Canadian Western Bank
TSX : CWB

Canadian Western Bank

September 03, 2015 07:00 ET

CWB Reports Solid Credit Quality and Strong Performance From Banking, Trust and Wealth Management Operations

EDMONTON, ALBERTA--(Marketwired - Sept. 3, 2015) - Canadian Western Bank (TSX:CWB) -

Third Quarter 2015 Highlights1,2 (compared to the same period in the prior year)

  • Strong loan growth of 3% in the quarter, 9% year-to-date and 11% over the past twelve months.

  • Stable credit quality and a provision for credit losses as a percentage of average loans of 17 basis points, compared to 16 basis points last year and unchanged from the prior quarter.

  • Excluding net realized gains and losses on securities in both periods, common shareholders' net income from Continuing Operations of $55.0 million and adjusted cash earnings per common share of $0.69, both up 10%.

  • Adjusted cash earnings per common share from Continuing Operations of $0.65, down 3%, including net realized losses on securities of $5.0 million, or $0.05 per diluted common share.

  • Common shareholders' net income from Combined Operations of $158.8 million, up 181%, including divestiture gains of $107.6 million. Diluted earnings per common share from Combined Operations of $1.97, up 181%, and adjusted cash earnings per common share of $1.98, up 179%.

  • Cash dividend declared of $0.22 per common share, 10% ($0.02) higher than the quarterly dividend declared one year ago and consistent with the prior quarter.

(1) Highlights include certain non-IFRS measures - refer to definitions following the table of Selected Financial Highlights.
(2) As a result of the sales of Canadian Direct Insurance (CDI) and the stock transfer business of Valiant Trust Company (Valiant), CWB has defined the contributions of both CDI and Valiant's stock transfer business as "Discontinued Operations", the remaining operations as "Continuing Operations", and the total Continuing Operations and Discontinued Operations as "Combined Operations".

Canadian Western Bank (TSX:CWB) (CWB) today announced strong third quarter financial performance from core banking, trust and wealth management operations, along with divestiture gains of $1.33 per diluted common share.

Strong year-over-year loan growth and ongoing stable credit quality contributed to common shareholders' net income from Continuing Operations, inclusive of $5 million of net losses on securities, of $51.2 million, down 3% compared to the same quarter last year. Diluted earnings per common share of $0.64 and adjusted cash earnings per common share of $0.65 were down 2% and 3%, respectively.

Common shareholders' net income from Continuing Operations, diluted earnings per common share and adjusted cash earnings per common share were all relatively consistent with the prior quarter.

Year-to-date common shareholders' net income from Continuing Operations of $155.1 million increased 4%, while diluted and adjusted cash earnings per common share of $1.93 and $1.96 were up 5% and 4%, respectively.

Excluding net realized gains/losses on securities in all periods, third quarter adjusted cash earnings per common share from Continuing Operations increased 10% compared to the same quarter last year, 6% from the prior quarter, and 13% on a year-to-date basis.

"Excellent third quarter financial performance from banking, trust and wealth management operations demonstrates the stability and significant earnings power of CWB's core businesses," said Chris Fowler, President and CEO. "We continue to deliver on our strategic direction, with strong, high quality loan growth and very strong performance against our targets for preferred types of branch-raised deposits, and we are maintaining investment in the growth of our complementary lines of business. Stable credit quality reflects our proven, secured lending business model, conservative underwriting and proactive loan management by our lending teams, along with the substantial management experience and financial stability of our client base."

"We remain optimistic about CWB's long-term growth opportunities throughout our footprint as we continue to work proactively with our clients to address challenges related to the economic impact of low oil prices," continued Mr. Fowler. "With almost one quarter of CWB's annual loan growth sourced outside of the four western provinces, we are realizing on our strategy to achieve selective geographic diversification. Looking ahead, we continue to actively pursue opportunities to enhance CWB's earnings power through redeployment of the significant capital realized through the divestitures closed this quarter. We are comfortable maintaining capital above our historical operating levels until we identify the appropriate growth opportunities for CWB shareholders."

Outlook for Combined Operations

The performance target ranges established for the 2015 fiscal year for Combined Operations together with CWB's year-to-date performance are presented in the table below:

2015
Year-to-date Performance from Combined Operations
2015
Target Ranges for Performance from Combined Operations
Adjusted cash earnings per common share growth(1) (2) 65% 5 - 8%
Loan growth(3) 11% 10 - 12%
Provision for credit losses as a percentage of average loans(4) 0.16% 0.17 - 0.22%
Efficiency ratio (teb)(5) 39.3% 47% or less
Return on common shareholders' equity(6) 21.6% 14.0 - 15.0%
Return on assets(7) 1.67% 1.07 - 1.12%
(1) Year-to-date performance for adjusted cash earnings per common share is the current year results over the same period in the prior year.
(2) Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the 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 to be 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), including the gains related to the sales of the property and casualty insurance subsidiary and CWB's stock transfer business and excluding the non-tax deductible change in fair value of contingent consideration.
(6) Return on common shareholders' equity is calculated as annualized common shareholders' net income divided by average common shareholders' equity.
(7) Return on assets is calculated as annualized common shareholders' net income divided by average total assets.

Gains on sale from the transactions involving Canadian Direct Insurance (CDI) and Valiant Trust Company (Valiant) contributed $1.33 of earnings per diluted common share in the third quarter. Including these gains, growth in adjusted cash earnings per common share and performance compared to the target ranges for key profitability ratios surpassed expectations established at the start of the year. Recognizing the positive impacts of divestiture gains and the absence of earnings contributions from CDI and Valiant in the second half of 2015, we have determined that performance target ranges established for the fiscal year are not meaningful for Continuing Operations with the exception of targets related to loan growth and the provision for credit losses.

Outlook for Continuing Operations

Third quarter loan growth was driven by solid overall activity in spite of continued economic uncertainty, reinforcing our expectation for another year of double-digit growth in fiscal 2015. CWB's strategic direction emphasizes competitive advantages within our core business banking platform, complemented by strategically aligned offerings in personal banking, equipment finance and leasing, alternative mortgages, wealth management, and trust services. Strong, ongoing growth in loans and preferred types of branch-raised deposits, along with the steady expansion of each complementary business line demonstrates our continued progress towards being seen as crucial to our clients' futures. While we recognize the significant challenges apparent within our operating environment, we plan to continue to pursue opportunities to service high quality borrowers operating within our targeted industry segments as we establish growth targets for fiscal 2016.

Overall credit quality is consistent with expectations, supporting our view that the annual provision for credit losses will fall within our target range of 17 and 22 basis points of average loans. As we work with our clients through a challenging operating environment, we continue to carefully monitor the loan portfolio for signs of weakness resulting from the first and second order impacts of lower oil prices. We remain confident that our combination of disciplined underwriting, secured lending practices and proactive account management will continue to mitigate the impacts on our portfolio from slower economic growth and the potential for increased loan impairments.

The relative stability of net interest margin this year has primarily resulted from a combination of several positive factors, including very strong growth in preferred types of branch-raised deposits, stronger relative growth in higher yielding loan portfolios with an acceptable risk profile, such as equipment financing and leasing, and Optimum Mortgage, and prudent management of average balances of cash and securities. However, continued pressure on net interest margin is expected given the current very low interest rate environment, further influenced by two Bank of Canada interest rate cuts this year, competitive factors and the persistently flat yield curve. While pressure on net interest margin is expected to constrain revenue growth compared to expectations at the start of the year, we will remain disciplined in managing the growth of non-interest expenses while maintaining investment in the infrastructure and technology necessary to support future business growth. Based on the current composition of the securities portfolio, net gains/losses on securities in the fourth quarter are not expected to have a material impact on non-interest income although equity and bond market conditions are inherently unpredictable in the short-term. Excluding net gains/losses on securities, the third quarter efficiency ratio for Continuing Operations was 46.9%.

Based on experience through prior business cycles and the results of stress tests simulating severe economic conditions in Alberta and Saskatchewan in combination with challenging economic conditions throughout the rest of CWB's geographic footprint over a multi-year timeframe, we are confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a strong capital position under the Standardized approach for calculating risk weighted assets.

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 material operating affiliates and divisions, National Leasing, Optimum Mortgage, Canadian Direct Financial, Canadian Western Trust, 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. CWB's common shares and Series 5 preferred shares are listed on the Toronto Stock Exchange under the trading symbols "CWB" and "CWB.PR.B", respectively. Refer to www.cwb.com for additional information.

Fiscal 2015 Third Quarter Results Conference Call

CWB's third quarter results conference call is scheduled for Thursday, September 3, 2015, at 1:30 p.m. ET (11:30 a.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 647-788-4922 or toll-free 1-877-223-4471. The call will also be webcast live on CWB's website: www.cwb.com/investor-relations/presentations-and-events.

A replay of the conference call will be available until September 17, 2015, by dialing 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 9439754.

Selected Financial Highlights
For the three months ended For the nine months ended
(unaudited)
($ thousands, except per share amounts)
July 31 2015 April 30 2015 July 31 2014 Change from July 31 2014 July 31 2015 July 31 2014 Change from July 31 2014
Results from Combined Operations(1)
Net interest income (teb - see below) $ 140,503 $ 134,886 $ 131,751 7 % $ 411,831 $ 380,717 8 %
Less teb adjustment 1,280 1,650 1,888 (32 ) 4,616 5,967 (23 )
Net interest income 139,223 133,236 129,863 7 407,215 374,750 9
Non-interest income 13,269 25,024 28,027 (53 ) 61,715 86,352 (29 )
Net gain on sale of businesses 107,639 - - 100 107,639 - 100
Total revenues (teb) 261,411 159,910 159,778 64 581,185 467,069 24
Total revenues 260,131 158,260 157,890 65 576,569 461,102 25
Common shareholders' net income 158,809 53,545 56,580 181 266,563 160,399 66
Earnings per common share
Basic(2) 1.97 0.67 0.71 177 3.31 2.01 65
Diluted(3) 1.97 0.67 0.70 181 3.31 1.98 67
Adjusted cash(4) 1.98 0.68 0.71 179 3.34 2.03 65
Return on common shareholders' equity(5) 36.3 % 13.6 % 14.9 % 2,140 bp(6) 21.6 % 14.7 % 690 bp(6)
Return on assets(7) 2.90 1.02 1.11 179 1.67 1.10 57
Efficiency ratio (teb)(8) 28.5 48.3 45.9 (1,740 ) 39.3 45.7 (640 )
Efficiency ratio 28.6 48.8 46.4 (1,780 ) 39.6 46.2 (660 )
Net interest margin (teb)(9) 2.57 2.58 2.58 (1 ) 2.58 2.60 (2 )
Net interest margin 2.55 2.55 2.54 1 2.56 2.56 -
Provision for credit losses as a Percentage of average loans 0.17 0.17 0.16 1 0.16 0.17 (1 )
Results from Continuing Operations(1)
Net interest income (teb - see below) $ 140,503 $ 133,064 $ 130,022 8 % $ 407,956 $ 375,745 9 %
Less teb adjustment 1,280 1,455 1,652 (23 ) 4,203 5,238 (20 )
Net interest income per financial statements 139,223 131,609 128,370 8 403,753 370,507 9
Non-interest income 13,269 18,097 19,704 (33 ) 49,361 60,551 (18 )
Total revenues (teb) 153,772 151,161 149,726 3 457,317 436,296 5
Total revenues 152,492 149,706 148,074 3 453,114 431,058 5
Common shareholders' net income 51,170 51,520 52,690 (3 ) 155,095 148,429 4
Earnings per common share
Basic(2) 0.64 0.64 0.66 (3 ) 1.93 1.86 4
Diluted(3) 0.64 0.64 0.65 (2 ) 1.93 1.84 5
Adjusted cash(4) 0.65 0.65 0.67 (3 ) 1.96 1.88 4
Return on common shareholders' equity(5) 11.7 % 13.1 % 13.9 % (220 ) bp(6) 12.6 % 13.6 % (100 ) bp(6)
Return on assets(7) 0.94 1.00 1.05 (11 ) 0.98 1.03 (5 )
Efficiency ratio (teb)(8) 48.4 47.1 45.7 270 47.5 45.5 200
Efficiency ratio 48.8 47.6 46.3 250 48.0 46.0 200
Net interest margin (teb)(9) 2.57 2.57 2.58 (1 ) 2.58 2.60 (2 )
Net interest margin 2.55 2.54 2.54 1 2.55 2.57 (2 )
Results of Discontinued Operations(1)
Common shareholders' net income $ 107,639 $ 2,025 $ 3,890 nm % $ 111,468 $ 11,970 nm %
Earnings per common share
Basic(2) 1.33 0.03 0.05 nm 1.38 0.15 nm
Diluted(3) 1.33 0.03 0.05 nm 1.38 0.14 nm
Adjusted cash(4) 1.33 0.03 0.04 nm 1.38 0.15 nm
Per Common Share
Cash dividends $ 0.22 $ 0.22 $ 0.20 10 % $ 0.64 $ 0.58 10 %
Book value 22.01 20.19 19.03 16 22.01 19.03 16
Closing market value 24.60 31.37 41.62 (41 ) 24.60 41.62 (41 )
Common shares outstanding (thousands) 80,479 80,451 80,270 - 80,479 80,270 -
Balance Sheet and Off-Balance Sheet Summary (Combined Operations)
Assets $ 22,253,847 $ 21,522,061 $ 20,522,735 8 %
Loans 19,040,363 18,564,168 17,141,881 11
Deposits 18,850,068 17,977,674 17,457,554 8
Debt 1,190,449 1,175,201 939,204 27
Shareholders' equity 1,896,211 1,749,008 1,652,708 15
Assets under administration 9,448,993 9,490,378 10,278,307 (8 )
Assets under management 1,911,656 1,910,863 1,788,500 7
Capital Adequacy(10)
Common equity Tier 1 ratio 8.5 % 7.9 % 8.0 % 50 bp
Tier 1 ratio 9.8 9.1 9.3 50
Total ratio 12.8 12.1 12.9 (10 )
(1) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB's stock transfer business as described in Note 3 of the interim consolidated financial statements. The contributions of both the insurance and stock transfer businesses, including gains on sale, are defined as "Discontinued Operations", the remaining operations are defined as "Continuing Operations", and the total Continuing Operations and Discontinued Operations are defined as "Combined Operations". Return on shareholders' equity reflects equity from Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated.
(2) Basic earnings per common share (EPS) is calculated as common shareholders' net income divided by the average number of common shares outstanding.
(3) Diluted EPS is calculated as common shareholders' net income 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 common shareholders' net income divided by average common shareholders' equity.
(6) bp - basis point change.
(7) Return on assets is calculated as annualized common shareholders' net income divided by average total assets.
(8) Efficiency ratio is calculated as non-interest expenses divided by total revenues, including the net gain related to the sales of the property and casualty insurance subsidiary and CWB's stock transfer business and excluding the non-tax deductible change in fair value of contingent consideration.
(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 September 2, 2015, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended July 31, 2015, and the audited consolidated financial statements and MD&A for the year ended October 31, 2014, available on SEDAR at www.sedar.com and CWB's website at www.cwb.com.

Continuing and Discontinued Operations

On May 1, 2015, CWB completed the previously disclosed divestitures of its property and casualty insurance subsidiary, Canadian Direct Insurance (CDI), and the stock transfer business of its subsidiary, Valiant Trust Company (Valiant), ("Discontinued Operations") as described in Note 3 of the interim consolidated financial statements. The remaining operations are defined as "Continuing Operations" and the total Discontinued Operations and Continuing Operations are defined as "Combined Operations". In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, revenue, expenses and gains on sale associated with the businesses sold have been classified as Discontinued Operations in CWB's interim consolidated statements of income for all periods presented. Associated assets and liabilities were classified as held for sale in CWB's interim consolidated balance sheets prospectively from January 31, 2015 until their sale on May 1, 2015, and comparative information has not been adjusted. Return on common shareholders' equity reflects equity from Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated. The proceeds of sale may be subject to further post-closing adjustments and costs.

Forward-looking Statements

From time to time, CWB makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about CWB's objectives and strategies, targeted and expected financial results and the outlook for CWB's businesses or for the Canadian 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, 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 2015 and how it will affect CWB's businesses are material factors considered when setting organizational objectives and targets. Performance target ranges for fiscal 2015, established in December 2014, considered expectations for performance from Combined Operations, without any divestitures, and the following management assumptions:

  • Moderate economic growth in Canada and relatively stronger performance in the four western provinces;
  • A relatively stable net interest margin (teb) compared to the level achieved in the fourth quarter of 2014, primarily attributed to treasury management strategies and shifts in asset mix that help to offset impacts from the very low interest rate environment, a flat interest rate curve and competitive factors; and,
  • Sound credit quality with actual losses remaining within CWB's historical range of acceptable levels.

A number of potential risks that could have a material adverse impact on economic expectations and forecasts were also identified, including a sustained period of materially lower energy and other commodity prices compared to average levels observed in fiscal 2014, 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 major global economies. Greater than expected pricing competition and/or disruptions in domestic or global financial markets that meaningfully impact loan yields and/or funding costs were also identified as risks which may contribute to adverse financial results compared to expectations.

Energy prices in the third quarter remained well below average levels observed last year. As a result, expectations for stronger relative economic performance in Alberta and Saskatchewan have been adjusted downward. Moderate economic growth in Canada is still anticipated overall, although performance through the first half of the calendar year was weaker than expected. The outlook for economic growth in British Columbia, Manitoba and Ontario reflects the potential for stimulation from lower energy costs and a lower Canadian dollar, but this potential impact has been slow to materialize. The persistent very low interest rate environment, reinforced by the Bank of Canada's January and July 2015 interest rate cuts and competitive factors, has a negative impact on loan yields and is expected to continue to constrain improvement in net interest margin compared to expectations at the start of the year.

Overview of Combined Operations

CWB reported strong quarterly and year-to-date performance from core banking, trust and wealth management operations, along with divestiture gains of $1.33 per diluted common share.

Q3 2015 vs. Q3 2014

Common shareholders' net income of $158.8 million was up 181%, reflecting divestiture gains of $107.6 million and the benefits of strong 11% loan growth and stable net interest margin, partially offset by lower non-interest income and growth in non-interest expenses. Non-interest income declined $6.4 million as increases in most categories were more than offset by an $8.9 million decrease in net gains/losses on securities. Net losses on securities this quarter reflect ongoing active risk management in view of macroeconomic conditions and management's conservative approach to securities markets, as well as changes in the pricing and liquidity of the Canadian preferred share market. Diluted earnings per common share of $1.97 increased 181% and 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 179% to $1.98.

Q3 2015 vs. Q2 2015

Common shareholders' net income increased 197% as divestiture gains, three more interest earning days and the positive impacts of loan growth and relatively stable net interest margin were partially offset by lower non-interest income and higher non-interest expenses.

YTD 2015 vs. YTD 2014

Common shareholders' net income of $266.6 million increased 66%, primarily reflecting the factors discussed under Q3 2015 vs. Q3 2014. Diluted earnings per common share of $3.31 was up 67% and adjusted cash earnings per common share increased 65% to $3.34.

ROE and ROA

Comparability of Combined Operations profitability ratios to prior periods is limited due to the impact of divestiture gains this quarter. Third quarter return on common shareholders' equity (ROE) was 36.3%, compared to 14.9% last year and 13.6% last quarter. Year-to-date ROE of 21.6% compares to 14.7% last year. Return on assets (ROA) of 2.90% compares to 1.11% a year earlier and 1.02% last quarter. Year-to-date ROA of 1.67% was 57 basis points higher than last year.

Strategic Transactions

On May 1, 2015, CWB completed the previously disclosed divestitures of its property and casualty insurance subsidiary, CDI, and the stock transfer business of Valiant Trust. These transactions resulted from a strategic assessment initiated early last year, and the combined gains on sale contributed $1.33 of earnings per diluted common share. Total sales proceeds represent approximately 15 times the combined normalized annual earnings contributions of divested operations.

As a result of these transactions, CWB has defined the contributions of both CDI and Valiant's stock transfer business, including gains on sale, as "Discontinued Operations". Common shareholders' net income from Discontinued Operations for the current and prior periods is provided in the interim consolidated statements of income.

Details of divestiture gains and financial results of Discontinued Operations are provided in Note 3 to the interim consolidated financial statements. The remainder of this Management's Discussion and Analysis, unless otherwise stated, refers to financial results of, and the outlook for, Continuing Operations.

CWB intends to deploy the capital generated from these transactions in due course for strategic and accretive opportunities aligned with its strategic direction and management is actively pursuing opportunities for investment and/or acquisitions. CWB's primary areas of interest in this respect are equipment finance and leasing, and wealth management.

Overview of Continuing Operations

Q3 2015 vs. Q3 2014

Common shareholders' net income of $51.2 million was down 3% as the benefits of strong 11% loan growth and relatively stable net interest margin were more than offset by a decrease in non-interest income and higher non-interest expenses. Total non-interest income declined $6.4 million, attributed to net losses on securities of $5.0 million compared to gains of $3.9 million last year. Reported diluted earnings per common share of $0.64 and adjusted cash earnings per common share of $0.65 were down 2% and 3%, respectively.

Q3 2015 vs. Q2 2015

Common shareholders' net income was relatively unchanged as the impact of loan growth and three additional interest earning days was offset by lower non-interest income and increased non-interest expenses.

YTD 2015 vs. YTD 2014

Common shareholders' net income of $155.1 million was up 4% as the positive impacts of strong loan growth, lower preferred share dividends and increases in most categories of non-interest income more than offset net losses on securities and higher non-interest expenses. Lower preferred share dividends paid reflect the second quarter 2014 issuance of $125 million of 4.40% Series 5 preferred shares and subsequent redemption of $209 million of 7.25% Series 3 preferred shares. Year-to-date diluted and adjusted cash earnings per common share of $1.93 and $1.96 were up 5% and 4%, respectively.

ROE and ROA

Third quarter return on common shareholders' equity (ROE) was 11.7%, compared to 13.9% last year and 13.1% in the previous quarter. Reported return on assets (ROA) of 0.94% was down from 1.05% a year earlier and 1.00% last quarter. Year-to-date reported ROE and ROA of 12.6% and 0.98%, respectively, compare to ROE of 13.6% and ROA of 1.03% last year.

Capital generated from the gains on sale related to the transactions involving CDI and Valiant Trust increased common shareholders' equity during the third quarter. Dependent upon the timing of subsequent capital deployment initiatives, the 2015 ROE from Continuing Operations is expected to be constrained compared to expectations at the start of the year. However, this enhanced capital level will position CWB to move quickly on strategic and accretive capital deployment opportunities as they materialize.

Impact of net gains/losses on securities

Excluding net gains/losses on securities in all periods, third quarter adjusted cash earnings per share was up 10% compared to the same quarter last year, 6% compared to the prior quarter and 13% on a year-to-date basis. Return on common shareholders' equity (ROE) was 12.6%, compared to 13.1% both last year and in the previous quarter. Return on assets (ROA) of 1.01% was up from 0.99% a year earlier and unchanged from last quarter. Year-to-date ROE and ROA of 12.9% and 1.00%, respectively, compare to ROE of 12.8% and ROA of 0.97% last year.

Total Revenues (teb) from Continuing Operations

Reported third quarter total revenues of $153.8 million, comprised of both net interest income (teb) and non-interest income, grew 3% compared to the same quarter in 2014 and 2% from the previous quarter. Year-to-date total revenues (teb) of $457.3 million were up 5%. Excluding net gains/losses on securities in all periods, third quarter total revenues grew 9% compared to the same quarter in 2014, 5% from the previous quarter, and 9% on a year-to-date basis.

Net Interest Income (teb)

Q3 2015 vs. Q3 2014

Net interest income of $139.2 million was up 8% ($10.8 million) primarily reflecting the benefit of strong 11% loan growth. Net interest margin of 2.57% was relatively stable as the impact of lower loan yields, reflecting both competitive factors and the Bank of Canada's interest rate cuts in January and July 2015, was offset by the combined impact of lower average balances of cash and securities, more favourable deposit costs and beneficial changes in deposit mix partly resulting from growth in preferred types of branch-raised deposits.

Q3 2015 vs. Q2 2015

Net interest income was up 6% ($7.6 million) reflecting the benefit of 3% loan growth, three additional interest earning days, and relatively stable net interest margin (teb).

YTD 2015 vs. YTD 2014

Net interest income was up 9% ($33.2 million), as the benefit of strong loan growth was partially offset by a two basis point decline in net interest margin to 2.58%. Lower net interest margin reflects factors similar to those described in the comparison of third quarter results to the same period last year, with a slightly lower impact from beneficial changes in deposit mix.

Interest rate sensitivity

Note 13 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at July 31, 2015. 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 certain floating rate loans, and applied at the appropriate repricing dates; and,
  • no early redemptions.
($ thousands) July 31
2015
April 30
2015
July 31
2014
Estimated impact on net interest income of a 1% increase in interest rates
1 year $ 1,024 $ 1,976 $ 7,584
1 year percentage change 0.2 % 0.4 % 1.6 %
Estimated impact on net interest income of a 1% decrease in interest rates
1 year $ 2,049 $ 1,660 $ (24,579 )
1 year percentage change 0.4 % 0.3 % (5.3 )%

The positive change in net interest income resulting from a decrease in interest rates reflects the impact of structural interest rate floors on certain floating rate loans, and the absence of such floors on the majority of floating rate deposits.

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 July 31, 2015 would increase unrealized losses related to available-for-sale securities and the fair value of interest rate swaps designated as hedges, and result in a reduction in other comprehensive income of approximately $73.0 million, net of tax (July 31, 2014 - $30.8 million). It is estimated that a one-percentage point decrease in all interest rates at July 31, 2015 would have the opposite effect, increasing other comprehensive income by approximately $67.5 million, net of tax (July 31, 2014 - $31.6 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. Differences in the respective sensitivity of net interest income and other comprehensive income to changes in interest rates compared to the same quarter last year primarily reflects the increased use of interest rate swaps to maintain management's targeted asset liability structure and interest rate sensitivity.

Outlook for net interest margin (teb)

Third quarter net interest margin was relatively stable, down a single basis point from the same period last year and unchanged from the previous quarter. Year-to-date net interest margin was down two basis points. Continued pressure on net interest margin is expected in view of the current low interest rate environment, competitive factors and the persistently flat yield curve. The Bank of Canada's January and July 2015 interest rate cuts and the corresponding 15 basis point decreases in CWB's prime lending interest rate have had a negative impact on loan yields. However, corresponding reductions in the cost of various deposits has largely offset the impact of these changes on net interest margin.

CWB will maintain its strategic focus on mitigating the earnings impact of ongoing margin pressure through efforts to achieve stronger relative growth in higher yielding loan portfolios with an acceptable risk profile, managing the funding mix to optimize the overall cost of funds and liquidity adequacy requirements, and prudently managing balances of cash and securities. Very strong 17% year-to-date growth in branch-raised notice and demand deposits has contributed to the stabilization of net interest margin this year, and CWB will maintain an ongoing strategic focus in this area.

Provision for Credit Losses

The quarterly provision for credit losses measured against average loans was 17 basis points, compared to16 in the same period last year and unchanged from the prior quarter.

Based on the current economic environment and corresponding expectations for credit quality, management expects the annual provision for credit losses to fall within the target range of 17 to 22 basis points of average loans. Although the provision for credit losses is likely to increase from current very low levels, management expects credit losses to remain comparable to CWB's experience through prior economic cycles. The current level of provisioning compares to peak write-offs during the prior economic cycle of 22 basis points in fiscal 2010.

Non-interest Income from Continuing Operations

Q3 2015 vs. Q3 2014

Non-interest income of $13.3 million was down 33% ($6.4 million) as combined growth of 16% ($2.5 million) in banking-related fee income, wealth management, trust services and 'other' non-interest income was more than offset by an $8.9 million decrease in net gains/losses on securities. Net losses on securities of $5.0 million reflect ongoing active risk management in view of macroeconomic conditions and management's conservative approach to securities markets, as well as changes in the pricing and liquidity of the Canadian preferred share market. 'Other' non-interest income was up $0.7 million, partially reflecting gains on the sale of residential mortgage portfolios.

Q3 2015 vs. Q2 2015

Non-interest income was down 27% ($4.8 million), primarily attributed to lower net gains/losses on securities.

YTD 2015 vs. YTD 2014

Non-interest income of $49.4 million was 18% ($11.2 million) lower as increases in most categories, including strong growth in both credit related and retail services fees of 13% and 20%, respectively, were more than offset by a $16.5 million decrease in net gains/losses on securities, reflecting the factors described above.

Outlook for non-interest income from Continuing Operations

The outlook for growth in banking-related fee income is relatively consistent with anticipated loan and deposit growth. Trust and wealth management services are also expected to continue to provide stable growth and consistent contributions. Based on the current composition of the securities portfolio, net gains/losses on securities are not expected to have a material impact on non-interest income in the fourth quarter, although equity and bond market conditions are inherently unpredictable in the short-term. Management will continue to realize gains on the sale of residential mortgage portfolios as opportunities become available. Such gains are anticipated to be a recurring, although sporadic, source of non-interest income.

Non-interest Expenses from Continuing Operations

Q3 2015 vs. Q3 2014

Quarterly non-interest expenses of $74.5 million were up 8% ($5.8 million) due to 9% ($4.1 million) higher salaries and benefits, a 9% ($1.1 million) increase in general expenses, and 5% ($0.6 million) higher premises and equipment costs.

The change in salaries and benefits mainly resulted from a larger staff complement to support ongoing growth across all businesses, annual salary increments and the implementation this year of a short-term incentive plan for non-executive employees.

Q3 2015 vs. Q2 2015

Non-interest expenses were up 4% ($3.1 million), primarily reflecting 3% ($1.2 million) higher salaries and benefits and combined smaller increases in general expenses.

YTD 2015 vs. YTD 2014

Non-interest expenses increased 9% ($18.9 million), mainly due to the factors discussed above in the comparison of third quarter results to the same period last year.

Outlook for non-interest expenses from Continuing Operations

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 is expected to provide material benefits in future periods. 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.

Work continues towards implementation of a new core banking system. The core system build and functional testing is complete and implementation is planned for the first half of fiscal 2016. Year-to-date progress is consistent with estimated costs of up to $71 million. The cost estimate and program timeline reflect the need for adequate system testing and training initiatives to ensure an optimal experience for both clients and staff upon implementation.

Upgrades and expansion of branch infrastructure are also ongoing, including work toward completion of relocated and expanded premises in Medicine Hat, Alberta.

Efficiency ratio

The reported third quarter efficiency ratio, which measures non-interest expenses as a percentage of total revenues (teb), was 48.4%, up from 45.7% last year and 47.1% in the previous quarter. Compared to the third quarter last year, the positive impact on total revenues of strong loan growth was more than offset by lower non-interest income and higher expenses. The year-to-date efficiency ratio was 47.5%, up from 45.5% last year, primarily reflecting the same factors described above.

Excluding realized gains/losses on securities in all periods, the third quarter efficiency ratio (teb) was 46.9%, unchanged from the same period last year and improved from 47.1% in the previous quarter. The year-to-date efficiency ratio was also 47.1%, up slightly from 46.8% last year.

Outlook for the efficiency ratio

The combination of ongoing pressure on net interest margin and lower than anticipated net gains on securities has constrained revenue growth compared to expectations at the start of the year. Management will continue to prudently manage the growth of non-interest expenses while maintaining long-term investments in the infrastructure and technology necessary to support future business growth. Excluding the impact of net gains/losses on securities, the efficiency ratio is expected to remain within a narrow range around 47.0% for the full year.

Income Taxes

The third quarter effective income tax rate (teb) for Continuing Operations was 25.8%, compared to 26.6% last year. The year-to-date effective income tax rate (teb) for Continuing Operations was 26.2% compared to 26.3% last year.

Outlook for income taxes

The 20% increase in Alberta's provincial corporate income tax rate, from 10% to 12%, effective July 1, has not had a material impact on common shareholders' net income in fiscal 2015, as the increase was offset by a recovery on the related deferred tax asset revaluation. The impact on common shareholders' net income in fiscal 2016 is expected to be approximately $0.06 per share based on application of the new tax rate to expected fiscal 2015 net income.

Overview of Discontinued Operations

Detailed financial results for Discontinued Operations are provided within Note 3 to the interim consolidated financial statements. The components of net income from Discontinued Operations included in the interim consolidated statements of income, which are attributable entirely to CWB common shareholders, follow:

For the three months ended For the nine months ended
July 31 2015 April 30 2015 July 31 2014 Change from July 31 2014 July 31 2015 July 31 2014 Change from July 31 2014
Net interest income (teb) $ - $ 1,822 $ 1,729 (100 )% $ 3,875 $ 4,972 (22 )%
Non-interest income - 6,927 8,323 (100 ) 12,354 25,801 (52 )
Total revenue (teb) - 8,749 10,052 (100 ) 16,229 30,773 (47 )
Non-interest expenses - 6,036 4,827 (100 ) 11,104 14,719 (25 )
Net income before income taxes - 2,713 5,225 (100 ) 5,125 16,054 (68 )
Income taxes (teb) - 688 1,335 (100 ) 1,296 4,084 (68 )
Net income before gain on sale - 2,025 3,890 (100 ) 3,829 11,970 (68 )
Gain on sale, net of tax 107,639 - - 100 107,639 - 100
Common shareholders' net income $ 107,639 $ 2,025 $ 3,890 nm $ 111,468 $ 11,970 nm
Earnings per common share
Basic $ 1.33 $ 0.03 $ 0.05 nm % $ 1.38 $ 0.15 nm %
Diluted 1.33 0.03 0.05 nm 1.38 0.14 nm
Adjusted cash 1.33 0.03 0.04 nm 1.38 0.15 nm

Third quarter common shareholders' net income from Discontinued Operations of $107.6 million, or $1.33 per common share, comprised the divestiture gains. The difference compared to $1.38 per common share estimated prior to closing relates to the reclassification of unrealized losses on available-for-sale securities included in the sale transaction from other comprehensive income to net income from Discontinued Operations. The proceeds of sale may be subject to further post closing adjustments and costs.

Comprehensive Income

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

Q3 2015 vs. Q3 2014

Comprehensive income of $164.8 million was up from $57.7 million in the same period last year. The significant change primarily resulted from the divestiture gains which increased common shareholders' net income from Discontinued Operations.

YTD 2015 vs. YTD 2014

Comprehensive income of $253.0 million was up from $180.1 million in the same period last year, with the increase mainly reflecting the divestiture gains described above, partially offset by lower OCI. Changes in OCI resulted from the combination of $39.8 million in unrealized losses, net of tax, on available-for-sale securities, compared to unrealized gains of $18.6 million last year, partially offset by an increase in fair value of derivatives designated as cash flow hedges. The decrease in fair value of available-for-sale securities mainly relates to a lower market value of securities within CWB's portfolio of investment grade preferred shares, combined with the realization of gains and losses on these and other available-for-sale securities. While the combined dollar investment in CWB's portfolios of preferred and common equities is relatively small in relation to total liquid assets, it increases the potential for comparatively larger fluctuations in OCI.

Balance Sheet

Total assets increased 8% in the past year and 3% in the quarter to reach $22,254 million at July 31, 2015.

Cash and Securities

Cash, securities and securities purchased or sold under resale or repurchase agreements totaled $2,856 million at July 31, 2015, compared to $2,992 million a year earlier and $2,393 million at the end of last quarter.

The cash and securities portfolio is primarily comprised of high quality debt instruments, investment grade preferred shares and common equities that are not held for trading purposes and, where applicable, are typically held until maturity.

Net unrealized losses on cash and securities from Continuing Operations recorded on the balance sheet of $49.1 million compare to net unrealized gains of $4.8 million as at July 31, 2014, and net unrealized losses of $39.8 million last quarter. Fluctuations in value are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve.

Volatility in equity markets also leads to fluctuations in value, particularly for common shares. The difference compared to prior periods reflects decreases in the market value of preferred shares, certain debt securities and common shares.

Net losses on securities from Continuing Operations in the third quarter were $5.0 million, compared to net gains of $3.9 million in the same period last year and nil in the previous quarter. Net losses on securities this quarter reflect ongoing active risk management in view of macroeconomic conditions and management's conservative approach to securities markets, as well as structural changes in the pricing and liquidity of the Canadian preferred share market following the amendment of certain regulatory standards.

Based on the current composition of the securities portfolio, net gains/losses on securities are not expected to have a material impact on non-interest income in the fourth quarter although equity and bond market conditions are inherently unpredictable in the short-term.

Treasury Management

Average balances of cash and securities were lower than the same quarter last year and relatively consistent with the prior quarter. Management expects the ratio of average liquid assets as a percentage of total assets to remain stable compared with the current level through the remainder of the year.

CWB remained compliant with the Office of the Superintendent of Financial Institutions' (OSFI) Liquidity Adequacy Requirements Guideline.

Loans

Total loans, excluding the allowance for credit losses, grew 11% ($1,918 million) in the past twelve months, 3% ($482 million) in the quarter and 9% ($1,548 million) year-to-date to reach $19,154 million. In dollar terms, year-over-year growth by lending sector was led by equipment financing and leasing ($414 million). Growth in real estate project loans was also strong ($405 million) as CWB continued to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels. Growth in personal loans and mortgages was $396 million, while general commercial loans grew $234 million. Commercial mortgages were up $227 million, corporate lending grew $195 million and the portfolio of oil and gas production loans was up $47 million. Growth in oil and gas production loans primarily reflects increased usage of existing credit facilities across a number of accounts, primarily within the syndicated loans segment of the oil and gas portfolio.

On a sequential basis, growth was led by personal loans and mortgages ($159 million), followed closely by equipment financing and leasing ($157 million) as both the broker-sourced residential mortgage business, Optimum Mortgage (Optimum), and the small-ticket leasing company, National Leasing, achieved record quarterly fundings. General commercial loans grew $140 million, real estate project loans were up $31 million and commercial mortgages increased $27 million. Both oil and gas production loans and the corporate lending portfolio contracted slightly, by $24 million and $9 million, respectively.

(unaudited)
(millions)
July 31 2015 April 30 2015 July 31 2014 % Change from July 31 2014
Commercial mortgages $ 3,775 $ 3,748 $ 3,548 6 %
General commercial loans 3,772 3,632 3,538 7
Equipment financing and leasing 3,695 3,538 3,281 13
Real estate project loans 3,173 3,142 2,768 15
Personal loans and mortgages 3,164 3,005 2,768 14
Corporate lending(1) 1,264 1,273 1,069 18
Oil and gas production loans 310 334 263 18
Total loans outstanding(2) $ 19,153 $ 18,672 $ 17,235 11 %
(1) Corporate lending represents a diversified portfolio that is centrally sourced and administered through a designated lending group located in Edmonton. These loans include participation in select syndications that are structured and led primarily by the major Canadian banks, but exclude participation in various other syndicated facilities sourced through relationships developed at CWB branches.
(2) Total loans outstanding by lending sector exclude the allowance for credit losses.

Lending activity in Alberta showed the highest growth in dollar terms on a year-over-year basis, followed by British Columbia and Ontario. Growth over the past twelve months in the related categories of real estate project loans and commercial mortgages was particularly strong in Alberta. Of the residential high-rise projects underway in Edmonton and Calgary, Alberta, nearly 90% of aggregate units are pre-sold. Projects continue to proceed as planned, and to date there has been no evidence of related presale rescissions or account deterioration. CWB continues to identify attractive lending opportunities with high quality borrowers in both major Alberta markets.

(unaudited)
(millions)
July 31 2015 April 30 2015 July 31 2014 % Change from July 31 2014
British Columbia $ 6,360 $ 6,234 $ 5,989 6 %
Alberta 7,978 7,861 7,079 13
Saskatchewan 1,290 1,243 1,137 13
Manitoba 519 480 473 10
Ontario 2,283 2,186 2,035 12
Other 723 668 522 39
Total loans outstanding(1) $ 19,153 $ 18,672 $ 17,235 11 %
(1) Total loans outstanding by province exclude the allowance for credit losses.

Optimum Mortgage

Net of portfolio sales, total loans of $1,770 million within Optimum increased 25% ($353 million) year-over-year, 9% ($148 million) compared to the prior quarter, and 20% ($298 million) in the past nine months. Growth for the quarter was driven almost exclusively by alternative mortgages secured via first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 70%. The book value of alternative mortgages represented 88% of Optimum's total portfolio at quarter end, compared to 85% last year and 87% in the prior quarter. Ontario continues to account for more than half of all new originations. At approximately 40% of the total, Ontario also represents the largest geographic exposure by province within Optimum's portfolio, followed by Alberta at 30% and British Columbia at 17%. Optimum's average individual mortgage outstanding is $260,000.

Outlook for Optimum Mortgage

Canada Mortgage and Housing Corporation (CMHC) recently stated that Canada's housing market is modestly overvalued at the national level, with Toronto, Winnipeg and Regina being the markets most at risk of a correction. Management believes Optimum's underwriting internal control adequately addresses the key risk factors associated with this type of lending. Through ongoing selective underwriting in all of its markets, including manual adjudication of each loan application, Optimum is expected to continue to deliver very strong performance with an attractive risk profile.

Securitization

Securitized leases are reported on-balance sheet with total loans. The gross amount of securitized leases at July 31, 2015 was $638 million, compared to $360 million one year ago and $621 million last quarter. Leases securitized in the third quarter and year-to-date totaled $86 million (2014 - $108 million) and $350 million (2014 - $210 million), respectively.

Outlook for loans

Consensus forecasts for economic performance in Western Canada have been further revised in recent months, primarily as a result of the ongoing impact of continued low oil prices. Alberta and Saskatchewan are expected to underperform the rest of Canada, reflecting expectations for reduced capital investment and slower in-migration owing to a more conservative outlook for resource-related activity. However, with the exception of slowing growth within the equipment finance and leasing portfolio in Alberta, ongoing loan growth was apparent in both provinces through the third quarter.

The combination of low oil prices and a weaker Canadian dollar has modestly improved the mid- to long-term outlook for Canada's non-oil exporting provinces, including British Columbia, Manitoba and Ontario, however the beneficial impact of these factors has been slow to materialize. With the recent further weakening of oil prices and data indicating sluggish overall economic performance in Canada through the first half of 2015, consensus forecasts now anticipate an extended period of moderate economic growth compared to recent years and an extended period of relatively low oil prices to persist into 2016.

CWB's direct exposure to the energy industry is small relative to its overall portfolio at approximately 6% of total loans outstanding. This includes direct loans to energy producers of approximately 2%, and direct lending to service-related companies within the sector representing an additional 4% of total loans. Growth opportunities in these areas are expected to be limited in the near term by the low oil price environment.

Canadian residential real estate markets have been resilient and affordability in most geographic areas outside of certain neighborhoods in Toronto and Vancouver remains within historical ranges, largely reflecting very low interest rates. However, reduced housing sector activity is apparent in Alberta and Saskatchewan, and the combination of historically high price levels and sentiment related to potential economic headwinds caused by low energy prices could also lead to further moderation of housing sector activity in these and other markets.

CWB's strategy continues to focus on enhancing existing competitive advantages within its core business banking platform while offering complementary financial services in personal banking, equipment finance and leasing, alternative mortgages, wealth management, and trust services. While strong competition from domestic banks and other financial services firms persists, 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 enhanced staffing in targeted areas and the effective execution of CWB's strategic plan. In view of strong growth through the first nine months, CWB's outlook for double-digit growth this fiscal year remains intact. While recognizing the significant challenges apparent within its operating environment, CWB will continue to pursue opportunities to service high quality borrowers operating within its targeted industry segments as management establishes growth targets for fiscal 2016.

Credit Quality

Overall credit quality reflects CWB's secured lending business model and continued strong underwriting practices, proactive loan management and the management experience and financial stability of its client base. CWB has no material exposure to unsecured personal borrowing. The full impact of lower oil prices has yet to work its way through all facets of the economy, and CWB continues to proactively monitor all accounts with a particular focus on those located within the oil-exporting provinces.

For the three months ended
(unaudited)
($ thousands)
July 31 2015 April 30 2015 July 31 2014 Change from July 31 2014
Gross impaired loans, beginning of period $ 92,855 $ 79,798 50,621 83 %
New formations 18,687 29,442 21,398 (13 )
Reductions, impaired accounts paid down or returned to performing status (15,421 ) (13,969 ) (10,942 ) 41
Write-offs (3,853 ) (2,416 ) (2,989 ) 29
Total(1) $ 92,268 $ 92,855 58,088 59 %
Balance of the ten largest impaired accounts $ 53,222 57,629 30,562 74 %
Total number of accounts classified as impaired(3) 114 122 117 (3 )
Gross impaired loans as a percentage of total loans 0.48 % 0.50 % 0.34 % 14 bp(2)
(1) Gross impaired loans include foreclosed assets held for sale with a carrying value of $1,109 (April 30, 2015 - $2,262 and July 31, 2014 - $1,154).
(2) bp - basis point change.
(3) Total number of accounts excludes National Leasing.

The dollar level of gross impaired loans at July 31, 2015 was relatively consistent with the prior quarter as repayments and loans returning to performing status substantially offset new formations. The level of new formations was lower compared to both the previous quarter and the same period last year. The dollar level of gross impaired loans represented 0.48% of total loans at quarter end, compared to 0.50% last quarter and 0.34% one year ago. Combined gross impaired loans in Alberta and Saskatchewan represented 45% of total gross impaired loans, which compares favourably with the 48% of total loans located in these two provinces.

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. Gross impaired loans at July 31, 2015 remain low as a percentage of total loans, with current levels comparing to a peak during the prior credit cycle of 1.68% in the second quarter of 2010. In view of the relatively low levels of impairments experienced in the prior year and current economic conditions, management expects both the dollar value of gross impaired loans and gross impaired loans as a percentage of total loans to increase from current levels. These increases would be consistent with CWB's experience through prior economic cycles.

CWB's reserve-based credit facilities extended directly to oil and gas producers are updated on an ongoing basis to reflect current reserves and conservative oil price assumptions. Further revisions to CWB's oil price assumptions were implemented subsequent to quarter end.

Specific allowances for expected write-offs are established through detailed analyses of both the overall quality and ultimate marketability of security held against impaired accounts. Actual credit losses are expected to remain within CWB's historical range of acceptable levels.

As at July 31, 2015, the collective allowance for credit losses exceeded the balance of impaired loans, net of specific allowances. The total allowance for credit losses (collective and specific) was $113.2 million at July 31, 2015, compared to $107.9 million last quarter and $93.5 million a year earlier. The total allowance for credit losses represented 123% of gross impaired loans at quarter end, compared to 116% last quarter and 161% one year ago. Growth of the collective allowance over the past twelve months was consistent with loan portfolio growth of 11%.

Based on the results of stress tests simulating severe economic conditions in Alberta and Saskatchewan in combination with challenging economic conditions throughout the rest of CWB's geographic footprint over a multi-year timeframe, management is confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a solid capital position under the Standardized approach for calculating risk weighted assets. Recent stress tests included the assumption of 150% of CWB's historical peak loss rates across all lending segments simultaneously within Alberta and Saskatchewan, and the experience of 100% of peak loss rates simultaneously in all other regions. Related assumptions included a persistent low interest rate environment and significantly slower loan growth to reflect lower assumed levels of economic activity, as well as increased competition for deposits resulting in meaningful compression of net interest margin.

Deposits

Total deposits were up 8% over the past year ($1,392 million), 5% ($872 million) from the previous quarter and increased 9% ($1,477 million) over the past nine months. Total deposits by type and source are summarized below:

As at
(unaudited)
($ millions)
July 31
2015
April 30
2015
July 31
2014
Change
from
July 31
2014
Deposits by type
Demand and notice deposits $ 6,651 $ 6,484 $ 5,538 20 %
Term deposits 9,787 9,454 9,881 (1 )
Capital markets 2,412 2,040 2,039 18
Total Deposits $ 18,850 $ 17,978 $ 17,458 8 %
As at
(unaudited)($ millions) July 31
2015
April 30
2015
July 31
2014
Change
from
July 31
2014
Deposits by source
CWB Group branch-raised $ $10,048 $ 9,778 $ 9,161 10 %
Deposit brokers 6,390 6,160 6,258 2
Capital markets 2,412 2,040 2,039 18
Total Deposits 18,850 $ 17,978 $ 17,458 8 %

Personal deposits represented 58% of total deposits at July 31, 2015, relatively consistent with 59% both one year ago and in the prior quarter. Total branch-raised deposits, including trust services deposits, represented 53% of total deposits at July 31, 2015, up slightly from 52% one year ago and down from 54% in the previous quarter. Lower cost demand and notice deposits increased 20% from the same quarter last year and now compose 35% of total deposits, up from 32% one year ago and relatively consistent with the previous quarter. Term deposits raised through debt capital markets were $2,412 million at quarter end, representing 13% of total deposits, up from 12% last year and 11% last quarter due to the net issuance of deposit notes.

Outlook for deposits

One of management's long-term strategic objectives is to increase the level of deposits which strengthen relationships by providing clients with relevant tools for managing their business and personal finances. These deposits also have attractive liquidity characteristics, are typically lower cost, and provide associated transactional fee income. Specific emphasis is placed on growing personal and business deposits raised within the branch network, trust services and, given suitable market conditions, Canadian Direct Financial, the internet-based division of CWB.

Recent improvements to CWB's product offerings for business clients, along with training programs and targeted staffing enhancements, continue to support this focus on growing branch-raised deposits. CWB's expanding market presence, including ongoing expansion and upgrades to existing branches, also supports the generation of branch-raised deposits. Very strong 20% year-over-year growth in preferred types of demand and notice deposits reflects this ongoing strategic focus.

Management remains committed to further enhance and diversify funding sources to support growth, manage the impact of competitive factors and mitigate pressure on net interest margins. The deposit broker network remains a valued channel for raising insured fixed term retail deposits and has proven to be an effective and efficient way to access funding and liquidity over a wide geographic base. Selectively utilizing debt capital markets is also part of management's strategy to further diversify the funding base over time.

Other Assets and Other Liabilities

Other assets totaled $358 million at July 31, 2015, compared to $388 million one year ago and $564 million last quarter. The decrease compared to last quarter reflects the elimination of assets held for sale resulting from closing the transactions involving CDI and Valiant Trust this quarter.

Other liabilities were $316 million at quarter end, compared to $473 million a year earlier and $618 million the previous quarter. Lower other liabilities primarily relate to insurance related other liabilities last year and a higher balance of securities sold under repurchase agreements at April 30, 2015.

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 $9,449 million at July 31, 2015, compared to $10,278 million one year ago and $9,490 million last quarter. Assets under management were $1,912 million at quarter end, compared to $1,789 million a year earlier and $1,911 million last quarter.

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

For additional information regarding other off-balance sheet items refer to Note 11 of the unaudited interim consolidated financial statements for the period ended July 31, 2015, as well as Notes 11 and 21 of the audited consolidated financial statements in CWB's 2014 Annual Report.

Capital Management

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

At July 31, 2015, CWB's capital ratios were 8.5% CET1, 9.8% Tier 1 and 12.8% total capital. At 8.0%, the Basel III leverage ratio reflects slightly lower leverage compared to the prior quarter and remains very conservative.

Impact of Divestitures

On May 1, 2015, CWB closed the transactions involving CDI and Valiant with divestiture gains resulting in 60 - 70 basis point increases to capital ratios compared to the prior quarter. Management intends to redeploy capital realized from these transactions in due course for strategic and accretive opportunities that are consistent with CWB's strategic direction. This enhanced capital level positions CWB to move quickly on investment opportunities as they materialize.

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

(unaudited)
($ millions)
As at
July 31
2015
As at
April 30
2015
As at
July 31
2014
Regulatory capital
CET1 capital before deductions $ 1,755 $ 1,615 $ 1,526
Net CET1 deductions (129 ) (132 ) (119 )
CET1 capital 1,626 1,483 1,407
Tier 1 capital(1) 1,856 1,713 1,637
Total capital(1) 2,428 2,280 2,267
Risk-weighted assets $ 19,024 $ 18,789 $ 17,556
Capital adequacy ratios
CET1 8.5 % 7.9 % 8.0 %
Tier 1 9.8 9.1 9.3
Total 12.8 12.1 12.9
(1) The 2015 inclusion of non-common equity instruments that do not include non-viability contingent capital clauses is capped at 70% of the January 1, 2013 outstanding balances (2014 - 80%). At July 31, 2015, $153 million of outstanding subordinated debentures (April 30, 2015 - $153 million and July 31, 2014 - $85 million) were excluded from regulatory capital. For all periods, there was no exclusion from regulatory capital related to the Innovative Tier 1 capital (disclosed in deposits).

CWB currently reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, which requires CWB to carry significantly more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings Based (AIRB) methodology.

For this reason, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks and other financial institutions which utilize the AIRB methodology.

Planning for CWB's possible multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets is underway, including preliminary development of quantitative credit risk models specific to certain portfolios, as well as evaluation of further resource requirements. CWB's new core banking system, implementation of which is expected in fiscal 2016, is a critical component for a number of requirements necessary for AIRB compliance, including the collection and analysis of certain types of data.

Further information relating to CWB's capital position is provided in Note 14 of the unaudited interim consolidated financial statements for the period ended July 31, 2015 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2014.

Book value per common share at July 31, 2015 was $22.01, compared to $19.03 last year and $20.19 last quarter. The increase from prior periods reflects both the gain on sale from the strategic transactions involving CDI and Valiant as well as strong business growth.

Common shareholders received a quarterly cash dividend of $0.22 per common share on June 25, 2015. On September 2, 2015, CWB's Board of Directors declared a cash dividend of $0.22 per common share, payable on September 24, 2015 to shareholders of record on September 14, 2015. This quarterly dividend is consistent with the prior quarter and up 10% from the dividend declared one year ago.

Preferred shareholders received a quarterly cash dividend of $0.275 on July 31, 2015. On September 2, 2015, the Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share payable on October 31, 2015 to shareholders of record on October 21, 2015.

Significant Changes in Accounting Policies and Financial Statement Presentation

The unaudited interim consolidated financial statements for the quarter were prepared using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2014, except as noted below.

Held for Sale Classification and Discontinued Operations

Assets and liabilities subject to a plan of disposal are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when a sale is highly probable and the assets are available for immediate sale in their present condition, subject only to terms that are usual and customary for sales of this nature. For a sale to be highly probable, management must be committed to sell the assets and liabilities within one year from the date of classification.

Assets and liabilities classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss is recognized as a reduction to the carrying amount of the assets held for sale.

Discontinued operations are presented if the operations and cash flows can be clearly distinguished operationally and financially from the rest of CWB, and if it represents a separate major line of business or geographic area of operations that either has been disposed of, is classified as held for sale, or is part of a single coordinated plan of disposal.

On May 1, 2015, CWB sold its property and casualty insurance subsidiary, CDI, and the stock transfer business of Valiant, as described in Note 3 of the interim consolidated financial statements. In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, the assets and liabilities of these businesses were classified as held for sale in the interim consolidated balance sheets as at January 31 and April 30, 2015, prior to their sale on May 1, 2015. No write downs to carrying amounts of the assets were required upon classification as held for sale. The interim consolidated statements of income have been restated to show the results of discontinued operations separately from continuing operations for all periods.

Future Accounting Changes

A number of standards and amendments have been issued by the International Accounting Standards Board (IASB) and are noted on page 70 of CWB's 2014 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.

During 2014, the IASB issued the complete version of IFRS 9 - Financial Instruments, which will be mandatorily effective for CWB's fiscal year beginning on November 1, 2018 with early adoption permitted. In January 2015, OSFI determined that Domestic Systemically Important Banks (D-SIBs) should adopt IFRS 9 beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year ends, such as CWB. CWB is currently reviewing IRFS 9 to determine the impact on the financial statements and has not yet determined if it will early adopt this standard.

CWB continues to monitor the IASB's proposed changes to IFRS. Additional discussion on future accounting standard changes that may impact CWB's future financial statements is included in Note 1 of the audited consolidated financial statements within CWB's 2014 Annual Report.

Controls and Procedures

There were no changes in CWB's internal controls over financial reporting that occurred during the quarter ended July 31, 2015 that have materially affected, or are reasonably likely to materially affect, CWB's internal controls over financial reporting.

Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of CWB.

Third-party Credit Ratings

DBRS Limited (DBRS) maintains published credit ratings on CWB's senior debt (deposits), short-term debt, subordinated debentures and 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.

Updated Share Information

As at August 26, 2015, there were 80,478,535 CWB common shares outstanding. Also outstanding were employee stock options, which are or will be exercisable for up to 5,237,346 common shares for maximum proceeds of $159 million.

Dividend Reinvestment Plan

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

Summary of Quarterly Financial Information
2015 2014 2013
($ thousands) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Combined Operations
Total revenues (teb) $ 261,411 $ 159,910 $ 159,864 $ 159,536 $ 159,778 $ 153,521 $ 153,770 $ 150,956
Total revenues 260,131 158,260 158,178 157,827 157,890 151,532 151,680 148,894
Common shareholders' net income
158,809

53,545
54,209 58,150 56,580 51,191 52,628 51,208
Earnings per common share
Basic 1.97 0.67 0.67 0.72 0.71 0.64 0.66 0.64
Diluted 1.97 0.67 0.67 0.72 0.70 0.63 0.65 0.64
Adjusted cash 1.98 0.68 0.69 0.73 0.71 0.65 0.67 0.65
Total assets ($ millions) 22,254
54
21,522 21,265 20,609 20,523 19,617 19,129 18,513
Continuing Operations
Total revenues (teb) $ 153,772 $ 151,161 $ 152,384 $ 153,047 $ 149,276 $ 142,497 $ 144,073 $ 140,403
Total revenues 152,492 149,706 150,916 151,542 148,074 140,753 142,231 138,581
Common shareholders' net income
51,170

51,520
52,405 56,859 52,690 46,673 49,066 46,856
Earnings per common share
Basic 0.64 0.64 0.65 0.71 0.66 0.58 0.62 0.59
Diluted 0.64 0.64 0.65 0.70 0.65 0.58 0.61 0.59
Adjusted cash 0.65 0.65 0.66 0.71 0.67 0.59 0.62 0.60
Discontinued Operations
Total revenues (teb) $ 107,639 $ 8,749 $ 7,480 $ 6,489 $ 10,052 $ 11,024 $ 9,697 $ 10,553
Total revenues 107,639 8,554 7,262 6,285 9,816 10,779 9,449 10,313
Common shareholders' net income (loss)
107,639

2,025
1,804 1,291 3,890 4,518 3,562 4,352
Earnings per common share
Basic 1.33 0.03 0.02 0.01 0.05 0.06 0.04 0.05
Diluted 1.33 0.03 0.02 0.02 0.05 0.05 0.04 0.05
Adjusted cash 1.33 0.03 0.03 0.02 0.04 0.06 0.05 0.05

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. Results of Combined and Discontinued Operations for the third quarter of fiscal 2015 include divestiture gains.

CWB's past quarterly financial results were subject to some fluctuation due to its exposure to property and casualty insurance. Insurance operations, which are now reflected in total revenues of Discontinued Operations up to and including the second quarter of fiscal 2015, are subject to seasonal weather conditions, cyclical patterns of the industry and natural catastrophes.

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

For additional details on variations between the prior quarters, refer to the summary of quarterly results section of CWB's MD&A for the year ended October 31, 2014 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 common shareholders' net income divided by average common shareholders' equity;
  • return on assets - annualized common shareholders' net income divided by average total assets;
  • efficiency ratio - non-interest expenses divided by total revenues, including the gain related to the sales of the property and casualty insurance subsidiary and CWB's stock transfer business and excluding the non-tax deductible change in fair value of contingent consideration;
  • 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 common shareholders' net income
(Combined Operations) For the three months ended For the nine months ended
(unaudited)
($ thousands)
July 31, 2015 April 30, 2015 July 31, 2014 July 31, 2015 July 31, 2014
Common shareholders' net income $ 158,809 $ 53,545 $ 56,580 $ 266,563 $ 160,399
Adjustments:
Amortization of acquisition-related intangible assets (after tax) 719 696 866 2,292 2,660
Contingent consideration fair value change - 338 400 638 700
Adjusted common shareholders' net income $ 159,528 $ 54,579 $ 57,846 $ 269,493 $ 163,759
Adjusted common shareholders' net income
(Continuing Operations) For the three months ended For the nine months ended
(unaudited)
($ thousands)
July 31 2015 April 30 2015 July 31 2014 July 31 2015 July 31 2014
Common shareholders' net income from Continuing Operations $ 51,170 $ 51,520 $ 52,690 $ 155,095 $ 148,429
Adjustments:
Amortization of acquisition-related intangible assets (after tax) 719 696 866 2,292 2,586
Contingent consideration fair value change - 338 400 638 700
Adjusted common shareholders' net income $ 51,889 $ 52,554 $ 53,956 $ 158,025 $ 151,715
Consolidated Balance Sheets
(unaudited)
($ thousands)
As at July 31 2015 As at April 30 2015 As at October 31 2014 As at July 31 2014 Change from July 31 2014
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions $ 6,532 $ 65,395 $ 13,320 $ 45,626 (86 )%
Interest bearing deposits with regulated financial institutions (Note 4 ) 536,773 104,793 491,255 418,220 28
Cheques and other items in transit 1,603 1,790 3,839 2,697 (41 )
544,908 171,978 508,414 466,543 17
Securities (Note 4 )
Issued or guaranteed by Canada 1,207,993 610,263 764,213 1,074,895 12
Issued or guaranteed by a province or municipality 474,230 1,101,000 560,482 676,319 (30 )
Other debt securities 152,434 133,262 290,363 269,544 (43 )
Preferred shares 163,706 228,575 321,216 348,835 (53 )
Common shares 142,549 148,349 152,931 156,324 (9 )
2,140,912 2,221,449 2,089,205 2,525,917 (15 )
Securities Purchased Under Resale Agreements 170,000 - 99,566 - 100
Loans (Notes 5 and 7 )
Personal 3,164,137 3,005,075 2,841,154 2,768,458 14
Business 15,989,397 15,666,951 14,764,543 14,466,926 11
19,153,534 18,672,026 17,605,697 17,235,384 11
Allowance for credit losses (Note 6 ) (113,171 ) (107,858 ) (95,598 ) (93,503 ) 21
19,040,363 18,564,168 17,510,099 17,141,881 11
Other
Property and equipment 61,637 61,052 66,257 67,111 (8 )
Goodwill 43,825 43,475 50,408 50,408 (13 )
Intangible assets 98,575 91,539 85,137 80,698 22
Derivative related (Note 8 ) 24,054 15,116 5,420 6,616 264
Other assets 129,573 119,637 128,386 120,004 8
Insurance related - - 65,764 63,557 (100 )
Assets held for sale (Note 3 ) - 233,647 - - -
357,664 564,466 401,372 388,394 (8 )
Total Assets $ 22,253,847 $ 21,522,061 $ 20,608,656 $ 20,522,735 8 %
Liabilities and Equity
Deposits
Personal $ 10,909,081 $ 10,628,959 $ 9,832,669 $ 10,293,130 6 %
Business and government 7,940,987 7,348,715 7,540,345 7,164,424 11
18,850,068 17,977,674 17,373,014 17,457,554 8
Other
Cheques and other items in transit 44,591 60,797 54,826 52,922 (16 )
Securities sold under repurchase agreements - 152,663 - - -
Derivative related (Note 8 ) 4,259 3,021 386 178 nm
Other liabilities 267,535 242,273 282,944 260,119 3
Insurance related - - 165,903 159,291 (100 )
Liabilities held for sale (Note 3 ) - 159,684 - - -
316,385 618,438 504,059 472,510 (33 )
Debt
Subordinated debentures 625,000 625,000 625,000 625,000 -
Debt securities 565,449 550,201 411,990 314,204 80
1,190,449 1,175,201 1,036,990 939,204 27
Equity
Preferred shares (Note 9 ) 125,000 125,000 125,000 125,000 -
Common shares (Note 9 ) 536,365 535,453 533,038 529,283 1
Retained earnings 1,226,244 1,085,136 1,011,147 969,066 27
Share-based payment reserve 28,331 27,399 25,339 24,048 18
Other reserves (19,729 ) (23,980 ) (997 ) 5,311 nm
Total Shareholders' Equity 1,896,211 1,749,008 1,693,527 1,652,708 15
Non-controlling interests 734 1,740 1,066 759 (3 )
Total Equity 1,896,945 1,750,748 1,694,593 1,653,467 15
Total Liabilities and Equity $ 22,253,847 $ 21,522,061 $ 20,608,656 $ 20,522,735 8 %
nm - not meaningful
The accompanying notes are an integral part of the interim consolidated financial statements.
Consolidated Statements of Income
For the three months ended For the nine months ended
(unaudited)
($ thousands, except per share amounts)
July 31 2015 April 30 2015 July 31 2014(1) Change from July 31 2014 July 31 2015 July 31 2014(1) Change from July 31 2014
Interest Income
Loans $ 217,913 $ 207,918 $ 206,251 6 % $ 637,218 $ 592,761 7 %
Securities 9,729 10,462 10,044 (3 ) 30,521 28,550 7
Deposits with regulated financial institutions 785 184 1,473 (47 ) 2,020 3,493 (42 )
228,427 218,564 217,768 5 669,759 624,804 7
Interest Expense
Deposits 79,488 77,599 81,126 (2 ) 237,678 230,526 3
Debt 9,716 9,356 8,272 17 28,328 23,771 19
89,204 86,955 89,398 - 266,006 254,297 5
Net Interest Income 139,223 131,609 128,370 8 403,753 370,507 9
Provision for Credit Losses (Note 6 ) 8,018 7,386 6,958 15 22,373 21,040 6
Net Interest Income after Provision for Credit Losses 131,205 124,223 121,412 8 381,380 349,467 9
Non-interest Income
Credit related 7,281 6,654 6,359 14 20,697 18,312 13
Wealth management services 3,624 3,565 3,478 4 10,906 10,339 5
Retail services 3,511 3,520 2,830 24 10,206 8,534 20
Trust services 2,675 2,818 2,646 1 8,308 8,224 1
Gains (losses) on securities, net (5,039 ) 46 3,880 nm (4,350 ) 12,182 nm
Other 1,217 1,494 511 138 3,594 2,960 21
13,269 18,097 19,704 (33 ) 49,361 60,551 (18 )
Net Interest and Non-interest Income 144,474 142,320 141,116 2 430,741 410,018 5
Non-interest Expenses
Salaries and employee benefits 48,467 47,223 44,348 9 142,864 130,703 9
Premises and equipment 12,266 11,414 11,662 5 35,659 32,184 11
Other expenses 13,739 12,736 12,660 9 39,192 35,944 9
74,472 71,373 68,670 8 217,715 198,831 9
Net Income before Income Taxes from Continuing Operations 70,002 70,947 72,446 (3 ) 213,026 211,187 1
Income Taxes 17,130 17,689 18,048 (5 ) 52,713 51,736 2
Net Income from Continuing Operations 52,872 53,258 54,398 (3 ) 160,313 159,451 1
Net Income Attributable to Non-Controlling Interests 327 363 333 (2 ) 1,093 887 23
Shareholders' Net Income from Continuing Operations 52,545 52,895 54,065 (3 ) 159,220 158,564 -
Preferred share dividends 1,375 1,375 1,375 - 4,125 10,135 (59 )
Common Shareholders' Net Income from Continuing Operations 51,170 51,520 52,690 (3 ) 155,095 148,429 4
Common Shareholders' Net Income from Discontinued Operations (Note 3 ) 107,639 2,025 3,890 nm 111,468 11,970 nm
Common Shareholders' Net Income $ 158,809 $ 53,545 $ 56,580 181 % $ 266,563 $ 160,399 66 %
Average number of common shares (in thousands) 80,463 80,424 80,141 - % 80,423 79,940 1 %
Average number of diluted common shares (in thousands) 80,557 80,565 81,121 (1 ) 80,650 80,841 -
Earnings Per Common Share
Basic - Combined Operations $ 1.97 $ 0.67 $ 0.71 177 % $ 3.31 $ 2.01 65 %
Basic -Continuing Operations 0.64 0.64 0.66 (3 ) 1.93 1.86 4
Basic -Discontinued Operations 1.33 0.03 0.05 nm 1.38 0.15 nm
Diluted - Combined Operations 1.97 0.67 0.70 181 3.31 1.98 67
Diluted - Continuing Operations 0.64 0.64 0.65 (2 ) 1.93 1.84 5
Diluted - Discontinued Operations 1.33 0.03 0.05 nm 1.38 0.14 nm
(1) Comparative information has been restated to reflect the presentation of discontinued operations as described in Note 3.
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 nine months ended
(unaudited)
($ thousands)
July 31 2015 July 31 2014 July 31 2015 July 31
2014
Net Income from Continuing Operations $ 52,872 $ 54,398 $ 160,313 $ 159,451
Common Shareholders' Net Income from Discontinued Operations 107,639 3,890 111,468 11,970
Net Income 160,511 58,288 271,781 171,421
Other Comprehensive Income (Loss), net of tax
Available-for-sale securities:
Gains (losses) from change in fair value(1) (9,566 ) 1,942 (39,790 ) 18,621
Reclassification to net income(2) (Note 3) 6,896 (3,176 ) 6,630 (9,938 )
(2,670 ) (1,234 ) (33,160 ) 8,683
Derivatives designated as cash flow hedges:
Gains from change in fair value(3) 5,171 2,264 10,877 4,159
Reclassification to net income(4) 1,750 (1,636 ) 3,551 (4,142 )
6,921 628 14,428 17
4,251 (606 ) (18,732 ) 8,700
Comprehensive Income for the Period $ 164,762 $ 57,682 $ 253,049 $ 180,121
Comprehensive income for the period attributable to:
Shareholders of CWB $ 164,435 $ 57,349 $ 251,956 $ 179,234
Non-controlling interests 327 333 1,093 887
Comprehensive Income for the Period $ 164,762 $ 57,682 $ 253,049 $ 180,121
(1) Net of income tax of $4,454 and $14,747 for the three and nine months ended July 31, 2015, respectively (2014 - $700 and $6,564).
(2) Net of income tax of $2,502 and $2,411 for the three and nine months ended July 31, 2015, respectively (2014 - $1,035 and $3,498).
(3) Net of income tax of $2,075 and $4,003 for the three and nine months ended July 31, 2015, respectively (2014 - $765 and $1,405).
(4) Net of income tax of $698 and $1,306 for the three and nine months ended July 31, 2015, respectively (2014 - $552 and $1,399).
Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statement of Income when specific conditions are met.
The accompanying notes are an integral part of the interim consolidated financial statements.
Consolidated Statements of Changes in Equity
For the nine months ended
(unaudited)
($ thousands)
July 31
2015
July 31
2014
Retained Earnings
Balance at beginning of period $ 1,011,147 $ 858,167
Shareholders' net income from continuing operations 159,220 158,564
Common shareholders' net income from discontinued operations 111,468 11,970
Dividends
- Preferred shares (4,125 ) (10,135 )
- Common shares (51,466 ) (46,353 )
Issuance costs on preferred shares - (3,147 )
Balance at end of period 1,226,244 969,066
Other Reserves
Balance at beginning of period (997 ) (3,389 )
Changes in available-for-sale securities (33,160 ) 8,683
Changes in derivatives designated as cash flow hedges 14,428 17
Balance at end of period (19,729 ) 5,311
Preferred Shares (Note 9)
Balance at beginning of period 125,000 208,815
Redeemed - (208,815 )
Issued - 125,000
Balance at end of period 125,000 125,000
Common Shares (Note 9)
Balance at beginning of period 533,038 510,282
Issued under dividend reinvestment plan 2,504 12,877
Transferred from share-based payment reserve on the exercise or exchange of options 823 5,058
Issued on exercise of options - 1,066
Balance at end of period 536,365 529,283
Share-based Payment Reserve
Balance at beginning of period 25,339 24,632
Amortization of fair value of options (Note 10) 3,815 4,474
Transferred to common shares on the exercise or exchange of options (823 ) (5,058 )
Balance at end of period 28,331 24,048
Total Shareholders' Equity 1,896,211 1,652,708
Non-Controlling Interests
Balance at beginning of period 1,066 1,062
Net income attributable to non-controlling interests 1,093 887
Dividends to non-controlling interests (1,326 ) (1,093 )
Partial ownership increase (99 ) (97 )
Balance at end of period 734 759
Total Equity $ 1,896,945 $ 1,653,467
The accompanying notes are an integral part of the interim consolidated financial statements.
Consolidated Statements of Cash Flow
For the nine months ended

(unaudited)
($ thousands)
July 31
2015
July 31
2014
Cash Flows from Operating Activities
Net income from continuing operations $ 160,313 $ 159,451
Common shareholders' net income from discontinued operations 111,468 11,970
Adjustments to determine net cash flows:
Gain on sale of discontinued operations (Note 3) (107,639 ) -
Provision for credit losses 22,373 21,040
Depreciation and amortization 15,102 17,644
Current income taxes receivable and payable (14,246 ) 9,219
Amortization of fair value of employee stock options (Note 10) 3,815 4,474
Accrued interest receivable and payable, net (12,157 ) 1,764
Deferred income taxes, net (4,648 ) (6,066 )
Gains (losses) on securities, net 4,633 (13,436 )
Change in operating assets and liabilities:
Deposits, net 1,477,054 1,826,514
Loans, net (1,552,637 ) (1,595,481 )
Securities purchased under resale agreements, net (70,434 ) -
Other items, net (9,998 ) 454
22,999 437,547
Cash Flows from Financing Activities
Common shares issued (Note 9) 2,504 13,943
Debt securities issued 349,685 210,021
Debt securities repaid (196,226 ) (91,467 )
Dividends (55,591 ) (56,488 )
Issuance costs on preferred shares - (3,147 )
Preferred shares redeemed - (208,815 )
Preferred shares issued - 125,000
Dividends to non-controlling interests (1,326 ) (1,093 )
99,046 (12,046 )
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net (79,153 ) (159,756 )
Securities, purchased (4,676,545 ) (5,745,372 )
Securities, sale proceeds 3,892,864 3,268,636
Securities, matured 554,622 2,200,209
Proceeds from disposal of discontinued operations (Note 3) 215,865 -
Property, equipment and intangible assets (28,388 ) (27,959 )
Partial ownership increase (99 ) (97 )
(120,834 ) (464,339 )
Change in Cash and Cash Equivalents 1,211 (38,838 )
Cash and Cash Equivalents at Beginning of Period (37,667 ) 34,239
Cash and Cash Equivalents at End of Period * $ (36,456 ) $ (4,599 )
* Represented by:
Cash and non-interest bearing deposits with financial institutions $ 6,532 $ 45,626
Cheques and other items in transit (included in Cash Resources) 1,603 2,697
Cheques and other items in transit (included in Other Liabilities) (44,591 ) (52,922 )
Cash and Cash Equivalents at End of Period $ (36,456 ) $ (4,599 )
Supplemental Disclosure of Cash Flow Information (Combined Operations)
Interest and dividends received $ 690,117 $ 636,692
Interest paid 277,747 250,219
Income taxes paid 71,696 51,938
The accompanying notes are an integral part of the interim consolidated financial statements.
Notes to Interim Consolidated Financial Statements
(unaudited)
($thousands, unless otherwise noted)

1. Basis of Presentation and Significant Accounting Policies

These unaudited condensed interim consolidated financial statements of Canadian Western Bank (CWB) have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2014, 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, 2014 as set out on pages 62 to 102 of CWB's 2014 Annual Report.

The interim consolidated financial statements were authorized for issue by the Board of Directors on September 2, 2015.

Held for Sale Classification and Discontinued Operations

In accordance with IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations, assets and liabilities subject to a plan of disposal are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when a sale is highly probable and the assets are available for immediate sale in their present condition, subject only to terms that are usual and customary for sales of this nature. For a sale to be highly probable, management must be committed to sell the assets and liabilities within one year from the date of classification.

Assets and liabilities classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss is recognized as a reduction to the carrying amount of the assets held for sale.

Discontinued operations are presented if the operations and cash flows can be clearly distinguished operationally and financially from the rest of CWB, and if it represents a separate major line of business or geographic area of operations that either has been disposed of, is classified as held for sale, or is part of a single coordinated plan of disposal.

2. Future Accounting Changes

CWB continues to monitor the IASB's proposed changes to accounting standards. Although not expected to materially impact CWB's 2015 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 2014 Annual Report.

IFRS 9 - Financial Instruments

During 2014, the IASB issued the complete version of IFRS 9, which will be mandatorily effective for CWB's fiscal year beginning on November 1, 2018 with early adoption permitted. In January 2015, OSFI determined that Domestic Systemically Important Banks (D-SIBs) will adopt IFRS 9 beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year-ends, such as CWB. CWB is currently reviewing IRFS 9 to determine the impact on the financial statements and has not yet determined if it will early adopt this standard.

IFRS 15 - Revenue from Contracts with Customers

During 2014, the IASB established principles for reporting about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The standard provides a single, principles based model for revenue recognition to be applied to all contracts with customers. In 2015, the IASB announced that the IFRS 15 mandatory adoption date would be deferred for one year. As such, the standard will be effective for CWB's fiscal year beginning November 1, 2018, with earlier adoption permitted.

3. Strategic Transactions

The sales of CWB's property and casualty insurance subsidiary, Canadian Direct Insurance (CDI), and the stock transfer business of its subsidiary, Valiant Trust Company, closed effective May 1, 2015. The transactions consisted of the sale of 100% of the shares of CDI as well as the transfer of certain operating assets, systems and employees that supported the stock transfer business.

The gain on disposal of both businesses was reflected in Common shareholders' net income from discontinued operations in the third quarter interim consolidated statements of income. The gain, which reflects sales proceeds less the net carrying value of the assets and liabilities sold and related transaction costs, is calculated as follows:

Sale proceeds(1) $ 221,018
Transaction costs 5,153
Net Proceeds 215,865
Net assets sold 81,439
Net Gain on Sale Before Income Taxes and Reclassification of Unrealized Losses From Other Comprehensive Income (OCI) 134,426
Income taxes 23,333
Net Gain on Sale Before Reclassification of Unrealized Losses From OCI 111,093
Unrealized losses reclassified from OCI, net of tax (3,454 )
Net Gain on Sale $ 107,639
(1) The sale proceeds may be subject to further post-closing adjustments and costs which are expected to be completed by the second quarter of 2016.

The components of the net assets sold, previously classified as held for sale, is comprised of the following:

As at
May 1
2015
Assets
Cash Resources
Interest bearing deposits with regulated financial institutions(1) $ 34,790
Securities
Other securities(2) 123,724
Other
Insurance related 60,927
Goodwill and intangible assets 9,271
Property and equipment 1,780
Other assets 9,090
81,068
Total assets $ 239,582
Liabilities
Insurance related $ 151,274
Other liabilities 6,869
Total liabilities $ 158,143
Net assets $ 81,439
(1) Includes unrealized gains of $405.
(2) Includes unrealized gains of $1,127 on debt securities, and unrealized losses of $5,721 and $201 on preferred shares and common shares, respectively.

The interim consolidated statements of income have been restated to show the results of discontinued operations separately from continuing operations for all periods. The components of net income from discontinued operations, which are attributable entirely to CWB common shareholders follow:

For the three months ended For the nine months ended
July 31 2015 April 30 2015 July 31
2014
Change
from
July 31
2014
July 31
2015
July 31
2014
Change
from
July 31
2014
Interest Income
Securities $ - $ 1,617 $ 1,410 (100 )% $ 3,389 $ 4,038 (16 )%
Deposits with regulated financial institutions - 10 83 (100 ) 73 205 (64 )
Net Interest Income - 1,627 1,493 (100 ) 3,462 4,243 (18 )
Non-interest Income
Net earned premiums - 32,624 33,055 (100 ) 66,262 97,320 (32 )
Commissions and processing fees - 353 418 (100 ) 742 1,160 (36 )
Net claims and adjustment expenses - (20,287 ) (21,262 ) (100 ) (44,451 ) (62,255 ) (29 )
Policy acquisition costs - (7,144 ) (6,706 ) (100 ) (13,137 ) (18,841 ) (30 )
Insurance revenues, net - 5,546 5,505 (100 ) 9,416 17,384 (46 )
Trust services - 1,656 2,487 (100 ) 3,221 7,163 (55 )
Gains (losses) on securities, net - (275 ) 331 (100 ) (283 ) 1,254 (123 )
- 6,927 8,323 (100 ) 12,354 25,801 (52 )
Net Interest and Non-interest Income from Discontinued Operations - 8,554 9,816 (100 ) 15,816 30,044 (47 )
Non-interest Expenses
Salaries and employee benefits - 3,600 3,129 (100 ) 6,596 9,301 (29 )
Premises and equipment - 1,278 1,293 (100 ) 2,572 3,972 (35 )
Other expenses - 1,158 405 (100 ) 1,936 1,446 34
- 6,036 4,827 (100 ) 11,104 14,719 (25 )
Net Income before Income Taxes - 2,518 4,989 (100 ) 4,712 15,325 (69 )
Income Taxes - 493 1,099 (100 ) 883 3,355 (74 )
Net Income from Discontinued Operations before Net Gain on Sale
-

2,025
3,890
(100
) 3,829 11,970
(68
)
Net Gain on Sale 107,639 - - 100 107,639 - 100
Common Shareholders' Net Income from Discontinued Operations $ 107,639 $ 2,025 $ 3,890 nm % $ 111,468 $ 11,970 nm %

Cash Flows from Discontinued Operations

Excluding the net proceeds of $215,865 related to the disposal of both businesses, there were no additional cash flows during the third quarter of 2015. The details of the cash flows from discontinued operations included in the interim consolidated statements of cash flows follow:

For the nine months ended
July 31
2015
July 31
2014
Net cash provided by (used in) operating activities $ (13,975 ) $ 8,188
Net cash provided by (used in) financing activities (8,000 ) -
Net cash provided by (used in) investing activities 22,028 (8,188 )
Increase (decrease) in Cash and Cash Equivalents $ 53 $ -

4. Securities

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