 23.70
Exercised or exchanged (127,437) 26.85 (144,951) 25.52
Expired (105,132) 34.56 (6,425) 27.15
Forfeited (7,573) 39.42 (9,774) 34.96
----------------------------------------------------------------------------
Balance at end of period 4,245,851 $ 30.42 5,481,286 $ 29.69
----------------------------------------------------------------------------
For the six months ended
--------------------------------------------
April 30, 2017 April 30, 2016
--------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Options
Balance at beginning of period 5,205,794 $ 29.63 5,232,366 $ 30.26
Granted 339,630 30.84 610,731 23.70
Exercised or exchanged (1,176,504) 26.56 (144,951) 25.52
Expired (109,224) 34.27 (187,788) 28.75
Forfeited (13,845) 39.28 (29,072) 34.47
----------------------------------------------------------------------------
Balance at end of period 4,245,851 $ 30.42 5,481,286 $ 29.69
----------------------------------------------------------------------------
All exercised options are settled via cashless settlement, which provides the option holder the number of shares equivalent to the excess of the market value of the shares under option, determined at the exercise date, over the exercise price. During the six months ended April 30, 2017, option holders exchanged the rights to 1,176,504 (2016 - 144,951) options and received 128,463 (2016 - 16,427) shares in return by way of cashless settlement.
For the six months ended April 30, 2017, salary expense of $1,080 (2016 - $1,489) was recognized related to the estimated fair value of options granted. The fair value of options granted during the six months ended April 30, 2017, which expire seven years after the grant date, was estimated using a binomial option pricing model with the following weighted average variables and assumptions: (i) risk-free interest rate of 1.3% (2016 - 0.8%) (ii) expected option life of 5.0 years (2016 - 5.0 years), (iii) expected annual volatility of 26% (2016 - 26%), and (iv) expected annual dividends of 3.1% (2016 - 3.8%). The weighted average fair value of options granted was estimated at $4.77 per share (2016 - $3.47).
Further details related to stock options outstanding and exercisable at April 30, 2017 follow:
Options Outstanding Options Exercisable
------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Options Life (years) Price Options Price
----------------------------------------------------------------------------
$23.70 to $26.40 1,422,879 3.9 25.13 159,468 26.40
$28.09 to $30.85 1,593,993 2.2 28.86 1,254,363 28.33
$37.50 to $39.42 1,228,979 1.9 38.58 538,674 37.50
----------------------------------------------------------------------------
Total 4,245,851 2.7 30.42 1,952,505 30.70
----------------------------------------------------------------------------
12. Contingent Liabilities and Commitments
In the normal course of business, CWB enters into various commitments and has contingent liabilities, which are not reflected in the consolidated balance sheets. At April 30, 2017, these items include guarantees and standby letters of credit of $455,753 (January 31, 2017 - $464,547; October 31, 2016 - $492,327). Significant contingent liabilities and commitments, including guarantees provided to third parties, are discussed in Note 20 of CWB's audited consolidated financial statements for the year ended October 31, 2016 (see page 99 of the 2016 Annual Report).
In the ordinary course of business, CWB and its subsidiaries are party to legal proceedings. Based on current knowledge, CWB does not expect the outcome of any of these proceedings to have a material effect on the consolidated financial position or results of operations.
13. Fair Value of Financial Instruments
Financial Assets and Liabilities by Measurement Basis
The table below provides the carrying amount of financial instruments by category as defined in IAS 39 - Financial Instruments: Recognition and Measurement and by balance sheet heading. The table does not include assets and liabilities that are not considered financial instruments. The table also excludes assets and liabilities which are considered financial instruments, but are not recorded at fair value and for which the carrying amount approximates fair value.
Loans and
Receivables
and Non-
trading Available-
As at April 30, 2017 Derivatives Liabilities for-sale
----------------------------------------------------------------------------
Financial Assets
Cash resources $ - $ - $ 805,746
Securities - - 1,129,334
Loans(1) - 22,286,778 -
Derivative related 5,437 - -
----------------------------------------------------------------------------
Total Financial Assets $ 5,437 $ 22,286,778 $ 1,935,080
----------------------------------------------------------------------------
Financial Liabilities
Deposits(1) $ - $ 20,494,117 $ -
Debt - 1,167,217 -
Securities sold under
repurchase agreements - 102,553 -
Derivative related 9,470 - -
Contingent consideration - 23,133 -
----------------------------------------------------------------------------
Total Financial Liabilities $ 9,470 $ 21,787,020 $ -
----------------------------------------------------------------------------
As at January 31, 2017
----------------------------------------------------------------------------
Total Financial Assets $ 8,456 $ 21,880,110 $ 2,551,712
----------------------------------------------------------------------------
Total Financial Liabilities $ 13,243 $ 21,959,606 $ 108,480
----------------------------------------------------------------------------
As at October 31, 2016
----------------------------------------------------------------------------
Total Financial Assets $ 10,370 $ 22,049,997 $ 2,791,968
----------------------------------------------------------------------------
Total Financial Liabilities $ 7,172 $ 22,508,297 $ -
----------------------------------------------------------------------------
Fair Value
Total Over (Under)
Carrying Carrying
As at April 30, 2017 Amount Fair Value Amount
----------------------------------------------------------------------------
Financial Assets
Cash resources $ 805,746 $ 805,746 $ -
Securities 1,129,334 1,129,334 -
Loans(1) 22,286,778 22,636,875 350,097
Derivative related 5,437 5,437 -
----------------------------------------------------------------------------
Total Financial Assets $ 24,227,295 $ 24,577,392 $ 350,097
----------------------------------------------------------------------------
Financial Liabilities
Deposits(1) $ 20,494,117 $ 20,559,388 $ 65,271
Debt 1,167,217 1,178,447 11,230
Securities sold under
repurchase agreements 102,553 102,553 -
Derivative related 9,470 9,470 -
Contingent consideration 23,133 23,133 -
----------------------------------------------------------------------------
Total Financial Liabilities $ 21,796,490 $ 21,872,991 $ 76,501
----------------------------------------------------------------------------
As at January 31, 2017
----------------------------------------------------------------------------
Total Financial Assets $ 24,440,278 $ 24,764,778 $ 324,000
----------------------------------------------------------------------------
Total Financial Liabilities $ 22,081,329 $ 22,190,786 $ 109,457
----------------------------------------------------------------------------
As at October 31, 2016
----------------------------------------------------------------------------
Total Financial Assets $ 24,852,335 $ 25,179,091 $ 326,756
----------------------------------------------------------------------------
Total Financial Liabilities $ 22,515,469 $ 22,584,300 $ 68,831
----------------------------------------------------------------------------
1. Loans and deposits exclude deferred premiums, deferred revenue,
allowances for credit losses, which are not financial instruments.
Fair values are based on management's best estimates based on market conditions and pricing policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgment and, as such, may not be reflective of future fair values. Further information on how the fair value of financial instruments is determined is included in Note 27 of the October 31, 2016 consolidated audited financial statements (see page 105 of the 2016 Annual Report).
Fair Value Hierarchy
CWB categorizes its fair value measurements of financial instruments recorded on the consolidated balance sheets according to a three-level hierarchy. Level 1 fair value measurements reflect unadjusted quoted prices in active markets for identical assets and liabilities that CWB can access at the measurement date. Level 2 fair value measurements were estimated using observable inputs, including quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model inputs that are either observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 fair value measurements were determined using one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. There were no transfers between Level 1, Level 2 or Level 3 during the three and six months ended April 30, 2017 or 2016.
13. Fair Value of Financial Instruments - continued
The following table presents CWB's financial assets and liabilities that are either carried at fair value on the balance sheet or for which fair value is disclosed, categorized by level under the fair value hierarchy:
Fair Value Hierarchy
Valuation Technique
As at April 30, 2017 Fair Value Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Financial assets
Cash resources $ 805,746 $ 94,006 $ 711,740 $ -
Securities 1,129,334 170,884 958,450 -
Loans 22,636,875 - - 22,636,875
Derivative related 5,437 - 5,437 -
----------------------------------------------------------------------------
$ 24,577,392 $ 264,890 $ 1,675,627 $ 22,636,875
----------------------------------------------------------------------------
Financial liabilities
Deposits $ 20,559,388 $ - $ 20,559,388 $ -
Debt 1,178,447 - 1,178,447 -
Securities sold under
repurchase agreements 102,553 - 102,553 -
Derivative related 9,470 - 9,470 -
Contingent
consideration 23,133 - - 23,133
----------------------------------------------------------------------------
$ 21,872,991 $ - $ 21,849,858 $ 23,133
----------------------------------------------------------------------------
As at January 31, 2017
----------------------------------------------------------------------------
Financial assets $ 24,764,778 $ 202,136 $ 2,358,032 $ 22,204,610
----------------------------------------------------------------------------
Financial liabilities $ 22,190,786 $ - $ 22,172,300 $ 18,486
----------------------------------------------------------------------------
As at October 31, 2016
----------------------------------------------------------------------------
Financial assets $ 25,179,091 $ 367,935 $ 2,434,403 $ 22,376,753
----------------------------------------------------------------------------
Financial liabilities $ 22,584,300 $ - $ 22,560,043 $ 24,257
----------------------------------------------------------------------------
Financial instruments that are not carried on the balance sheet at fair value, but for which fair value is disclosed above, include loans, deposits and debt.
Level 3 Financial Instruments
The level 3 financial liabilities measured at fair value on the consolidated balance sheets are comprised of contingent consideration on business acquisitions and dispositions. The following table shows a reconciliation of the fair value measurements related to the Level 3 valued instruments:
For the six months ended
April 30
2017 2016
----------------------------------------------------------------------------
Business acquisition
Balance at beginning of period $ 24,257$ -
Business acquisition - 16,400
Contingent consideration fair value changes 9,008 -
Contingent consideration instalment payment (10,132) -
----------------------------------------------------------------------------
23,133 16,400
----------------------------------------------------------------------------
Business disposition
Balance at beginning and end of period - 650
Contingent consideration fair value changes - (325)
----------------------------------------------------------------------------
- 325
----------------------------------------------------------------------------
Balance at end of period $ 23,133$ 16,725
----------------------------------------------------------------------------
14. Interest Rate Sensitivity
CWB's exposure to interest rate risk as a result of a difference or gap between the maturity or repricing behavior of interest sensitive assets and liabilities, including derivative financial instruments, is discussed in Note 26 of the audited consolidated financial statements for the year ended October 31, 2016 (see page 104 of the 2016 Annual Report). The following table shows the gap position for selected time intervals.
Asset Liability Gap Positions
Floating
Rate and
Within 1 1 to 3 3 Months to Total Within
($ millions) Month Months 1 Year 1 Year
----------------------------------------------------------------------------
April 30, 2017
Assets
Cash resources
and securities $ 687 $ 198 $ 80 $ 965
Loans 10,230 1,247 3,353 14,830
Other assets - - - -
Derivative
financial
instruments(1) - 450 1,005 1,455
----------------------------------------------------------------------------
Total 10,917 1,895 4,438 17,250
----------------------------------------------------------------------------
Liabilities and
Equity
Deposits 7,935 1,302 4,020 13,257
Other
liabilities 103 - - 103
Debt 30 57 242 329
Equity - - - -
Derivative
financial
instruments(1) 3,332 - - 3,332
----------------------------------------------------------------------------
Total 11,400 1,359 4,262 17,021
----------------------------------------------------------------------------
Interest Rate
Sensitive Gap $ (483) $ 536 $ 176 $ 229
----------------------------------------------------------------------------
Cumulative Gap $ (483) $ 53 $ 229 $ 229
----------------------------------------------------------------------------
Cumulative Gap
as a Percentage
of Total Assets (1.7)% 0.2% 0.8% 0.8%
----------------------------------------------------------------------------
January 31, 2017
Cumulative Gap $ (1,069) $ (283) $ 30 $ 30
----------------------------------------------------------------------------
Cumulative Gap
as a Percentage
of Total Assets (3.7)% (1.0)% 0.1% 0.1%
----------------------------------------------------------------------------
October 31, 2016
Cumulative Gap $ 219 $ 1,235 $ 1,003 $ 1,003
----------------------------------------------------------------------------
Cumulative Gap
as a Percentage
of Total Assets 0.8% 4.2% 3.5% 3.5%
----------------------------------------------------------------------------
1 Year to 5 More than Non-interest
($ millions) Years 5 Years Sensitive Total
----------------------------------------------------------------------------
April 30, 2017
Assets
Cash resources
and securities $ 827 $ 133 $ 10 $ 1,935
Loans 7,210 247 (72) 22,215
Other assets - - 467 467
Derivative
financial
instruments(1) 1,853 - 78 3,386
----------------------------------------------------------------------------
Total 9,890 380 483 28,003
----------------------------------------------------------------------------
Liabilities and
Equity
Deposits 7,237 - (20) 20,474
Other
liabilities - - 464 567
Debt 838 - - 1,167
Equity 265 - 2,144 2,409
Derivative
financial
instruments(1) - - 54 3,386
----------------------------------------------------------------------------
Total 8,340 - 2,642 28,003
----------------------------------------------------------------------------
Interest Rate
Sensitive Gap $ 1,550 $ 380 $ (2,159) $ -
----------------------------------------------------------------------------
Cumulative Gap $ 1,779 $ 2,159 $ - $ -
----------------------------------------------------------------------------
Cumulative Gap
as a Percentage
of Total Assets 6.4% 7.7% -% -%
----------------------------------------------------------------------------
January 31, 2017
Cumulative Gap $ 1,855 $ 2,085 $ - $ -
----------------------------------------------------------------------------
Cumulative Gap
as a Percentage
of Total Assets 6.5% 7.3% -% -%
----------------------------------------------------------------------------
October 31, 2016
Cumulative Gap $ 1,815 $ 2,075 $ - $ -
----------------------------------------------------------------------------
Cumulative Gap
as a Percentage
of Total Assets 6.2% 7.1% -% -%
----------------------------------------------------------------------------
1. Derivative financial instruments are included in this table at the
notional amount.
2. Accrued interest is excluded in calculating interest sensitive assets
and liabilities.
3. Potential prepayments of fixed rate loans and early redemption of
redeemable fixed term deposits have not been estimated. Redemptions of
fixed deposits where depositors have this option are not expected to be
material. The majority of fixed rate loans, mortgages and leases are
either closed or carry prepayment penalties.
The effective weighted average interest rates of financial assets and liabilities are shown below:
Floating
Rate and 3 Months Total 1 Year More
April 30, Within 1 1 to 3 to 1 Within 1 to than 5
2017 Month Months Year Year 5 Years Years Total
----------------------------------------------------------------------------
Total assets 3.3% 2.9% 3.6% 3.3% 3.5% 3.9% 3.4%
Total
liabilities 1.0 1.9 1.8 1.2 2.1 0.0 2.0
----------------------------------------------------------------------------
Interest rate
sensitive
gap 2.3% 1.0% 1.8% 2.1% 1.4% 3.9% 1.4%
----------------------------------------------------------------------------
January 31,
2017
----------------------------------------------------------------------------
Total assets 3.4% 2.7% 3.6% 3.4% 3.2% 4.6% 3.3%
Total
liabilities 0.9 2.0 1.8 1.2 2.2 - 2.0
----------------------------------------------------------------------------
Interest rate
sensitive
gap 2.5% 0.7% 1.8% 2.2% 1.0% 4.6% 1.3%
----------------------------------------------------------------------------
October 31,
2016
----------------------------------------------------------------------------
Total assets 3.1% 2.5% 3.7% 3.2% 3.4% 4.1% 3.3%
Total
liabilities 0.9 2.4 1.7 1.3 2.2 - 2.0
----------------------------------------------------------------------------
Interest rate
sensitive
gap 2.2% 0.1% 2.0% 1.9% 1.2% 4.1% 1.3%
----------------------------------------------------------------------------
Based on the current interest rate gap position, it is estimated that a one-percentage point increase in all interest rates would increase net interest income by approximately 1.41% or $8,755 (January 31, 2017 - 1.17% or $7,230; October 31, 2016 - 2.15% or $12,582) and decrease other comprehensive income by $61,091 (January 31, 2017 - $80,308; October 31, 2016 - $57,109) net of tax, respectively over the following twelve months. A one-percentage point decrease in all interest rates would decrease net interest income by approximately 1.58% or $9,810 (January 31, 2017 - 0.65% or $4,016; October 31, 2016 - 0.88% or $5,150) and increase other comprehensive income by $62,402 (January 31, 2017 - $81,848; October 31, 2016 - $58,646) net of tax.
15. Capital Management
Capital for Canadian financial institutions is managed and reported in accordance with a capital management framework specified by OSFI commonly called Basel III. Additional information about CWB's capital management practices is provided in Note 30 to the fiscal 2016 audited consolidated financial statements within the 2016 Annual Report (see page 109 of the 2016 Annual Report) and in the Capital Management section in the Q2 2017 Management's Discussion and Analysis.
Capital funds are managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and markets. The goal is to maintain adequate regulatory capital to be considered well capitalized, protect customer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all while providing a satisfactory return for shareholders.
Capital Structure and Regulatory Ratios
As at As at As at
April 30 January 31 April 30
2017 2017 2016
----------------------------------------------------------------------------
Regulatory capital, net of
deductions
Common equity Tier 1 $ 1,938,648 $ 1,896,565 $ 1,639,805
Tier 1 2,203,740 2,161,636 2,009,858
Total 2,571,881 2,601,999 2,434,761
----------------------------------------------------------------------------
Capital ratios
Common equity Tier 1 9.6% 9.5% 8.2%
Tier 1 10.9 10.8 10.1
Total 12.7 13.0 12.2
Leverage ratio 8.7 8.4 8.0
In December 2016, CWB redeemed both the $105,000 senior deposit note held by CWB Capital Trust and all outstanding CWB Capital Trust Securities Series 1 (WesTS), which did not qualify as non-viability contingent capital (NVCC) under the Basel III regulatory capital requirements. The redemption resulted in a $105,000 reduction in CWB's Total regulatory capital and reduced both the Tier 1 and Total Capital ratios by approximately 50 basis points. Additional information about the senior deposit note held by CWB Capital Trust and WesTS is provided in Note 14 of the fiscal 2016 audited consolidated financial statements within the 2016 Annual Report (see page 92 of the Annual Report).
In March 2017, CWB redeemed all $75 million outstanding 5.571% subordinated debentures, which did not qualify as NVCC under the Basel III regulatory requirements. This reduced the Total ratio by approximately 40 basis points.
During the six months ended April 30, 2017, CWB complied with all internal and external capital requirements.
Shareholder Information
Head Office CWB Financial Group Suite 3000, Canadian Western Bank Place 10303 Jasper Avenue Edmonton, AB T5J 3X6 Telephone: (780) 423-8888 Fax: (780) 423-8897 cwb.com Contact Information National Leasing Group Inc. 1525 Buffalo Place Winnipeg, MB R3T 1L9 Toll-free: 1-800-665-1326 Toll-free fax: 1-866-408-0729 nationalleasing.com CWB Maxium Financial Inc. 30 Vogell Road, Suite 1 Richmond Hill, ON L4B 3K6 Toll-free: 1-800-379-5888 Fax: (905) 780-3273 maxium.net CWB Optimum Mortgage Suite 1010, Canadian Western Bank Place 10303 Jasper Avenue Edmonton, AB T5J 3X6 Toll-free: 1-866-441-3775 Fax: 1-866-477-8897 optimummortgage.ca Canadian Western Trust Company Suite 300, 750 Cambie Street Vancouver, BC V6B 0A2 Toll-free: 1-800-663-1124 Fax: (604) 669-6069 cwt.ca CWB Wealth Management Ltd. Suite 1250, Canadian Western Bank Place 10303 Jasper Avenue Edmonton, AB T5J 3N6 Telephone: (855) 292-9655 cwbwealth.com McLean & Partners Wealth Management Ltd. 801 10th Avenue SW Calgary, AB T2R 0B4 Telephone: (403) 234-0005 Fax: (403) 234-0606 mcleanpartners.com Stock Exchange Listings The Toronto Stock Exchange Common Shares: CWB Series 5 Preferred Shares: CWB.PR.B Series 7 Preferred Shares: CWB.PR.C Transfer Agent and Registrar Computershare 100 University Avenue, 8th Floor Toronto, ON M5J 2Y1 Telephone: (416) 263-9200 Fax: 1-888-453-0330 Website: www.computershare.com
Eligible Dividends Designation
CWB designates all dividends for both common and preferred shares paid to Canadian residents as "eligible dividends", as defined in the Income Tax Act (Canada), unless otherwise noted.
Dividend Reinvestment Plan
CWB's dividend reinvestment plan allows common and preferred shareholders to purchase additional common shares by reinvesting their cash dividend without incurring brokerage and commission fees. For information about participation in the plan, please contact the Transfer Agent and Registrar or visit cwb.com.
Investor Relations CWB Financial Group Telephone: (780) 969-8337 Toll-free: 1-800-836-1886 Fax: (780) 969-8326 Email: [email protected]
Online Investor Information
Additional investor information including supplemental financial information and corporate presentations are available on CWB's website at cwb.com.
Quarterly Conference Call and Webcast
CWB's quarterly conference call and live audio webcast will take place on June 1, 2017 at 2:00 p.m. ET. The webcast will be archived on CWB's website at cwb.com for sixty days. A replay of the conference call will be available until June 8, 2017 by dialing 404-537-3406 (Toronto) or 1-855-859-2056 (toll-free) and entering passcode 21496571.
Contacts: Matt Evans, CFA Senior AVP, Strategy & Investor Relations Phone: (780) 969-8337 Email: [email protected]
Source: Canadian Western Bank
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