Canadian Western Bank
TSX : CWB

Canadian Western Bank

September 01, 2016 07:00 ET

CWB Reports Third Quarter Financial Performance

Pre-tax, pre-provision earnings up 6% compared to last year

Continued strong loan growth with strategic, geographic diversification

EDMONTON, ALBERTA--(Marketwired - Sept. 1, 2016) - Canadian Western Bank (TSX:CWB) -

"CWB's solid third quarter operating performance reflects the continued successful execution of our strategy. Our strategic objectives include strong, balanced growth of both loans and funding sources, as well as progress toward a more balanced geographic footprint and broader diversification within targeted sectors of Canada's commercial banking industry," said Chris Fowler, President and CEO. "In support of these goals, we delivered very strong 14% year-over-year loan growth and strong growth in branch-raised deposits, contributing to 6% growth in pre-tax, pre-provision earnings. Our two recent acquisitions, CWB Maxium Financial and CWB Franchise Finance, are integral components of our balanced growth strategy. With 80% of both portfolios based outside of Western Canada and the majority of originations focused within the general commercial sector, these businesses will contribute to the expansion of our geographic footprint and further diversification of our asset mix."

"I'm pleased to say that we achieved positive operating leverage this quarter while continuing to invest in our ability to grow client relationships across the country, despite persistent pressure on net interest margin," continued Mr. Fowler. "With respect to credit quality related to oil and gas production loans, we have taken a proactive approach to resolve positions within this portfolio, and will continue to conservatively manage exposures in view of the difficult operating environment."

"This quarter we launched our new core banking system and strengthened our capital position through the issuance of common shares. The banking system will improve our capabilities to manage client relationships, risk and capital. Very strong capital ratios will support continued growth at levels consistent with our strategic direction over the medium-term while temporarily constraining growth of earnings per share. Together these steps are key components of our strategy to deliver strong, balanced growth with an attractive risk profile."

Third Quarter 2016 Highlights1,2 for Continuing Operations (compared to the same period in the prior year unless otherwise noted)

  • Very strong loan growth of 14% and strong branch-raised deposit growth of 10%.
  • Completed the acquisition of the Canadian franchise finance platform of GE Capital, now known as CWB Franchise Finance, supporting CWB's strategic objective to achieve further geographic and business diversification within targeted segments of the commercial banking industry.
  • Successfully launched CWB's new core banking system, which will enhance CWB's long-term capacity to broaden and deepen client relationships.
  • Opened CWB's 42nd full service branch through expansion of our operations in Lloydminster, Saskatchewan.
  • Pre-tax, pre-provision earnings of $82.2 million, up 6%.
  • Common shareholders' net income of $45.6 million, down 11%.
  • Adjusted cash earnings per common share of $0.60, down 8%.
  • Net interest margin (teb) of 2.40%, down 17 basis points from last year and seven basis points from the prior quarter; these decreases include a one-time impact of three basis points related to a change in methodology for the recognition of certain loan fees.
  • Provision for credit losses as a percentage of average loans of 32 basis points, compared to 17 basis points last year and 78 basis points in the prior quarter.
  • Gross impaired loans represented 0.49% of total loans, relatively consistent with the third quarter last year and down from 0.68% last quarter.
  • Strengthened capital position through issuance of $150 million of common shares, contributing to very strong Basel III regulatory capital ratios under the Standardized approach for calculating risk-weighted assets of 9.0% common equity Tier 1 (CET1), 10.8% Tier 1 and 12.9% total capital.
  1. Highlights include certain non-IFRS measures - refer to definitions page 23.
  2. As a result of the sales of Canadian Direct Insurance (CDI) and the stock transfer business of Valiant Trust Company (Valiant) on May 1, 2015, CWB has defined the contributions of these businesses as "Discontinued Operations", the remaining operations as "Continuing Operations", and the total Continuing Operations and Discontinued Operations as "Combined Operations".

Canadian Western Bank (CWB) today announced third quarter financial performance which, compared to the same quarter in 2015, included very strong and geographically diverse loan growth, strong branch-raised deposit growth and steady growth in pre-tax, pre-provision (PTPP) earnings. Common shareholders' net income from Continuing Operations of $45.6 million was down 11%. Loan growth of 14%, including the addition of CWB Franchise Finance assets, was very strong and well-balanced by industry segment. Non-interest income was up 47%, primarily due to the influence of net losses on securities last year and gains on the sale of residential mortgages in the current period. These positive earnings drivers were more than offset by the combined impact of several factors, including increased energy-related provisions for credit losses, a 17 basis point decline in net interest margin, moderate growth of non-interest expenses, the addition of acquisition-related contingent consideration fair value changes reflecting performance within CWB Maxium Financial (CWB Maxium), higher preferred share dividends, and the 20% increase to CWB's income tax rate in Alberta. Diluted earnings per common share of $0.55 and adjusted cash earnings per common share of $0.60 were down 14% and 8%, respectively. The common share issuance on July 7, 2016 reduced quarterly earnings per common share by $0.01. PTPP earnings were up 6% to $82.2 million.

Compared to the prior quarter, common shareholders' net income from Continuing Operations increased 42%, diluted earnings per common share was 38% higher and adjusted cash earnings per common share was up 46%. These positive changes primarily relate to the impact of lower provisions for credit losses this quarter. PTPP earnings declined 3%. The benefit of 2% loan growth, two additional interest-earning days, consistent non-interest income and stable non-interest expenses was more than offset by a seven basis point decrease in net interest margin, the addition of acquisition-related contingent consideration fair value changes and higher preferred share dividends. Of note, due to timing of the issuance, the third quarter Series 7 preferred share dividend payment included a stub period dividend.

Year-to-date common shareholders' net income from Continuing Operations of $129.9 million was 16% lower as the benefits of very strong 12% loan growth and 7% higher non-interest income were more than offset by increased energy-related provisions for credit losses, a 13 basis point decrease in net interest margin, and the other factors cited above in the year-over-year comparison of third quarter performance. Diluted and adjusted cash earnings per common share declined 18% and 15%, respectively. Year-to-date PTPP earnings of $248.1 million increased 6%.

Medium-term Performance Target Ranges for Continuing Operations

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

Medium-term Performance Target Ranges
Current Context
Adjusted cash earnings per common share growth(1) (2) 7 - 12% Earnings growth and profitability for 2016 reflect the credit performance of CWB's oil and gas production loans and lower net interest margin.
Adjusted return on common shareholders' equity(3) 12 - 15%
Operating leverage(4) Positive Current operating leverage is positive.
Common equity Tier 1 capital ratio under the Standardized approach(5) Strong Q3 2016 ratio of 9.0% is very strong.
Common share dividend payout ratio(6) ~30% Q3 2016 ratio of 40% includes the impact of credit performance of oil and gas production loans.
  1. Performance for adjusted cash earnings per common share is the current year results over the same period in the prior year.
  2. Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the acquisition-related amortization of intangible assets and the contingent consideration fair value changes, net of tax, which represent charges that are not considered to be indicative of ongoing operating performance.
  3. Adjusted return on common shareholders' equity is calculated as annualized common shareholders' net income excluding the acquisition-related amortization of intangible assets and the contingent consideration fair value changes, net of tax, divided by average common shareholders' equity.
  4. Operating leverage is calculated as total revenue (teb) growth over the past twelve months, less non-interest expense growth over the past twelve months, excluding the pre-tax amortization of acquisition-related intangible assets.
  5. Common equity Tier 1 capital ratio is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) using the Standardized approach for credit risk.
  6. Common share dividend payout ratio is calculated as common share dividends declared during the past twelve months divided by common shareholders' net income from Continuing Operations earned over the same period.

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

Continuing Operations

Our outlook for the remainder of 2016 reflects expectations for ongoing credit stress and macroeconomic uncertainty within Alberta, primarily related to the impact of persistent low oil prices. Credit quality reflects strain within CWB's small portfolio of oil and gas production loans, and the level of provisioning remains elevated compared to our historical experience. Outside of the oil and gas portfolio, credit quality has remained stable. Compared to 2015, we expect adjusted cash earnings per share in fiscal 2016 to be lower in view of the impact of increased provisions for credit losses on year-to-date results, as well as the likelihood of ongoing pressure on net interest margin, incremental increases in our expense base mainly related to implementation of our new core banking system, and a higher share count following the issuance of common shares on July 7, 2016. Of note, lower net interest margin this quarter includes a one-time impact of three basis points related to a change in methodology for the recognition of certain loan fees.

CWB's strategic direction and related benefits of acquisitions and core banking implementation

Over the medium-term, ongoing strong, balanced growth of both loans and funding sources remain important strategic objectives. Further geographic and business sector diversification within targeted segments of Canada's commercial banking industry is the foundation of our strategic direction. We completed two important steps in support of this strategy with the acquisition of CWB Maxium on March 1, 2016, and the acquisition of GE Capital's Canadian franchise finance platform, now known as CWB Franchise Finance, on July 1, 2016.

CWB Maxium and CWB Franchise Finance will both contribute to an expanded CWB presence outside of Western Canada as approximately 80% of their current business is based in Ontario and other eastern Canadian provinces. We expect the combination of these two meaningful strategic acquisitions to be slightly accretive to adjusted cash earnings per share this year, with accelerating contributions thereafter.

We also expect CWB's earnings growth and business diversification to benefit from ongoing success in key strategic initiatives to expand our existing client relationships and attract new clients. The successful launch of our new core banking system this quarter will facilitate these initiatives over the medium term and advance our efforts to build core funding sources, enhance product and service offerings, and leverage current and future investment in technology. We look forward to realizing the significant benefits of this improved technology going forward, including the ability to leverage a client-centric view of our branch-based relationships and achieve further operational efficiencies, as well as support for CWB's eventual transition to the Advanced Internal Ratings Based (AIRB) methodology for calculating risk weighted assets.

Very strong loan growth and strong growth in branch-raised deposits

Fiscal 2016 now marks the 26th time in 27 years CWB has achieved double digit loan growth. Loan growth of 14% over the past twelve months, 2% compared to the prior quarter and 12% on a year-to-date basis was driven by strong activity within targeted portfolio segments. In combination, the addition of approximately $350 million of loans within CWB Franchise Finance and third quarter net originations within CWB Maxium of approximately $100 million accounted for nearly 20% of our growth from last year and a significant proportion of the net sequential increase. Combined loan growth within BC and Ontario accounted for more than 75% of the increase from last year. Loan growth in Alberta and Saskatchewan has slowed compared to prior years due to the economic impact of low oil prices. Outstanding balances in Alberta fell 3% from the second quarter and we expect the trend of stronger relative growth in non-oil producing provinces to continue through the remainder of 2016.

Deposit growth was 12% over the past twelve months, 4% compared to the prior quarter and 9% on a year-to-date basis. We remain committed to further enhance and diversify funding sources to support growth, manage the impact of competitive factors and mitigate pressure on net interest margin.

Year-over-year branch-raised deposit growth was 10%. A key strategic objective, supported by our investment in the new core banking system, is to increase the level of these deposits as they strengthen relationships by providing clients with relevant tools for managing their finances.

Preferred types of branch-raised deposits also have attractive liquidity characteristics, are typically lower cost, and provide associated transactional fee income. As such, we place specific emphasis on growing personal and business deposits raised within the branch network, as well as through trust services and, given suitable market conditions, Canadian Direct Financial, CWB's Internet-based division.

Credit stress remains confined to oil and gas production loans

Total gross impaired loans of $106.7 million compare to $92.3 million in the third quarter last year and improved from $145.0 million last quarter. Inclusive of the 78 basis point provision for credit losses last quarter and a sequentially-improved third quarter provision of 32 basis points, the year-to-date provision as a percentage of average loans was 43 basis points at July 31, 2016. Significantly higher provisioning within the oil and gas portfolio has resulted from the impact of persistently low and volatile energy commodity prices on producer cash flows, as well as the influence of regulatory factors on the liquidity of assets securing these exposures. Credit quality outside of our portfolio of oil and gas production loans remains stable, and we continue to expect the fiscal 2016 provision to fall in a range between 35 to 45 basis points.

As we work with our clients through the challenging operating environment in Alberta and Saskatchewan, we continue to carefully monitor the entire loan portfolio across our geographic footprint for signs of weakness resulting from the first and second order impacts of lower oil prices. We are also carefully monitoring developments within the residential housing sector, with a particular focus on markets where a combination of rapid price escalation and regulatory change could impact pricing and the level of future activity. Although we expect periodic increases in the balance of impaired loans across the portfolio, we anticipate loss rates on impaired loans outside of oil and gas production lending to be consistent with our prior experience, where write-offs have been low as a percentage of impaired loans. This assumption is based on the expected combined positive impact of our disciplined underwriting, secured lending practices and proactive account management.

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

Efficient Operations and Positive Operating Leverage

In view of the level of investment necessary to facilitate ongoing implementation of our relationship-focused strategy, as well as the low probability of meaningful short-term improvement in net interest margin, we expect our efficiency ratio to fluctuate at levels moderately higher than the recent past. Combined amortization and sustainment costs related to the new core banking system have added to our expense base commencing this quarter. However, we expect this investment to facilitate both revenue growth and cost efficiencies over the medium-term, as well as help us achieve our strategic client relationship-related objectives. In general, expense growth at or near a double-digit annual rate in percentage terms is consistent with our medium-term objectives.

Third quarter operating leverage was positive as strong year-over-year growth of total revenues outpaced moderate growth of non-interest expenses. We are committed to disciplined control of all discretionary expenses and expect to achieve positive operating leverage over the medium-term. However, in view of the above mentioned increases to our cost base and the likelihood for ongoing pressure on net interest margin to constrain revenue growth, we expect to experience occasional periods of negative operating leverage.

Prudent Capital Management and Dividends

With the issuance of $150 million of common shares this quarter, CWB is well-positioned to continue to execute against our balanced growth strategy while ensuring resilience and flexibility through the maintenance of strong regulatory capital ratios under the more conservative Standardized approach for calculating risk-weighted assets. The common share dividend declared yesterday of $0.23 per share is consistent with the prior quarter and 5% higher than the dividend declared one year ago. Common share dividend increases are evaluated every quarter against the dividend payout ratio target of approximately 30%. The third quarter dividend payout ratio was 40%, primarily reflecting the current impact of the credit performance of oil and gas loans on common shareholders' net income, as well as net interest margin pressure. The timing of future dividend increases will be influenced by capital requirements under the Standardized approach to support ongoing strong and balanced asset growth, as well as challenges related to persistent net interest margin pressure and ongoing macroeconomic uncertainty. Yesterday CWB's Board of Directors also declared dividends on the Series 5 and Series 7 preferred shares.

About CWB Group

CWB Group (CWB) is a diversified financial services organization serving businesses and individuals across Canada. Operating from its headquarters in Edmonton, Alberta, CWB's key business lines include full-service business and personal banking offered through 42 branches of Canadian Western Bank and Internet banking services provided by Canadian Direct Financial (CDF). Highly responsive specialized financing is delivered under the banners of CWB Equipment Financing, National Leasing, CWB Maxium Financial, CWB Franchise Finance and CWB Optimum Mortgage. Trust Services are offered through Canadian Western Trust. Comprehensive wealth management offerings are provided through CWB Wealth Management, which includes the businesses of Adroit Investment Management, McLean & Partners Wealth Management and Canadian Western Financial. As a public company on the Toronto Stock Exchange (TSX), CWB trades under the symbols "CWB" (common shares), "CWB.PR.B" (Series 5 Preferred Shares) and "CWB.PR.C" (Series 7 Preferred Shares). Learn more at www.cwb.com.

Fiscal 2016 Third Quarter Results Conference Call

CWB's third quarter results conference call is scheduled for Thursday, September 1, 2016, at 2:00 p.m. ET (12:00 noon MT). CWB's executives will comment on financial results and respond to questions from analysts and institutional investors.

The conference call may be accessed on a listen-only basis by dialing 647-788-4922 or toll-free 1-877-223-4471. The call will also be webcast live on CWB's website:

www.cwb.com/investor-relations/webcasts-and-events.

A replay of the conference call will be available until September 15, 2016, by dialing 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 65983631.

Selected Financial Highlights(1,2)
(unaudited)
For the three months ended For the nine months ended
($ thousands, except per share amounts) July 31
2016
April 30
2016
July 31
2015
Change
from
July 31
2015
July 31
2016
July 31
2015
Change
from
July 31
2015
Results from Continuing Operations(1)
Net interest income (teb)(2) $ 149,547 $ 145,106 $ 140,503 6 % $ 438,760 $ 407,956 8 %
Less teb adjustment(2) 676 754 1,280 (47) 2,661 4,203 (37)
Net interest income per financial statements 148,871 144,352 139,223 7 436,099 403,753 8
Non-interest income 19,541 19,378 13,269 47 53,545 49,999 7
Pre-tax, pre-provision earnings (teb)(2) 82,152 84,487 77,598 6 248,101 234,384 6
Common shareholders' net income 45,582 32,213 51,170 (11) 129,927 155,095 (16)
Earnings per common share
Basic 0.55 0.40 0.64 (14) 1.59 1.93 (18)
Diluted 0.55 0.40 0.64 (14) 1.59 1.93 (18)
Adjusted cash(2) 0.60 0.41 0.65 (8) 1.66 1.96 (15)
Return on common shareholders' equity(2) 9.4 % 7.1 % 11.7 % (230) bp(3) 9.4 % 12.6 % (320) bp(3)
Adjusted return on common shareholders' equity(2) 10.3 7.4 11.9 (160) 9.8 12.8 (300)
Return on assets(2) 0.73 0.55 0.94 (21) 0.72 0.98 (26)
Efficiency ratio (teb)(2) 45.4 46.7 47.7 (230) 46.3 46.8 (50)
Efficiency ratio(2) 45.6 46.9 48.1 (250) 46.6 47.2 (60)
Net interest margin (teb)(2) 2.40 2.47 2.57 (17) 2.45 2.58 (13)
Net interest margin(2) 2.39 2.45 2.55 (16) 2.43 2.55 (12)
Provision for credit losses as a percentage of average loans 0.32 0.78 0.17 15 0.43 0.16 27
Results from Combined Operations(1)
Net interest income (teb)(2) $ 149,547 $ 145,106 $ 140,503 6 % $ 438,760 $ 411,831 7 %
Less teb adjustment(2) 676 754 1,280 (47) 2,661 4,616 (42)
Net interest income 148,871 144,352 139,223 7 436,099 407,215 7
Non-interest income 19,541 19,378 13,269 47 53,545 62,353 (14)
Net gain on sale of businesses - - 107,639 (100) - 107,639 (100)
Common shareholders' net income 45,582 32,213 158,809 (71) 129,927 266,563 (51)
Earnings per common share
Basic 0.55 0.40 1.97 (72) 1.59 3.31 (52)
Diluted 0.55 0.40 1.97 (72) 1.59 3.31 (52)
Adjusted cash(2) 0.60 0.41 1.98 (70) 1.66 3.34 (50)
Return on common shareholders' equity(2) 9.4 % 7.1 % 36.3 % (2,690) bp(3) 9.4 % 21.6 % (1,220) bp(3)
Adjusted return on common shareholders equity(2) 10.3 7.4 36.5 (2,620) 9.8 21.9 (1,210)
Return on assets(2) 0.73 0.55 2.90 (217) 0.72 1.67 (95)
Efficiency ratio (teb)(2) 45.4 46.7 28.1 1,730 46.3 38.7 760
Efficiency ratio(2) 45.6 46.9 28.2 1,740 46.6 39.0 760
Net interest margin (teb)(2) 2.40 2.47 2.57 (17) 2.45 2.58 (13)
Net interest margin(2) 2.39 2.45 2.55 (16) 2.43 2.56 (13)
Results of Discontinued Operations(1)
Common shareholders' net income $ - $ - $ 107,639 (100) % - $ 111,468 (100) %
Earnings per common share
Basic - - 1.33 (100) - 1.38 (100)
Diluted - - 1.33 (100) - 1.38 (100)
Adjusted cash(2) - - 1.33 (100) - 1.38 (100)
Per Common Share
Cash dividends $ 0.23 $ 0.23 $ 0.22 5 % 0.69 $ 0.64 8 %
Book value 23.19 22.62 22.01 5 23.19 22.01 5
Closing market value 25.22 27.68 24.60 3 25.22 24.60 3
Common shares outstanding (thousands) 88,056 81,882 80,479 9 88,056 80,479 9
Balance Sheet and Off-Balance Sheet
Summary (Combined Operations)
Assets $ 25,185,441 $ 24,236,901 $ 22,279,688 13 %
Loans 21,744,502 21,248,005 19,066,204 14
Deposits 21,156,890 20,340,925 18,850,068 12
Debt 1,279,002 1,210,202 1,190,449 7
Shareholders' equity 2,307,255 2,117,409 1,896,211 22
Assets under administration 10,305,408 10,287,891 9,448,993 9
Assets under management 1,888,828 1,834,203 1,911,656 (1)
Capital Adequacy(2)
Common equity Tier 1 ratio 9.0 % 8.2 % 8.5 % 50 bp(3)
Tier 1 ratio 10.8 10.1 9.8 100
Total ratio 12.9 12.2 12.8 10
  1. On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB's stock transfer business as described in the 2015 Annual Report. The 2015 contributions of both the insurance and stock transfer businesses, including gains on sale, are defined as "Discontinued Operations", the remaining operations are defined as "Continuing Operations", and the total Continuing Operations and Discontinued Operations are defined as "Combined Operations". Return on shareholders' equity reflects equity from Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated.
  2. See definitions on page 23.
  3. bp - basis point change.

Management's Discussion and Analysis

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

Continuing and Discontinued Operations

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

Forward-looking Statements

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

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

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

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

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

Acquisitions of CWB Maxium Financial and CWB Franchise Finance

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

On July 1, 2016, CWB acquired GE Capital's Canadian Franchise Finance platform, now referred to as "CWB Franchise Finance". The business provides financing across Canada to a diverse group of established companies in the franchised hospitality and restaurant industries. The acquisition included key employees to support CWB's continued strategic commercial banking growth and geographic expansion. The balance of loans acquired was approximately $350 million. Financial consideration was comprised of cash and no goodwill or intangible assets are included in the purchase structure.

In combination, these two strategic acquisitions are expected to be slightly accretive to adjusted cash earnings per share this year, with accelerating contributions thereafter.

Overview of Continuing Operations

Q3 2016 vs. Q3 2015

Common shareholders' net income of $45.6 million was down 11%. A 10% increase in total revenue was more than offset by the impact of a $9.4 million increase in provisions for credit losses, mainly attributed to the credit performance of oil and gas production loans, moderate growth of non-interest expenses, the addition of acquisition-related changes in fair value of contingent consideration this quarter, higher preferred share dividends and income taxes. Net interest income (teb) of $149.5 million was up 6% as the benefit of very strong 14% loan growth was partially offset by a 17 basis point decrease in net interest margin (teb). Non-interest income increased 47% to $19.5 million, primarily due to nil net gains on securities compared to net losses of $5.0 million in the third quarter last year. Diluted earnings per common share of $0.55 and adjusted cash earnings per common share, which excludes the acquisition-related amortization of intangible assets and contingent consideration fair value changes, net of tax, of $0.60 were down 14% and 8%, respectively. Excluding provisions for credit losses and income taxes in all periods, pre-tax, pre-provision (PTPP) earnings reflected strong core operating performance and were up 6% to $82.2 million.

Q3 2016 vs. Q2 2016

Common shareholders' net income was up 42%, mainly reflecting the larger impact of energy-related provisions for credit losses last quarter. Net interest income (teb) increased 3%, as the positive impacts of 2% loan growth and two additional interest earning days was partially offset by a decline of seven basis points in net interest margin. Non-interest income of $19.5 million was relatively consistent with the prior quarter. PTPP earnings were 3% lower, primarily due to increased preferred share dividends this quarter and acquisition-related changes in fair value of contingent consideration.

YTD 2016 vs. YTD 2015

Common shareholders' net income of $129.9 million was down 16% as provisions for credit losses of $66.0 million compared to $22.4 million last year. Net interest income (teb) increased 8% to $438.8 million, as the positive impact of very strong 12% loan growth offset a 13 basis point decline in net interest margin (teb) to 2.45%.

Non-interest income of $53.5 million was 7% higher reflecting gains in most categories, including a decrease of $1.5 million in net losses on securities. Diluted earnings per common share of $1.59 and adjusted cash earnings per common share of $1.66 were down 18% and 15%, respectively. Year-to-date PTPP earnings of $248.1 million increased 6%.

ROE and ROA

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

Third quarter adjusted return on common shareholders' equity (adjusted ROE) was 10.3%, compared to 11.9% last year and 7.4% in the previous quarter. Year-to-date adjusted ROE was 9.8%, compared to 12.8% last year. Return on assets (ROA) of 0.73% was down from 0.94% a year earlier and up from 0.55% last quarter.

Lower profitability ratios compared to last year primarily resulted from higher provisions for credit losses this year. Improvement in adjusted ROE compared to the prior quarter was partially constrained by the issuance of common shares on July 7, 2016.

Outlook for Profitability Ratios

Compared to fiscal 2015, we expect earnings in fiscal 2016 to be lower in view of the impact of elevated provisions for credit losses on year-to-date performance, as well as ongoing pressure on net interest margin. Common shares issued on July 7, 2016 strengthened CWB's capital position and will support CWB's ongoing profitable and balanced growth; however, this issuance will result in higher levels of common shareholders' equity this year and have a moderate negative impact on adjusted ROE compared to prior expectations.

Total Revenue (teb) from Continuing Operations

Third quarter total revenue of $169.1 million, comprised of both net interest income (teb) and non-interest income, grew 10% compared to the same quarter in 2015 and 3% from the prior quarter, reflecting strong core operating performance. Year-to-date total revenues of $492.3 million were up 8% from last year.

Net Interest Income (teb)

Q3 2016 vs. Q3 2015

Net interest income (teb) of $149.5 million was up 6% primarily reflecting the benefit of very strong 14% loan growth, partially offset by a 17 basis point decrease in net interest margin (teb) to 2.40%. Of note, the decrease includes a one-time impact of three basis points related to a change in methodology for the recognition of certain loan fees. The Bank of Canada's July 2015 interest rate cut had a negative impact on loan and securities yields compared to last year, with a further impact of competitive factors on loan pricing. Corresponding reductions in the cost of various deposits and favourable changes in deposit mix, partly resulting from strong growth in preferred types of branch-raised demand and notice deposits, did not fully offset the impact of these negative factors on net interest margin.

Q3 2016 vs. Q2 2016

Net interest income was up 3% reflecting the benefit of 2% loan growth and two additional interest earning days, partially offset by a seven basis point reduction in net interest margin (teb). Three basis points of the sequential decline in net interest margin related to the change in methodology for the recognition of certain loan fees discussed above. Other factors included lower asset yields, higher overall deposit costs, partially due to increased reliance on broker-sourced funding in support of very strong asset growth, and incremental changes in loan mix.

YTD 2016 vs. YTD 2015

Net interest income (teb) of $438.8 million increased 8% due to the combined benefits of very strong 12% loan growth, partially offset by a 13 basis point reduction in net interest margin (teb) to 2.45%. One basis point of the decline related to the change in methodology for the recognition of certain loan fees discussed above. The remaining change in net interest margin (teb) reflects factors similar to those discussed above in the comparison of quarterly performance to the third quarter last year.

Interest rate sensitivity

Note 13 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at July 31, 2016. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income that would result over the following 12 months from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:

  • a constant structure in the interest sensitive asset and liability portfolios;
  • interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount, except floor levels for various deposit liabilities and certain floating rate loans, and applied at the appropriate repricing dates; and,
  • no early redemptions.
($ thousands) July 31 2016 April 30
2016
July 31
2015
Estimated impact on net interest income of a 1% increase in interest rates
1 year $ 12,180 $ 8,032 $ 1,024
1 year percentage change 2.09 % 1.39 % 0.2 %
Estimated impact on net interest income of a 1% decrease in interest rates
1 year $ (6,416 ) $ (6,981 ) $ 2,049
1 year percentage change (1.10 )% (1.21 )% 0.4 %

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, 2016 would increase unrealized losses related to available-for-sale securities and the fair value of interest rate swaps designated as hedges, and result in a reduction in other comprehensive income of approximately $51.4 million, net of tax (July 31, 2015 - $73.0 million). It is estimated that a one-percentage point decrease in all interest rates at July 31, 2016 would have the opposite effect, increasing other comprehensive income by approximately $50.3 million, net of tax (July 31, 2015 - $67.5 million). Management maintains the asset liability structure and interest rate sensitivity within CWB's established policies through pricing and product initiatives, as well as the use of interest rate swaps.

Outlook for net interest margin (teb)

Continued pressure on net interest margin may result from the combined impact of the current low interest rate environment, competitive factors and the persistently flat yield curve. The negative impact of the change in methodology for the recognition of certain loan fees is expected to be a one-time item. CWB will maintain its strategic focus on mitigating the earnings impact of ongoing margin pressure through continued implementation of its balanced growth strategy. This strategy includes efforts to optimize the overall cost of funds through targeted growth of lower-cost funding sources, as well as selective, geographically diversified growth in higher yielding loan portfolios with an acceptable risk profile.

Provision for Credit Losses

The third quarter provision for credit losses measured against average loans was 32 basis points, compared to 17 basis points last year and 78 basis points in the prior quarter. Of the provision this quarter, 12 basis points related to direct oil and gas exposures, 11 basis points to other, non-energy related exposures, and nine basis points comprised an increase in the collective allowance. As at October 31, 2015, CWB's five year average of annual net new specific allowances, excluding increases to the collective allowance, was approximately 12 basis points. The year-to-date provision for credit losses was 43 basis points, compared to 16 basis points last year. This compares to our original expectation for the provision to fall between 18 and 23 basis points, with the increase primarily attributed to specific allowances recorded against energy loans. Significantly higher provisioning within this portion of the oil and gas portfolio has resulted from the impact of persistently low and volatile energy commodity prices on producer cash flows, borrowing base redeterminations and the influence of regulatory factors on the liquidity of assets securing these exposures. Credit quality outside of our portfolio of oil and gas production loans remains stable, and management continues to expect the fiscal 2016 provision to fall in a range between 35 to 45 basis points as a percentage of average loans.

Acquisition-related Fair Value Changes

The estimated fair value of contingent consideration related to the acquisition of CWB Maxium increased by $3.9 million during the third quarter, reflecting the operating performance of this newly acquired business. Quarterly contingent consideration similar in magnitude through the remainder of the three-year earn out period would represent the maximum amount available through the purchase agreement.

Non-interest Income from Continuing Operations

Q3 2016 vs. Q3 2015

Non-interest income increased 47% to $19.5 million, primarily reflecting nil net gains/losses on securities compared to net losses of $5.0 million last year. The $1.6 million increase in 'other' non-interest income mainly related to gains on the sales of residential mortgages this quarter.

Q3 2016 vs. Q2 2016

Non-interest income was relatively consistent reflecting stability across most categories. Higher 'other' non-interest income offset a decrease in retail fees.

YTD 2016 vs. YTD 2015

Non-interest income of $53.5 million was 7% higher, reflecting gains in most categories including a $1.5 decrease in net losses on securities and a $1.0 million increase in 'other' non-interest income. Higher 'other' non-interest income relates to gains on the sales of residential mortgages discussed 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 services and CWB Wealth Management are also expected to continue to provide consistent contributions.

CWB has liquidated its holdings of common equities and has no plans to re-establish this portfolio. In view of this change, and based on the current composition of the securities portfolio, net gains/losses on securities in the fourth quarter are not expected to have a material impact on non-interest income although financial market conditions are inherently unpredictable in the short-term. Management will realize gains on the sale of residential mortgage portfolios as opportunities become available. Such gains are anticipated to be a recurring, although sporadic, source of 'other' non-interest income.

Non-interest Expenses from Continuing Operations

Q3 2016 vs. Q3 2015

Quarterly non-interest expenses of $78.5 million were up 5% ($4.0 million) due to 5% ($2.2 million) higher salaries and benefits and a 12% ($1.5 million) increase in premises and equipment expenses. General expenses of $14.1 million were relatively unchanged from last year. The change in salaries and benefits mainly resulted from annual salary increments and modest increases in staff complement to support ongoing growth across all businesses, partially offset by lower estimated performance-based executive compensation. Costs related to the amortization and sustainment of the core banking system following implementation on May 2, 2016, contributed approximately $1.2 million to premises and equipment expenses.

Q3 2016 vs. Q2 2016

Non-interest expenses were relatively unchanged as slightly lower salaries and benefits, along with stable general expenses, offset a slight increase in premises and equipment expenses which mainly resulted from the banking system implementation. The decrease in salaries and benefits relates to a change in estimated performance-based executive compensation discussed above, as well as the elimination of certain temporary positions related to the core banking system project.

YTD 2016 vs. YTD 2015

Non-interest expenses of $232.5 million increased 7% ($14.8 million) due to 7% ($9.8 million) higher salaries and benefits, a 7% ($2.6 million) increase in premises and equipment expense, and a 6% ($2.4 million) increase in general expenses. Changes in salaries and benefits, and premises and equipment expenses reflect the factors discussed above.

Outlook for non-interest expenses from Continuing Operations

A key priority for CWB is to deliver strong long-term growth in adjusted cash earnings per share through strategic investment while maintaining effective control of costs. CWB's current investments in people, technology and infrastructure are expected to contribute to long-term shareholder value through improved financial performance in future periods.

Combined amortization and sustainment costs related to the new core banking system are expected to add approximately $2.0 million to non-interest expenses on a quarterly basis commencing next quarter. Upgrades and expansion of branch infrastructure continue, including the addition this quarter of a new full-service branch in Lloydminster, Saskatchewan. 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.

In view of the level of investment currently underway, non-interest expense growth is expected to increase moderately over the near term compared to the recent past. In general, annual expense growth at or near a double-digit annual rate in percentage terms is consistent with CWB's strategic direction and medium-term performance objectives.

Core banking system implementation

CWB's new core banking system was successfully launched on May 2, 2016, and a planned four-month stabilization period is nearly complete. Total investment was consistent with estimated total costs of up to $71 million.

The implementation of this important new technology reflects several years of focused effort on the part of CWB's dedicated project team as well as a tremendous team effort within CWB's branches and corporate office during and after implementation. Management expects CWB to realize significant benefits related to this improved technology in due course, including the ability to leverage a client-centric view of CWB's branch-based client relationships, and support for CWB's eventual transition to the Advanced Internal Ratings Based (AIRB) methodology for calculating risk weighted assets.

Efficiency ratio and operating leverage

To adjust for the impact of acquisition-related accounting items which represent charges not considered indicative of ongoing operating performance, CWB calculates its efficiency ratio excluding the amortization of acquisition-related intangible assets and contingent consideration fair value changes.

The third quarter efficiency ratio (teb) was 45.4%, improved from 47.7% last year. The positive impact on total revenues of very strong loan growth and higher non-interest income more than offset the impact of lower net interest margin (teb) and higher expenses.

The efficiency ratio improved from 46.7% in the previous quarter as the combined benefits of 2% loan growth, stable non-interest income and the temporary reduction in salaries and benefits offset the impact of lower net interest margin (teb).

The year-to-date efficiency ratio (teb) of 46.3% improved from 46.8%, as the benefit of very strong 12% loan growth and increased non-interest income offset the impact of lower net interest margin (teb) and higher non-interest expenses.

Third quarter operating leverage was positive 5% as strong year-over-year growth in total revenues outpaced moderate growth in non-interest expenses.

Outlook for the efficiency ratio and operating leverage

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

Income Taxes

The third quarter effective income tax rate (teb) for Continuing Operations was 27.7%, compared to 25.8% last year. The year-to-date effective income tax rate (teb) for Continuing Operations was 27.5% compared to 26.2% last year. The 20% increase in Alberta's provincial corporate income tax rate, from 10% to 12%, effective July 1, 2015, had a negative impact on year-to-date adjusted cash earnings per share of approximately $0.03 compared to the same period last year.

Outlook for income taxes

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

Overview of Discontinued Operations

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

For the three months ended For the nine months ended
July 31
2016
April 30
2016
July 31
2015
Change
from
July 31
2015
July 31
2016
July 31
2015
Change
from
July 31
2015
Net interest income (teb) $ - $ - $ - - % $ - $ 3,875 (100 )%
Non-interest income - - - - - 12,354 (100 )
Total revenue (teb) - - - - - 16,229 (100 )
Non-interest expenses - - - - - 11,104 (100 )
Net income before income taxes - - - - - 5,125 (100 )
Income taxes (teb) - - - - - 1,296 (100 )
Net income before gain on sale - - - 3,829 (100 )
Gain on sale, net of tax - - 107,639 (100 ) - 107,639 (100 )
Common shareholders' net income $ - $ - $ 107,639 (100 )% $ - $ 111,468 (100 )%
Earnings per common Share
Basic $ - $ - $ 1.33 (100 )% $ - $ 1.38 (100 )%
Diluted - - 1.33 (100 ) - 1.38 (100 )
Adjusted cash - - 1.33 (100 ) - 1.38 (100 )

Third quarter and year-to-date common shareholders' net income from Discontinued Operations was nil compared to $107.6 million and $111.5 million, respectively, in 2015. Third quarter and year-to-date adjusted cash earnings per common share were nil compared to $1.33 and $1.38, respectively, in 2015. Common shareholders' net income and adjusted cash earnings per share from Discontinued Operations last year were primarily comprised of divestiture gains.

Overview of Combined Operations

Q3 2016 vs. Q3 2015

Common shareholders' net income of $45.6 million was down from $158.8 million, with the difference primarily reflecting divestiture gains of $107.6 million from Discontinued Operations in the third quarter last year, as well as the factors discussed above within the overview of Continuing Operations. Diluted earnings per common share of $0.55 and adjusted cash earnings per common share of $0.60 both decreased from $1.97 and $1.98, respectively.

Q3 2016 vs. Q2 2016

Common shareholders' net income increased 42% reflecting the factors discussed above within the overview of Continuing Operations.

YTD 2016 vs. YTD 2015

Common shareholders' net income of $129.9 million decreased from $266.6 million, mainly due to the contribution of divestiture gains from Discontinued Operations last year, as well as the factors discussed above within the overview of Continuing Operations. Diluted earnings per common share of $1.59 and adjusted cash earnings per common share of $1.66 were down from $3.31 and $3.34, respectively.

ROE and ROA

Third quarter adjusted return on common shareholders' equity (adjusted ROE) was 10.3%, compared to 36.5% last year and 7.4% last quarter. Return on assets (ROA) of 0.73% compares to 2.90% a year earlier and 0.55% last quarter. Year-to-date adjusted ROE of 9.8% compares to 21.9% last year, and ROA of 0.72% was down from 1.67%.

Comprehensive Income

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

Q3 2016 vs. Q3 2015

Comprehensive income of $66.0 million was down from $164.8 million in the same period last year. Lower net income mainly reflected the contribution of divestiture gains from Discontinued Operations last year, as well as the impact of higher provisions for credit losses on net income from Continuing Operations this year. OCI of $15.9 million was $11.7 million higher than last year.

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

YTD 2016 vs. YTD 2015

Comprehensive income of $147.0 million was down from $253.0 million last year, primarily due to lower common shareholders' net income. Net income of $137.7 million compared to $271.8 million last year, with the decrease reflecting both the contribution of divestiture gains from Discontinued Operations in 2015 and the impact of energy-related provisions for credit losses on net income from Continuing Operations this year. OCI was $28.1 million higher as gains from changes in the fair value of available-for-sale securities of $14.9 million compared to losses of $39.8 million last year. This was partially offset by fair value losses of $7.9 million related to derivatives designated as cash flow hedges compared to $10.9 million of fair value gains in the prior year.

Balance Sheet

Total assets increased 13% in the past year, 4% in the quarter and 10% on a year-to-date basis to reach $25,185 million at July 31, 2016.

Cash and Securities

Cash, securities and securities purchased and sold under resale and repurchase agreements totaled $2,979 million at July 31, 2016, compared to $2,856 million a year earlier and $2,427 million at the end of last quarter.

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

Net unrealized losses on securities from Continuing Operations recorded on the balance sheet of $52.7 million were up slightly from $49.1 million as at July 31, 2015, and down from $72.5 million last quarter. Fluctuations in value are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve. The difference compared to last year primarily reflects decreases in the market value of preferred shares. The change from last quarter primarily reflects higher market values for preferred shares and fixed income securities.

Net realized gains/losses on securities of nil in the third quarter compare to net losses of $5.0 million last year and were consistent with the previous quarter. Year-to-date net losses on securities of $2.9 million compare to net losses of $4.4 million last year. Net losses on securities in prior periods primarily reflected the impact of volatile financial market conditions on CWB's previously held portfolio of common equities. CWB's common equity holdings have been liquidated and management does not intend to re-establish this portfolio. Based on the current composition of the securities portfolio, net gains/losses on securities are not expected to have a material impact on non-interest income in the fourth quarter, although financial market conditions are inherently unpredictable in the short-term.

Treasury Management

The average balance of cash and securities as a percentage of total assets in the third quarter was relatively consistent with the same quarter last year and the prior quarter. CWB held liquidity early in the quarter in preparation for the July 1, 2016 closing of the CWB Franchise Finance acquisition. Management expects to maintain a conservative level of liquid assets as a percentage of total assets. CWB remains compliant with the Office of the Superintendent of Financial Institutions' (OSFI) Liquidity Adequacy Requirements guideline.

Loans

CWB has achieved another year of balanced, double-digit loan growth by the end of the third quarter, marking the 26th time in 27 years CWB has achieved this significant level of performance. Total loans, excluding the allowance for credit losses, grew 14% ($2,701 million) in the past twelve months, 2% ($478 million) in the quarter and 12% ($2,285 million) year-to-date to reach $21,854 million. Acquisition of the CWB Franchise Finance portfolio contributed approximately $350 million to general commercial loans this quarter. Third quarter net originations within CWB Maxium were approximately $100 million, also primarily comprised of general commercial loans.

In dollar terms, year-over-year growth by lending sector was led by real estate project loans ($1,123 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 general commercial loans ($917 million) was also strong, as was the increase in personal loans and mortgages ($612 million). Commercial mortgages were up $231 million, and equipment financing and leasing grew $29 million. Corporate lending declined by $158 million and exposure to oil and gas production loans decreased $53 million to $257 million.

On a sequential basis, third quarter growth was led by general commercial loans ($522 million), primarily due to the contributions of CWB Franchise Finance and CWB Maxium discussed above. Real estate project loans were up $158 million, and personal loans and mortgages grew $76 million. Corporate lending contracted by $111 million, the balance of oil and gas production loans declined $70 million, commercial mortgages were down $60 million and equipment financing and leasing contracted $37 million. Contraction of these portfolios mainly occurred within Alberta. With the exception of corporate lending, stable growth was evident across most portfolios outside of Alberta.

(unaudited)
(millions)
July 31 2016 April 30 2016 July 31 2015 Change from
July 31 2015
General commercial loans $ 4,689 $ 4,167 $ 3,772 24 %
Real estate project loans 4,296 4,138 3,173 35
Commercial mortgages 4,006 4,066 3,775 6
Equipment financing and leasing 3,724 3,761 3,695 1
Personal loans and mortgages 3,776 3,700 3,164 19
Corporate lending(1) 1,106 1,217 1,264 (13 )
Oil and gas production loans 257 327 310 (17 )
Total loans outstanding(2) $ 21,854 $ 21,376 $ 19,153 14 %
  1. Corporate lending represents a diversified portfolio that is centrally sourced and administered through a designated lending group located in Edmonton. These loans include participation in select syndications that are structured and led primarily by the major Canadian banks, but exclude participation in various other syndicated facilities sourced through relationships developed at CWB branches.
  2. Total loans outstanding by lending sector exclude the allowance for credit losses.

Lending activity in British Columbia showed the highest growth in dollar terms on a year-over-year basis, followed by Ontario and Alberta. Loan growth within BC and Ontario accounted for more than three quarters of the increase from July 31, 2015, while Alberta accounted for less than one tenth of CWB's year-over-year growth. Alberta now represents approximately 38% of CWB's overall loan exposure by location of security, down from 50% in 2009.

(unaudited)
(millions)
July 31 2016 April 30 2016 July 31 2015 Change from
July 31 2015
Alberta $ 8,201 $ 8,441 $ 7,978 3 %
British Columbia 7,793 7,532 6,360 23
Ontario 2,962 2,661 2,283 30
Saskatchewan 1,364 1,335 1,290 6
Manitoba 671 619 519 29
Other 863 788 723 19
Total loans outstanding(1) $ 21,854 $ 21,376 $ 19,153 14 %
  1. Total loans outstanding by province exclude the allowance for credit losses.

Optimum Mortgage

Net of the sale of three portfolios totalling $71 million on a year-to-date basis, total loans of $2,184 million within Optimum increased 23% ($413 million) year-over-year, 3% ($62 million) compared to the prior quarter and 13% ($256 million) year-to-date. Growth for the quarter was driven almost exclusively by alternative mortgages secured via first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 69%. The book value of alternative mortgages represented 92% of Optimum's total portfolio at quarter end, compared to 88% last year and 89% in the prior quarter. Ontario continues to account for more than half of all new originations. At approximately 44% of the total, Ontario also represents the largest geographic exposure by province within Optimum's portfolio, followed by Alberta at 27% and British Columbia at 16%. The average size of Optimum mortgages originated in the third quarter was approximately $311,000, and the average size of mortgage outstanding at July 31, 2016 was approximately $251,000.

Outlook for Optimum Mortgage

Optimum is expected to continue to deliver strong performance with an attractive risk profile based on the addition of business development staff to new markets within the past year and maintenance of disciplined underwriting criteria at all times. This includes a generally conservative approach to risk, manual adjudication of each loan application and reduced loan-to-value ratios at initiation within housing markets perceived to be more vulnerable to price correction. Canadian residential real estate markets have been resilient and affordability in most geographic areas outside of certain neighborhoods in Toronto and Vancouver remains within historical ranges, largely reflecting very low interest rates. Reduced housing sector activity and softer pricing is apparent in Alberta and Saskatchewan, and the combination of historically high price levels and sentiment related to potential economic headwinds caused by low energy prices could lead to further moderation of housing sector activity in these and other markets. Preliminary stress testing of Optimum's portfolio to simulate the impact of a 50% price correction in Vancouver, a 40% price correction in Toronto, and a 30% price correction elsewhere across the country, along with reasonable related macroeconomic assumptions, produces a one-year loss rate of approximately 50 basis points as a percentage of Optimum's outstanding loans.

Outlook for loans

CWB will continue to support high quality borrowers operating within targeted industry segments and selectively pursue opportunities for profitable growth across Canada. Very strong loan growth through the first three quarters of the year was the result of significantly higher relative contributions from non-oil producing provinces across CWB's growing geographic footprint and includes the impact of Optimum Mortgage, National Leasing and CWB's newly acquired businesses. Continued economic strength in the U.S. and a lower Canadian dollar are expected to support an escalation of manufacturing and exporting activity in all provinces, especially BC, Ontario and Manitoba. Taken together, these three provinces account for greater than half of CWB's geographic exposure. Alberta and Saskatchewan are currently assumed to be in recession and are generally expected to continue to underperform the rest of Canada over the near term. This is primarily based on the recognition of diminished resource-related activity resulting from persistent low oil prices. As such, loan growth in these two provinces is expected to remain slow through the remainder of 2016 as compared to the levels achieved in recent years. Approximately 80% of the current business of both CWB Maxium and CWB Franchise Finance is outside of Western Canada, and combined annual commercial lending originations from these sources are expected to exceed $500 million commencing in fiscal 2017.

Credit Quality

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

Within the oil and gas production portfolio, the impact of very low commodity prices on producer cash flows early in the calendar year, as well as borrowing base redeterminations and the influence of regulatory factors on the liquidity of assets securing these exposures has led to significant credit stress over the last two quarters. In view of these factors, CWB recorded $32.5 million of pre-tax provisions for credit losses against oil and gas production loans last quarter, and an additional $6.8 million of net allowances this quarter. Total cumulative specific provisions of $41.4 million have been recorded against these loans.

CWB's direct exposure to the energy industry is relatively small at approximately 3% of total loans outstanding, comprised of loans to exploration and production companies representing approximately 1%, and loans to energy service companies representing approximately 2%. Nearly three quarters of CWB's direct exposure to exploration and production companies is now comprised of advances to borrowers with strong balance sheets and substantial proven, developed and producing resources.

Loans to service companies are primarily comprised of term-reducing advances against standard industrial equipment, rather than operating lines of credit or loans secured against receivables and/or inventory. These factors mitigate the loss potential of CWB's limited exposures to the energy services sector. Management continues to proactively monitor all accounts with a particular focus on those located within the oil-exporting provinces. To date, the impact of lower oil prices outside of the oil and gas portfolio has been minimal and consistent with expectations.

For the three months ended
(unaudited)
($ thousands)
July 31 2016 April 30 2016 July 31 2015 Change from
July 31 2015
Gross impaired loans, beginning of period $ 144,963 $ 111,507 $ 92,855 56 %
New formations 14,288 69,905 18,687 (24)
Reductions, impaired accounts paid down or returned to performing status (21,551) (20,741) (15,421) (40)
Write-offs (30,989) (15,708) (3,853) (704)
Total(1) $ 106,711 $ 144,963 $ 92,268 16 %
Balance of the ten largest impaired accounts $ 54,106 $ 85,756 $ 53,222 2 %
Total number of accounts classified as impaired(3) 180 166 114 58
Gross impaired loans as a percentage of total loans 0.49 % 0.68 % 0.48 % 1 bp(2)
  1. Gross impaired loans include foreclosed assets held for sale (primarily residential mortgages) with a carrying value of $2,877 (April 30, 2016 - $3,392 and July 31, 2015 - $1,109).
  2. bp - basis point change.
  3. Total number of accounts excludes National Leasing.

The dollar level of gross impaired loans at July 31, 2016 totaled $106.7 million, up from $92.3 million last year and down from $145.0 million in the prior quarter. Total gross impaired loans within Alberta of $42.6 million at July 31, 2016 increased from $33.9 million in the third quarter last year, and were down from $80.4 million in the prior quarter. Gross impaired loans within the oil and gas production lending portfolio totaled $17.2 million at July 31, 2016, compared to $13.4 million in the third quarter last year and $53.8 million last quarter. There were no new oil and gas loans added to gross impaired loans this quarter. Total third quarter gross impaired loans from CWB's equipment financing and leasing exposures were $35.7 million, relatively unchanged from the prior quarter, with approximately 50% of the balance represented by Alberta exposures. Impairments in this category one year ago were $22.5 million, with approximately 30% represented by Alberta exposures.

The dollar level of gross impaired loans represented 0.49% of total loans at quarter end, compared to 0.48% last year and 0.68% at April 30, 2016. The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved, and does not directly reflect the dollar value of expected write-offs given tangible security held in support of lending exposures. The overall loan portfolio is reviewed regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends. Loans that have become impaired are monitored closely by a specialized team with regular quarterly, or more frequent, reviews of each loan and its realization plan.

Specific allowances for expected write-offs are established through detailed analyses of both the overall quality and ultimate marketability of security held against each impaired account. Specific allowances attributed to oil and gas loans accounted for approximately 39% of the third quarter provision for credit losses, and approximately 63% of the provision on a year-to-date basis.

As at July 31, 2016, the collective allowance for credit losses exceeded the balance of impaired loans, net of specific allowances. The total allowance for credit losses (collective and specific) was $132.7 million at July 31, 2016, compared to $113.2 million a year earlier and $145.8 million last quarter. The total allowance for credit losses represented 124% of gross impaired loans at quarter end, compared to 123% one year ago and 101% last quarter. The collective allowance grew 5% over the past twelve months.

Outlook for credit quality

Credit quality outside of CWB's portfolio of oil and gas production loans remains stable. However, recent loss rates related to impaired loans within the oil and gas portfolio have exceeded those experienced during prior economic cycles. As such, management continues to expect the annual provision to fall between 35 and 45 basis points as a percentage of average loans. As CWB works with clients through the challenging operating environment in Alberta, management continues to carefully monitor the entire loan portfolio for signs of weakness resulting from the first and second order impacts of lower oil prices. To date, no material impact has been evident.

In view of the decrease from last quarter, gross impaired loans remain low as a percentage of total loans, with the current level of 0.49% comparing to a peak during the prior credit cycle of 1.68% in the second quarter of 2010. Partially due the extended period of economic weakness within Alberta, including the impact of the Fort McMurray wildfires on economic activity across the province, we expect periodic further increases in the balance of impaired loans across the portfolio; however, we anticipate loss rates on impaired loans outside of oil and gas production lending to reflect the combined positive impact of our disciplined underwriting, secured lending practices and proactive account management, and to be more consistent with our prior experience. Ongoing loan management processes include assignment of experienced credit adjudicators to help branches and credit teams proactively identify and address higher risk loans.

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

Deposits and Funding

Total deposits were up 12% over the past year ($2,307 million), 4% ($816 million) from the previous quarter and 9% ($1,792 million) year-to-date. Total deposits by type and source are summarized below:

As at
(unaudited)
($ millions)
July 31 2016 April 30 2016 July 31 2015 Change from
July 31
2015
Deposits by type
Demand and notice deposits $ 7,187 $ 6,941 $ 6,651 8 %
Term deposits 12,077 11,480 9,787 23
Capital markets 1,893 1,920 2,412 (22 )
Total Deposits $ 21,157 $ 20,341 $ 18,850 12 %
As at
(unaudited)
($ millions)
July 31 2016 April 30 2016 July 31 2015 Change from
July 31
2015
Deposits by source
CWB Group branch-raised $ 11,077 $ 10,701 $ 10,048 10 %
Deposit brokers 8,187 7,720 6,390 28
Capital markets 1,893 1,920 2,412 (22 )
Total Deposits $ 21,157 $ 20,341 $ 18,850 12 %

Personal deposits represented 62% of total deposits at July 31, 2016, up from 61% in the prior quarter and 58% last year. Total branch-raised deposits, including trust services deposits, grew 10% from the third quarter last year and 4% from the prior quarter, to represent 52% of total deposits at July 31, 2016. This was down slightly from 53% both one year ago and in the previous quarter.

Lower cost demand and notice deposits increased 8% from the same quarter last year and comprise 34% of total deposits, relatively consistent with last year and the previous quarter. Term deposits raised through debt capital markets were $1,893 million at quarter end, representing 9% of total deposits, down from 13% last year reflecting the redemption of certain deposit notes. The level of capital markets deposits was relatively consistent with the prior quarter.

Securitization

Securitized leases and mortgages are reported on-balance sheet with total loans. The gross amount of securitized leases at July 31, 2016 was $1,045 million, up from $638 million one year ago and $969 million last quarter. No mortgages were securitized under the NHA MBS program in the third quarter. The gross amount of mortgages securitized under this program on a year-to-date basis is $171 million (2015 - nil). Year-to-date funding from the securitization of leases was $634 million (2015 - $310 million). Increased utilization of securitization reflects the relative cost-effectiveness of this funding channel, as well as initiatives finalized earlier this year which resulted in lower overall capital requirements for CWB's existing pool of securitized leases.

Outlook for deposits and funding

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

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

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

Other Assets and Other Liabilities

Other assets totaled $462 million at July 31, 2016, compared to $358 million one year ago and unchanged from last quarter. Other liabilities were $442 million at quarter end, compared to $342 million a year earlier and $568 million the previous quarter. The increase in other assets compared to last year primarily reflects the increase in goodwill and intangible assets related to the acquisition of CWB Maxium and the investment in the new core banking system. The increase in other liabilities from one year ago mainly reflects a higher balance of cheques and other items in transit and the contingent consideration liability related to the CWB Maxium acquisition.

Off-Balance Sheet

Off-balance sheet items include assets under administration and assets under management. Total assets under administration, which are comprised of trust assets and third-party leases under administration, and mortgages under service agreements, totaled $10,305 million at July 31, 2016, compared to $9,449 million one year ago and $10,288 million last quarter. Assets under management were $1,889 million at quarter end, compared to $1,912 million a year earlier and $1,834 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, 2016, as well as Note 20 of the audited consolidated financial statements in CWB's 2015 Annual Report.

Capital Management

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

Issuance of Common Shares

On July 7, 2016, CWB closed a public issuance of 6,125,000 common shares at a price of $24.50 per share to raise gross proceeds of approximately $150 million. At July 31, 2016, CWB's capital ratios were very strong at 9.0% CET1, 10.8% Tier 1 and 12.9% total capital. Changes in CWB's capital ratios from last quarter mainly reflect an increase of 72 basis points related to the common share issuance, partially offset by the investment of 15 basis points in closing the acquisition of the CWB Franchise Finance portfolio. Higher Tier 1 and Total capital ratios compared to last year reflect the impact of this common share issuance, as well as the issuance on March 31, 2016 of $140 million of non-cumulative 5-year rate reset First Preferred Shares Series 7 (Non-Viability Contingent Capital), partially offset by the redemption of $300 million of subordinated debentures on November 30, 2015.

CWB is well-positioned to continue to execute against management's balanced growth strategy while ensuring resilience and flexibility through the maintenance of strong capital ratios. At 8.4%, the Basel III leverage ratio remains very conservative.

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

(unaudited)
($ millions)
As at
July 31
2016
As at
April 30
2016
As at
July 31
2015
Regulatory capital
CET1 capital before deductions $ 2,037 $ 1,849 $ 1,755
Net CET1 deductions (211 ) (209 ) (129 )
CET1 capital 1,826 1,640 1,626
Tier 1 capital(1) 2,196 2,010 1,856
Total capital(1) 2,626 2,435 2,428
Risk-weighted assets $ 20,395 $ 19,934 $ 19,024
Capital adequacy ratios
CET1 9.0 % 8.2 % 8.5 %
Tier 1 10.8 10.1 9.8
Total 12.9 12.2 12.8
  1. The 2016 inclusion of non-common equity instruments that do not include non-viability contingent capital clauses is capped at 60% of the January 1, 2013 outstanding balances (2015 - 70%). The balance of subordinated debentures outstanding at July 31, 2016 was within the inclusion threshold and no amounts were excluded from regulatory capital (July 31, 2015 - $153 million excluded). For all periods, there was no exclusion from regulatory capital related to the Innovative Tier 1 capital (disclosed in deposits).

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

CWB continues to monitor changes proposed to both the Standardized and AIRB approaches for credit risk by the Basel Committee on Banking Supervision. CWB's multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets is underway. Implementation of CWB's new core banking system, successfully completed this quarter, 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, 2016 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2015.

Book value per common share at July 31, 2016 was $23.19, compared to $22.01 last year and $22.62 last quarter. Higher book value compared to prior periods reflects CWB's strong business growth and the issuance of common shares at $24.50 per share this quarter.

Common shareholders received a quarterly cash dividend of $0.23 per common share on June 30, 2016. On August 31, 2016, CWB's Board of Directors declared a cash dividend of $0.23 per common share, payable on September 29, 2016 to shareholders of record on September 15, 2016. This quarterly dividend is consistent with the prior quarter and up 5% from the dividend declared one year ago.

Common share dividend increases are evaluated every quarter against the dividend payout ratio target of approximately 30%. The third quarter dividend payout ratio was 40%. The timing of future dividend increases will be influenced by capital requirements under the Standardized approach to support ongoing strong asset growth, as well as challenges related to persistent net interest margin pressure and ongoing macroeconomic uncertainty.

On July 31, 2016, Series 5 preferred shareholders received a quarterly cash dividend of $0.275 and Series 7 preferred shareholders received an initial cash dividend of $0.5223, which included a stub period dividend due to timing of the Series 7 issuance. On August 31, 2016, the Board of Directors also declared a cash dividend of $0.275 per Series 5 Preferred Share, and a cash dividend of $0.390625 per Series 7 Preferred Share, both payable on October 31, 2016 to shareholders of record on October 20, 2016.

Significant Changes in Accounting Policies and Financial Statement Presentation

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

Future Accounting Changes

A number of standards and amendments have been issued by the International Accounting Standards Board (IASB) and are described in further detail on page 49 of CWB's 2015 Annual Report and in Note 2 of the unaudited interim consolidated financial statements for the period ended July 31, 2016. These standards and amendments may impact the presentation of financial statements in the future and management is currently reviewing these changes to determine the impact, if any.

IFRS 16 - Leases

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

IFRS 15 - Revenue from Contracts with Customers

In April 2016, the IASB issued amendments to IFRS 15, which clarify the underlying principles of IFRS 15 and provide additional transitional relief on initial application. These amendments are effective for CWB's fiscal year beginning November 1, 2018. The impact on CWB of these amendments has not yet been determined.

IFRS 2 - Share-based Payment Transactions

In June 2016, the IASB issued amendments to IFRS 2, which clarify how to account for certain types of share-based payment transactions. These amendments are effective for CWB's fiscal year beginning November 1, 2018 and can be applied prospectively. The impact on CWB of these amendments has not yet been determined.

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

Controls and Procedures

During the third quarter, CWB implemented its new core banking system. Implementation of this system impacted CWB's disclosure controls and internal controls over financial reporting. The evaluation of the changes to the design of the disclosure controls and internal controls over financial reporting concluded there is reasonable assurance that material and required disclosure information is appropriately identified and reported and that financial reporting is reliable and in accordance with IFRS. The operating effectiveness of the controls related to the banking system implementation, including internal controls over financial reporting, will be tested and evaluated prior to CWB's October 31, 2016 year-end.

CWB's certifying officers have limited the scope of the design of disclosure controls and procedures and internal controls over financial reporting to exclude the controls, policies and procedures of CWB Maxium, acquired on March 1, 2016. This limitation will be removed no later than January 31, 2017. CWB Maxium's revenue for the three and five months ended July 31, 2016 was $2.2 million and $3.2 million, respectively. CWB Maxium's net loss for the three and five months ended July 31, 2016, which include the $2.9 million after-tax change in fair value of contingent consideration recorded in the third quarter, was $2.8 million and $3.2 million, respectively. Total assets and liabilities of CWB Maxium at July 31, 2016 were $277.5 million and $249.4 million, respectively.

There were no other changes in CWB's ongoing internal controls over financial reporting that occurred during the quarter ended July 31, 2016 that have materially affected, or are reasonably likely to materially affect, CWB's internal controls over financial reporting. Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of CWB.

Third-party Credit Ratings

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

Updated Share Information

As at August 25, 2016, there were 88,056,771 common shares and 5,222,444 stock options outstanding. For additional information on share capital and stock options, see Notes 17 and 18 of the audited annual consolidated financial statements for the year ended October 31, 2015 and Notes 9 and 10 to the interim consolidated financial statements for this quarter.

Dividend Reinvestment Plan

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

Summary of Quarterly Financial Information

2016 2015 2014
($ thousands) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Continuing Operations
Common shareholders' net income $ 45,582 $ 32,213 $ 52,132 $ 52,969 $ 51,170 $ 51,520 $ 52,405 $ 56,859
Earnings per common share
Basic 0.55 0.40 0.65 0.66 0.64 0.64 0.65 0.71
Diluted 0.55 0.40 0.65 0.66 0.64 0.64 0.65 0.70
Adjusted cash 0.60 0.41 0.66 0.67 0.65 0.65 0.66 0.71
Combined Operations
Common shareholders' net income $ 45,582 $ 32,213 $ 52,132 $ 53,138 $ 158,809 $ 53,545 $ 54,209 $ 58,150
Earnings per common share
Basic 0.55 0.40 0.65 0.66 1.97 0.67 0.67 0.72
Diluted 0.55 0.40 0.65 0.66 1.97 0.67 0.67 0.72
Adjusted cash 0.60 0.41 0.66 0.67 1.98 0.68 0.69 0.73
Total assets ($ millions) 25,185 24,237 23,473 22,839 22,280 21,545 21,285 20,635
Discontinued Operations
Common shareholders' net income (loss) $ - $ - $ - $ 169 $ 107,639 $ 2,025 $ 1,804 $ 1,291
Earnings per common share
Basic - - - - 1.33 0.03 0.02 0.01
Diluted - - - - 1.33 0.03 0.02 0.02
Adjusted cash - - - - 1.33 0.03 0.03 0.02

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

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

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

Taxable Equivalent Basis (teb)

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

Non-IFRS Measures

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

  • taxable equivalent basis - described above;
  • pre-tax, pre-provision earnings - common shareholders' net income plus the provision for credit losses and income taxes (teb) (see calculation below);
  • adjusted cash earnings per common share - diluted earnings per common share excluding the acquisition-related amortization of intangible assets and contingent consideration fair value changes, net of tax (see calculation below). Excluded items are not considered to be indicative of ongoing business performance;
  • return on common shareholders' equity - annualized common shareholders' net income divided by average common shareholders' equity;
  • adjusted return on common shareholders' equity - annualized common shareholders' net income excluding the acquisition-related amortization of intangible assets and contingent consideration fair value changes, net of tax (see calculation below), divided by average common shareholders' equity.
  • return on assets - annualized common shareholders' net income divided by average total assets;
  • efficiency ratio - non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets (see calculation below), divided by total revenues, including the net gain related to the sales of the property and casualty insurance subsidiary and CWB's stock transfer business;
  • net interest margin - annualized net interest income divided by average total assets;
  • Basel III common equity Tier 1, Tier 1 and total capital ratios - in accordance with Basel III guidelines issued by OSFI;
  • operating leverage - total revenue (teb) growth less non-interest expense growth, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months;
  • common share dividend payout ratio - common share dividends declared during the past twelve months divided by common shareholders' net income earned over the same period; and
  • average balances - average daily balances.
Adjusted Financial Measures
(Continuing Operations) For the three months ended For the nine months ended
(unaudited)
($ thousands)
July 31 2016 April 30 2016 July 31 2015 Change from July 31 2015 July 31 2016 July 31 2015 Change from July 31 2015
Non-interest expenses $ 78,504 $ 78,461 $ 74,472 5 % $ 232,518 $ 217,715 7 %
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets (1,776 ) (1,605 ) (1,097 ) 62 (4,559 ) (3,441 ) 32
Adjusted non-interest expenses $ 76,728 $ 76,856 $ 73,375 5 % $ 227,959 $ 214,274 6 %
Common shareholders' net income from Continuing Operations $ 45,582 $ 32,213 $ 51,170 (11 )% $ 129,927 $ 155,095 (16 )%
Adjustments (after-tax):
Amortization of acquisition-related intangible assets 1,307 1,182 719 82 3,358 2,292 47
Acquisition-related fair value changes 2,896 - - 100 2,896 638 354
Adjusted common shareholders' net income from Continuing Operations $ 49,785 $ 33,395 $ 51,889 (4 )% $ 136,181 $ 158,025 (14 )%
Adjusted Financial Measures
(Combined Operations) For the three months ended For the nine months ended
(unaudited)
($ thousands)
July 31
2016
April 30
2016
July 31
2015
Change
from
July 31
2015
July 31
2016
July 31
2015
Change
from
July 31
2015
Non-interest expenses $ 78,504 $ 78,461 $ 74,472 5 % $ 232,518 $ 228,819 2 %
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets (pre-tax) (1,776 ) (1,605 ) (1,097 ) 62 (4,559 ) (3,441 ) 32
Adjusted non-interest expenses $ 76,728 $ 76,856 $ 73,375 5 % $ 227,959 $ 225,378 1 %
Common shareholders' net income from Combined Operations $ 45,582 $ 32,213 $ 158,809 (71 )% $ 129,927 $ 266,563 (51 )%
Adjustments (after-tax):
Amortization of acquisition-related intangible assets 1,307 1,182 719 82 3,358 2,292 47
Acquisition-related fair value changes 2,896 - - 100 2,896 638 354
Adjusted common shareholders' net income from Combined Operations $ 49,785 $ 33,395 $ 159,528 (69 )% $ 136,181 $ 269,493 (49 )%
Pre-tax, pre-provision (PTPP) earnings
(Continuing Operations) For the three months ended For the nine months ended
(unaudited)
($ thousands)
July 31
2016
April 30
2016
July 31
2015
Change
from
July 31
2015
July 31
2016
July 31
2015
Change
from
July 31
2015
Common shareholders' net income from Continuing Operations $ 45,582 $ 32,213 $ 51,170 (11 )% $ 129,927 $ 155,095 (16 )%
Adjustments:
Provision for credit losses 17,402 39,671 8,018 117 66,005 22,373 195
Income taxes (teb) 19,168 12,603 18,410 4 52,169 56,916 (8 )
Pre-tax, pre-provision earnings $ 82,152 $ 84,487 $ 77,598 6 % $ 248,101 $ 234,384 6 %
Consolidated Balance Sheets
(unaudited)
($ thousands)
As at
July 31
2016
As at
April 30
2016
As at
October 31
2015
As at
July 31
2015(1)
Change
from
July 31
2015
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions $ 38,025 $ 6,271 $ 23,949 $ 6,532 482 %
Interest bearing deposits with regulated financial institutions (Note 4) 544,793 169,997 412,768 536,773 1
Cheques and other items in transit 10,435 19,844 6,705 1,603 551
593,253 196,112 443,422 544,908 9
Securities (Note 4)
Issued or guaranteed by Canada 1,306,045 1,522,143 1,364,862 1,207,993 8
Issued or guaranteed by a province or municipality 546,335 360,837 620,904 474,230 15
Other debt securities 214,244 173,040 346,299 152,434 41
Preferred shares 123,580 131,437 143,868 163,706 (25 )
Common shares - - 75,179 142,549 (100 )
2,190,204 2,187,457 2,551,112 2,140,912 2
Securities Purchased Under Resale Agreements 195,079 142,915 - 170,000 15
Loans (Notes 5 and 7)
Personal 3,775,988 3,699,902 3,318,254 3,164,137 19
Business 18,078,402 17,675,776 16,251,530 15,989,397 13
21,854,390 21,375,678 19,569,784 19,153,534 14
Allowance for credit losses (Note 6) (109,888 ) (127,673 ) (94,401 ) (87,330 ) 26
21,744,502 21,248,005 19,475,383 19,066,204 14
Other
Property and equipment 57,808 59,053 61,356 61,637 (6 )
Goodwill 84,488 84,488 43,781 43,825 93
Intangible assets 148,941 143,580 106,103 98,575 51
Derivative related (Note 8) 13,155 28,308 23,245 24,054 (45 )
Other assets 158,011 146,983 134,125 129,573 22
462,403 462,412 368,610 357,664 29
Total Assets $ 25,185,441 $ 24,236,901 $ 22,838,527 $ 22,279,688 13 %
Liabilities and Equity
Deposits
Personal $ 13,098,162 $ 12,463,248 $ 11,416,621 $ 10,909,081 20 %
Business and government 8,058,728 7,877,677 7,948,786 7,940,987 1
21,156,890 20,340,925 19,365,407 18,850,068 12
Other
Cheques and other items in transit 93,651 122,309 60,258 44,591 110
Securities sold under repurchase agreements - 99,003 - - -
Derivative related (Note 8) 7,062 7,757 4,503 4,259 66
Other liabilities 341,159 338,938 308,837 293,376 16
441,872 568,007 373,598 342,226 29
Debt
Debt securities 954,002 885,202 562,623 565,449 69
Subordinated debentures 325,000 325,000 625,000 625,000 (48 )
1,279,002 1,210,202 1,187,623 1,190,449 7
Equity
Preferred shares (Note 9) 265,000 265,000 125,000 125,000 112
Common shares (Note 9) 717,208 565,927 537,511 536,365 34
Retained earnings 1,327,554 1,305,522 1,261,678 1,226,244 8
Share-based payment reserve 30,623 30,014 29,210 28,331 8
Other reserves (33,130 ) (49,054 ) (42,492 ) (19,729 ) 68
Total Shareholders' Equity 2,307,255 2,117,409 1,910,907 1,896,211 22
Non-controlling interests 422 358 992 734 (43 )
Total Equity 2,307,677 2,117,767 1,911,899 1,896,945 22
Total Liabilities and Equity $ 25,185,441 $ 24,236,901 $ 22,838,527 $ 22,279,688 13 %
  1. During the fourth quarter of 2015, the collective allowance for credit losses related to committed but undrawn exposures was reclassified from Loans to Other Liabilities. This reclassification is reflected for all periods (see Note 6).

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 2016 April 30 2016 July 31 2015 Change from July 31
2015
July 31 2016 July 31 2015 Change from July 31 2015
Interest Income
Loans $ 237,877 $ 227,569 $ 217,913 9 % $ 688,143 $ 637,218 8 %
Securities 6,491 7,122 9,729 (33 ) 22,774 30,521 (25 )
Deposits with regulated financial institutions 1,329 787 785 69 2,948 2,020 46
245,697 235,478 228,427 8 713,865 669,759 7
Interest Expense
Deposits 89,518 83,970 79,488 13 255,643 237,678 8
Debt 7,308 7,156 9,716 (25 ) 22,123 28,328 (22 )
96,826 91,126 89,204 9 277,766 266,006 4
Net Interest Income 148,871 144,352 139,223 7 436,099 403,753 8
Non-interest Income
Credit related 7,496 7,173 7,281 3 21,837 20,697 6
Wealth management services 3,498 3,453 3,624 (3 ) 10,548 10,906 (3 )
Retail services 3,044 3,890 3,511 (13 ) 10,214 10,206 -
Trust services 2,734 2,997 2,675 2 8,558 8,308 3
Gains (losses) on securities, net 2 - (5,039 ) nm (2,882 ) (4,350 ) (34 )
Other 2,767 1,865 1,217 127 5,270 4,232 25
19,541 19,378 13,269 47 53,545 49,999 7
Total Revenue 168,412 163,730 152,492 10 489,644 453,752 8
Provision for Credit Losses (Note 6) 17,402 39,671 8,018 117 66,005 22,373 195
Acquisition-related Fair Value Changes (Note 3) 3,940 - - 100 3,940 638 518
Non-interest Expenses
Salaries and employee benefits 50,662 51,939 48,467 5 152,625 142,864 7
Premises and equipment 13,760 12,460 12,266 12 38,266 35,659 7
Other expenses 14,082 14,062 13,739 2 41,627 39,192 6
78,504 78,461 74,472 5 232,518 217,715 7
Net Income before Income Taxes from Continuing Operations 68,566 45,598 70,002 (2 ) 187,181 213,026 (12 )
Income Taxes 18,492 11,849 17,130 8 49,508 52,713 (6 )
Net Income from Continuing Operations 50,074 33,749 52,872 (5 ) 137,673 160,313 (14 )
Net Income Attributable to Non-Controlling Interests 192 161 327 (41 ) 696 1,093 (36 )
Shareholders' Net Income from Continuing Operations 49,882 33,588 52,545 (5 ) 136,977 159,220 (14 )
Preferred share dividends 4,300 1,375 1,375 213 7,050 4,125 71
Common Shareholders' Net Income from Continuing Operations 45,582 32,213 51,170 (11 ) 129,927 155,095 (16 )
Common Shareholders' Net Income from Discontinued Operations - - 107,639 (100 ) - 111,468 (100 )
Common Shareholders' Net Income $ 45,582 $ 32,213 $ 158,809 (71 )% $ 129,927 $ 266,563 (51 )%
Average number of common shares (in thousands) 83,564 81,429 80,463 4 % 81,846 80,423 2 %
Average number of diluted common shares (in thousands) 83,564 81,444 80,557 4 81,856 80,650 1
Earnings Per Common Share
Basic
- Continuing Operations $ 0.55 $ 0.40 $ 0.64 (14 )% $ 1.59 $ 1.93 (18 )%
- Combined Operations 0.55 0.40 1.97 (72 ) 1.59 3.31 (52 )
- Discontinued Operations - - 1.33 (100 ) - 1.38 (100 )
Diluted
- Continuing Operations 0.55 0.40 0.64 (14 ) 1.59 1.93 (18 )
- Combined Operations 0.55 0.40 1.97 (72 ) 1.59 3.31 (52 )
- Discontinued Operations - - 1.33 (100 ) - 1.38 (100 )

nm - not meaningful

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

Consolidated Statements of Comprehensive Income
For the three months ended For the nine months ended
(unaudited)
($ thousands)
July 31
2016
July 31
2015
July 31
2016
July 31
2015
Net Income from Continuing Operations $ 50,074 $ 52,872 $ 137,673 $ 160,313
Common Shareholders' Net Income from Discontinued Operations - 107,639 - 111,468
Net Income 50,074 160,511 137,673 271,781
Other Comprehensive Income (Loss), net of tax
Available-for-sale securities:
Gains (losses) from change in fair value(1) 14,444 (9,566 ) 14,914 (39,790 )
Reclassification to net income(2) (2 ) 6,896 2,196 6,630
14,442 (2,670 ) 17,110 (33,160 )
Derivatives designated as cash flow hedges:
Gains (losses) from change in fair value(3) 782 5,171 (7,882 ) 10,877
Reclassification to net income(4) 700 1,750 134 3,551
1,482 6,921 (7,748 ) 14,428
15,924 4,251 9,362 (18,732 )
Comprehensive Income for the Period $ 65,998 $ 164,762 $ 147,035 $ 253,049
Comprehensive income for the period attributable to:
Shareholders of CWB $ 65,806 $ 164,435 $ 146,339 $ 251,956
Non-controlling interests 192 327 696 1,093
Comprehensive Income for the Period $ 65,998 $ 164,762 $ 147,035 $ 253,049
  1. Net of income tax of $5,354 and $5,544 for the three and nine months ended July 31, 2016, respectively (2015 - $4,454 and $14,747).
  2. Net of income tax of $1 and $810 for the three and nine months ended July 31, 2016, respectively (2015 - $2,502 and $2,411).
  3. Net of income tax of $288 and $2,900 for the three and nine months ended July 31, 2016, respectively (2015 - $2,075 and $4,003).
  4. Net of income tax of $257 and $49 for the three and nine months ended July 31, 2016, respectively (2015 - $698 and $1,306).

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 2016 July 31 2015
Retained Earnings
Balance at beginning of period $ 1,261,678 $ 1,011,147
Shareholders' net income from continuing operations 136,977 159,220
Common shareholders' net income from discontinued operations - 111,468
Dividends
- Preferred shares (7,050 ) (4,125 )
- Common shares (56,171 ) (51,466 )
Issuance costs on common and preferred shares (7,880 ) -
Balance at end of period 1,327,554 1,226,244
Other Reserves
Balance at beginning of period (42,492 ) (997 )
Changes in available-for-sale securities 17,110 (33,160 )
Changes in derivatives designated as cash flow hedges (7,748 ) 14,428
Balance at end of period (33,130 ) (19,729 )
Preferred Shares (Note 9)
Balance at beginning of period 125,000 125,000
Issued 140,000 -
Balance at end of period 265,000 125,000
Common Shares (Note 9)
Balance at beginning of period 537,511 533,038
Issued 150,063 -
Issued on acquisition of subsidiary (Note 3) 25,606 -
Issued under dividend reinvestment plan 3,333 2,504
Transferred from share-based payment reserve on the exercise or exchange of options 695 823
Balance at end of period 717,208 536,365
Share-based Payment Reserve
Balance at beginning of period 29,210 25,339
Amortization of fair value of options (Note 10) 2,108 3,815
Transferred to common shares on the exercise or exchange of options (695 ) (823 )
Balance at end of period 30,623 28,331
Total Shareholders' Equity 2,307,255 1,896,211
Non-Controlling Interests
Balance at beginning of period 992 1,066
Net income attributable to non-controlling interests 696 1,093
Dividends to non-controlling interests (913 ) (1,326 )
Partial ownership increase (353 ) (99 )
Balance at end of period 422 734
Total Equity $ 2,307,677 $ 1,896,945

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 2016 July 31 2015
Cash Flows from Operating Activities
Net income from continuing operations $ 137,673 $ 160,313
Common shareholders' net income from discontinued operations - 111,468
Adjustments to determine net cash flows:
Gain on sale of discontinued operations - (107,639 )
Provision for credit losses 66,005 22,373
Acquisition-related fair value changes (Note 3) 3,940 -
Depreciation and amortization 17,497 15,102
Current income taxes receivable and payable (16,666 ) (14,246 )
Amortization of fair value of employee stock options (Note 10) 2,108 3,815
Accrued interest receivable and payable, net (14,886 ) (12,157 )
Deferred income taxes, net (2,995 ) (4,648 )
Losses on securities, net 2,882 4,633
Change in operating assets and liabilities:
Deposits, net 1,791,483 1,477,054
Loans, net (1,991,106 ) (1,552,637 )
Securities purchased under resale agreements, net (195,079 ) (70,434 )
Other items, net 36,721 (9,998 )
(162,423 ) 22,999
Cash Flows from Financing Activities
Common shares issued, net of issuance costs (Note 9) 148,678 2,504
Preferred shares issued, net of issuance costs 136,838 -
Debt securities issued 634,476 309,809
Debt securities repaid (243,097 ) (156,350 )
Debentures redeemed (300,000 ) -
Dividends (63,221 ) (55,591 )
Dividends to non-controlling interests (913 ) (1,326 )
312,761 99,046
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net (132,025 ) (79,153 )
Securities, purchased (7,231,486 ) (4,676,545 )
Securities, sale proceeds 5,706,543 3,892,864
Securities, matured 1,892,661 554,622
Proceeds from disposal of discontinued operations - 215,865
Property, equipment and intangible assets (36,742 ) (28,388 )
Partial ownership increase (353 ) (99 )
Acquisitions (Note 3) (364,523 ) -
(165,925 ) (120,834 )
Change in Cash and Cash Equivalents (15,587 ) 1,211
Cash and Cash Equivalents at Beginning of Period (29,604 ) (37,667 )
Cash and Cash Equivalents at End of Period * $ (45,191 ) $ (36,456 )
* Represented by:
Cash and non-interest bearing deposits with financial institutions $ 38,025 $ 6,532
Cheques and other items in transit (included in Cash Resources) 10,435 1,603
Cheques and other items in transit (included in Other Liabilities) (93,651 ) (44,591 )
Cash and Cash Equivalents at End of Period $ (45,191 ) $ (36,456 )
Supplemental Disclosure of Cash Flow Information (Combined Operations)
Interest and dividends received $ 723,492 $ 690,117
Interest paid 296,216 277,747
Income taxes paid 66,968 71,696

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

Notes to Interim Consolidated Financial Statements

(unaudited)

($ thousands, unless otherwise noted)

1. Basis of Presentation and Significant Accounting Policies

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

The interim consolidated financial statements were authorized for issue by the Board of Directors on August 31, 2016.

2. Future Accounting Changes

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

IFRS 16 - Leases

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

IFRS 15 - Revenue from Contracts with Customers

In April 2016, the IASB issued amendments to IFRS 15, which clarify the underlying principles of IFRS 15 and provide additional transitional relief on initial application. These amendments are effective for CWB's fiscal year beginning November 1, 2018. The impact on CWB of these amendments has not yet been determined.

IFRS 2 - Share-based Payment Transactions

In June 2016, the IASB issued amendments to IFRS 2, which clarify how to account for certain types of share-based payment transactions. These amendments are effective for CWB's fiscal year beginning November 1, 2018 and can be applied prospectively. The impact on CWB of these amendments has not yet been determined.

3. Acquisitions

Maxium Financial Services Inc. and Desante Financial Services Inc.

On March 1, 2016, CWB acquired the non-securitized lending assets and other business assets of the privately held Maxium Financial Services Inc. and Desante Financial Services Inc., now referred to as "CWB Maxium Financial" (CWB Maxium) in exchange for $19,500 in cash, as well as 1,250,312 common shares of CWB and contingent consideration with fair values on the acquisition date of $25,606 and $16,400, respectively, for a total initial acquisition cost of $61,506.

Contingent consideration, to a maximum of $70,500, will be paid in annual installments with determination of the total amount payable based on CWB Maxium's cumulative business performance over a 36-month purchase price adjustment period. Up to 50% of the total contingent consideration may be settled with CWB shares at the vendors' option, provided the average share price over the 20 days preceding issuance exceeds $30.00, with the remainder to be paid in cash. During the third quarter of 2016, the fair value of contingent consideration was increased by $3,940, which was recognized as an acquisition-related fair value change on the Consolidated Statements of Income (see Note 12).

CWB Maxium provides loans, equipment leases and structured financing solutions to more than 35,000 clients, mainly in Ontario. Specialized financing solutions are primarily provided in the areas of health care, golf, transportation, real estate, and general corporate financing. Securitized assets that were originated prior to March 1, 2016 were not included in the transaction. The results of operations from CWB Maxium have been included in CWB's consolidated financial statements since the acquisition date.

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

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

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

CWB Franchise Finance

On July 1, 2016, CWB acquired a portfolio of Franchise Finance loan assets and the team from GE Canada Equipment Financing G.P., which added $344,018 to performing loans at fair value. No goodwill or intangible assets were included in the purchase structure. No allowance for credit losses is recorded on the acquisition date and loans are evaluated for impairment at each balance sheet date using the same methodology as loans originated by the bank.

4. Securities

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

As at
July 31
2016
As at
April 30
2016
As at
October 31
2015
Interest bearing deposits with regulated financial institutions $ (75 ) $ 21 $ (377 )
Securities issued or guaranteed by
Canada 1,663 (7,814 ) (8,614 )
A province or municipality 340 (2,025 ) (5,396 )
Other debt securities 1,459 902 (1,023 )
Preferred shares (56,092 ) (63,583 ) (54,457 )
Common shares - - (6,349 )
Unrealized losses, net $ (52,705 ) $ (72,499 ) $ (76,216 )

The securities portfolio is primarily comprised of high quality debt and equity instruments that are not held for trading purposes and, where applicable, are typically held until maturity. Fluctuations in value are generally attributed to changes in interest rates, market credit spreads and shifts in the interest rate curve. During the three and nine months ended July 31, 2016, CWB assessed the securities with unrealized losses and based on available objective evidence, including a review of the creditworthiness of the issuers, no impairment charges were included in gains (losses) on securities, net ($1,100 for the three and nine months ended July 31, 2015, respectively).

5. Loans

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

Composition Percentage
($ millions) AB BC ON SK MB Other Total July 31 2016 April 30 2016 October 31 2015
Personal(1) $ 1,219 $ 1,077 $ 1,116 $ 189 $ 98 $ 77 $ 3,776 17 % 17 % 17 %
Business
Real estate 3,362 4,157 432 496 177 22 8,646 40 40 38
Commercial 2,201 1,910 649 283 234 174 5,451 25 24 24
Equipment financing(2) 1,184 649 765 374 162 590 3,724 17 17 19
Energy 235 - - 22 - - 257 1 2 2
6,982 6,716 1,846 1,175 573 786 18,078 83 83 83
Total Loans(3) $ 8,201 $ 7,793 $ 2,962 $ 1,364 $ 671 $ 863 $ 21,854 100 % 100 % 100 %
Composition Percentage
July 31, 2016 38 % 36 % 13 % 6 % 3 % 4 % 100 %
April 30, 2016 40 % 35 % 12 % 6 % 3 % 4 % 100 %
October 31, 2015 41 % 33 % 12 % 7 % 3 % 4 % 100 %
  1. Includes securitized mortgages reported on-balance sheet of $165 (April 30, 2016 - $171 and October 31, 2015 - nil) that were not transferred to external parties.
  2. Includes securitized leases reported on-balance sheet of $1,045 (April 30, 2016 - $969 and October 31, 2015 - $635).
  3. This table does not include an allocation for credit losses.

6. Allowance for Credit Losses

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

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


Specific Allowance
Collective Allowance for Credit Losses Total

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 45,927 $ 99,890 $ 145,817 $ 20,881 $ 99,729 $ 120,610
Provision for credit losses 12,361 5,041 17,402 39,510 161 39,671
Write-offs (30,989 ) - (30,989 ) (15,708 ) - (15,708 )
Recoveries 458 - 458 1,244 - 1,244
Balance at end of period $ 27,757 $ 104,931 $ 132,688 $ 45,927 $ 99,890 $ 145,817
Represented by:
Loans $ 27,757 $ 82,131 $ 109,888 $ 45,927 $ 81,746 $ 127,673
Committed but undrawn exposures - 22,800 22,800 - 18,144 18,144
Total allowance $ 27,757 $ 104,931 $ 132,688 $ 45,927 $ 99,890 $ 145,817
For the three months ended
July 31, 2015(1)

Specific Allowance
Collective Allowance for Credit Losses Total