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CWB Reports Solid Financial Performance and Strong Earnings Growth

T.CWB

Common Share Dividend of $0.20 Per Share Declared, Up 11% Over the Dividend Declared a Year Earlier; Quarterly Dividend Declared on Series 5 Preferred Shares

EDMONTON, ALBERTA--(Marketwired - June 5, 2014) - Canadian Western Bank (TSX:CWB) (CWB) -

Second Quarter 2014 Highlights(1) (compared to the same period in the prior year)

  • Net income available to common shareholders of $51.2 million, up 19%.

  • Diluted earnings per common share of $0.63, up 17%, and adjusted cash earnings per common share of $0.65, up 18%.

  • Total revenues, on a taxable equivalent basis (teb)(1), of $153.5 million, up 13%.

  • Strong loan growth of 3% in the quarter, 7% year-to-date and 12% over the past twelve months.

  • Net interest margin (teb) of 2.59%, compared to 2.64% in the previous quarter and 2.61% last year.

  • Issued $125 million of 4.40% preferred shares and redeemed $209 million of 7.25% preferred shares.

  • Solid Basel III regulatory capital ratios using the Standardized approach for calculating risk-weighted assets of 8.1% common equity Tier 1 (CET1), 9.4% Tier 1 and 13.1% total ratio.

  • Relocated Edmonton flagship branch into new and expanded premises.

 
(1) Highlights include certain non-IFRS measures - refer to definitions following the table of Selected Financial Highlights.

Canadian Western Bank today announced solid second quarter financial performance led by strong earnings growth. Compared to the same quarter last year, net income available to common shareholders of $51.2 million was up 19%, while diluted earnings per common share increased 17% to $0.63. Adjusted cash earnings per common share, which excludes the after-tax amortization of acquisition-related intangible assets and non-tax deductible changes in fair value of contingent consideration, increased 18% to $0.65. Total revenues (teb) of $153.5 million increased 13%, reflecting the positive impact of strong 12% loan growth and a 27% increase in other income, partially offset by a two basis point decline in net interest margin (teb) to 2.59%.

Compared to last quarter, net income available to common shareholders decreased 3% as the benefits of 3% loan growth, 4% higher other income and a lower provision for credit losses were offset by three fewer revenue earning days, a decline of five basis points in net interest margin (teb), higher non-interest expenses and a one-time increase in preferred share dividends. Adjusted cash earnings per share was also down 3%.

Year-to-date net income available to common shareholders of $103.8 million increased 17% as the benefit of strong growth in loans and other income was partially offset by higher non-interest expenses and preferred share dividends, while net interest margin (teb) was unchanged. Diluted and adjusted cash earnings per share each increased 16%, to reach $1.29 and $1.31, respectively.

"Our targeted, client-focused strategy continues to deliver solid performance for CWB Group shareholders," said Chris Fowler, President and CEO. "Growth in second quarter net income available to common shareholders of 19% is a very positive result, and our strong year-to-date loan growth and promising pipeline for new loans are very encouraging. Overall, we continue to maintain an optimistic outlook for the remainder of the year, even though pressure on net interest margin remains."

"Our capital structure was enhanced with this quarter's issuance of $125 million of Basel III-compliant preferred shares to replace our $209 million of higher cost preferred shares issued in 2009," continued Mr. Fowler. "This more efficient capital structure and a lower overall cost of capital will have a significant positive impact on future earnings per share and reinforce our solid foundation for future growth."

On June 4, 2014, CWB's Board of Directors declared a cash dividend of $0.20 per common share, payable on June 26, 2014 to shareholders of record on June 16, 2014. This quarterly dividend was 11% ($0.02) higher than the quarterly dividend declared one year ago and 5% ($0.01) higher than the prior quarter. The Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share, payable on July 31, 2014 to shareholders of record on July 24, 2014.

Fiscal 2014 Performance Target Ranges and Outlook

CWB's actual year-to-date performance together with the 2014 performance target ranges are presented in the table below:

  2014
Year-to-date Performance
2014
Target Ranges
Adjusted cash earnings per common share growth(1)(2) 16% 12 - 16%
Total revenue (teb) growth(1) 13% 10 - 12%
Loan growth(3) 12% 10 - 12%
Provision for credit losses as a percentage of average loans(4) 0.18% 0.18 - 0.23%
Efficiency ratio (teb)(5) 45.5% 46% or less
Return on common shareholders' equity(6) 14.5% 14.0 - 15.0%
Return on assets(7) 1.09% 1.05 - 1.15%
  1. Year-to-date performance for adjusted cash earnings per common share and total revenue growth (teb) is the current year results over the same period last year.
  2. Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the after-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration (which represent non-cash charges that are not considered indicative of ongoing business performance).
  3. Loan growth is the increase over the past twelve months.
  4. Year-to-date provision for credit losses, annualized, divided by average total loans.
  5. Efficiency ratio (teb) is calculated as non-interest expenses divided by total revenues (teb) excluding the non-tax deductible change in fair value of contingent consideration.
  6. Return on common shareholders' equity is calculated as annualized net income available to common shareholders divided by average common shareholders' equity.
  7. Return on assets is calculated as annualized net income available to common shareholders divided by average total assets.

Performance through the first half of the year has CWB positioned to achieve full-year financial results within all of our target ranges. Performance for loan growth, adjusted cash earnings per share and total revenues was driven by ongoing activity across our key lending sectors in each geographic region. Year-to-date net interest margin (teb) was unchanged compared to last year, as the impact of lower loan yields was offset by more favourable fixed term deposit and debenture costs and lower average liquidity. Meaningful improvement in this key metric is not expected in the absence of increases in the prime lending interest rate and/or a sustained steepening of the yield curve. The 2014 target for the efficiency ratio remains challenging but attainable as revenue growth through the remainder of the year is expected to offset the impact of higher non-interest expenses from an increased staff complement and ongoing initiatives to support business growth. Overall credit quality remains stable and supports our view that the annual provision for credit losses will remain near the low end of the target range.

During the quarter, we issued $125 million of 4.40% non-cumulative five-year rate reset Series 5 preferred shares and, on April 30th, redeemed the outstanding $209 million of 7.25% non-cumulative five-year rate reset Series 3 preferred shares. These transactions will have a positive impact on future growth in net income available to common shareholders and adjusted cash earnings per share, although the timing of the new preferred share issuance led to the second quarter payment of dividends on both series. As a result, year-to-date preferred share dividend payments were $1.2 million, approximately $0.01 per share, higher than last year.

The outlook for the Canadian economy is positive and economic fundamentals within CWB's key western Canadian markets remain particularly strong. Steady job creation in the western provinces continues to support very strong in-migration and overall employment conditions have remained stable. Supply and demand in the Canadian housing sector appear to be roughly in balance, however, we continue to carefully monitor market dynamics within specific geographic regions. Economic growth in the United States (U.S.) is expected to accelerate on the basis of escalating demand for goods and services, although moderation in the housing recovery is apparent in certain regions. On the basis of expectations for ongoing stability in the U.S. and global markets, consensus forecasts call for improved expansion within the domestic economy in 2014 and 2015, supporting our optimistic outlook for continued profitable growth.

About CWB Group

Canadian Western Bank offers a full range of business and personal banking services across the four western provinces and is the largest publicly traded Canadian bank headquartered in Western Canada. CWB, along with its operating affiliates, National Leasing, Canadian Western Trust, Valiant Trust, Canadian Direct Insurance, Canadian Western Financial, Adroit Investment Management, and McLean & Partners Wealth Management, collectively offer a diversified range of financial services across Canada and are together known as the CWB Group. The common shares of Canadian Western Bank are listed on the Toronto Stock Exchange under the trading symbol "CWB". CWB's Series 5 preferred shares trade on the Toronto Stock Exchange under the trading symbol "CWB.PR.B". Refer to www.cwb.com for additional information.

Fiscal 2014 Second Quarter Results Conference Call

CWB's second quarter results conference call is scheduled for Thursday, June 5, 2014 at 3:00 p.m. ET (1:00 p.m. 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 416-695-7848 or toll-free 1-800-396-7098. The call will also be webcast live on CWB's website: www.cwb.com/investor_relations/webcast_events.htm.

A replay of the conference call will be available until June 19, 2014 by dialing 905-694-9451 (Toronto) or 1-800-408-3053 (toll-free) and entering passcode 1696268.

 
Selected Financial Highlights
                     
(unaudited)
($ thousands,
For the three months ended Change
from
      For the six months ended Change
from
     
except   April 30     January 31     April 30   April 30         April 30     April 30   April 30      
per share amounts)   2014     2014     2013(1)   2013         2014     2013(1)   2013      
Results of Operations
Net interest income (teb - see below) $ 123,727   $ 125,239   $ 111,929   11     % $ 248,966   $ 224,981   11     %
Less teb adjustment   1,989     2,090     2,000   (1 )       4,079     3,915   4      
Net interest income per financial statements   121,738     123,149     109,929   11         244,887     221,066   11      
Other income   29,794     28,531     23,390   27         58,325     45,769   27      
Total revenues (teb)   153,521     153,770     135,319   13         307,291     270,750   13      
Total revenues   151,532     151,680     133,319   14         303,212     266,835   14      
Net income available to common shareholders   51,191     52,628     42,988   19         103,819     88,470   17      
Earnings per common share                                              
  Basic(2)   0.64     0.66     0.54   19         1.30     1.12   16      
  Diluted(3)   0.63     0.65     0.54   17         1.29     1.11   16      
  Adjusted cash(4)   0.65     0.67     0.55   18         1.31     1.13   16      
Return on common shareholders' equity(5)   14.3 %   14.7 %   13.4 % 90   bp     14.5 %   13.8 % 70   bp(6 )
Return on assets(7)   1.07     1.11     1.00   7         1.09     1.03   6      
Efficiency ratio (teb)(8)   46.0     45.1     47.9   (190 )       45.5     46.9   (140 )    
Efficiency ratio   46.6     45.7     48.6   (200 )       46.1     47.6   (150 )    
Net interest margin (teb)(9)   2.59     2.64     2.61   (2 )       2.61     2.61   -      
Net interest margin   2.55     2.60     2.56   (1 )       2.57     2.57   -      
Provision for credit losses as a percentage of average loans   0.16     0.19     0.19   (3 )       0.18     0.18   -      
Per Common Share
Cash dividends $ 0.19   $ 0.19   $ 0.17   12     % $ 0.38   $ 0.34   12     %
Book value   18.65     18.03     16.82   11         18.65     16.82   11      
Closing market value   37.14     36.43     28.46   30         37.14     28.46   30      
Common shares outstanding (thousands)   80,045     79,897     79,171   1         80,045     79,171   1      
Balance Sheet and Off-Balance Sheet Summary
Assets $ 19,626,666   $ 19,135,490   $ 17,779,280   10     %                    
Loans   16,707,888     16,156,366     14,884,553   12                          
Deposits   16,668,534     16,243,496     14,885,315   12                          
Debt   997,962     812,780     897,183   11                          
Shareholders' equity   1,492,553     1,648,971     1,540,971   (3 )                        
Assets under administration   11,538,750     8,463,935     7,821,089   48                          
Assets under management   1,763,256     1,683,813     904,730   95                          
Capital Adequacy(10)
Common equity Tier 1 ratio   8.1 %   8.0 %   8.0 % 10   bp                      
Tier 1 ratio   9.4     9.5     9.7   (30 )                        
Total ratio   13.1     13.2     14.1   (100 )                        
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1 of the consolidated financial statements.
  2. Basic earnings per common share (EPS) is calculated as net income available to common shareholders divided by the average number of common shares outstanding.
  3. Diluted EPS is calculated as net income available to common shareholders divided by the average number of common shares outstanding adjusted for the dilutive effects of stock options.
  4. Adjusted cash EPS is diluted EPS excluding the after-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration. These exclusions represent non-cash charges and are not considered indicative of ongoing business performance.
  5. Return on common shareholders' equity is calculated as annualized net income available to common shareholders divided by average common shareholders' equity.
  6. bp - basis point change.
  7. Return on assets is calculated as annualized net income available to common shareholders divided by average total assets.
  8. Efficiency ratio is calculated as non-interest expenses divided by total revenues excluding the non-tax deductible change in fair value of contingent consideration.
  9. Net interest margin is calculated as annualized net interest income divided by average total assets.
  10. Capital adequacy is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).

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 International Financial Reporting Standards (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, 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.

Management's Discussion and Analysis

This management's discussion and analysis (MD&A), dated June 4, 2014, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended April 30, 2014, and the audited consolidated financial statements and MD&A for the year ended October 31, 2013, 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 or U.S. economy. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "may increase", "may impact" 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. 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 lack of liquidity in financial markets, fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, regulatory and legal developments, the level of competition in CWB's markets, the occurrence of weather-related and other natural catastrophes, changes in accounting standards and policies, the accuracy of 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 CWB's 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.

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 in 2014 and how it will affect CWB's businesses are material factors considered when setting organizational objectives and targets. Performance target ranges for fiscal 2014 consider the following management assumptions: a modest acceleration of economic growth in Canada and relatively stronger performance in the four western provinces; prices for energy and other commodities remaining at levels comparable with those observed at October 31, 2013; sound credit quality with actual losses remaining within CWB's historical range of acceptable levels; and, a relatively stable net interest margin (teb) compared to the prior year, attributed to favourable deposit costs and shifts in asset mix that help to offset impacts from the very low interest rate environment and competitive factors. Management's assumptions at the end of the second quarter remained relatively unchanged compared to those at the 2013 fiscal year end.

Potential risks that would have a material adverse impact on current economic expectations and forecasts include a slowing rate of economic growth in the U.S., a significant and sustained deterioration in Canadian residential real estate prices, or a significant disruption in other global economies. Unexpected pricing competition and/or disruptions in domestic or global financial markets that meaningfully impact the costs of overall deposit funding may also contribute to adverse financial results compared to expectations.

Overview

CWB reported solid financial performance including strong loan growth of 12% over the past twelve months, 3% in the quarter and 7% year-to-date.

Q2 2014 vs. Q2 2013

Net income available to common shareholders of $51.2 million was up 19% as the benefit of strong loan growth, higher other income and a lower provision for credit losses more than offset a two basis point decrease in net interest margin (teb) and higher non-interest expenses. Other income increased 27% primarily reflecting a significant increase in trust and wealth management revenues, as well as higher net gains on securities and credit related fee income. Diluted earnings per common share was up 17% to $0.63. Despite the payment of dividends on both Series 3 and Series 5 preferred shares this quarter, adjusted cash earnings per common share, which excludes the after-tax amortization of acquisition-related intangible assets and non-tax deductible changes in fair value of contingent consideration, increased 18% to $0.65.

Q2 2014 vs. Q1 2014

Net income available to common shareholders was 3% lower as the positive revenue impact of strong loan growth and higher other income, as well as a lower provision for credit losses, was offset by three fewer revenue-earning days, lower net interest margin (teb), higher non-interest expenses and a one-time increase in preferred share dividends.

YTD 2014 vs. YTD 2013

Net income available to common shareholders of $103.8 million was up 17% as growth in total revenues (teb) of 13% more than offset the one-time increase in preferred share dividends and higher non-interest expenses. Higher total revenues were driven by an 11% increase in net interest income (teb) and 27% higher other income. The year-to-date net interest margin (teb) of 2.61% was unchanged. Adjusted cash earnings per share increased 16% to $1.31.

ROE and ROA

Second quarter return on common shareholders' equity (ROE) was 14.3% compared to 14.7% last quarter and 13.4% last year. Year-to-date ROE of 14.5% was 70 basis points higher than last year. Return on assets (ROA) of 1.07% was down four basis points from last quarter and up seven basis points compared to a year earlier. Year-to-date ROA of 1.09% compares to 1.03% last year.

Issuance of First Preferred Shares Series 5 and Redemption of First Preferred Shares Series 3

As previously reported, CWB closed its domestic public offering of five million Basel III-compliant non-cumulative five-year rate reset Series 5 preferred shares for gross proceeds of $125 million during the second quarter. Holders of these shares are entitled to receive a non-cumulative fixed dividend in the amount of $1.10 annually, payable quarterly, for the initial period ending April 30, 2019. The quarterly dividend represented an annual yield of 4.40% at issuance, based on the $25.00 issue price per share. CWB also redeemed, on April 30, 2014, $209 million of outstanding 7.25% Series 3 preferred shares.

These transactions will benefit shareholders through a more efficient capital structure while ensuring CWB remains well capitalized within the Basel III regulatory capital framework. 

Total Revenues (teb)

Total revenues, comprised of both net interest income (teb) and other income, of $153.5 million were 13% higher than the same quarter in 2013 and relatively unchanged from the previous quarter. Year-to-date total revenues of $307.3 million were up 13% compared to last year. 

Net Interest Income (teb)

Q2 2014 vs. Q2 2013

Net interest income of $123.7 million was up 11% as the revenue contribution from strong 12% loan growth more than offset a two basis point decline in net interest margin (teb) to 2.59%. The change in net interest margin mainly resulted from lower loan yields, partially offset by more favourable fixed term deposit and debenture costs.

Q2 2014 vs. Q1 2014

Net interest income was down 1% as the benefit of strong 3% loan growth was offset by three fewer days and a five basis point decrease in net interest margin (teb). The decline in net interest margin primarily resulted from lower loan yields and higher average liquidity.

YTD 2014 vs. YTD 2013

Net interest income of $249.0 million was up 11%, mainly the result of strong loan growth. Net interest margin (teb) of 2.61% was unchanged as lower loan yields were offset by more favourable fixed term deposit and debenture costs and lower average liquidity.

Interest rate sensitivity

Note 14 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at April 30, 2014. 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 twelve 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 applied at the appropriate repricing dates; and,
  • no early redemptions.
                   
($ thousands)   April 30 2014     January 31
 2014
    April 30
2013
 
                   
Estimated impact on net interest income of a 1% increase in interest rates                  
  1 year $ 16,270   $ 13,980   $ 20,425  
  1 year percentage change   3.8 %   3.1 %   4.9 %
                   
Estimated impact on net interest income of a 1% decrease in interest rates                  
  1 year $ (29,418 ) $ (23,587 ) $ (28,260 )
  1 year percentage change   (6.9 )%   (5.2 )%   (6.8 )%

Higher sensitivity to a decrease in rates is due to asymmetry in the impact of falling rates on loans and deposits. A decrease of one-percentage point in rates is assumed to reduce loan yields by an equivalent amount. The assumed change in total deposit costs is lower because deposits yielding less than one percent cannot be reduced to a rate lower than zero.

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, 2014 would decrease unrealized gains 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 $14.6 million, net of tax (April 30, 2013 - $9.5 million). It is estimated that a one-percentage point decrease in all interest rates at April 30, 2014 would have the opposite effect, increasing other comprehensive income by approximately $14.6 million, net of tax (April 30, 2013 - $9.5 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 and other appropriate strategies.

Outlook for net interest margin

Second quarter net interest margin (teb) was two basis points lower than the same quarter last year, down five basis points from the previous quarter, and unchanged on a year-to-date basis. Meaningful improvement in net interest margin (teb) from the current level is not expected in the absence of increases in the prime lending interest rate and/or a sustained steepening of the interest rate curve. CWB will maintain its long-term strategic focus on mitigating the earnings impact of ongoing margin pressure through efforts to achieve stronger relative growth in higher yielding loan portfolios with an acceptable risk profile, improving the funding mix to lower the overall cost of funds, prudently managing liquidity levels and increasing contributions from other income sources.

Other Income

Q2 2014 vs. Q2 2013

Other income of $29.8 million was up 27% ($6.4 million) mainly due to increases in trust and wealth management revenues, net gains on securities, credit related fee income and the "other" category of other income, partially offset by lower net insurance income. Higher wealth management revenue primarily reflects the third quarter 2013 acquisition of McLean & Partners. Higher net gains on securities reflect strategic management of the portfolio in view of favourable equity and bond market conditions. Based on the level of gains realized and the current composition of the securities portfolio, quarterly net gains on securities are expected to be lower through the remainder of the year although equity and bond market conditions are inherently unpredictable in the short-term. The 'other' category of other income was up $0.8 million, mainly due to a gain on the sale of $25 million of conventional residential mortgages. 

Q2 2014 vs. Q1 2014

Other income was up 4% ($1.3 million) primarily reflecting a $0.9 million increase in the 'other' category of other income and higher trust revenues, offset by slightly lower net insurance revenues and net gains on securities. The increase in 'other' other income reflects the sale of residential mortgages discussed above.

YTD 2014 vs. YTD 2013

Other income was up 27% ($12.6 million), reflecting increases across all categories with the exception of 'other' other income. A significant $6.7 million increase in trust and wealth management revenues accounted for over half of the overall increase, with higher net gains on securities and credit related fee income also contributing. Increases in these categories mainly reflect the factors discussed above under the heading Q2 2014 vs. Q2 2013.

Credit Quality

Overall credit quality reflects continued strong underwriting practices and relatively stable levels of economic activity in Western Canada. The dollar level of gross impaired loans at April 30, 2014 represented 0.30% of total loans at quarter end, compared to 0.33% last quarter and 0.41% one year ago.

           
  For the three months ended         Change
from
     
(unaudited)   April 30     January 31     April 30   April 30      
($ thousands)   2014     2014     2013   2013      
                           
Gross impaired loans, beginning of period $ 53,937   $ 64,211   $ 55,734   (3 )   %
  New formations   23,129     5,634     19,923   16      
  Reductions, impaired accounts paid down or returned to performing status   (17,189 )   (13,455 )   (10,158 ) 69      
  Write-offs   (9,256 )   (2,453 )   (3,876 ) 139      
Total(1) $ 50,621   $ 53,937   $ 61,623   (18 )   %
                           
Balance of the ten largest impaired accounts $ 22,009   $ 27,929   $ 33,189   (34 )   %
Total number of accounts classified as impaired(3)   133     132     131   2      
Gross impaired loans as a percentage of total loans(4)   0.30 %   0.33 %   0.41 % (11 ) bp(2 )
  1. Gross impaired loans include foreclosed assets held for sale with a carrying value of $4,157 (January 31, 2014 - $5,014 and April 30, 2013 - $7,256).
  2. bp - basis point change.
  3. Total number of accounts excludes National Leasing.
  4. Total loans do not include an allocation for credit losses or deferred revenue and premiums.

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 reduction in gross impaired loans compared to both the prior quarter and last year mainly resulted from write-offs in the current period, coupled with pay downs and loans returned to performing status. Management expects gross impaired loans to increase from the current very low level reflecting normal fluctuations of the credit cycle.

Specific allowances for expected write-offs are established through detailed analyses of both the overall quality and ultimate marketability of the security held against impaired accounts. Actual credit losses are expected to remain within CWB's historical range of acceptable levels. As at April 30, 2014, the collective allowance for credit losses exceeded the balance of impaired loans, net of specific allowances. The total allowance for credit losses (collective and specific) represented 176% of gross impaired loans at quarter end, compared to 169% last quarter and 129% one year ago. The total allowance for credit losses was $89.0 million at April 30, 2014, compared to $91.4 million last quarter and $79.5 million a year earlier.

The quarterly provision for credit losses measured against average loans was 16 basis points, three basis points lower than both the same quarter last year and the prior quarter. On a year-to-date basis, the provision for credit losses measured against average loans was unchanged from last year at 18 basis points. Based on the current environment and expectations for credit quality looking forward, management expects the annual provision for credit losses will remain at the low end of the 2014 target range of 18 to 23 basis points.

Non-interest Expenses

One of management's key priorities is to deliver strong long-term growth through strategic investment in people, technology, infrastructure and other areas while maintaining effective control of costs. This strategy is aligned with a commitment to maximize long-term shareholder value and expected to provide material benefits in future periods. Work toward implementation of a new core banking system has proceeded on time and on budget through the end of the second quarter. Current plans estimate completion of this very significant technology project in 2015 based on a capital budget of $50 million. Upgrades and expansion of branch infrastructure are also ongoing, as evidenced by this quarter's relocation of CWB's flagship Edmonton Main Branch to significantly expanded premises. Compliance with an increasing level of regulatory rules and oversight for all Canadian banks requires the investment of both time and resources, which further contributes to higher non-interest expenses.

Q2 2014 vs. Q2 2013

Quarterly non-interest expenses of $70.6 million were up 9% ($5.8 million) primarily due to higher salaries and benefits, and premises and equipment expense. Of the total increase in non-interest expenses, 33% reflects the addition of McLean & Partners. The change in salaries and benefits, excluding McLean & Partners, mainly resulted from higher full-time salary expense associated with annual salary increments and a larger staff complement to support ongoing growth across all businesses. Premises and equipment expense was 10% higher primarily reflecting increased rent expense and direct computer costs.

Q2 2014 vs. Q1 2014

Non-interest expenses were up 2%. Increases in benefit costs, direct computer costs and premises expense were partially offset by lower maintenance and salary expense. The sequential decrease in salaries reflects lower stock based compensation charges. 

YTD 2014 vs. YTD 2013

Non-interest expenses of $140.1 million were 10% ($13.2 million) higher than the prior year, primarily as a result of increases in salaries and benefits, premises and equipment, and general expenses. Of the total increase in non-interest expenses, 27% reflects the addition of McLean & Partners. Higher salaries and benefits, and premises and equipment expense reflect the factors discussed above under the heading Q2 2014 vs. Q2 2013. The change in general expenses was driven by higher regulatory costs, the impact of a higher CWB common share price on Deferred Share Units (DSUs) for directors, and expenses related to this quarter's issuance of preferred shares. 

Efficiency ratio

The second quarter efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues (teb), was 46.0%, compared to 47.9% last year and 45.1% in the previous quarter. Improved efficiency compared to last year reflects the revenue benefit of strong growth in loans and other income, partially offset by slightly lower net interest margin (teb). The change compared to the prior quarter mainly reflects three fewer revenue earning days combined with the impact on total revenues of lower net interest margin (teb). Improvement in the year-to-date efficiency ratio, from 46.9% last year to 45.5% this year, reflects the combined benefits of strong total revenue growth and effective cost control. Based on year-to-date performance and in consideration of expected revenues and planned expenditures through the rest of the year, management believes the 2014 efficiency ratio target of 46% or better is challenging but attainable.

Income Taxes

The second quarter effective income tax rate (teb) was 26.2%, compared to 26.5% last year. The effective income tax rate (teb) for the first six months of 2014 was 26.1%, compared to 26.4% last year.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes, and totaled $67.0 million for the second quarter, compared to $46.7 million last year.

The increase in second quarter comprehensive income was driven by a significant increase in OCI and higher net income. The increase in OCI mainly resulted from higher unrealized gains, net of tax, from changes in fair value of available-for-sale securities, which was driven by the net effect of increased market values of securities and the realization of gains and losses within CWB's portfolios of common and preferred equities. While the combined dollar investment in these portfolios is relatively small in relation to total liquid assets, it increases the potential for comparatively larger fluctuations in OCI. Year-to-date comprehensive income of $122.4 million compares to $99.6 million last year. The increase in year-to-date comprehensive income was mainly the result of higher net income and OCI, with the latter driven by the factors described above.

Balance Sheet

Total assets increased 3% in the quarter, 10% in the past year and 6% year-to-date to reach $19,627 million at April 30, 2014.

Cash and Securities

Cash and securities totaled $2,535 million at April 30, 2014, compared to $2,545 million a year earlier and $2,596 million at the end of last quarter. Net unrealized gains recorded on the balance sheet of $6.4 million compare to unrealized gains of $16.5 million a year earlier and unrealized losses of $8.8 million last quarter. The securities portfolio is primarily comprised of high quality debt instruments, preferred shares and common equities that are not held for trading purposes and, where applicable, are typically held until maturity. Volatility in equity markets can lead to fluctuations in value, particularly for common shares. Fluctuations in the value of interest rate sensitive securities, such as preferred shares and debt instruments, are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve. Changes in unrealized gains or losses result from the combined impact of strategic repositioning of the securities portfolio and changes in market values.

Net realized gains on securities in the second quarter of $4.6 million compare to $3.1 million in the same period last year and $4.7 million in the previous quarter. Year-to-date net gains of $9.2 million were up from $5.7 million last year. Net gains reflect both favourable equity and bond market conditions and strategic management of the securities portfolio. Based on the level of gains realized and current composition of the portfolio, quarterly net gains on securities are expected to be lower through the remainder of the year although equity and bond market conditions are inherently unpredictable in the short-term.

Treasury Management

Average liquidity was up from the prior quarter and down from the same quarter last year. Assuming an ongoing supportive economic environment, management expects average liquidity ratios to remain relatively consistent with the current level through the remainder of the year.

DBRS Limited (DBRS) maintains published credit ratings on CWB's senior debt (deposits), short-term debt, subordinated debentures and Basel III-compliant First Preferred Shares Series 5 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.

Loans

Total loans grew 3% ($552 million) in the quarter, 12% ($1,823 million) in the past twelve months and 7% ($1,131 million) year-to-date to reach $16,708 million.

Lending activity in British Columbia showed the highest growth in dollar terms for all comparison periods, led by particularly strong growth in real estate project loans. Year-to-date growth was also relatively strong in Ontario, primarily reflecting increased corporate lending and ongoing development of CWB's broker-sourced residential mortgage business, Optimum Mortgage (Optimum).

Loan growth by portfolio compared to the prior quarter, the same quarter last year and on a year-to-date basis is provided in the table below.

                     
                  %  
                  Change from  
(unaudited) April 30 January 31 October 31 April 30 April 30  
(millions) 2014 2014 2013 2013 2013  
                     
General commercial loans $ 3,525 $ 3,505 $ 3,428 $ 3,312 6 %
Commercial mortgages   3,512   3,475   3,311   3,124 12  
Equipment financing and leasing   3,131   3,016   2,942   2,766 13  
Personal loans and mortgages   2,665   2,602   2,502   2,378 12  
Real estate project loans   2,632   2,418   2,304   2,091 26  
Corporate lending(1)   1,044   951   902   1,011 3  
Oil and gas production loans   288   281   274   282 2  
Total loans outstanding(2) $ 16,797 $ 16,248 $ 15,663 $ 14,964 12 %
  1. Corporate lending represents a diversified portfolio that is centrally sourced and administered through a designated lending group located in Edmonton. These loans include participation in select syndications that are structured and led primarily by the major Canadian banks, but exclude participation in various other syndicated facilities sourced through relationships developed at CWB branches.
  2. Loans by lending sector exclude the allowance for credit losses.

Growth was led by real estate project loans for all comparison periods as CWB continued to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels. Although recent growth in this area has been very strong, CWB's total exposure to real estate remains within management's established risk appetite. Lower than anticipated growth in general commercial loans was partly the result of approved credit facilities remaining undrawn. The potential growth represented by undrawn credit facilities and CWB's promising pipeline of new commercial loans supports management's expectations for strong relative growth in this portfolio over time.

Optimum Mortgage

Total loans of $1,342 million within Optimum represented an increase of 3% ($36 million) compared to the prior quarter, 17% ($196 million) year-over-year, and 10% ($120 million) on a year-to-date basis. Adjusted for loan sales in the current period and third quarter of 2013 of $25 million and $66 million, respectively, loan growth was 5% ($61 million) for the quarter, 25% ($287 million) over the past twelve months and 12% ($145 million) year-to-date. Net growth was driven almost exclusively by alternative mortgages secured via conventional residential first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 71%. The book value of alternative mortgages represented 85% of Optimum's total portfolio at quarter end, compared to 80% in the prior quarter and 74% last year, with the increase partly resulting from loan sales. Overall, Optimum continues to deliver very strong performance and expand its geographic footprint beyond Western Canada. In addition to its growing presence in Ontario, Optimum added sales staff in Atlantic Canada this quarter. 

Securitization

Securitized leases are reported on-balance sheet with total loans. The gross amount of securitized leases at April 30, 2014 was $282 million, compared to $223 million last quarter and $255 million one year ago. Leases securitized in the second quarter and year-to-date totaled $85 million and $102 million, respectively.

Outlook for loans

While strong competition from domestic banks and other financial services firms is expected to continue, management believes CWB will continue to gain market share through a combination of several positive influences. These include an expanded market presence, increased brand awareness in core geographic markets due in part to ongoing marketing initiatives, and the effective execution of CWB's strategic plan focused on targeted client solutions and superior customer service. CWB's strategy continues to focus on enhancing existing competitive advantages in business banking, while offering complementary products and personalized services in small-ticket equipment leasing, personal banking, trust, wealth management and insurance.

Consensus forecasts for Canada's domestic economy continue to anticipate more rapid expansion of economic growth in 2014 and 2015 compared to prior years, largely predicated on improving economic conditions in the U.S. Key markets in Western Canada are expected to perform well relative to the rest of Canada reflecting ongoing capital investment and increased personal spending as well as in-migration primarily related to a favourable long-term outlook for commodities. Canadian residential real estate markets have been resilient and affordability in most geographic areas remains within historical ranges, largely reflecting very low interest rates.

However, the combination of historically high prices, elevated levels of Canadian consumer debt and the potential for increasing interest rates could slow construction and other related lending activity, particularly in Vancouver and Toronto.

Relatively weak natural gas markets and ongoing uncertainty surrounding long-term transportation solutions for both natural gas and heavy oil could lead to moderated growth in capital investment related to natural gas production and oil sands development in the near term. However, the composition of economic growth in Western Canada has broadened in recent years, with accelerations in non-resource exports, personal consumption and housing-related activity. Opportunities related to the maintenance of existing facilities within the resource sector also remain abundant. The current overall economic outlook remains supportive of management's expectations for double-digit loan growth in fiscal 2014.

Deposits

Total deposits at April 30, 2014 were $16,669 million, up 3% over the previous quarter and 12% over the past year. Personal deposits represented 60% of total deposits at April 30, 2014, up from 59% the prior quarter and down from 62% one year ago. Total branch-raised deposits, including trust services deposits, represented 54% of total deposits at April 30, 2014, unchanged from the previous quarter and down from 56% one year ago. Demand and notice deposits were 31% of total deposits, down from 32% in the previous quarter and 33% in the same period last year.

Total branch deposits of $8,875 million were up 1% sequentially, 7% over the past twelve months and 3% year-to-date. The demand and notice component within branch-raised deposits, which includes lower cost balances, was up 2% compared to the prior quarter, 7% from the same time last year and 4% year-to-date to reach $5,216 million. One of management's long-term strategic objectives is to increase the level of personal and business deposits raised within the branch network, trust companies and Canadian Direct Financial, the Internet-based division of CWB. Specific emphasis is placed on growing deposits that are lower cost, provide associated transactional fee income and strengthen relationships by providing clients with relevant tools for managing their business and personal finances. Meaningful enhancements to CWB's cash management offerings for business clients, including the availability of desktop wires and foreign exchange services, now expected in the third quarter, continue to support this focus on growing branch-raised deposits over time, as do focused training programs that have reached a significant number of branch employees.

CWB's growing market presence, including ongoing expansion and upgrades to existing branches, also supports the generation of branch-raised deposits. On April 28, 2014, CWB opened its relocated flagship branch in central Edmonton, Alberta. The significantly expanded footprint will enhance the branch's overall capacity for future growth and accommodate CWB's primary team of real estate lending specialists for the capital region.

Management remains committed to further enhance and diversify all funding sources to support growth, manage the impact of competitive factors and mitigate pressure on net interest margin. The deposit broker network remains a valued source for raising insured fixed term retail deposits and has proven to be an effective and efficient way to access funding and liquidity over a wide geographic base. Selectively utilizing debt capital markets is also part of management's strategy to further diversify the funding base over time. At the end of the second quarter, a total of $1,719 million of term deposits raised through debt capital markets was outstanding, representing 10% of total deposits, consistent with the previous quarter and up from 7% from last year. The increase from last year mainly reflects a $300 million senior deposit note issuance in January 2014 and expansion of CWB's Bearer Deposit Note (BDN) program to $314 million. Management will continue to evaluate the funding potential available through securitization of portfolios that may include equipment loans and leases, residential mortgages and commercial mortgages.

Other Assets and Other Liabilities

Other assets at April 30, 2014 totaled $383 million, unchanged from the prior quarter and up from $350 million one year ago. Other liabilities at quarter end were $466 million, compared to $429 million the previous quarter and $456 million a year earlier.

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 $11,539 million at April 30, 2014, compared to $8,464 million last quarter and $7,821 million one year ago.

The significant increase in assets under administration during the quarter was mainly driven by funds temporarily on hand at Valiant Trust related to a large corporate action and the addition of a new trust services client.

Assets under management were $1,763 million at quarter end, compared to $1,684 million last quarter and $905 million a year earlier. Higher assets under management compared to last year reflect the addition of McLean & Partners.

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, 2014, as well as Notes 11 and 20 of the audited consolidated financial statements in CWB's 2013 Annual Report.

Capital Management

The Office of the Superintendent of Financial Institutions Canada (OSFI) requires Canadian financial institutions to manage and report regulatory capital in accordance with the Basel III capital management framework. The 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.

During the quarter CWB closed its domestic public offering of five million Basel III-compliant Series 5 preferred shares for gross proceeds of $125 million. CWB also redeemed the outstanding non-cumulative five-year rate reset Series 3 preferred shares on April 30, 2014.

At April 30, 2014, CWB's capital ratios were 8.1% CET1, 9.4% Tier 1 and 13.1% total capital. The CET1 ratio increased 10 basis points from the previous quarter, while the Tier 1 and total capital ratios were each down 10 basis points. Lower Tier 1 and total capital ratios reflect the net impact of the preferred share transactions.

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

                   
(unaudited)
($ millions)
  As at
April 30
2014
    As at
January 31
2014
    As at
April 30
2013
 
Regulatory capital                  
  CET1 capital before deductions $ 1,492   $ 1,438   $ 1,331  
  Net CET1 deductions   (115 )   (112 )   (101 )
  CET1 capital   1,377     1,326     1,230  
  Tier 1 capital before deductions(1)   230     252     283  
  Net deductions   -     (2 )   (10 )
  Tier 1 capital   1,607     1,576     1,503  
  Tier 2 capital before deductions(1)   625     619     678  
  Net deductions   -     -     (1 )
  Total capital $ 2,232   $ 2,195   $ 2,180  
Risk-weighted assets $ 17,089   $ 16,671   $ 15,446  
Capital adequacy ratios                  
    CET1   8.1 %   8.0 %   8.0 %
    Tier 1   9.4     9.5     9.7  
    Total   13.1     13.2     14.1  
  1. The 2014 inclusion of non-common equity instruments that do not include non-viability contingent capital clauses is capped at 80% of the January 1, 2013 outstanding balances (April 30, 2013 - 90%). At April 30, 2014, there was no exclusion from regulatory capital related to the Innovative Tier 1 capital (disclosed in deposits). At January 31, 2014 and April 30, 2013 a combined $62 million and $31 million, respectively, of outstanding Innovative Tier 1 capital and preferred shares were excluded from regulatory capital. At April 30, 2014, $85 million of outstanding subordinated debentures (January 31, 2014 - $85 million and April 30, 2013 - $68 million) were excluded from regulatory capital. 

Retention of earnings associated with anticipated performance within the 2014 target ranges is expected to support capital requirements, including targets established through CWB's Internal Capital Adequacy Assessment Process (ICAAP). 

CWB currently reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets. This approach requires CWB to carry significantly more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings Based (AIRB) methodology used by larger Canadian financial institutions. For this reason, regulatory capital ratios of banks that utilize the Standardized approach versus the AIRB methodology are not directly comparable. Required resources, costs and potential timelines related to CWB's possible multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets continue to be evaluated. CWB's new core banking system, expected to be implemented in 2015, is a critical component for a number of requirements necessary for AIRB compliance, including the collection and analysis of certain types of data.

Further information relating to CWB's capital position is provided in Note 15 of the unaudited interim consolidated financial statements as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2013.

Book value per common share at April 30, 2014 was $18.65, compared to $18.03 last quarter and $16.82 one year ago.

Common shareholders received a quarterly cash dividend of $0.19 per common share on March 27, 2014. On April 30, 2014, holders of Series 3 preferred shares received the final quarterly cash dividend of $0.453125 per share and holders of Series 5 preferred shares received an initial pro-rated cash dividend of $0.2381 per share. On June 4, 2014, CWB's Board of Directors declared a cash dividend of $0.20 per common share, payable on June 26, 2014 to shareholders of record on June 16, 2014. This quarterly dividend was 11% higher than the quarterly dividend declared one year ago and 5% higher than the prior quarter. The Board of Directors also declared a quarterly cash dividend of $0.275 per Series 5 preferred share payable on July 31, 2014 to shareholders of record on July 24, 2014.

Significant Changes in Accounting Policies

Consolidated Financial Statements

Effective November 1, 2013, CWB adopted IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosures of Interests in Other Entities, which establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities, and new disclosure requirements for all forms of interests in other entities. As a result of the application of IFRS 10, CWB has changed its accounting policy for determining whether it has control over its investees and consequently, has de-consolidated Canadian Western Bank Capital Trust (the Trust) through which certain regulatory capital instruments are issued. In accordance with the transitional provisions, CWB has applied IFRS 10 retrospectively and comparative figures have been restated to reflect the de-consolidation of the Trust. The de-consolidation of the Trust resulted in a $105 million decrease in CWB Capital Trust Capital Securities Series 1 (WesTS) previously classified as non-controlling interest and an increase of $105 million in deposit liabilities, and reclassification of the associated distribution, which totaled $1.7 million and $3.3 million for the three and six months ended April 30, 2013, respectively, from non-controlling interest to interest expense.

Fair value measurement

Effective November 1, 2013, CWB adopted IFRS 13 Fair Value Measurement, which applies to other IFRS standards that require or permit fair value measurements or disclosures about fair value measurements and sets out a framework on how to measure fair value using the assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. In accordance with the transitional provisions of IFRS 13, CWB has applied the new fair value measurement guidance prospectively. This new standard had no impact on the measurement of CWB's assets and liabilities. Additional disclosures required by IFRS 13 are included in Note 13 of the unaudited interim consolidated financial statements.

Future Accounting Changes

A number of standards and amendments have been issued by the International Accounting Standards Board (IASB) and are noted on page 45 of the 2013 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.

CWB continues to monitor activities of the IASB as well as proposed changes to IFRS. Several accounting standards in the process of being amended by the IASB (e.g. loan impairment, leases and insurance) may have a significant impact on the presentation of CWB's consolidated financial statements in the future.

Controls and Procedures

There were no changes in CWB's internal controls over financial reporting that occurred during the quarter ended April 30, 2014 that have materially affected, or are reasonably likely to materially affect, CWB's internal controls over financial reporting.

The Bank's certifying officers had previously limited the scope of the design of disclosure controls and procedures and internal control over financial reporting to exclude the controls, policies and procedures of McLean & Partners, acquired in the third quarter of 2013. This limitation has now been removed.

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.

Updated Share Information

As at May 30, 2014, there were 80,047,829 CWB common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 4,413,632 common shares for maximum proceeds of $127 million.

Dividend Reinvestment Plan

CWB common shares (TSX:CWB), as well as Series 3 and Series 5 preferred shares (TSX: CWB.PR.A and CWB.PR.B, respectively) have been deemed eligible to participate in CWB's dividend reinvestment plan (the Plan). The Plan provides holders of eligible shares the opportunity to direct cash dividends toward the purchase of CWB common shares. Further details for the Plan are available on CWB's website at www.cwb.com/investor_relations/drip. At the current time, for the purposes of the Plan, CWB has elected to issue common shares from treasury at a 2% discount from the average market price (as defined in the Plan).

Preferred Share Normal Course Issuer Bid

Prior to its expiration on February 28, 2014, CWB had a Normal Course Issuer Bid (NCIB) outstanding to purchase, for cancellation, up to 826,120 Non-Cumulative five-Year Rate Reset Preferred Shares Series 3 ("preferred shares"). During fiscal 2014, CWB did not purchase any preferred shares under the NCIB.

 
Summary of Quarterly Financial Information
       
  2014 2013(1) 2012(1)
($ thousands)   Q2   Q1   Q4   Q3   Q2   Q1   Q4   Q3
Total revenues (teb) $ 153,521 $ 153,770 $ 150,956 $ 144,034 $ 135,319 $ 135,431 $ 131,482 $ 136,454
Total revenues   151,532   151,680   148,894   141,873   133,319   133,516   129,503   134,368
Net income   56,384   56,749   55,332   51,623   46,887   49,365   46,920   51,882
Net income available to common shareholders   51,191   52,628   51,210   47,484   42,988   45,482   43,046   48,004
Earnings per common share                                
  Basic   0.64   0.66   0.64   0.60   0.54   0.58   0.55   0.62
  Diluted   0.63   0.65   0.64   0.60   0.54   0.57   0.55   0.61
  Adjusted cash   0.65   0.67   0.65   0.61   0.55   0.58   0.56   0.63
Total assets ($ millions)   19,627   19,135   18,520   17,927   17,779   17,161   16,873   16,033
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1 of the consolidated financial statements and within the Changes in Accounting Policies section of this MD&A. 2012 financial results have been restated for the purposes of this chart.

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.

CWB's quarterly financial results are subject to some fluctuation due to its exposure to property and casualty insurance. Insurance operations, which are primarily reflected in other income, are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes.

Among other things, quarterly results can also fluctuate from the recognition of periodic income tax items.

For additional details on variations between the prior quarters, refer to the summary of quarterly results section of CWB's MD&A for the year ended October 31, 2013 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, 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;
  • adjusted cash earnings per common share - diluted earnings per common share excluding the after-tax amortization of acquisition-related intangible assets and the non-tax deductible change in fair value of contingent consideration (see calculation below). These exclusions represent non-cash charges and are not considered to be indicative of ongoing business performance;
  • return on common shareholders' equity - annualized net income available to common shareholders divided by average common shareholders' equity;
  • return on assets - annualized net income available to common shareholders divided by average total assets;
  • efficiency ratio - non-interest expenses divided by total revenues excluding the non-tax deductible change in fair value of contingent consideration;
  • net interest margin - net interest income divided by average total assets;
  • Basel III common equity Tier 1, Tier 1 and total capital ratios - in accordance with guidelines issued by OSFI; and
  • average balances - average daily balances.
Adjusted net income available to common shareholders
  For the three months ended For the six months ended
(unaudited)
($ thousands)
  April 30 2014 January 31 2014 April 30 2013   April 30 2014 April 30 2013
Net income available to common shareholders $ 51,191 $ 52,628 $ 42,988 $ 103,819 $ 88,470
Adjustments:                    
  Amortization of acquisition-related intangible assets (after tax)   903   891   731   1,794   1,461
  Contingent consideration fair value change   150   150   -   300   -
Adjusted net income available to common shareholders $ 52,244 $ 53,669 $ 43,719 $ 105,913 $ 89,931
                     
                     
                     
Consolidated Balance Sheets
                              Change  
        As at     As at     As at     As at   from  
(unaudited)       April 30     January 31     October 31     April 30   April 30  
($ thousands)       2014     2014     2013(1)     2013(1)   2013  
Assets                                
Cash Resources                                
  Cash and non-interest bearing deposits with financial institutions     $ 54,040   $ 273   $ 83,856   $ 48,506   11 %
  Interest bearing deposits with regulated financial institutions (Note 4 )   342,179     375,717     258,466     107,683   218  
  Cheques and other items in transit       280     7,288     5,673     5,251   (95 )
        396,499     383,278     347,995     161,440   146  
Securities (Note 4 )                            
  Issued or guaranteed by Canada       712,167     734,924     927,077     736,092   (3 )
  Issued or guaranteed by a province or municipality       630,849     619,242     410,984     600,257   5  
  Other securities       795,779     858,776     894,271     1,046,854   (24 )
        2,138,795     2,212,942     2,232,332     2,383,203   (10 )
                                 
Loans (Notes 5 and 7 )                            
  Personal       2,665,550     2,602,391     2,502,295     2,378,451   12  
  Business       14,131,314     13,645,329     13,160,384     12,585,573   12  
        16,796,864     16,247,720     15,662,679     14,964,024   12  
  Allowance for credit losses (Note 6 )   (88,976 )   (91,354 )   (85,786 )   (79,471 ) 12  
        16,707,888     16,156,366     15,576,893     14,884,553   12  
Other                                
  Property and equipment       67,505     65,626     66,647     64,860   4  
  Goodwill       50,408     50,408     49,424     45,536   11  
  Intangible assets       76,375     72,767     70,197     53,141   44  
  Insurance related       63,541     63,637     64,365     56,853   12  
  Derivative related (Note 8 )   7,050     6,975     4,509     1,468   380  
  Other assets       118,605     123,491     107,898     128,226   (8 )
        383,484     382,904     363,040     350,084   10  
Total Assets     $ 19,626,666   $ 19,135,490   $ 18,520,260   $ 17,779,280   10 %
                                 
Liabilities and Equity                                
Deposits                                
  Personal     $ 10,040,387   $ 9,632,095   $ 9,420,754   $ 9,293,391   8 %
  Business and government       6,628,147     6,611,401     6,210,286     5,591,924   19  
        16,668,534     16,243,496     15,631,040     14,885,315   12  
Other                                
  Cheques and other items in transit       64,055     36,853     55,290     68,708   (7 )
  Insurance related       155,961     159,372     167,816     153,837   1  
  Derivative related (Note 8 )   44     82     36     18   144  
  Other liabilities       246,184     232,733     238,939     233,006   6  
        466,244     429,040     462,081     455,569   2  
Debt                                
  Subordinated debentures       625,000     625,000     625,000     675,000   (7 )
  Debt securities       247,962     187,780     195,650     222,183   12  
  Preferred share liabilities (Note 9 )   125,000     -     -     -   100  
        997,962     812,780     820,650     897,183   11  
Equity                                
  Preferred shares (Note 10 )   -     208,815     208,815     209,649   (100 )
  Common shares (Note 10 )   522,790     518,010     510,282     499,730   5  
  Retained earnings       938,568     902,568     865,087     794,944   18  
  Share-based payment reserve       25,278     24,248     24,632     24,026   5  
  Other reserves       5,917     (4,670 )   (3,389 )   12,622   (53 )
Total Shareholders' Equity       1,492,553     1,648,971     1,605,427     1,540,971   (3 )
  Non-controlling interests       1,373     1,203     1,062     242   467  
Total Equity       1,493,926     1,650,174     1,606,489     1,541,213   (3 )
Total Liabilities and Equity     $ 19,626,666   $ 19,135,490   $ 18,520,260   $ 17,779,280   10 %
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1.
The accompanying notes are an integral part of the interim consolidated financial statements.
 
 
 
Consolidated Statements of Income
               
(unaudited)   For the three months ended Change
from
  For the six months ended Change
from
 
($ thousands, except     April 30 January 31 April 30 April 30   April 30   April 30 April 30  
per share amounts)      2014  2014  2013(1)  2013    2014    2013(1)  2013  
Interest Income                              
  Loans   $ 192,685 $ 193,825 $ 177,159 9 % $ 386,510 $ 356,200 9 %
  Securities     10,625   10,509   11,272 (6 )   21,134   22,496 (6 )
  Deposits with regulated financial institutions     1,165   917   419 178     2,082   856 143  
      204,475   205,251   188,850 8     409,726   379,552 8  
Interest Expense                              
  Deposits     75,061   74,279   70,500 6     149,340   142,412 5  
  Debt     7,676   7,823   8,421 (9 )   15,499   16,074 (4 )
      82,737   82,102   78,921 5     164,839   158,486 4  
Net Interest Income     121,738   123,149   109,929 11     244,887   221,066 11  
Provision for Credit Losses (Note 6)   6,463   7,619   6,684 (3 )   14,082   13,011 8  
Net Interest Income after                              
Provision for Credit Losses     115,275   115,530   103,245 12     230,805   208,055 11  
Other Income                              
  Trust and wealth management services     8,780   8,335   5,371 63     17,115   10,414 64  
  Credit related     5,966   5,987   5,053 18     11,953   10,487 14  
  Insurance, net (Note 3)   5,868   6,011   6,201 (5 )   11,879   11,403 4  
  Gains on securities, net     4,572   4,653   3,074 49     9,225   5,736 61  
  Retail services     2,934   2,770   2,774 6     5,704   5,242 9  
  Other     1,674   775   917 83     2,449   2,487 (2 )
      29,794   28,531   23,390 27     58,325   45,769 27  
Net Interest and Other Income     145,069   144,061   126,635 15     289,130   253,824 14  
Non-Interest Expenses                              
  Salaries and employee benefits     46,636   45,891   42,287 10     92,527   83,642 11  
  Premises and equipment     11,820   11,381   10,730 10     23,201   20,984 11  
  Other expenses     12,162   12,163   11,810 3     24,325   22,268 9  
      70,618   69,435   64,827 9     140,053   126,894 10  
Net Income before Income Taxes     74,451   74,626   61,808 20     149,077   126,930 17  
Income Taxes     18,067   17,877   14,921 21     35,944   30,678 17  
Net Income     56,384   56,749   46,887 20     113,133   96,252 18  
Net Income Attributable to                              
Non-Controlling Interests     218   336   92 137     554   173 220  
Net Income Attributable to                              
Shareholders of CWB     56,166   56,413   46,795 20     112,579   96,079 17  
  Preferred share dividends     4,975   3,785   3,800 31     8,760   7,602 15  
  Premium paid on purchase of preferred shares for cancellation     -   -   7 (100 )   -   7 (100 )
Net Income Available to Common Shareholders   $ 51,191 $ 52,628 $ 42,988 19 % $ 103,819 $ 88,470 17 %
  Average number of common shares (in thousands)     79,955   79,724   79,075 1     79,838   78,936 1  
  Average number of diluted common shares (in thousands)     80,826   80,514   79,471 2     80,702   79,362 2  
Earnings Per Common Share                              
  Basic   $ 0.64 $ 0.66 $ 0.54 19 % $ 1.30 $ 1.12 16 %
  Diluted     0.63   0.65   0.54 17     1.29   1.11 16  
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1.
The accompanying notes are an integral part of the interim consolidated financial statements.
 
 
 
Consolidated Statements of Comprehensive Income   
           
  For the three months ended     For the six months ended  
(unaudited)
($ thousands)
  April 30 2014     April 30 2013(1)       April 30 2014     April 30 2013(1)  
Net Income $ 56,384   $ 46,887     $ 113,133   $ 96,252  
Other Comprehensive Income (Loss), net of tax                          
  Available-for-sale securities:                          
  Gains from change in fair value(2)   14,620     2,572       16,679     7,896  
  Reclassification to net income(3)   (3,237 )   (2,241 )     (6,762 )   (4,183 )
    11,383     331       9,917     3,713  
  Derivatives designated as cash flow hedges:                          
  Gains (loss) from change in fair value(4)   91     (983 )     1,895     (365 )
  Reclassification to net income(5)   (887 )   508       (2,506 )   27  
    (796 )   (475 )     (611 )   (338 )
    10,587     (144 )     9,306     3,375  
Comprehensive Income for the Period $ 66,971   $ 46,743     $ 122,439   $ 99,627  
                           
  Comprehensive income for the period attributable to:                          
  Shareholders of CWB $ 66,753   $ 46,651     $ 121,885   $ 99,454  
  Non-controlling interests   218     92       554     173  
Comprehensive Income for the Period $ 66,971   $ 46,743     $ 122,439   $ 99,627  
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1. Net of income tax of $5,366 and $6,075 for the three and six months ended April 30, 2014, respectively (2013 - $960 and $2,949).
  2. Net of income tax of $1,335 and $2,463 for the three and six months ended April 30, 2014, respectively (2013 - $833 and $1,553).
  3. Net of income tax of $31 and $640 for the three and six months ended April 30, 2014, respectively (2013 - $330 and $123).
  4. Net of income tax of $300 and $847 for the three and six months ended April 30, 2014, respectively (2013 - $170 and $9).
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     April 30  
($ thousands)     2014     2013(1)  
Retained Earnings              
Balance at beginning of period   $ 865,087   $ 733,298  
Net income attributable to shareholders of CWB     112,579     96,079  
Dividends - Preferred shares/preferred share liabilities     (8,760 )   (7,602 )
          - Common shares     (30,338 )   (26,824 )
Premium paid on preferred shares purchased for cancellation     -     (7 )
Balance at end of period     938,568     794,944  
Other Reserves              
Balance at beginning of period     (3,389 )   9,247  
Changes in available-for-sale securities     9,917     3,713  
Changes in derivatives designated as cash flow hedges     (611 )   (338 )
Balance at end of period     5,917     12,622  
Preferred Shares (Note 10)            
Balance at beginning of period     208,815     209,750  
Redeemed     (208,815 )   -  
Purchased for cancellation     -     (101 )
Balance at end of period     -     209,649  
Common Shares (Note 10)            
Balance at beginning of period     510,282     490,218  
Issued under dividend reinvestment plan     9,172     7,172  
Transferred from share-based payment reserve on the exercise or exchange of options     2,270     1,389  
Issued on exercise of options     1,066     951  
Balance at end of period     522,790     499,730  
Share-based Payment Reserve              
Balance at beginning of period     24,632     22,468  
Amortization of fair value of options (Note 11)   2,916     2,947  
Transferred to common shares on the exercise or exchange of options     (2,270 )   (1,389 )
Balance at end of period     25,278     24,026  
Total Shareholders' Equity     1,492,553     1,540,971  
Non-Controlling Interests              
Balance at beginning of period     1,062     244  
Net income attributable to non-controlling interests     554     173  
Dividends to non-controlling interests     (146 )   (175 )
Partial ownership increase     (97 )   -  
Balance at end of period     1,373     242  
Total Equity   $ 1,493,926   $ 1,541,213  
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1.
The accompanying notes are an integral part of the interim consolidated financial statements.
 
 
 
Consolidated Statements of Cash Flow
    For the six months ended
(unaudited)     April 30     April 30  
($ thousands)     2014     2013(1)  
Cash Flows from Operating Activities              
  Net income   $ 113,133   $ 96,252  
  Adjustments to determine net cash flows:              
    Provision for credit losses     14,082     13,011  
    Depreciation and amortization     11,714     10,338  
    Current income taxes receivable and payable     (3,987 )   (12,420 )
    Amortization of fair value of employee stock options (Note 11)   2,916     2,947  
    Accrued interest receivable and payable, net     3,949     8,517  
    Deferred income taxes, net     (4,762 )   2,196  
    Gain on securities, net     (9,225 )   (5,736 )
  Change in operating assets and liabilities:              
    Deposits, net     1,037,494     635,478  
    Loans, net     (1,145,078 )   (943,878 )
    Securities sold under repurchase agreements, net     -     (70,089 )
    Other items, net     (21,849 )   (16,062 )
      (1,613 )   (279,446 )
Cash Flows from Financing Activities              
  Common shares issued (Note 10)   10,238     8,123  
  Debt securities issued     101,789     59,321  
  Debt securities repaid     (49,477 )   (46,410 )
  Dividends     (39,098 )   (34,426 )
  Preferred shares redeemed (Note 10)   (208,815 )   -  
  Preferred shares purchased and cancelled     -     (108 )
  Preferred share liabilities issued (Note 9)   125,000     -  
  Distributions to non-controlling interests     (146 )   (175 )
  Debentures issued     -     250,000  
      (60,509 )   236,325  
Cash Flows from Investing Activities              
  Interest bearing deposits with regulated financial institutions, net     (83,499 )   69,547  
  Securities, purchased     (3,603,834 )   (3,208,919 )
  Securities, sale proceeds     2,223,556     2,003,746  
  Securities, matured     1,500,403     1,167,732  
  Property, equipment and intangible assets     (18,478 )   (9,862 )
      18,148     22,244  
Change in Cash and Cash Equivalents     (43,974 )   (20,877 )
Cash and Cash Equivalents at Beginning of Period     34,239     5,926  
Cash and Cash Equivalents at End of Period *   $ (9,735 ) $ (14,951 )
* Represented by:              
  Cash and non-interest bearing deposits with financial institutions   $ 54,040   $ 48,506  
  Cheques and other items in transit (included in Cash Resources)     280     5,251  
  Cheques and other items in transit (included in Other Liabilities)     (64,055 )   (68,708 )
Cash and Cash Equivalents at End of Period   $ (9,735 ) $ (14,951 )
               
               
Supplemental Disclosure of Cash Flow Information              
  Interest and dividends received   $ 415,537   $ 395,296  
  Interest paid     160,072     154,353  
  Income taxes paid     44,693     40,671  
  1. Effective November 1, 2013, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements as described in Note 1.
The accompanying notes are an integral part of the interim consolidated financial statements.
 
Notes to Interim Consolidated Financial Statements
(unaudited)
($thousands, except per share amounts)

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, 2013, except as noted below. These interim consolidated financial statements of CWB, domiciled in Canada, have also been prepared in accordance with subsection 308 (4) of the Bank Act and the accounting requirements of the Office of the Superintendent of Financial Institutions Canada (OSFI). Under International Financial Reporting Standards (IFRS), additional disclosures are required in annual financial statements and accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2013 as set out on pages 62 to 102 of CWB's 2013 Annual Report.

The interim consolidated financial statements were authorized for issue by the Board of Directors on June 4, 2014.

Significant Changes in Accounting Policies

Consolidated Financial Statements

Effective November 1, 2013, CWB adopted IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosures of Interests in Other Entities, which establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities, and new disclosure requirements for all forms of interests in other entities. As a result of the application of IFRS 10, CWB has changed its accounting policy for determining whether it has control over its investees and consequently, has de-consolidated Canadian Western Bank Capital Trust (the Trust) through which certain regulatory capital instruments are issued. In accordance with the transitional provisions, CWB has applied IFRS 10 retrospectively and comparative figures have been restated to reflect the de-consolidation of the Trust. The de-consolidation of the Trust resulted in a $105,000 decrease in CWB Capital Trust Capital Securities Series 1 (WesTS) previously classified as non-controlling interest and an increase of $105,000 in deposit liabilities, and reclassification of the associated distribution, which totaled $1,647 and $3,344 for the three and six months ended April 30, 2013, from non-controlling interest to interest expense. Additional information on the Trust is discussed in Note 19 of CWB's audited consolidated financial statements for the year ended October 31, 2013.

Fair value measurement

Effective November 1, 2013, CWB adopted IFRS 13 Fair Value Measurement, which applies to other IFRS standards that require or permit fair value measurements or disclosures about fair value measurements and sets out a framework on how to measure fair value using the assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. In accordance with the transitional provisions of IFRS 13, CWB has applied the new fair value measurement guidance prospectively. This new standard had no impact on the measurement of CWB's assets and liabilities. Additional disclosures required by IFRS 13 are included in Note 13.

2. Future Accounting Changes

CWB continues to monitor the IASB's proposed changes to accounting standards. Although not expected to materially impact CWB's 2014 consolidated financial statements, these proposed changes may have a significant impact on future financial statements. Additional discussion on certain accounting standards that may impact CWB is included in the audited consolidated financial statements within CWB's 2013 Annual Report.

3. Insurance Revenues, Net

Insurance revenues, net, as reported in other income on the consolidated statement of income are presented net of net claims and adjustment expenses, and policy acquisition costs.

             
    For the three months ended     For the six months ended  
    April 30 2014     January 31 2014     April 30
2013
    April 30
 2014
    April 30 2013  
Net earned premiums $ 31,646   $ 32,619   $ 30,701   $ 64,265   $ 62,196  
Commissions and processing fees   317     425     404     742     841  
Net claims and adjustment expenses   (19,741 )   (21,252 )   (18,312 )   (40,993 )   (38,997 )
Policy acquisition costs   (6,354 )   (5,781 )   (6,592 )   (12,135 )   (12,637 )
Total, net $ 5,868   $ 6,011   $ 6,201   $ 11,879   $ 11,403  

4. Securities

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

                   
    As at
April 30 2014
    As at
January 31
2014
    As at
October 31
 2013
 
Interest bearing deposits with regulated financial institutions $ 435   $ 822   $ 569  
Securities issued or guaranteed by                  
  Canada   150     424     632  
  A province or municipality   181     (70 )   161  
Other debt securities   1,166     1,455     1,180  
Equity securities                  
  Preferred shares   (258 )   (15,923 )   (16,301 )
  Common shares   4,730     4,459     6,657  
Unrealized gains (losses), net $ 6,404   $ (8,833 ) $ (7,102 )

The securities portfolio is primarily comprised of high quality debt instruments, preferred shares and common shares 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. Volatility in equity markets also leads to fluctuations in value, particularly for common shares. For the three and six months ended April 30, 2014, CWB assessed the securities with unrealized losses and, based on available objective evidence, no impairment charges (2013 - nil) were included in gains on securities, net.

5. Loans

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

                                           
                                          Composition Percentage
($ millions)   BC     AB     ON   SK     MB     Other     Total   April 30 2014   January 31 2014   October 31 2013  
                                                     
Personal $ 864   $ 1,076   $ 482 $ 171   $ 72   $ 1   $ 2,666   16 % 16 % 16 %
                                                     
Business                                                    
  Real estate   2,878     2,523     430   438     119     13     6,401   38   38   37  
  Commercial   1,541     1,737     427   207     287     79     4,278   25   26   26  
  Equipment financing and energy(1)   589     1,468     608   285     116     386     3,452   21   20   21  
Total Business   5,008     5,728     1,465   930     522     478     14,131   84   84   84  
Total Loans(2) $ 5,872   $ 6,804   $ 1,947 $ 1,101   $ 594   $ 479   $ 16,797   100 % 100 % 100 %
Composition Percentage                                                    
  April 30, 2014   35 %   41 %   11 % 7 %   3 %   3 %   100 %            
  January 31, 2014   35 %   42 %   11 % 7 %   2 %   3 %   100 %            
  October 31, 2013   35 %   42 %   11 % 7 %   2 %   3 %   100 %            
  1. Includes securitized leases reported on-balance sheet of $282 (January 31, 2014 - $223; October 31, 2013 - $230).
  2. This table does not include an allocation for credit losses.

6. Allowance for Credit Losses

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

         
  For the three months ended
April 30, 2014
  For the three months ended
January 31, 2014
 
   

Specific Allowance
    Collective Allowance for Credit Losses   Total    

Specific Allowance
    Collective Allowance for Credit Losses   Total  
Balance at beginning of period $ 12,757   $ 78,597 $ 91,354   $ 9,569   $ 76,217 $ 85,786  
Provision for credit losses   338     6,125   6,463     5,239     2,380   7,619  
Write-offs   (9,256 )   -   (9,256 )   (2,453 )   -   (2,453 )
Recoveries   415     -   415     402     -   402  
Balance at end of period $ 4,254   $ 84,722 $ 88,976   $ 12,757   $ 78,597 $ 91,354  
       
    For the three months ended
April 30, 2013
 
   
Specific Allowance
    Collective Allowance for Credit Losses   Total  
Balance at beginning of period $ 6,667   $ 69,701 $ 76,368  
Provision for credit losses   5,885     799   6,684  
Write-offs   (3,876 )   -   (3,876 )
Recoveries   295     -   295  
Balance at end of period $ 8,971   $ 70,500 $ 79,471  
             
    For the six months ended
April 30, 2014
    For the six months ended
April 30, 2013
 
   

Specific Allowance
    Collective Allowance for Credit Losses   Total    
Specific Allowance
    Collective Allowance for Credit Losses   Total  
Balance at beginning of period $ 9,569   $ 76,217 $ 85,786   $ 14,379   $ 67,344 $ 81,723  
Provision for credit losses   5,577     8,505   14,082     9,855     3,156   13,011  
Write-offs   (11,709 )   -   (11,709 )   (17,048 )   -   (17,048 )
Recoveries   817     -   817     1,785     -   1,785  
Balance at end of period $ 4,254   $ 84,722 $ 88,976   $ 8,971   $ 70,500 $ 79,471  

7. Impaired and Past Due Loans

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

         
  As at April 30, 2014   As at January 31, 2014  
    Gross Amount   Gross Impaired Amount   Specific Allowance Net
Impaired Loans
    Gross Amount   Gross Impaired Amount
Specific Allowance
  Net Impaired Loans  
Personal $ 2,665,550 $ 14,883 $ 665 $ 14,218   $ 2,602,391 $ 15,561 $ 507 $ 15,054  
Business                                    
  Real estate(1)   6,401,392   20,101   300   19,801     6,132,790   23,226   7,476   15,750  
  Commercial   4,277,615   4,526   196   4,330     4,198,341   3,801   221   3,580  
  Equipment financing and energy   3,452,307   11,111   3,093   8,018     3,314,198   11,349   4,553   6,796  
Total(2) $ 16,796,864 $ 50,621 $ 4,254   46,367   $ 16,247,720 $ 53,937 $ 12,757   41,180  
Collective allowance(3)               (84,722 )               (78,597 )
Net impaired loans after collective allowance             $ (38,355 )             $ (37,417 )
           
    As at October 31, 2013  
    Gross Amount   Gross Impaired Amount  
Specific Allowance
  Net Impaired Loans  
Personal $ 2,502,295 $ 17,052 $ 748 $ 16,304  
Business                  
  Real estate(1)   5,829,225   31,937   6,349   25,588  
  Commercial   4,091,371   4,612   293   4,319  
  Equipment financing and energy   3,239,788   10,610   2,179   8,431  
Total(2) $ 15,662,679 $ 64,211 $ 9,569   54,642  
Collective allowance(3)               (76,217 )
Net impaired loans after collective allowance             $ (21,575 )
  1. Multi-family residential mortgages are included in real estate loans.
  2. Gross impaired loans include foreclosed assets with a carrying value of $4,157 (January 31, 2014 - $5,014 and October 31, 2013 - $12,407) 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 risk is not allocated by loan type.

Outstanding impaired loans, net of allowance for credit losses, by provincial location of security, are as follows:

         
  As at April 30, 2014   As at January 31, 2014  
  Gross Impaired Amount Specific Allowance Net
Impaired
Loans
    Gross Impaired Amount
Specific Allowance
  Net Impaired Loans  
Alberta $ 11,343 $ 1,465 $ 9,878   $ 29,764 $ 10,168 $ 19,596  
British Columbia   28,890   716   28,174     14,920   406   14,514  
Ontario   6,524   904   5,620     5,084   954   4,130  
Saskatchewan   1,973   475   1,498     2,329   505   1,824  
Manitoba   542   162   380     715   196   519  
Other   1,349   532   817     1,125   528   597  
Total $ 50,621 $ 4,254   46,367   $ 53,937 $ 12,757   41,180  
Collective allowance(1)           (84,722 )           (78,597 )
Net impaired loans after collective allowance         $ (38,355 )         $ (37,417 )
           
    As at October 31, 2013  
    Gross Impaired Amount  
Specific Allowance
  Net Impaired Loans  
Alberta $ 38,886 $ 7,475 $ 31,411  
British Columbia   17,904   476   17,428  
Ontario   2,886   728   2,158  
Saskatchewan   1,861   381   1,480  
Manitoba   1,214   146   1,068  
Other   1,460   363   1,097  
Total $ 64,211 $ 9,569   54,642  
Collective allowance(1)           (76,217 )
Net impaired loans after collective allowance         $ (21,575 )
  1. The collective allowance for credit risk 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 are as follows:

   
  As at April 30, 2014
  1 - 30 days 31 - 60 days 61 - 90 days More than
90 days
  Total
Personal $ 24,166 $ 2,546 $ 1,465 $ 1,506 $ 29,683
Business   45,734   17,336   4,871   -   67,941
  $ 69,900 $ 19,882 $ 6,336 $ 1,506 $ 97,624
                     
Total as at January 31, 2014 $ 37,076 $ 28,980 $ 17,491 $ 1,897 $ 85,444
Total as at October 31, 2013 $ 24,710 $ 48,102 $ 2,075 $ 2,400 $ 77,287

8. Derivative Financial Instruments

CWB designates certain derivative financial instruments 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). 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 hedging transaction becomes ineffective or if the derivative is not designated as a cash flow hedge, any subsequent change in the fair value of the hedging instrument is recognized in net income.

For the three and six months ended April 30, 2014, $91 and $1,895 of net unrealized after tax gains (2013 - $983 and $365 unrealized after tax losses) were recorded in other comprehensive income for changes in fair value of the effective portion of equity and interest rate swap derivatives designated as cash flow hedges, and no amounts (2013 - $nil) were recorded in other income for changes in fair value of the ineffective portion of derivatives classified as cash flow hedges. Amounts accumulated in other comprehensive income are reclassified to net income in the same period that the hedged item affects income. For the three and six months ended April 30, 2014, $887 and $2,506 of net gains after tax (2013 - $508 and $27 of net losses after tax) were reclassified to net income.

The following table shows the notional value outstanding for derivative financial instruments and the related fair value:

     
  As at April 30, 2014 As at January 31, 2014
    Notional Amount   Positive
Fair Value
  Negative Fair Value   Notional Amount   Positive
 Fair Value
  Negative
Fair Value
Interest rate swaps designated as hedges(1)
$
775,000 $ 329 $ 40 $ 700,000 $ 763 $ 26
Equity swaps designated as hedges(2)   17,470   6,712   -   17,470   6,142   -
Foreign exchange contracts(3)   858   9   4   4,134   70   56
Derivative related amounts $ 793,328 $ 7,050 $ 44 $ 721,604 $ 6,975 $ 82
   
  As at October 31, 2013
    Notional Amount   Positive
Fair Value
  Negative
Fair Value
Interest rate swaps designated as hedges $ 800,000 $ 367 $ 32
Equity swaps designated as hedges   17,470   4,131   -
Foreign exchange contracts   1,235   11   4
Derivative related amounts $ 818,705 $ 4,509 $ 36
  1. Interest rate swaps designated as hedges outstanding at April 30, 2014 mature between May 2014 and April 2016.
  2. Equity swaps designated as hedges outstanding at April 30, 2014 mature between June 2014 and June 2016.
  3. Foreign exchange contracts outstanding at April 30, 2014 mature between May 2014 and March 2015.

There were no forecasted transactions that failed to occur during the three and six months ended April 30, 2014.

9. Preferred Share Liabilities

On February 10, 2014, CWB issued five million Basel III-compliant, non-cumulative, five year rate reset First Preferred Shares Series 5 (Series 5 Preferred Shares) at $25 per share, for gross proceeds of $125 million. The shares are recorded as liabilities on the consolidated balance sheets due to the inclusion of non-viability contingent capital provisions necessary for the shares to qualify as regulatory capital. The distributions are recorded in equity reflecting CWB's discretion over dividend payments.

Holders of Series 5 Preferred Shares are entitled to receive a non-cumulative fixed dividend in the amount of $1.10 annually, payable quarterly, as and when declared by the Board of Directors of CWB, for the initial period ending April 30, 2019. The quarterly dividend represents an annual yield of 4.40% based on the stated issue price per share. Thereafter, the dividend rate will reset every five years at a level of 276 basis points over the then five year Government of Canada bond yield.

CWB maintains the right to redeem, subject to the approval of OSFI, up to all of the then outstanding Series 5 Preferred Shares on April 30, 2019, and on April 30 every five years thereafter at a price of $25.00 per share. Should CWB choose not to exercise its right to redeem the Series 5 Preferred Shares, holders of these shares will have the right to convert their shares into an equal number of non-cumulative, floating rate First Preferred Shares Series 6 (Series 6 Preferred Shares), subject to certain conditions, on April 30, 2019, and on April 30 every five years thereafter. Holders of the Series 6 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of CWB, equal to the 90-day Government of Canada Treasury Bill rate plus 276 basis points.

Upon the occurrence of a trigger event (as defined by OSFI), each Series 5 or 6 Preferred Share will be automatically converted, without the consent of the holders, into CWB common shares. Conversion to common shares will be determined by dividing the preferred share conversion value ($25.00 per preferred share plus any declared but unpaid dividends) by the common share value (the greater of (i) the floor price of $5.00 and (ii) the current market price calculated as the volume-weighted average trading price for the ten consecutive trading days ending on the day immediately prior to the date of the conversion).

10. Capital Stock

Share Capital

  For the six months ended  
  April 30, 2014   April 30, 2013  
  Number of Shares     Amount   Number of Shares     Amount  
Preferred Shares - Series 3                    
  Outstanding at beginning of period 8,352,496   $ 208,815   8,390,000   $ 209,750  
  Redeemed (8,352,496 )   (208,815 ) -     -  
  Purchased for cancellation -     -   (4,038 )   (101 )
  Outstanding at end of period -     -   8,385,962     209,649  
Common Shares                    
  Outstanding at beginning of period 79,619,595     510,282   78,742,812     490,218  
  Issued under dividend reinvestment plan(1) 248,620     9,172   257,795     7,172  
  Issued on exercise or exchange of options 177,052     1,066   169,910     951  
  Transferred from share-based payment reserve on exercise or exchange of options -     2,270   -     1,389  
  Outstanding at end of period 80,045,267     522,790   79,170,517     499,730  
Share Capital     $ 522,790       $ 709,379  
  1. Shares are issued at a 2% discount from the average closing price of the five trading days preceding the dividend payment date.

On April 30, 2014, CWB redeemed all outstanding Series 3 Preferred Shares at $25.00 per share.

11. Share-based Payments

Stock Options

   
  For the three months ended
  April 30, 2014 April 30, 2013
 

Number of Options
    Weighted Average Exercise Price

 Number of Options
    Weighted Average Exercise Price
Options                
  Balance at beginning of period 4,524,603   $ 28.73 3,857,314   $ 25.37
  Exercised or exchanged (61,203 )   21.36 (107,196 )   17.44
  Forfeited (40,520 )   29.55 (14,300 )   27.05
Balance at end of period 4,422,880   $ 28.83 3,735,818   $ 25.60
                 
  For the six months ended
  April 30, 2014 April 30, 2013
 

Number of Options
    Weighted Average Exercise Price

 Number of Options
    Weighted Average Exercise Price
Options                
  Balance at beginning of period 4,217,908   $ 26.96 3,441,100   $ 24.51
  Granted 623,320     37.50 824,667     28.09
  Exercised or exchanged (359,609 )   21.89 (343,722 )   17.96
  Forfeited (58,739 )   29.39 (24,152 )   27.39
  Expired -     - (162,075 )   31.18
Balance at end of period 4,422,880   $ 28.83 3,735,818   $ 25.60

Until March 1, 2014, the terms of the share incentive plan allowed the holders of vested options a cashless settlement alternative whereby the option holder could either (i) elect to receive shares by delivering cash to CWB in the amount of the option exercise price or (ii) elect to receive 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 (cashless settlement). Effective March 1, 2014, all options exercised are settled via cashless settlement. Of the 359,609 (2013 - 343,722) options exercised or exchanged in the six months ended April 30, 2014, option holders exchanged the rights to 313,117 (2013 - 291,140) options and received 130,560 (2013 - 117,328) shares in return under the cashless settlement alternative.

For the six months ended April 30, 2014, salary expense of $2,916 (2013 - $2,947) was recognized relating to the estimated fair value of options granted. The fair value of options granted was estimated using a binomial option pricing model with the following variables and assumptions: (i) risk-free interest rate of 1.5% (2013 - 1.4%), (ii) expected option life of 4.0 (2013 - 4.0) years, (iii) expected annual volatility of 19% (2013 - 25%), and (iv) expected annual dividends of 2.0% (2013 - 2.5%). The weighted average fair value of options granted was estimated at $5.19 (2013 - $4.61) per share.

Further details relating to stock options outstanding and exercisable at April 30, 2014 follow:

     
  Options Outstanding Options Exercisable




Range of Exercise Prices



Number of Options
Weighted Average Remaining Contractual Life (years)  
Weighted Average Exercise Price



Number of Options
 
Weighted Average Exercise
Price
$16.89 to $23.43 247,817 0.8 $ 21.99 247,817 $ 21.99
$25.46 to $29.42 3,219,579 3.3   27.49 271,775   29.42
$30.75 to $37.50 955,484 3.4   35.09 -   -
Total 4,422,880 3.2 $ 28.83 519,592 $ 25.88

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, 2014, these items include guarantees and standby letters of credit of $360,448 (October 31, 2013 - $354,083). 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, 2013 (see page 89 of the 2013 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.

                         
As at April 30, 2014  



Derivatives
  Loans and Receivables and Non-trading Liabilities  


Available-for-sale
 

Total Carrying Amount
 



Fair Value
  Fair Value Over (Under) Carrying Amount
Financial Assets                        
  Cash resources $ - $ - $ 396,499 $ 396,499 $ 396,499 $ -
  Securities   -   -   2,138,795   2,138,795   2,138,795   -
  Loans (1)   -   16,766,355   -   16,766,355   16,771,004   4,649
  Other assets (2)   -   127,242   -   127,242   127,242   -
  Derivative related   7,050   -   -   7,050   7,050   -
Total Financial Assets $ 7,050 $ 16,893,597 $ 2,535,294 $ 19,435,941 $ 19,440,590 $ 4,649
                         
Financial Liabilities                        
  Deposits (1) $ - $ 16,684,195 $ - $ 16,684,195 $ 16,716,091 $ 31,896
  Other liabilities(3)   -   376,082   -   376,082   376,082   -
  Debt   -   997,962   -   997,962   1,022,630   24,668
  Derivative related   44   -   -   44   44   -
Total Financial Liabilities $ 44 $ 18,058,239 $ - $ 18,058,283 $ 18,114,847 $ 56,564
                         
As at January 31, 2014                
Total Financial Assets $ 6,975 $ 16,362,530 $ 2,596,220 $ 18,965,725 $ 18,985,528 $ 19,803
Total Financial Liabilities $ 82 $ 17,419,162 $ - $ 17,419,244 $ 17,481,512 $ 62,268
As at October 31, 2013                
Total Financial Assets $ 4,509 $ 15,750,288 $ 2,580,327 $ 18,335,124 $ 18,320,618 $ (14,506)
Total Financial Liabilities $ 36 $ 16,834,175 $ - $ 16,834,211 $ 16,867,410 $ 33,199
  1. Loans and deposits exclude deferred premiums and deferred revenue, which are not financial instruments.
  2. Other assets exclude property and equipment, goodwill and other intangible assets, reinsurers' share of unpaid claims and adjustment expenses, deferred tax asset, prepaid and deferred expenses, financing costs and other items that are not financial instruments.
  3. Other liabilities exclude deferred tax liability, deferred revenue, unearned insurance premiums and other items that 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 29 of the October 31, 2013 consolidated audited financial statements (see page 97 of the 2013 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 published market prices quoted in active markets. Level 2 fair value measurements were estimated using a valuation technique based on observable market data. Level 3 fair value measurements were determined using a valuation technique based on unobservable market data. There were no transfers between Level 1 and Level 2 during the three and six months ended April 30, 2014.

Further information on how the fair value of financial instruments is determined is included in Note 29 of the October 31, 2013 consolidated audited financial statements (see page 97 of the 2013 Annual Report).

The following table presents CWB's financial assets and liabilities that are carried at fair value, categorized by level under the fair value hierarchy:

       
      Valuation Technique
As at April 30, 2014   Fair Value   Level 1   Level 2   Level 3
Financial assets                
  Cash resources $ 396,499 $ 382,439 $ 14,060 $ -
   Securities   2,138,795   2,138,795   -   -
  Derivative related   7,050   -   7,050   -
  $ 2,542,344 $ 2,521,234 $ 21,110 $ -
                 
Financial liabilities                
  Other liability $ 1,979 $ - $ - $ 1,979
  Derivative related   44   -   44   -
  $ 2,023 $ - $ 44 $ 1,979
As at January 31, 2014              
Financial assets $ 2,603,195 $ 2,559,982 $ 43,213 $ -
Financial liabilities $ 1,911 $ - $ 82 $ 1,829
As at October 31, 2013                
Financial assets $ 2,584,836 $ 2,533,327 $ 51,509 $ -
Financial liabilities $ 1,715 $ - $ 36 $ 1,679

Financial instruments that are not carried on the balance sheet at fair value include loans, deposits and debt. Based on the inputs used to calculate fair values disclosed above, these financial instruments are classified as Level 2 in the fair value hierarchy.

Level 3 Financial Instruments

The Level 3 financial instrument are comprised of the contingent consideration related to a subsidiary acquisition. The following table shows a reconciliation of the fair value measurements related to the Level 3 valued instrument:

   
  For the six months ended
  April 30
    2014   2013
Balance at beginning of period $ 1,679 $ -
  Change in fair value charged to other income   300   -
Balance at end of period $ 1,979 $ -
         

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 28 of the audited consolidated financial statements for the year ended October 31, 2013 (see page 96 of the 2013 Annual Report). The following table shows the gap position for selected time intervals.

Asset Liability Gap Positions

                                             
($ millions)   Floating Rate and Within 1 Month     1 to 3 Months    
3 Months to 1 Year
   
Total Within 1 Year
  1 Year to 5 Years  

More than
5 Years
   
Non-interest Sensitive
   


Total
 
April 30, 2014                                                
Assets                                                
Cash resources and securities $ 217   $ 920   $ 426   $ 1,563   $ 703   $ 168   $ 101   $ 2,535  
Loans   7,906     737     2,278     10,921     5,739     107     (58 )   16,709  
Other assets   -     -     -     -     -     -     383     383  
Derivative financial instruments(1)   150     208     275     633     159     -     1     793  
Total   8,273     1,865     2,979     13,117     6,601     275     427     20,420  
Liabilities and Equity                                                
Deposits   5,908     1,332     3,845     11,085     5,600     -     (16 )   16,669  
Other liabilities   4     8     34     46     31     9     380     466  
Debt   9     16     69     94     529     250     125     998  
Equity   -     -     -     -     -     -     1,494     1,494  
Derivative financial instruments(1)   792     -     -     792     -     -     1     793  
Total   6,713     1,356     3,948     12,017     6,160     259     1,984     20,420  
Interest Rate Sensitive Gap $ 1,560   $ 509   $ (969 ) $ 1,100   $ 441   $ 16   $ (1,557 ) $ -  
Cumulative Gap $ 1,560   $ 2,069   $ 1,100   $ 1,100   $ 1,541   $ 1,557   $ -   $ -  
Cumulative Gap as a Percentage of Total Assets   7.6
%
  10.1
%
  5.4 %   5.4
%
  7.5 %   7.6
%
  -
%
  -
%
                                                 
January 31, 2014                                                
Cumulative Gap $ 1,292   $ 1,456   $ 596   $ 596   $ 1,570   $ 1,625   $ -   $ -  
Cumulative Gap as a Percentage of Total Assets   6.5
%
  7.3
%
  3.0 %   3.0
%
  7.9 %   8.2
%
  -
%
 
-

%
                                                 
October 31, 2013                                                
Cumulative Gap $ 1,289   $ 1,785   $ 240   $ 240   $ 1,499   $ 1,541   $ -   $ -  
Cumulative Gap as a Percentage of Total Assets   6.7
%
  9.2
%
  1.2 %   1.2
%
  7.8 %   8.0
%
  -
%
 
-

%
  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 term 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:

April 30, 2014 Floating Rate and Within 1 Month   1 to 3 Months  
3 Months to 1 Year
  Total Within 1 Year   1 Year to
5 Years
  More than 5 Years  

Total
 
Total assets 3.3 % 2.4 % 4.2 % 3.4 % 4.5 % 4.7 % 3.8 %
Total liabilities 1.3   1.8   2.0   1.6   2.4   3.3   1.9  
Interest rate sensitive gap 2.0 % 0.6 % 2.2 % 1.8 % 2.1 % 1.4 % 1.9 %
                             
January 31, 2014                            
Total assets 3.7 % 2.5 % 4.0 % 3.6 % 4.5 % 4.7 % 4.0 %
Total liabilities 1.3   1.8   2.0   1.6   2.5   3.3   1.9  
Interest rate sensitive gap 2.4 % 0.7 % 2.0 % 2.0 % 2.0 % 1.4 % 2.1 %
                             
October 31, 2013                            
Total assets 3.8 % 2.3 % 4.0 % 3.6 % 4.6 % 4.8 % 4.0 %
Total liabilities 1.3   1.9   2.0   1.6   2.4   3.3   1.9  
Interest rate sensitive gap 2.5 % 0.4 % 2.0 % 2.0 % 2.2 % 1.5 % 2.1 %
                             

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 31 to the fiscal 2013 audited consolidated financial statements within 2013 Annual Report (see page 100 of the 2013 Annual Report) and in the Capital Management section in the Q2 2014 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.

On February 10, 2014, CWB issued five million Basel III-compliant, non-cumulative, five year rate reset Series 5 Preferred Shares at $25 per share, for gross proceeds of $125 million (see Note 9). On April 30, 2014, CWB redeemed all outstanding Series 3 Preferred Shares (see Note 10).

Capital Structure and Regulatory Ratios

    As at
April 30
2014
    As at
January 31 2014
    As at
April 30
2013
 
Regulatory capital, net of deductions                  
  Common equity Tier 1 $ 1,376,624   $ 1,326,448   $ 1,229,936  
  Tier 1   1,606,780     1,576,411     1,503,325  
  Total   2,231,539     2,194,824     2,180,295  
Capital ratios                  
  Common equity Tier 1   8.1 %   8.0 %   8.0 %
  Tier 1   9.4     9.5     9.7  
  Total   13.1     13.2     14.1  
Asset to capital multiple   8.7 x   8.6 x   8.0 x

During the six months ended April 30, 2014, CWB complied with all internal and external capital requirements.

16. Comparative Figures

Certain comparative figures have been reclassified to conform to the current period's presentation.

Shareholder Information
 
Head Office
 
Canadian Western Bank Group
Suite 3000, Canadian Western Bank Place
10303 Jasper Avenue
Edmonton, AB T5J 3X6
Telephone: (780) 423-8888
Fax: (780) 423-8897
cwb.com
 
Subsidiary Offices
 
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
 
Canadian Western Trust Company
Suite 600, 750 Cambie Street
Vancouver, BC V6B 0A2
Toll-free: 1-800-663-1124
Fax: (604) 669-6069
cwt.ca
 
Valiant Trust Company
Suite 310, 606 4th Street S.W.
Calgary, AB T2P 1T1
Toll-free: 1-866-313-1872
Fax: (403) 233-2857
valianttrust.com
 
Canadian Direct Insurance Incorporated
Suite 600, 750 Cambie Street
Vancouver, BC V6B 0A2
Telephone: (604) 699-3678
Fax: (604) 699-3851
canadiandirect.com
 
Adroit Investment Management Ltd.
Suite 1250, Canadian Western Bank Place
10303 Jasper Avenue
Edmonton, AB T5J 3N6
Telephone: (780) 429-3500
Fax: (780) 429-9680
adroitinvestments.ca
 
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
 
 
Transfer Agent and Registrar
 
Valiant Trust Company
Suite 310, 606 4th Street S.W.
Calgary, AB T2P 1T1
Telephone: (403) 233-2801
Fax: (403) 233-2857
Website: http://www.valianttrust.com/
Email: inquiries@valianttrust.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
 
Investor & Public Relations
Canadian Western Bank
Telephone: (780) 969-8337
Toll-free: 1-800-836-1886
Fax: (780) 969-8326
Email: InvestorRelations@cwbank.com

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 5, 2014 at 3:00 p.m. ET (1:00 p.m. MT). 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 19, 2014 by dialing 905-694-9451 (Toronto) or 1-800-408-3053 (toll-free) and entering passcode 1696268.

Canadian Western Bank
Matt Evans, CFA
Senior Manager, Investor Relations
(780) 969-8337
matt.evans@cwbank.com
www.cwb.com



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