Canadian Western Bank
TSX : CWB

Canadian Western Bank

August 31, 2017 07:00 ET

CWB reports very strong third quarter financial performance

Positive loan growth and ongoing growth of relationship-based branch-raised deposits

Higher net interest margin, positive operating leverage and common share dividend increase

Adjusted cash earnings per common share of $0.69

EDMONTON, ALBERTA--(Marketwired - Aug. 31, 2017) - "I'm very pleased with this quarter's operating performance for CWB Financial Group. Highlights of the continued execution of our balanced growth strategy include very strong 24% growth of common shareholders' net income from last year with positive operating leverage, positive loan growth and ongoing growth of stable, relationship-based branch-raised deposits. Credit quality remains entirely consistent with our expectations and the long-term track record of our secured lending business model," said Chris Fowler, President and CEO. "The Banker magazine recently ranked CWB as the soundest bank in Canada as measured by the capital to assets ratio. This balance sheet strength provides us with flexibility to create value for shareholders through a range of strategic initiatives, and this quarter we've announced a 4% increase to our common share dividend."

"We have clearly defined strategic objectives, including strong growth of client relationships with our focus on business owners. We are confident purposeful execution of our strategy will create long-term value for shareholders through balanced growth of both loans and funding sources and broader diversification within targeted sectors of Canada's banking industry. Related efforts to significantly expand CWB's growth opportunities by diversifying outside of Western Canada are continuing to pay off," continued Mr. Fowler. "While Alberta and Saskatchewan continue to recover from a prolonged recession, our loan book outside of these provinces grew 11% from the third quarter last year and 4% this quarter alone. Our core portfolio of general commercial loans outside of Alberta and Saskatchewan grew 15% over the past twelve months, and 6% in the third quarter. At the same time we continue to actively support and seek new business with Alberta and Saskatchewan clients, and we anticipate the economic recovery in these provinces will continue. With our businesses across the rest of the country delivering very strong performance, we are well-positioned to benefit as the recovery takes hold."

"Going forward, we will continue to execute on our strategy to capitalize on both CWB's broader reach and the ongoing transformation of the financial services landscape. Our focus on technology investments and related initiatives will provide us the leverage to deliver exceptional client experiences and build full banking relationships both within and beyond our branch footprint. Our dedicated, caring teams throughout CWB Financial Group are excited about the future, and ready to help our clients grow."

Third Quarter 2017 Highlights1(compared to the same period in the prior year)

  • Very strong operating performance, with common shareholders' net income of $56.3 million, up 24% and pre-tax, pre-provision income (teb) of $100.9 million, up 9%.
  • Diluted and adjusted cash earnings per common share of $0.64 and $0.69, up 16% and 15%, respectively.
  • Record total revenue (teb) of $184.4 million, up 9%, with strong 10% growth of net interest income (teb).
  • Positive operating leverage.
  • Loan growth of 4% and branch-raised deposit growth of 6%, including an 8% increase in lower-cost demand and notice deposits.
  • Excluding Alberta and Saskatchewan, loan growth was 11% from last year and 4% from the prior quarter.
  • Net interest margin (teb) of 2.60%, up 20 basis points from last year and five basis points from the prior quarter.
  • Provision for credit losses as a percentage of average loans of 20 basis points, down from 32 basis points last year and 25 basis points last quarter.
  • Gross impaired loans represented 0.74% of total loans, up from 0.49% last year and 0.62% last quarter, with the increase consistent with our previously-stated expectations.
  • Very strong Basel III regulatory capital ratios under the Standardized approach for calculating risk-weighted assets of 9.6% common equity Tier 1 (CET1), 10.9% Tier 1 and 12.7% Total capital.
  • Common share dividend increased $0.01 to $0.24.

(1) Highlights include certain non-IFRS measures - refer to definitions following the table on page 22.

CWB Financial Group (TSX:CWB) (CWB) today announced very strong third quarter financial performance as we continue to execute our balanced growth strategy. Compared to the third quarter last year, results included positive loan growth with significantly higher net interest margin, a lower provision for credit losses, ongoing growth of relationship-based branch-raised deposits, record total revenue (teb) and substantial earnings growth, all supported with very strong regulatory capital ratios. Common shareholders' net income of $56.3 million and pre-tax, pre-provision income (teb) of $100.9 million were up 24% and 9%, respectively. Very strong earnings growth was driven by a 9% increase in total revenue, a lower provision for credit losses, and decreased preferred share dividends. Record third quarter total revenue (teb) primarily reflects 10% higher net interest income (teb) resulting from the combined positive impact of a 20 basis point increase in net interest margin (teb) to 2.60% and 4% loan growth. Non-interest income was also higher. The provision for credit losses as a percentage of average loans was 20 basis points, down from 32 basis points last year. These factors were partially offset within common shareholders' net income by increased non-interest expenses and acquisition-related fair value changes. Operating leverage was positive 0.3%. Changes in deposit mix were favourable with a lower balance of term deposits raised through the broker network and ongoing growth of relationship-based branch-raised deposits. Diluted earnings per common share of $0.64 and adjusted cash earnings per common share of $0.69 were up 16% and 15%, respectively, reflecting the factors noted above and the 2016 issuance of common shares.

Compared to the prior quarter, common shareholders' net income and pre-tax, pre-provision income (teb) were up 18% and 11%, respectively. Total revenue (teb) increased by 7% from the second quarter. Net interest income (teb) was up 8%, reflecting the combined positive impacts of three additional interest-earning days, 2% loan growth and a five basis point increase in net interest margin (teb). Non-interest income was relatively consistent with the prior quarter. The provision for credit losses declined five basis points to 20 basis points as a percentage of average loans. Non-interest expenses and acquisition-related fair value changes were relatively unchanged. Diluted earnings per common share and adjusted cash earnings per common share were up 19% and 17%, respectively.

Year-to-date common shareholders' net income of $153.4 million and pre-tax, pre-provision income (teb) of $286.6 million were up 18% and 8%, respectively. Strong earnings growth reflected an 8% increase in net interest income (teb) and 11% growth of non-interest income. Higher net interest income was driven by the combined impact of 4% loan growth and a nine basis point increase in net interest margin to 2.54%. The provision for credit losses of 24 basis points as a percentage of average loans was down from 43 basis points last year, primarily reflecting the impact of specific allowances recorded against energy loans in 2016. These factors were partly offset within common shareholders' net income by increases in non-interest expenses, acquisition-related fair value changes and preferred share dividends. Diluted earnings per common share of $1.74 and adjusted cash earnings per common share of $1.89 were up 9% and 14%, respectively.

Positive loan growth with continued strategic diversification and ongoing growth of lower-cost, relationship-based branch-raised deposits

Total loans, including the allowance for credit losses, of $22,719 million increased 4% from the same period last year and 2% from the prior quarter. The composition of year-over-year growth by portfolio segment and geography was in line with our expectations and consistent with our balanced growth strategy. Growth within personal loans and mortgages continued to be very strong with a 22% increase from a year ago driven by ongoing strong performance within CWB Optimum Mortgage. Mortgage application volumes within CWB Optimum were elevated early in the third quarter due to challenges faced by its largest direct competitor. In response, we tightened lending criteria and maintained origination volumes at levels consistent with our strategic growth objectives and established risk appetite. General commercial loans increased 8% year-over-year, with solid contributions from CWB Maxium and CWB Franchise Finance, both acquired last year. Growth within CWB Optimum, CWB Maxium, CWB Franchise Finance and National Leasing contributed to a 34% ($1,003 million) annual increase in CWB's Ontario-based loan balances, along with further industry diversification.

We remain committed to delivering double-digit annual loan growth whenever prudent, with a continued focus on secured loans that offer an appropriate return and acceptable risk profile. Our pipeline of new lending opportunities across all provinces continues to expand. In dollar terms, sequential net loan growth was $514 million this quarter, up from $445 million in the second quarter. This is broadly in line with our expectations for loan growth to accelerate in the second half of fiscal 2017.

Of note, excluding Alberta and Saskatchewan, loan growth was 11% from the third quarter last year and 4% from the prior quarter. Growth within the general commercial segment outside of these two provinces was 15% on an annual basis and 6% from the prior quarter.

We remain very active in supporting our clients in Alberta and Saskatchewan and pursuing new business as the economic recovery takes hold. Over $1,000 million of new and additional lending was originated in Alberta and Saskatchewan during the third quarter. However, total loans within these provinces contracted over the past year and near-term growth on a net basis is expected to remain moderate. In view of constrained growth within this portion of our geographic footprint, we do not expect to achieve double digit loan growth on a consolidated basis in fiscal 2017.

Another key strategic objective, supported by the capabilities of our new core banking system, is to increase the level of relationship-based branch-raised deposits. These core funding products are typically lower cost than non-branch-raised sources, and are often associated with transactional fee income. Branch-raised deposit products include various business savings, cash management, and bare trustee accounts. With the exception of bare trustee accounts, these are tools which help our banking clients conveniently manage their business and personal finances. We consider growth within these product categories to demonstrate success in strengthening key, full-service client relationships, primarily tied to our network of 42 branches within Western Canada. Third quarter branch-raised deposit balances were up 6% from the same period last year and lower-cost demand and notice deposits were up 8%. Growth was more constrained on a sequential basis, with total branch-raised funding relatively unchanged and the balance of demand and notice deposits down slightly.

Ongoing enhancements to CWB's client experience in support of full-service client relationships

Implementation of the new banking system has enabled progress toward enhanced CWB client experiences through a number of targeted initiatives. For example, we recently improved our clients' online wire transfer experience and expanded desktop foreign exchange capabilities through strategic external partnerships. We are also on track to deliver remote deposit capture technology early in the new fiscal year, which will enable clients to make deposits anywhere, anytime. This will complement the introduction of next generation online banking tools for businesses, which will allow clients to house their business and personal banking on a common platform. These are key steps to enhance CWB's full-service banking experience for business owners. Together we expect these initiatives to improve our client experience and support development of broader, multi-product client relationships.

We also continue to position our rebranded online bank, Motive Financial (Motive), as an effective funding channel through a renewed focus on creating valuable savings opportunities for clients from coast-to-coast. During the third quarter, Motive implemented a solution to expedite and simplify the account opening process through identity verification steps carried out entirely online.

Impaired loans consistent with expectations and lower provision for credit losses

Overall credit quality is consistent with expectations. Gross impaired loans totaled $168.7 million and represented 0.74% of total loans, compared to $106.7 million or 0.49% last year, and $137.8 million or 0.62% last quarter. While Alberta-based loans represent 34% of CWB's overall portfolio, gross impaired loans within Alberta of $95.0 million represent 56% of total impairments at July 31, 2017, up from 40% last year and 47% in the prior quarter. Two accounts comprised approximately half of the balance of new impaired loan formations this quarter. The overall increase in gross impaired loans is generally consistent with our previously-stated expectations for the lagging impact of the 2015-2016 regional recession to be apparent within the credit performance of CWB's Alberta- and Saskatchewan-based lending exposures this year.

The third quarter provision for credit losses as a percentage of average loans was 20 basis points, down from 32 basis points in the same period last year and 25 basis points last quarter. On a year-to-date basis, the provision for credit losses was 24 basis points, slightly beneath the low end of our expected full-year range of 25 - 35 basis points, and down from 43 basis points a year ago. Last year's provisions reflected specific allowances related to energy loans, as we took a proactive approach to resolve positions within CWB's small portfolio of oil and gas production loans. This portfolio now represents less than 1% of our total loans, and we do not expect material credit impacts related to remaining oil and gas loans.

We will continue to carefully monitor the loan portfolio for signs of weakness. Although periodic increases in the balance of impaired loans may occur, we remain confident that our combination of disciplined underwriting, secured lending practices and proactive account management will continue to mitigate the earnings impact of further impairments. Loss rates on current and future impaired loans are expected to be consistent with CWB's prior experience, where write-offs have been low as a percentage of impaired loans.

Efficient operations and positive operating leverage

The third quarter efficiency ratio (teb) was 45.3%, relatively unchanged from last year and improved from 47.5% in the previous quarter. The year-to-date efficiency ratio (teb) was stable at 46.3%. Operating leverage, which is calculated as the growth rate of total revenue (teb) less the growth rate of non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months, was positive 0.3%. Operating leverage was also slightly positive on a year-to-date basis, at 0.1%.

One of our key priorities is to deliver consistent increases in adjusted cash earnings per share through business growth and strategic investment while maintaining effective control of costs. CWB's ongoing investment in people, technology and infrastructure is expected to contribute to long-term shareholder value through improved financial performance in future periods. In view of the level of necessary future investment to facilitate ongoing implementation of our strategic direction, we expect CWB's efficiency ratio to fluctuate within a relatively narrow range around 46% over the near-term. We are committed to disciplined control of all discretionary expenses, and we expect to deliver positive operating leverage over the medium-term.

Prudent capital management and dividends

At July 31, 2017, CWB's capital ratios were 9.6% common equity Tier 1, 10.9% Tier 1 and 12.7% Total capital. With a very strong capital position under the more conservative Standardized approach for calculating risk-weighted assets, CWB is well-positioned to create value for shareholders through a range of capital deployment options consistent with our balanced growth strategy. Ongoing support and development of each of CWB's core businesses will remain a key priority, and we will continue to evaluate potential strategic acquisitions.

We evaluate common share dividend increases every quarter against our dividend payout ratio target of approximately 30% of common shareholders' net income, as well as capital requirements under the Standardized approach to support ongoing strong and balanced asset growth. The common share dividend declared yesterday of $0.24 per share is up one cent, or 4%, from the dividends declared both one year ago and last quarter. While the dividend payout ratio this quarter was approximately 40%, we expect earnings growth to result in migration of this metric toward 30% over the medium-term.

Medium-term Performance Target Ranges

CWB's performance target ranges for key financial metrics reflect the objectives embedded within CWB's balanced growth strategy and a time horizon consistent with the longer-term interests of our shareholders. These targets are based on expectations for moderate economic growth and a relatively stable net interest margin environment over the forecast horizon. Our target ranges are presented in the following table:

Medium-term Performance Target Ranges
Adjusted cash earnings per common share growth(1) 7 - 12%
Adjusted return on common shareholders' equity(2) 12 - 15%
Operating leverage(3) Positive
Common equity Tier 1 capital ratio under the Standardized approach(4) Strong
Common share dividend payout ratio(5) ~30%
(1) Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the amortization of acquisition-related intangible assets and the contingent consideration fair value changes, net of tax (see calculation on page 22). Excluded items are not considered to be indicative of ongoing operating performance. Performance for adjusted cash earnings per common share is the current year results over the same period in the year.
(2) Adjusted return on common shareholders' equity is calculated as annualized common shareholders' net income excluding the amortization of acquisition-related intangible assets and the contingent consideration fair value changes, net of tax (see calculation on page 22), divided by average common shareholders' equity.
(3) Operating leverage is calculated as the growth rate of total revenue (teb) less the growth rate of non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months.
(4) Common equity Tier 1 capital ratio is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
(5) Common share dividend payout ratio is calculated as common share dividends declared during the past twelve months divided by common shareholders' net income earned over the same period.

We expect performance to be consistent with our medium-term targets in fiscal 2017, with the exception of adjusted return on common shareholders' equity (ROE) and the dividend payout ratio. Adjusted ROE for the full year is expected to remain below 12%, primarily due to a higher balance of shareholders' equity with the issuance of common shares last year. Over a three- to five-year timeframe, we expect our results to benefit from our expanding geographic footprint with increased business diversification; success in key strategic initiatives to enhance client experiences, build core funding sources, and leverage current and future investment in technology; and, our planned transition to the AIRB methodology for managing credit risk and calculating risk-weighted assets.

About CWB Financial Group

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

Fiscal 2017 Third Quarter Results Conference Call

CWB's third quarter results conference call is scheduled for Thursday, August 31, 2017, at 3:00 p.m. ET (1:00 p.m. MT). CWB's executives will comment on financial results and respond to questions from analysts and institutional investors.

The conference call may be accessed on a listen-only basis by dialing (703) 736-7380 (Toronto) or (844) 400-1695 (toll free) and entering passcode: 69771983. 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 7, 2017, by dialing (404) 537-3406 (Toronto) or (855) 859-2056 (toll-free) and entering passcode 69771983.

Contents

Selected Financial Highlights 6

Management's Discussion and Analysis 7

Interim Consolidated Financial Statements 23

Shareholder Information 38

Selected Financial Highlights

For the three months ended For the nine months ended
(unaudited) July 31 2017 April 30 2017 July 31 2016 Change from
July 31
2016
July 31 2017 July 31
2016
Change from
July 31
2016
($ thousands, except per share amounts)
Results from Operations
Net interest income (teb)(1) $ 164,555 $ 152,739 $ 149,547 10 % $ 473,659 $ 438,760 8 %
Less teb adjustment(1) 564 583 676 (17) 1,763 2,661 (34)
Net interest income per financial
statements 163,991 152,156 148,871 10 471,896 436,099 8
Non-interest income 19,852 20,287 19,541 2 59,617 53,545 11
Total revenue (teb) 184,407 173,026 169,088 9 533,276 492,305 8
Total revenue 183,843 172,443 168,412 9 531,513 489,644 9
Pre-tax, pre-provision income (teb)(1) 100,924 90,786 92,360 9 286,590 264,346 8
Common shareholders' net income 56,308 47,594 45,582 24 153,444 129,927 18
Earnings per common share
Basic 0.64 0.54 0.55 16 1.74 1.59 9
Diluted 0.64 0.54 0.55 16 1.74 1.59 9
Adjusted cash(1) 0.69 0.59 0.60 15 1.89 1.66 14
Return on common shareholders' equity(1) 10.4 % 9.2 % 9.4 % 100 bp(2) 9.7 % 9.4 % 30 bp(2)
Adjusted return on common shareholders'
equity(1) 11.3 10.1 10.3 100 10.6 9.8 80
Return on assets(1) 0.89 0.79 0.73 16 0.82 0.72 10
Efficiency ratio (teb)(1) 45.3 47.5 45.4 (10) 46.3 46.3 -
Efficiency ratio(1) 45.4 47.7 45.6 (20) 46.4 46.6 (20)
Net interest margin (teb)(1) 2.60 2.55 2.40 20 2.54 2.45 9
Net interest margin(1) 2.59 2.54 2.39 20 2.53 2.43 10
Provision for credit losses as a
percentage of average loans 0.20 0.25 0.32 (12) 0.24 0.43 (19)
Number of full-time equivalent staff 2,034 1,993 1,982 3 % 2,034 1,982 3 %
Per Common Share
Cash dividends $ 0.23 $ 0.23 $ 0.23 - % $ 0.69 $ 0.69 - %
Book value 24.31 24.27 23.19 5 24.31 23.19 5
Closing market value 28.00 26.83 25.22 11 28.00 25.22 11
Common shares outstanding (thousands) 88,361 88,300 88,056 - 88,361 88,056 -
Balance Sheet and Off-Balance Sheet
Assets $ 25,344,867 $ 24,617,568 $ 25,185,441 1 %
Loans 22,718,871 22,215,190 21,744,502 4
Deposits 20,880,279 20,473,739 21,156,890 (1)
Debt 1,325,270 1,167,217 1,279,002 4
Shareholders' equity 2,412,767 2,408,064 2,307,255 5
Assets under administration 11,441,989 11,614,170 10,305,408 11
Assets under management 1,974,733 2,064,422 1,888,828 5
Capital Adequacy(1)
Common equity Tier 1 ratio 9.6 % 9.6 % 9.0 % 60 bp(2)
Tier 1 ratio 10.9 10.9 10.8 10
Total ratio 12.7 12.7 12.9 (20)

(1) See definitions on page 22.

(2) bp - basis point change.

Management's Discussion and Analysis

This management's discussion and analysis (MD&A), dated August 31, 2017, should be read in conjunction with Canadian Western Bank's (CWB) unaudited condensed interim consolidated financial statements for the period ended July 31, 2017, and the audited consolidated financial statements and MD&A for the year ended October 31, 2016, available on SEDAR at www.sedar.com and CWB's website at www.cwb.com.

Forward-looking Statements

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

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

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

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

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

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.

Strategic Transactions

On March 1, 2016, CWB acquired the non-securitized lending assets and other net business assets, including key employees, of CWB Maxium Financial (CWB Maxium). CWB Maxium provides loans, equipment leases and structured financing solutions to more than 35,000 clients, mainly in Ontario. Specialized financing solutions are primarily provided in the areas of health care, golf, transportation, real estate, and general corporate financing. Under the terms of the purchase agreement, contingent payment installments will be made annually with determination of the total amount payable based on CWB Maxium's cumulative business performance over a 36-month period. CWB paid the first contingent consideration instalment in cash in the first quarter of fiscal 2017.

On July 1, 2016, CWB acquired the portfolio now referred to as CWB Franchise Finance. The business provides financing across Canada to a diverse group of established companies in the franchised hospitality and restaurant industries. The acquisition included key employees to support CWB's continued strategic commercial banking growth and geographic expansion. Both acquisitions have delivered strong performance since closing, consistent with management's expectations.

On August 16, 2017, CWB announced that Canadian Western Trust (CWT) will focus its activities within business lines that are most aligned with the strategic objectives of CWB Financial Group, and will no longer offer self-directed account services to holders of exempt market securities. CWT has entered into a definitive agreement to appoint a successor trustee or custodian, which is expected to close no later than September 30, 2017. As a result of the agreement, management expects to realize an after-tax gain on sale amounting to approximately $0.06 of adjusted cash earnings per common share in the fourth quarter of fiscal 2017, annual revenues from trust services are expected to be approximately $3.5 million lower next year, and $1.5 billion of assets under administration will transfer to the successor trustee on the closing date.

Overview

Q3 2017 vs. Q3 2016

Common shareholders' net income of $56.3 million and pre-tax, pre-provision income (teb) of $100.9 million were up 24% and 9%, respectively. Very strong earnings growth was mainly driven by a $15.3 million increase in total revenue (teb) to a record $184.4 million. Net interest income (teb) of $164.6 million was up 10%, reflecting 4% loan growth and a 20 basis point increase in net interest margin (teb) to 2.60%. Non-interest income was 2% higher, primarily due to increased credit related and wealth management fees. Earnings growth also benefitted from a decrease in the provision for credit losses to 20 basis points of average loans, compared to 32 basis points last year, as well as lower preferred share dividends. Of note, preferred share dividends last year included a stub period dividend due to timing of the issuance of Series 7 preferred shares. These factors were partially offset within common shareholders' net income by higher non-interest expenses and acquisition-related fair value changes, up 9% and 16%, respectively. Diluted earnings per common share of $0.64 and adjusted cash earnings per common share of $0.69 increased 16% and 15%, respectively, reflecting the factors noted above and the issuance of common shares last year.

Q3 2017 vs. Q2 2017

Common shareholders' net income and pre-tax, pre-provision income (teb) were up 18% and 11%, respectively. Total revenue (teb) increased by 7%. Net interest income (teb) was up 8%, reflecting the combined positive impacts of three additional interest-earning days, 2% loan growth and a five basis point increase in net interest margin (teb). Non-interest income, non-interest expenses and acquisition-related fair value changes were relatively unchanged. The provision for credit losses declined five basis points to 20 basis points as a percentage of average loans. Diluted earnings per common share and adjusted cash earnings per common share were up 19% and 17%, respectively.

YTD 2017 vs. YTD 2016

Common shareholders' net income of $153.4 million and pre-tax, pre-provision income (teb) of $286.6 million were up 18% and 8%, respectively. Strong earnings growth primarily reflects 8% growth of total revenue (teb) and a lower provision for credit losses. Total revenue (teb) benefitted from an 8% increase in net interest income (teb) and 11% growth of non-interest income. Higher net interest income was driven by the combined impact of 4% loan growth and a nine basis point increase in net interest margin to 2.54%. The provision for credit losses of 24 basis points as a percentage of average loans was down from 43 basis points last year, primarily reflecting the impact of specific allowances recorded against energy loans in 2016.

These factors were partially offset within common shareholders' net income by increases in non-interest expenses, acquisition-related fair value changes, and preferred share dividends. Diluted earnings per common share of $1.74 and adjusted cash earnings per common share of $1.89 were up 9% and 14%, respectively, reflecting the factors noted above and the issuance of common shares last year.

Adjusted ROE and ROA

Third quarter adjusted return on common shareholders' equity (ROE) of 11.3% increased 100 basis points from the same period last year. This was primarily due to higher common shareholders' net income, reflecting strong business growth and the impact of energy-related provisions last year, partially offset by the impact of common shares issued in the third quarter last year.

Adjusted ROE was up 120 basis points sequentially, primarily due to the impact of profitable business growth and a lower provision for credit losses.

Year-to-date adjusted ROE of 10.6% was up 80 basis points reflecting the factors noted above, partially offset by the impact of last year's common share issuance.

Return on assets (ROA) was 0.89% in the third quarter, compared to 0.73% in the same period last year and 0.79% last quarter. Year-to-date ROA of 0.82% was up 10 basis points from last year.

Outlook for Profitability Ratios

Over the medium-term, management expects CWB's earnings growth and profitability to benefit from the expansion of existing client relationships through exceptional service and enhanced client experiences, the attraction of new full-service clients and the planned transition to the AIRB methodology for managing credit risk and calculating risk-weighted assets. Common shares issued in the third quarter of 2016 support CWB's very strong capital position and continued execution against the balanced growth strategy. Primarily due to the impact of the common share issuance on shareholders' equity, adjusted return on common shareholders' equity in fiscal 2017 is expected to fall below CWB's medium-term target range.

Total Revenue (teb)

Record quarterly total revenue (teb) of $184.4 million, comprised of both net interest income (teb) and non-interest income, increased 9% from the same quarter in 2016 and 7% from the previous quarter. Year-to-date total revenue (teb) of $533.3 million was up 8% from last year.

Net Interest Income (teb)

Q3 2017 vs. Q3 2016

Net interest income (teb) of $164.6 million was up 10% ($15.0 million) reflecting the combined positive impact of 4% loan growth and a 20 basis point increase in net interest margin. The increase in net interest margin to 2.60% reflects a number of factors, including: favourable changes in asset mix, increasing contributions from the relatively higher-yielding CWB Maxium, CWB Franchise Finance and CWB Optimum Mortgage portfolios, and lower average balances of cash and securities; favourable changes in funding mix with ongoing growth of lower-cost branch-raised deposits and lower utilization of deposits sourced through the broker market; and, higher asset yields reflecting the impact of pricing discipline, elevated pre-payment fees and steepening of the yield curve. The impact of the July increase in the Bank of Canada's overnight rate was positive, but not significant, as it occurred relatively late in the quarter.

Q3 2017 vs. Q2 2017

Net interest income (teb) was up 8% ($11.8 million), reflecting the combined positive impacts of three additional interest-earning days, 2% loan growth and a five basis point increase in net interest margin (teb). Net interest margin benefitted from the same favourable changes in asset mix discussed above, along with higher asset yields. Funding costs were slightly lower, partly due to replacement of maturing broker deposits with new broker deposits sourced at lower rates. Of note, pricing disruption within the broker deposit market early in the third quarter proved to be temporary.

YTD 2017 vs. YTD 2016

Net interest income (teb) of $473.7 million was up 8% ($34.9 million), primarily reflecting 4% growth of total loans and a nine basis point increase in net interest margin (teb) to 2.54%. The change in net interest margin primarily reflects the favourable changes in funding and asset mix discussed above, as well as higher asset yields.

Interest rate sensitivity

Note 14 to the unaudited interim consolidated financial statements summarizes CWB's exposure to interest rate risk as at July 31, 2017. The estimated sensitivity of net interest income to a change in interest rates is presented in the table below. The amounts represent the estimated change in net interest income that would result over the following 12 months from a one-percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include:

  • a constant structure in the interest sensitive asset and liability portfolios;
  • interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount, except floor levels for various deposit liabilities and certain floating rate loans, and applied at the appropriate repricing dates; and,
  • no early redemptions
($ thousands) July 31 2017 April 30
2017
July 31
2016
Estimated impact on net interest income of a 1% increase in interest rates
1 year $ 13,376 $ 8,755 $ 12,180
1 year percentage change 2.12 % 1.41 % 2.09 %
Estimated impact on net interest income of a 1% decrease in interest rates
1 year $ (16,278) $ (9,810) $ (6,416)
1 year percentage change (2.58) % (1.58) % (1.10) %

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, 2017 would increase unrealized losses related to available-for-sale securities and the fair value of interest rate swaps designated as hedges, and result in a reduction in other comprehensive income of approximately $75.6 million, net of tax (July 31, 2016 - $51.4 million). It is estimated that a one-percentage point decrease in all interest rates at July 31, 2017 would have the opposite effect, increasing other comprehensive income by approximately $76.7 million, net of tax (July 31, 2016 - $50.3 million). Management maintains the asset liability structure and interest rate sensitivity within CWB's established policies through pricing and product initiatives, as well as the use of interest rate swaps.

Outlook for net interest margin (teb)

CWB continues to execute on its balanced growth strategy. This strategy targets growth of lower-cost funding sources along with selective, geographically diversified loan growth in higher yielding portfolios with an acceptable risk profile. Acceleration of loan growth in 2018 may require increased usage of the relatively higher-cost broker deposit funding channel, and management may periodically hold higher average balances of cash and securities with a lower average yield in the event of macroeconomic or financial market volatility. Competitive pressure on both loan yields and deposit costs is also expected to remain apparent. However, the combined positive impact of successful strategic execution, higher interest rates following the 25 basis point increase to the Bank of Canada's overnight rate in July, and recent steepening of the yield curve is expected to support incremental net interest margin improvement over the near term. Any further increases in the Bank of Canada's overnight rate would also be expected to have a positive impact on this key metric.

Non-interest Income

Q3 2017 vs. Q3 2016

Non-interest income of $19.9 million was relatively unchanged as higher credit related fee income, wealth management fees, and retail services income were offset by lower 'other' non-interest income. 'Other' non-interest income last year included gains related to the sale of a residential mortgage portfolio.

Q3 2017 vs. Q2 2017

Non-interest income was relatively unchanged. The $0.8 million increase in 'other' non-interest income includes derivative related and foreign exchange income. The $0.8 million decrease in wealth management fees reflects recognition of one additional month of McLean & Partners results last quarter to align the timing of financial reporting with CWB Financial Group.

YTD 2017 vs. YTD 2016

Non-interest income of $59.6 million was up 11% ($6.1 million), primarily reflecting higher credit related fees, $0.7 million of net gains on securities this year compared to $2.9 million of net losses in 2016, and higher wealth management fees.

Wealth management fees this year include one additional month of McLean & Partners revenues, as discussed above. 'Other' non-interest income was $3.4 million lower, as this category included gains related to the sales of three residential mortgage portfolios last year.

Outlook for non-interest income

Growth of non-interest income is expected to reflect CWB's strategy to extend and deepen relationships with both new and existing clients. Increases are expected across most categories of non-interest income reflecting CWB's continued strategic focus on strong, high quality loan growth with associated fee income, as well as enhanced transactional capabilities in cash management and other retail services, including CWB's relationship-based, branch-raised deposit franchise.

Based on the current composition of the securities portfolio, net gains/losses on securities are not expected to contribute materially to non-interest income in 2017; however, the magnitude and timing of gains or losses are dependent on market factors that are difficult to predict. CWB liquidated its holdings of common equities in 2016 and has no plans to re-establish this portfolio.

Management expects further increases in wealth management revenues to result over the medium-term from solid performance within CWB Wealth Management, including organic growth of discretionary investment services, and further growth of proprietary investment products introduced last year. Management will realize gains on the sale of residential mortgage portfolios as opportunities become available. Such gains are anticipated to be a recurring, although sporadic, source of 'other' non-interest income.

CWT's exit from the exempt market securities business line is expected to result in an after-tax gain on sale amounting to approximately $0.06 of adjusted cash earnings per common share in the fourth quarter of fiscal 2017. Annual revenues from trust services are expected to be approximately $3.5 million lower in fiscal 2018 as a result of the agreement with a successor trustee.

Acquisition-related Fair Value Changes

The estimated change in fair value of contingent consideration related to the acquisition of CWB Maxium was $4.6 million, compared to $3.9 million in the third quarter last year and consistent with last quarter. Primarily reflecting strong operating performance since the acquisition closed on March 1, 2016, this brings the year-to-date change in estimated fair value of contingent consideration to $13.6 million. The year-to-date change last year was $3.9 million, with accruals commencing after the acquisition closed. Quarterly contingent consideration fair value changes approximately similar in magnitude through the remainder of the three-year earn out period would represent the maximum amount available through the purchase agreement.

Non-interest Expenses

Q3 2017 vs. Q3 2016

Non-interest expenses of $85.4 million were up 9% ($6.9 million), primarily due to 7% ($3.5 million) growth in salaries and benefits. Higher salaries and benefits mainly reflects annual salary increments, general hiring activity to support business growth and the addition of the CWB Franchise Finance team. Other expenses were up 18% ($2.5 million), while premises and equipment expense, which includes costs associated with the new core banking system, increased 6% ($0.9 million).

Q3 2017 vs. Q2 2017

Sequential non-interest expense growth was moderate at 1% ($1.2 million). The change mainly reflects increased other expenses ($1.2 million) while salaries and benefits, and premises and equipment costs were each relatively consistent with the prior quarter.

YTD 2017 vs. YTD 2016

Year-to-date non-interest expenses of $252.3 million were up 9% ($19.8 million) mainly due to a 7% ($10.0 million) increase in salaries and benefits. The addition of CWB Maxium and CWB Franchise Finance contributed approximately half of the increase in salaries and benefits, with the remainder attributed to annual salary increases and additional staff to support business growth. Premises and equipment, which includes costs associated with the new core banking system beginning in the third quarter last year, were up 14% ($5.4 million), while other expenses increased 10% ($4.3 million).

Efficiency ratio and operating leverage

The third quarter efficiency ratio (teb) of 45.3%, which measures non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, divided by total revenues (teb), was relatively unchanged from 45.4% in the same period last year and improved from 47.5% in the previous quarter. Improvement in the efficiency ratio this quarter primarily reflects the combined positive impact of higher revenues from ongoing loan growth and further increases in net interest margin (teb), and effective management of discretionary expense growth. On a year-to-date basis, the efficiency ratio (teb) was stable at 46.3%, reflecting factors similar to those discussed above.

Operating leverage, which is calculated as the growth rate of total revenue (teb) less the growth rate of non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, over the past 12 months, was positive 0.3%. On a year-to-date basis, operating leverage was positive 0.1%.

Outlook for the efficiency ratio and operating leverage

CWB's medium-term targets for growth of adjusted cash earnings per share and positive operating leverage incorporate expectations for strong business growth supported through strategic investment in people, technology and infrastructure, along with effective control of expense growth. CWB's efficiency ratio has fluctuated between approximately 45% and 48% in the recent past, while the average annual efficiency ratio (teb) over the past three years is approximately 46%. In view of both necessary future investment to facilitate ongoing execution of CWB's balanced growth strategy, and the recently improved outlook for net interest margin, management expects CWB's efficiency ratio to fluctuate around 46% over the near-term. Management is committed to maintaining efficient operations through disciplined control of all discretionary expenses, and positive operating leverage is expected over the medium-term.

Income Taxes

The third quarter effective income tax rate (teb) was 27.5%, compared to 27.7% last year. On a year-to-date basis, effective tax rate (teb) was 27.6%, compared to 27.5% last year.

Outlook for income taxes

CWB's expected income tax rate (teb) for 2017 is approximately 27.5%.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes.

Q3 2017 vs. Q3 2016

Comprehensive income of $25.7 million was down from $66.0 million in the same period last year. The decline was attributed to a $50.4 million decrease in OCI. This was partly offset by a $10.1 million increase in net income, reflecting both strong business growth and a lower provision for credit losses.

Changes in OCI, all net of tax, resulted from decreases in the fair value of both available-for-sale securities ($29.9 million) and derivatives designated as cash flow hedges ($19.6 million). CWB's portfolio of available-for-sale securities is comprised of debt securities and investment grade preferred shares. 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 the negative impact of shifts in the interest rate curve and the July increase in the Bank of Canada's overnight rate on market values of government debt securities, partially offset by higher market values of preferred shares. While the dollar investment in CWB's portfolio of preferred shares is relatively small in relation to total assets, volatility in the market value of these securities increases the potential for comparatively larger fluctuations in OCI.

YTD 2017 vs. YTD 2016

Comprehensive income of $135.1 million was down from $147.0 million last year. The decline was due to the $39.3 million decrease in OCI. This was partly offset by $27.3 million increase in net income, reflecting profitable business growth and the substantial decline in provision for credit losses this year. Changes in OCI, all net of tax, resulted from decreases in the fair value of available-for-sale securities ($17.9 million) and derivatives designated as cash flow hedges ($17.8 million).

Balance Sheet

The quarter end balance of total assets of $25,345 million was up 1% from last year and 3% from last quarter.

Cash and Securities

Cash, securities and securities purchased under resale agreements totaled $2,130 million at July 31, 2017, compared to $2,979 million a year earlier and $1,935 million last quarter. CWB maintains prudent liquidity levels at all times while remaining compliant with the Liquidity Adequacy Requirements guideline established by the Office of the Superintendent of Financial Institutions Canada (OSFI). CWB's liquidity management is based on an internal stressed cash flow model, with the level of cash and securities driven primarily by the term structure of both assets and liabilities.

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. Net unrealized losses on cash and securities recorded on the balance sheet of $49.5 million were down from $52.7 million last year and up from $28.3 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 higher market values of preferred shares, partially offset by lower market values of government debt securities. The change from the prior quarter mainly reflects lower market values of government debt securities resulting from shifts in the interest rate curve and the July increase in the Bank of Canada's overnight rate.

Net realized gains/losses on securities were consistent with nil gains/losses in the same period last year and $0.5 million of net gains last quarter. Year-to-date net realized gains on securities were $0.7 million, compared to net losses of $2.9 million last year. Based on the current composition of the securities portfolio, net gains/losses on securities going forward are not expected to have a material impact on non-interest income, although debt security and preferred share market conditions are inherently unpredictable in the short-term.

Loans

Total loans, excluding the allowance for credit losses, of $22,842 million increased 5% ($988 million) from last year and 2% ($514 million) from the prior quarter. Including the allowance for credit losses, loan growth from the third quarter last year was 4%. Excluding CWB's Alberta and Saskatchewan portfolios, where growth has been constrained by the lagging impact of the 2015 - 2016 regional recession, overall loan growth was 11% from the third quarter last year and 4% from the prior quarter.

(unaudited) July 31 2017 April 30
2017
July 31
2016
Change from July 31 2016
(millions)
General commercial loans $ 5,903 $ 5,605 $ 5,451 8 %
Personal loans and mortgages 4,606 4,476 3,776 22
Real estate project loans 4,207 4,148 4,634 (9)
Commercial mortgages 4,163 4,151 4,012 4
Equipment financing and leasing 3,832 3,797 3,724 3
Oil and gas production loans 131 151 257 (49)
Total loans outstanding(1) $ 22,842 $ 22,328 $ 21,854 5 %
(1) Total loans outstanding by lending sector exclude the allowance for credit losses.

Year-over-year growth by lending sector was consistent with CWB's balanced growth strategy. In dollar terms, growth was led by personal loans and mortgages ($830 million), including sustained strong performance within CWB Optimum Mortgage. General commercial loans were up $452 million, which include the contributions of CWB Maxium and CWB Franchise Finance. Annual growth within this core strategic category was 15% outside of Alberta and Saskatchewan. Commercial mortgages, and equipment financing and leasing increased $151 million and $108 million, respectively. Real estate project loans contracted $427 million, primarily reflecting the successful completion of development projects along with reduced new activity within Alberta. CWB maintained a proactive approach in managing its small portfolio of oil and gas production loans over the past year, reducing outstanding balances by $126 million.

On a sequential basis, loan growth of $514 million was 15% higher than the $445 million of net new loans added last quarter. All loan categories increased from the prior quarter with the exception of oil and gas production loans. General commercial loans grew $298 million driven by strong growth of $140 million within CWB Maxium and $100 million within CWB Franchise Finance. Sequential loan growth within this category was 6% outside of Alberta and Saskatchewan.

Personal loans and mortgages were up $130 million in the third quarter. Real estate project loans returned to positive net growth with a $59 million increase. Equipment financing and leasing was up $35 million, sustaining positive momentum within the category. Commercial mortgages increased $12 million, while oil and gas production loans were down $20 million.

(unaudited) July 31 2017 April 30
2017
July 31 2016 Change from July 31 2016
(millions)
British Columbia $ 7,991 $ 7,727 $ 7,793 3 %
Alberta 7,824 7,858 8,201 (5)
Ontario 3,965 3,777 2,962 34
Saskatchewan 1,331 1,327 1,364 (2)
Manitoba 727 726 671 8
Other 1,004 913 863 16
Total loans outstanding(1) $ 22,842 $ 22,328 $ 21,854 5 %
(1) Total loans outstanding by province exclude the allowance for credit losses.

Ontario continued to lead year-over-year loan growth by province in dollar terms with a significant increase of $1,003 million, followed by British Columbia ($198 million). Strong growth in Ontario reflects the geographic diversification objectives embedded within CWB's balanced growth strategy, underpinned by strong performance from CWB's businesses that have a national footprint, including CWB Maxium, CWB Optimum Mortgage, National Leasing, and CWB Franchise Finance. Outstanding loans within Alberta and Saskatchewan were down 5% and 2%, respectively, primarily reflecting the lagging impact of the 2015 - 2016 regional recession on new lending opportunities.

Compared to the prior quarter, total outstanding loans increased across all provinces except Alberta, with the strongest growth apparent in British Columbia and Ontario. CWB remains very active in supporting its clients in Alberta and Saskatchewan and pursuing new business as the economic recovery takes hold. Over $1,000 million of new and additional lending was originated in these two provinces during the third quarter.

Optimum Mortgage

Total loans of $2,664 million within CWB Optimum increased 22% ($480 million) year-over-year, 6% ($153 million) compared to the prior quarter and 17% ($381 million) year-to-date. Total loans within CWB Optimum comprise approximately 12% of CWB's total outstanding lending exposures. Growth for the quarter was driven almost exclusively by alternative mortgages secured via first mortgages carrying a weighted average loan-to-value ratio at initiation of approximately 67%. Mortgage application volumes within CWB Optimum were elevated early in the third quarter due to challenges faced by its largest direct competitor and sequential growth accelerated moderately from the second quarter. However, management tightened lending criteria and origination volumes were maintained at levels consistent with CWB's strategic growth objectives and established risk appetite. Application volumes returned to more normal levels as the quarter progressed.

The book value of alternative mortgages represented 93% of CWB Optimum's total portfolio at quarter end, compared to 92% last year and 93% in the prior quarter. Ontario continues to account for more than half of all new originations. At approximately 55% of the total, Ontario also represents the largest geographic exposure by province within CWB Optimum's portfolio, followed by Alberta at 20% and British Columbia at 17%. The average size of CWB Optimum mortgages originated in the third quarter was approximately $348,000 and the average size of all mortgages outstanding at July 31, 2017 was $231,000.

Outlook for loans

Real estate activity within British Columbia remains robust, and CWB expects to continue to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels. Within Greater Vancouver, a general supply shortage of detached single family homes remains apparent, and home prices have held relatively firm despite counter-cyclical measures undertaken by both the federal and provincial governments. The recent change in British Columbia's provincial government has resulted in greater uncertainty related to the future of energy infrastructure development opportunities within the province.

Management is also assessing the potential impact of the British Columbia wildfires. The wildfires are likely to result in lower than expected forestry-related activity throughout the interior of the province in the near-term, with related impacts on the outlook for growth in CWB's equipment finance business. CWB is actively supporting affected clients, and forestry activity is expected to accelerate after the summer wildfire season. As such, any related slowdown of activity is expected to be short-lived.

While business sentiment within Alberta and Saskatchewan has improved through the course of 2017, the economic recovery in these provinces remains in its early stages. Declining oil prices in May and June resulted in renewed caution within the energy sector, and overall growth in Alberta and Saskatchewan may continue to be constrained through the remainder of 2017.

Within Ontario, growth is expected to continue to benefit from the increasing contributions of CWB Maxium and CWB Franchise Finance, as well as ongoing strong activity within National Leasing and CWB Optimum Mortgage. A material decrease in the volume of detached home sales has become apparent within Greater Toronto and the surrounding areas, as buyers and sellers react to the Ontario Fair Housing Plan. A decline in average home prices continued within these markets during the third quarter. In addition to the impact of the Ontario Fair Housing Plan, the change in housing market activity also relates to earlier regulatory changes implemented at the federal level which primarily targeted insured mortgages and mortgages funded through securitization. If implemented as proposed, potential revisions to OSFI's Guideline B-20, Residential Mortgage Underwriting Practices and Procedures (B-20) could serve to further curtail market activity and reduce the pace of home price increases across the country. In particular, the 200 basis point qualifying stress test and prohibition on co-lending arrangements could make it more difficult for certain prospective buyers to qualify for uninsured mortgages, and have a negative impact on originations within CWB Optimum; however, the changes may also result in incremental lending opportunities within the alternative mortgage space as larger lenders are also affected by revisions to the guideline. In view of these somewhat offsetting factors, management would expect a moderate negative impact to origination volumes within CWB Optimum if B-20 revisions were implemented as proposed.

The challenges faced by CWB Optimum's largest competitor moderated during the third quarter and application volumes subsided as the competitive environment continued to normalize. CWB Optimum's manual adjudication and underwriting processes remain consistent with CWB's conservative risk appetite and management expects origination volumes to remain consistent with its strategic growth objectives.

Overall, CWB remains very active and the pipeline of new lending opportunities within targeted markets across Canada continues to expand. CWB will continue to focus on prudent growth of secured loans that offer an acceptable risk profile and appropriate return. Loan growth accelerated this quarter to a double-digit pace outside of the provinces most affected by the 2015 - 2016 regional recession, and management expects this trend to continue through the remainder of the year. While CWB remains committed to its objective to deliver double-digit annual loan growth whenever prudent, management does not expect to achieve double-digit loan growth in fiscal 2017 due to constrained growth early in the year.

Credit Quality

Overall credit quality is consistent with expectations and continues to reflect CWB's secured lending business model, disciplined underwriting practices and proactive loan management. CWB has no material exposure to unsecured personal borrowing, including credit cards. Management continues to proactively monitor all accounts with a particular focus on those located within Alberta and Saskatchewan as the lagging impacts of the 2015 - 2016 regional recession continue to work through all facets of the affected economies. Last year CWB took a proactive approach to resolve positions within its small portfolio of loans to oil and gas producers. Remaining direct exposure to borrowers in this category represents less than 1% of the overall portfolio. Loans to energy service companies are primarily comprised of term-reducing advances against standard industrial equipment, as opposed to operating lines of credit or loans secured against receivables and/or inventory. These factors mitigate the risk of CWB's limited direct exposures to the energy sector.

For the three months ended
(unaudited) July 31 2017 April 30 2017 July 31 2016 Change from
July 31 2016
($ thousands)
Gross impaired loans, beginning of period $ 137,834 $ 124,439 $ 144,963 (5) %
New formations 56,765 37,705 14,288 297
Reductions, impaired accounts paid down or returned to performing status (17,803) (16,538) (21,551) (17)
Write-offs (8,112) (7,772) (30,989) (74)
Total(1) $ 168,684 $ 137,834 $ 106,711 58 %
Balance of the ten largest impaired accounts $ 83,714 $ 67,402 $ 54,106 55 %
Total number of accounts classified as impaired(3) 227 234 180 26
Gross impaired loans as a percentage of total loans 0.74 % 0.62 % 0.49 % 25 bp(2)(2)
(1) Gross impaired loans include foreclosed assets held for sale (primarily residential mortgages) with a carrying value of $2,275 (April 30, 2017 - $3,436 and July 31, 2016 - $2,877).
(2) bp - basis point change.
(3) Total number of accounts excludes National Leasing.

The dollar level of gross impaired loans at July 31, 2017 totaled $168.7 million, up from $106.7 million last year and $137.8 million in the prior quarter. Two accounts in the general commercial category comprised approximately half of the balance of new impaired loan formations this quarter. Gross impaired loans within Alberta of $95.0 million account for 56% of total impairments at July 31, compared to 40% last year and 47% in the prior quarter.

The dollar level of gross impaired loans represented 0.74% of total loans at quarter end, compared to 0.49% last year and 0.62% at April 30, 2017. The level of gross impaired loans fluctuates as loans become impaired and are subsequently resolved, and does not directly reflect the dollar value of expected write-offs given tangible security held in support of lending exposures. The overall loan portfolio is reviewed regularly with credit decisions undertaken on a case-by-case basis to provide early identification of possible adverse trends. Ongoing loan management processes include assignment of experienced credit adjudicators to assist branches and credit teams to proactively identify and address higher risk loans. Loans that have become impaired are monitored closely by a specialized team with regular reviews of each loan and its realization plan. Specific allowances for expected write-offs are established through detailed analyses of both the overall quality and marketability of security held against each impaired account. Total specific allowances of $22.8 million this quarter include specific allowances of $8.6 million on loans with Alberta-based security, down from $17.1 million last year and up from $4.5 million last quarter.

As at July 31, 2017, the total allowance for credit losses (collective and specific) was $141.1 million, compared to $132.7 million a year ago and $136.4 million last quarter. The total allowance for credit losses represented 84% of gross impaired loans at quarter end, compared to 124% last year and 99% in the prior quarter. The collective allowance for credit losses increased 13% over the past twelve months and was relatively unchanged from the prior quarter.

Provision for Credit Losses

The third quarter provision for credit losses of 20 basis points of average loans compares to 32 basis points in the same quarter last year and 25 basis points in the prior quarter.

On a year-to-date basis, the provision for credit losses as a percentage of average loans was 24 basis points, consistent with expectations for the provision to fall toward the lower end of a range between 25 and 35 basis points. The year-to-date provision last year was 43 basis points.

Outlook for credit quality

Partially due to the lagging impacts of the regional 2015 - 2016 recession, management expects periodic further increases in the balance of impaired loans across the portfolio; however, material credit impacts related to the small balance of remaining oil and gas loans are not expected. Loss rates on current and future impaired loans are expected to be low, reflecting the combined positive impact of CWB's disciplined underwriting, secured lending practices and proactive account management. This expectation is consistent with CWB's prior experience, where write-offs have typically been low as a percentage of impairments. Gross impaired loans within CWB Optimum Mortgage may increase in view of softer housing market conditions in Ontario and Alberta. Management remains confident in the strength, diversity and underwriting structure of the overall loan portfolio and lending exposures continue to be closely monitored. CWB continues to carefully monitor the entire portfolio for signs of weakness.

Based on the results of stress tests simulating severe economic conditions across CWB's geographic footprint over a multi-year timeframe, including consideration for the impact of a severe housing market correction, management is confident CWB will continue to deliver positive earnings for shareholders while maintaining financial stability and a strong capital position. Stress test assumptions include severe credit losses, a persistent low interest rate environment and significantly slower loan growth to reflect lower assumed levels of economic activity, as well as increased competition for deposits and much higher levels of gross impaired loans that could combine to result in significant compression of net interest margin.

Deposits and Funding

Total deposits were down 1% over the past year ($277 million) and up 2% ($406 million) from the prior quarter. Relationship-based branch-raised funding increased 6% from last year, including 8% growth of lower-cost demand and notice deposits. Total deposits by type and source are summarized below:

As at
(unaudited) July 31 2017 April 30 2017 July 31 2016 Change from
July 31
2016
($ millions)
Deposits by type
Demand and notice deposits $ 7,745 $ 8,012 $ 7,187 8 %
Term deposits 11,279 10,697 12,077 (7)
Capital markets 1,856 1,765 1,893 (2)
Total Deposits $ 20,880 $ 20,474 $ 21,157 (1) %
As at
(unaudited) July 31 2017 April 30 2017 July 31 2016 Change from
July 31
2016
($ millions)
Deposits by source
CWB Group branch-raised $ 11,701 $ 11,714 $ 11,077 6 %
Deposit brokers 7,323 6,995 8,187 (11)
Capital markets 1,856 1,765 1,893 (2)
Total Deposits $ 20,880 $ 20,474 $ 21,157 (1) %

Personal deposits represented 61% of total deposits at July 31, 2017, compared to 62% both last year and at the end of the prior quarter. Total branch-raised deposits, including trust services deposits, accounted for 56% of total deposits at July 31, 2017, up from 52% last year and down from 57% in the prior quarter. Demand and notice deposits comprise 37% of total deposits, up from 34% last year and down from 39% last quarter. The deposit broker network remains an efficient source for raising insured fixed term retail deposits and has proven to be a reliable and effective way to access funding and liquidity over a wide geographic base. CWB raises only fixed-term broker deposits, with terms to maturity between one and five years, and does not offer a High Interest Savings Account (HISA) product. Term deposits raised through the broker network represented 35% of total funding at quarter end, compared to 39% last year and 34% last quarter.

Total deposits raised through debt capital markets of $1,856 million represented 9% of total deposits at July 31, 2017, consistent with last year and last quarter.

Securitization

Securitized leases and mortgages are reported on-balance sheet with total loans. The gross amount of securitized leases at July 31, 2017 was $1,082 million, compared to $1,045 million last year and $906 million last quarter. The gross amount of mortgages securitized under the National Housing Act Mortgage Backed Securities (NHA MBS) program was $355 million (April 30, 2017 - $373 million; July 31, 2016 - $165 million). Year-to-date funding from the securitization of leases and mortgages was $463 million (2016 - $634 million).

Outlook for deposits and funding

CWB's strategic focus to increase relationship-based branch-raised deposits will continue, with particular emphasis on demand and notice deposits. This funding segment is typically lower cost and provides associated transactional fee income. Continued growth in the proportion of branch-raised funding is also a key strategic objective because it reflects success in strengthening targeted multi-product client relationships. CWB's growing market presence, which includes the periodic expansion of full-service branches, supports objectives to generate branch-raised deposits, and the capabilities of CWB's new core banking system will support various growth initiatives related to branch-raised funding over the medium term.

For example, the online wire transfer experience and desktop foreign exchange capabilities for CWB clients were recently improved through strategic external partnerships. CWB is on track to deliver remote deposit capture technology early in the new fiscal year, which will enable clients to make deposits anywhere, anytime. This will complement the introduction of next generation online banking tools for businesses, which will allow clients to house their business and personal banking on a common platform. These are key steps forward to enhance CWB's full-service banking experience for business owners. Together, management expects these initiatives to improve the convenience and overall user experience of CWB's suite of business and personal banking tools, and support CWB's deposit gathering activity through development of broader client relationships.

CWB continues to position its rebranded online bank, Motive Financial (Motive), as an effective funding channel through a renewed focus to create valuable savings opportunities for clients from coast-to-coast. During the third quarter, Motive implemented a solution to expedite and simplify the account opening process through identity verification steps carried out entirely online.

Pricing disruption within the broker deposit market which began in late April proved to be temporary from CWB's perspective. The broker deposit market remained deep, liquid and highly accessible to CWB throughout the period of pricing disruption. Despite the impact of this price disruption, the weighted average cost of funding for broker deposits issued by CWB during the third quarter was less than the weighted average cost of maturing broker deposits. In view of expectations for continued acceleration of loan growth into the next fiscal year, management may incrementally increase usage of the broker deposit channel compared to fiscal 2017.

Selectively utilizing the debt capital markets remains part of management's strategy to further augment and diversify both the long- and short-term funding base over time.

Ongoing utilization of lease securitization is expected in view of the addition of a second lease securitization funding partner this year and the relative cost-effectiveness of these funding channels. CWB commenced securitization of residential mortgages in 2016 through the NHA MBS program, and has been approved by the Canada Mortgage and Housing Corporation (CMHC) as an issuer of Canada Mortgage Bonds (CMB) subsequent to quarter end. Management expects to initiate participation in the CMB Program by the end of fiscal 2017.

Other Assets and Other Liabilities

Other assets totaled $496 million at July 31, 2017, compared to $462 million one year ago and $467 million last quarter. Other liabilities were $725 million at quarter end, compared to $442 million a year earlier and up from $567 million the previous quarter. The higher balance of other liabilities relates to increased repurchase agreements used for liquidity management.

Off-Balance Sheet

Off-balance sheet items include assets under administration and assets under management. Total assets under administration, which are comprised of trust assets and third-party leases under administration, as well as mortgages under service agreements, totaled $11,442 million at July 31, 2017, compared to $10,305 million one year ago and $11,614 million last quarter. Approximately $1,500 million of trust assets under administration are expected to transfer to the successor trustee during the fourth quarter as part of CWT's exit from the exempt market securities business line. Assets under management were $1,975 million at quarter end, compared to $1,889 million a year earlier and $2,064 million last quarter.

Other off-balance sheet items are comprised of standard industry credit instruments (guarantees, standby letters of credit and commitments to extend credit). CWB does not utilize, nor does it have exposure to, collateralized debt obligations or credit default swaps. For additional information regarding other off-balance sheet items refer to Note 12 of the unaudited interim consolidated financial statements for the period ended July 31, 2017, as well as Note 20 of the audited consolidated financial statements in CWB's 2016 Annual Report.

Capital Management

OSFI requires Canadian financial institutions to manage and report regulatory capital in accordance with the Basel III capital management framework. CWB currently reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, which requires CWB to carry significantly more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings Based (AIRB) methodology. For this reason, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks and other financial institutions which utilize the AIRB methodology. CWB's required minimum regulatory capital ratios, including a 250 basis point capital conservation buffer, are 7.0% common equity Tier 1 (CET1), 8.5% Tier 1 and 10.5% Total capital.

CWB is well-positioned to continue to execute against its balanced growth strategy with very strong capital ratios of 9.6% CET1, 10.9% Tier 1 and 12.7% Total capital at July 31, 2017. The increase of 60 basis points in CWB's CET1 capital ratio from last year was primarily driven by strong earnings growth. On December 31, 2016, CWB redeemed both the $105 million senior deposit note held by CWB Capital Trust and all outstanding CWB Capital Trust Capital Securities Series 1 (WesTS), which did not qualify as non-viability contingent capital (NVCC) under the Basel III regulatory capital requirements. The redemption resulted in a $105 million reduction in CWB's Tier 1 regulatory capital and reduced both the Tier 1 and Total capital ratios by approximately 50 basis points. CWB redeemed all $75 million outstanding 5.571% subordinated debentures on March 22, 2017. This redemption reduced the Total capital ratio by approximately 40 basis points. At 8.5%, 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) As at
July 31 2017
As at
April 30
2017
As at
July 31
2016
($ millions)
Regulatory capital
CET1 capital before deductions $ 2,169 $ 2,145 $ 2,037
Net CET1 deductions (206) (207) (211)
CET1 capital 1,963 1,938 1,826
Tier 1 capital(1) 2,228 2,204 2,196
Total capital(1) 2,596 2,572 2,626
Risk-weighted assets $ 20,527 $ 20,239 $ 20,395
Capital adequacy ratios
CET1 9.6 % 9.6 % 9.0 %
Tier 1 10.9 10.9 10.8
Total 12.7 12.7 12.9
(1) The 2017 inclusion of non-common equity instruments that do not include NVCC clauses is capped at 50% of the January 1, 2013 outstanding balances (2016 - 60%). For all periods, there were no exclusion from regulatory capital related to NVCC instruments.

Book value per common share at July 31, 2017 was $24.31, compared to $23.19 last year and $24.27 last quarter. The change from last year primarily reflects earnings growth.

Common shareholders received a quarterly cash dividend of $0.23 per common share on June 30, 2017. On August 30, 2017, CWB's Board of Directors declared a cash dividend of $0.24 per common share, payable on September 29, 2017 to shareholders of record on September 15, 2017. This quarterly dividend is one cent, or 4%, higher than both the prior quarter and the dividend declared one year ago.

Common share dividend increases are evaluated every quarter against the dividend payout ratio target of approximately 30%, and capital requirements under the Standardized approach to support ongoing strong and balanced asset growth. While the dividend payout ratio this quarter was approximately 40%, management expects earnings growth to result in migration of this metric toward 30% over the medium-term.

Series 5 and Series 7 preferred shareholders received quarterly cash dividends of $0.275 and $0.390625 on July 31, 2017. On August 30, 2017, the Board of Directors also declared cash dividends on Series 5 and Series 7 Preferred Shares in amounts unchanged from the prior quarter, both payable on October 31, 2017 to shareholders of record on October 20, 2017.

Outlook for Capital Management

CWB continues to operate from a very strong capital position. Management will maintain strong capital ratios under the Standardized approach for calculating risk-weighted assets, above CWB's target thresholds and OSFI's required minimums. Target capital ratios, including an appropriate capital buffer over the prescribed OSFI minimums, are reconfirmed through CWB's regulatory capital planning.

The ongoing retention of earnings, net of expected common and preferred share dividends, is expected to support capital requirements associated with the anticipated achievement of CWB's medium-term performance target for a strong common equity Tier 1 ratio. CWB continues to monitor changes proposed to the Standardized approach for credit risk by the Basel Committee on Banking Supervision (BCBS).

AIRB transition plan

CWB's project continues in support of an application to OSFI for transition to the AIRB methodology for managing credit risk and calculating risk-weighted assets, including an anticipated three-year time frame ending in fiscal 2019. The AIRB approach will put CWB on more equal footing with its competition. It will add risk sensitivity to CWB's framework for capital management, increase risk quantification processes, improve risk based pricing capabilities and economic capital estimations, and enhance CWB's ability to comply with new accounting standards. These improved risk management capabilities will better equip CWB to target business segments that generate the most attractive risk-adjusted returns and allocate resources accordingly.

CWB's AIRB transition project is separated into several discrete phases, including: establishment of formalized project governance; creation of models including data collection, development, validation, deployment, operationalization and use test; model validation; implementation of risk-weighted asset calculator; and, submission of final application to OSFI.

AIRB models have now been developed for CWB Optimum Mortgage, National Leasing, small- and medium-sized enterprises, and branch-based residential mortgages, representing approximately one third of CWB's overall portfolio. These models have been deployed in the business with operationalization and evaluation underway. Management expects models representing approximately 80% of the portfolio to be developed and deployed with operational testing underway by the end of fiscal 2017.

Work continues toward development of an enhanced enterprise data warehouse to serve as the repository for required data. Model validation and continuous improvement has commenced. Further development of CWB's risk function, including: three lines of defence enhancement; stress testing capabilities; and, economic capital estimation are also underway.

Further information relating to CWB's capital position is provided in Note 15 of the unaudited interim consolidated financial statements for the period ended July 31, 2017 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2016.

Significant Changes in Accounting Policies and Financial Statement Presentation

The unaudited interim consolidated financial statements for the quarter were prepared using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2016.

Future Accounting Changes

CWB continues to monitor changes to International Financial Reporting Standards (IFRS) proposed by the International Accounting Standards Board (IASB). A number of standards and amendments have been issued by the IASB and are described in further detail on page 52 of CWB's 2016 Annual Report. These standards and amendments may impact the presentation of financial statements in the future and management is currently reviewing these changes to determine the impact, if any.

IFRS 9 - Financial Instruments

IFRS 9 will be mandatorily effective for CWB's fiscal year beginning on November 1, 2018, and early adoption is permitted. In January 2015, OSFI determined that Domestic Systemically Important Banks (D-SIBs) should adopt IFRS 9 beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year ends, such as CWB. CWB plans to adopt IFRS 9 on November 1, 2018.

In March 2017, the BCBS issued Standards, Regulatory treatment of accounting provisions - interim and transitional arrangements, which addresses the regulatory impact of transitioning to IFRS 9. The standard confirms the retention of current regulatory treatment of accounting provisions under both the Standardized and AIRB approaches for calculating regulatory capital and outlines potential transitional arrangements. The BCBS recommended each national regulator further define the regulatory treatment of collective and specific allowances in the context of IFRS 9-based expected credit loss calculations and determine an appropriate transition approach.

Controls and Procedures

There were no significant changes in CWB's disclosure controls and procedures and internal controls over financial reporting that occurred during the quarter ended July 31, 2017 that have materially affected, or are reasonably likely to materially affect, CWB's disclosures of required information and internal controls over financial reporting. Prior to its release, this quarterly report to shareholders was reviewed by the Audit Committee and, on the Audit Committee's recommendation, approved by the Board of Directors of CWB.

Third-party Credit Ratings

DBRS Limited (DBRS) maintains published credit ratings on CWB's long-term senior debt, long-term deposits, short-term debt, subordinated debentures, and both series of First Preferred Shares of "A (low)", "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 24, 2017, there were 88,360,810 common shares and 4,067,125 stock options outstanding. For additional information on share capital and stock options, see Notes 17 and 18 of the audited annual consolidated financial statements for the year ended October 31, 2016 and Notes 10 and 11 to the interim consolidated financial statements for this quarter.

Dividend Reinvestment Plan

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

Summary of Quarterly Financial Information

2017 2016 2015
($ thousands) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
Continuing Operations
Common shareholders' net income $
56,308
$
47,594
$ 49,542
$
47,834 $
45,582
$
32,213
$
52,132
$
52,969
Earnings per common share
Basic 0.64 0.54 0.56 0.54 0.55 0.40 0.65 0.66
Diluted 0.64 0.54 0.56 0.54 0.55 0.40 0.65 0.66
Adjusted cash 0.69 0.59 0.61 0.59 0.60 0.41 0.66 0.67
Combined Operations
Common shareholders' net income
$

56,308
$
47,594
$
49,542

$
47,834 $
45,582
$
32,213
$
52,132
$
53,138
Earnings per common share
Basic 0.64 0.54 0.56 0.54 0.55 0.40 0.65 0.66
Diluted 0.64 0.54 0.56 0.54 0.55 0.40 0.65 0.66
Adjusted cash 0.69 0.59 0.61 0.59 0.60 0.41 0.66 0.67
Total assets ($ millions) 25,345 24,618 24,815 25,223 25,185 24,237 23,473 22,839
Discontinued Operations(1)
Common shareholders' net income
$

-
$
-
$
-

$
- $ - $ - $ - $
169
Earnings per common share
Basic - - - - - - - -
Diluted - - - - - - - -
Adjusted cash - - - - - - - -
(1) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB's stock transfer business as described in the 2015 and 2016 Annual Reports. The 2015 contributions of both the insurance and stock transfer businesses, including gains on sale, are defined as "Discontinued Operations", the remaining operations are defined as "Continuing Operations", and the total Continuing Operations and Discontinued Operations are defined as "Combined Operations".

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.

For additional details on variations between the prior quarters, refer to the summary of quarterly results section of CWB's MD&A for the year ended October 31, 2016 and the individual quarterly reports to shareholders which are available on SEDAR at www.sedar.com and on CWB's website at www.cwb.com.

Taxable Equivalent Basis (teb)

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

Non-IFRS Measures

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

  • taxable equivalent basis - described above;
  • pre-tax, pre-provision income - total revenue (teb) less non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets (see calculation below);
  • adjusted cash earnings per common share - diluted earnings per common share excluding the amortization of acquisition-related 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 amortization of acquisition-related intangible assets and contingent consideration fair value changes, net of tax (see calculation below), divided by average common shareholders' equity;
  • return on assets - annualized common shareholders' net income divided by average total assets;
  • efficiency ratio - non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, divided by total revenues, (see calculation below);
  • net interest margin - net interest income divided by average total assets;
  • operating leverage - growth rate of total revenue (teb) less growth rate of non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets;
  • common share dividend payout ratio - common share dividends declared during the past twelve months divided by common shareholders' net income earned over the same period;
  • Basel III common equity Tier 1, Tier 1, Total capital, and leverage ratios - in accordance with guidelines issued by OSFI; and
  • average balances - average daily balances.
Adjusted Financial Measures
For the three months ended For the nine months ended
(unaudited) July 31 2017 April 30 2017 July 31 2016 Change from July 31
2016
July 31 2017 July 31 2016 Change from July 31
2016
($ thousands)
Non-interest expenses $ 85,383 $ 84,139 $ 78,504 9 % $ 252,337 $ 232,518 9 %
Adjustments (before tax):
Amortization of acquisition-related intangible assets (1,900) (1,899) (1,776) 7 (5,651) (4,559) 24
Adjusted non-interest expenses $ 83,483 $ 82,240 $ 76,728 9 % $ 246,686 $ 227,959 8 %
Common shareholders' net income $ 56,308 $ 47,594 $ 45,582 24 % $ 153,444 $ 129,927 18 %
Adjustments (after-tax)
Acquisition-related fair value changes 3,364 3,392 2,896 16 9,940 2,896 243
Amortization of acquisition-related intangible assets 1,401 1,399 1,307 7 4,164 3,358 24
Adjusted common shareholders' net income $ 61,073 $ 52,385 $ 49,785 23 % $ 167,548 $ 136,181 23 %

Pre-tax, pre-provision (PTPP) income

For the three months ended For the nine months ended
(unaudited) July 31 2017 April 30 2017 July 31 2016 Change from July 31
2016
July 31 2017 July 31 2016 Change from July 31
2016
($ thousands)
Total revenue (teb) $ 184,407 $ 173,026 $ 169,088 9 % $ 533,276 $ 492,305 8 %
Less:
Adjusted non-interest expenses 83,483 82,240 76,728 9 246,686 227,959 8
Pre-tax, pre-provision income $ 100,924 $ 90,786 $ 92,360 9 % $ 286,590 $ 264,346 8 %
Consolidated Balance Sheets
(unaudited) As at
July 31
2017
As at April 30
2017
As at October 31 2016 As at July 31 2016 Change from July 31
2016
($ thousands)
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions $ 57,599 $ 67,963 $ 11,490 $ 38,025 51 %
Interest bearing deposits with regulated financial institutions (Note 3) 137,633 722,075 890,516 544,793 (75)
Cheques and other items in transit 1,427 15,708 18,050 10,435 (86)
196,659 805,746 920,056 593,253 (67)
Securities (Note 3)
Issued or guaranteed by Canada 1,097,193 725,527 1,142,798 1,306,045 (16)
Issued or guaranteed by a province or municipality 578,505 173,268 291,947 546,335 6
Other debt securities 118,706 88,614 154,648 214,244 (45)
Preferred shares 139,092 141,925 119,201 123,580 13
1,933,496 1,129,334 1,708,594 2,190,204 (12)
Securities Purchased Under Resale Agreements - - 163,318 195,079 (100)
Loans (Notes 4 and 6)
Personal 4,605,813 4,475,620 4,063,552 3,775,988 22
Business 18,236,098 17,852,517 18,001,584 18,078,402 1
22,841,911 22,328,137 22,065,136 21,854,390 5
Allowance for credit losses (Note 5) (123,040) (112,947) (103,788) (109,888) 12
22,718,871 22,215,190 21,961,348 21,744,502 4
Other
Property and equipment 55,555 56,131 57,330 57,808 (4)
Goodwill 85,669 85,669 84,762 84,488 1
Intangible assets 149,344 149,134 149,312 148,941 -
Derivative related (Note 8) 6,619 5,437 10,370 13,155 (50)
Other assets 198,654 170,927 167,459 158,011 26
495,841 467,298 469,233 462,403 7
Total Assets $ 25,344,867 $ 24,617,568 $ 25,222,549 $ 25,185,441 1 %
Liabilities and Equity
Deposits
Personal $ 12,785,428 $ 12,694,328 $ 13,223,702 $ 13,098,162 (2) %
Business and government 8,094,851 7,779,411 7,970,851 8,058,728 -
20,880,279 20,473,739 21,194,553 21,156,890 (1)
Other
Cheques and other items in transit 53,486 54,192 27,683 93,651 (43)
Securities sold under repurchase agreements (Note 7) 264,401 102,553 - - 100
Derivative related (Note 8) 31,696 9,470 7,172 7,062 349
Other liabilities 375,556 401,228 382,130 341,159 10
725,139 567,443 416,985 441,872 64
Debt
Debt securities (Note 7) 1,075,270 917,217 943,198 954,002 13
Subordinated debentures 250,000 250,000 325,000 325,000 (23)
1,325,270 1,167,217 1,268,198 1,279,002 4
Equity
Preferred shares (Note 10) 265,000 265,000 265,000 265,000 -
Common shares (Note 10) 727,539 725,912 718,377 717,208 1
Retained earnings 1,450,386 1,413,324 1,354,966 1,327,554 9
Share-based payment reserve 27,325 26,878 31,276 30,623 (11)
Other reserves (57,483) (23,050) (27,579) (33,130) 74
Total Shareholders' Equity 2,412,767 2,408,064 2,342,040 2,307,255 5
Non-controlling interests 1,412 1,105 773 422 235
Total Equity 2,414,179 2,409,169 2,342,813 2,307,677 5
Total Liabilities and Equity $ 25,344,867 $ 24,617,568 $ 25,222,549 $ 25,185,441 1 %

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) July 31 2017 April 30 2017 July 31 2016 Change from
July 31
2016
July 31 2017 July 31 2016 Change from July 31 2016
($ thousands, except per share amounts)
Interest Income
Loans $ 250,326 $ 235,249 $ 237,877 5 % $ 729,375 $ 688,143 6 %
Securities 5,525 5,255 6,491 (15) 17,810 22,774 (22)
Deposits with regulated financial institutions 2,068 2,447 1,329 56 6,584 2,948 123
257,919 242,951 245,697 5 753,769 713,865 6
Interest Expense
Deposits 86,557 83,860 89,518 (3) 259,891 255,643 2
Debt 7,371 6,935 7,308 1 21,982 22,123 (1)
93,928 90,795 96,826 (3) 281,873 277,766 1
Net Interest Income 163,991 152,156 148,871 10 471,896 436,099 8
Non-interest Income
Credit related 8,538 8,324 7,496 14 25,631 21,837 17
Wealth management services 4,021 4,822 3,498 15 12,479 10,548 18
Retail services 3,397 3,361 3,044 12 10,171 10,214 -
Trust services 2,819 3,016 2,734 3 8,784 8,558 3
Gains (losses) on securities, net 46 539 2 nm 655 (2,882) nm
Other 1,031 225 2,767 (63) 1,897 5,270 (64)
19,852 20,287 19,541 2 59,617 53,545 11
Total Revenue 183,843 172,443 168,412 9 531,513 489,644 9
Provision for Credit Losses (Note 5) 11,424 13,159 17,402 (34) 39,575 66,005 (40)
Acquisition-related Fair Value Changes 4,577 4,647 3,940 16 13,585 3,940 245
Non-interest Expenses
Salaries and employee benefits 54,209 54,082 50,662 7 162,655 152,625 7
Premises and equipment 14,619 14,747 13,760 6 43,714 38,266 14
Other expenses 16,555 15,310 14,082 18 45,968 41,627 10
85,383 84,139 78,504 9 252,337 232,518 9
Net Income before Income Taxes 82,459 70,498 68,566 20 226,016 187,181 21
Income taxes 22,302 19,009 18,492 21 61,006 49,508 23
Net Income 60,157 51,489 50,074 20 165,010 137,673 20
Net income attributable to
non-controlling interests 286 333 192 49 878 696 26
Shareholders' Net Income 59,871 51,156 49,882 20 164,132 136,977 20
Preferred share dividends 3,563 3,562 4,300 (17) 10,688 7,050 52
Common Shareholders' Net Income $ 56,308 $ 47,594 $ 45,582 24 % $ 153,444 $ 129,927 18 %
Average number of common shares (in thousands) 88,321 88,271 83,564 6 % 88,259 81,846 8 %
Average number of diluted common shares (in thousands) 88,355 88,490 83,564 6 88,418 81,856 8
Earnings Per Common Share
Basic $ 0.64 $ 0.54 $ 0.55 16 % $ 1.74 $ 1.59 9 %
Diluted 0.64 0.54 0.55 16 1.74 1.59 9

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 2017 July 31
2016
July 31 2017 July 31
2016
Net Income $ 60,157 $ 50,074 $ 165,010 $ 137,673
Other Comprehensive Income (Loss), net of tax
Available-for-sale securities:
Gains (losses) from change in fair value(1) (15,438) 14,444 (2,996) 14,914
Reclassification to net income(2) (33) (2) (479) 2,196
(15,471) 14,442 (3,475) 17,110
Derivatives designated as cash flow hedges:
Gains (losses) from change in fair value(3) (18,802) 782 (25,683) (7,882)
Reclassification to net income(4) (160) 700 (746) 134
(18,962) 1,482 (26,429) (7,748)
(34,433) 15,924 (29,904) 9,362
Comprehensive Income for the Period $ 25,724 $ 65,998 $ 135,106 $ 147,035
Comprehensive income for the period attributable to:
Shareholders of CWB $ 25,438 $ 65,806 $ 134,228 $ 146,339
Non-controlling interests 286 192 878 696
Comprehensive Income for the Period $ 25,724 $ 65,998 $ 135,106 $ 147,035
(1) Net of income tax of $5,661 and $1,107 for the three and nine months ended July 31, 2017, respectively (2016 - $5,354 and $5,544).
(2) Net of income tax of $13 and $176 for the three and nine months ended July 31, 2017, respectively (2016 - $1 and $810).
(3) Net of income tax of $6,919 and $9,450 for the three and nine months ended July 31, 2017, respectively (2016 - $288 and $2,900).
(4) Net of income tax of $59 and $275 for the three and nine months ended July 31, 2017, respectively (2016 - $257 and $49).

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) July 31 2017 July 31 2016
($ thousands)
Retained Earnings
Balance at beginning of period $ 1,354,966 $ 1,261,678
Shareholders' net income 164,132 136,977
Dividends - Preferred shares (10,688) (7,050)
- Common shares (60,896) (56,171)
Increase in equity attributable to non-controlling interests ownership change 2,872 -
Issuance costs on common and preferred shares - (7,880)
Balance at end of period 1,450,386 1,327,554
Other Reserves
Balance at beginning of period (27,579) (42,492)
Changes in available-for-sale securities (3,475) 17,110
Changes in derivatives designated as cash flow hedges (26,429) (7,748)
Balance at end of period (57,483) (33,130)
Preferred Shares (Note 10)
Balance at beginning of period 265,000 125,000
Issued - 140,000
Balance at end of period 265,000 265,000
Common Shares (Note 10)
Balance at beginning of period 718,377 537,511
Issued - 150,063
Issued on acquisition of subsidiary - 25,606
Issued under dividend reinvestment plan 3,684 3,333
Transferred from share-based payment reserve on the exercise or exchange of options 5,478 695
Balance at end of period 727,539 717,208
Share-based Payment Reserve
Balance at beginning of period 31,276 29,210
Amortization of fair value of options (Note 11) 1,527 2,108
Transferred to common shares on the exercise or exchange of options (5,478) (695)
Balance at end of period 27,325 30,623
Total Shareholders' Equity 2,412,767 2,307,255
Non-Controlling Interests
Balance at beginning of period 773 992
Net income attributable to non-controlling interests 878 696
Dividends to non-controlling interests (607) (913)
Increase in equity attributable to non-controlling interests 485 -
Partial ownership increase (117) (353)
Balance at end of period 1,412 422
Total Equity $ 2,414,179 $ 2,307,677

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

Consolidated Statements of Cash Flow
For the nine months ended
(unaudited) July 31 2017 July 31
2016
($ thousands)
Cash Flows from Operating Activities
Net income $ 165,010 $ 137,673
Adjustments to determine net cash flows:
Provision for credit losses 39,575 66,005
Acquisition-related fair value changes 13,585 3,940
Depreciation and amortization 21,795 17,497
Current income taxes receivable and payable (1,098) (16,666)
Amortization of fair value of employee stock options (Note 11) 1,527 2,108
Accrued interest receivable and payable, net (36,356) (14,886)
Deferred income taxes, net (1,779) (2,995)
(Gains) losses on securities, net (655) 2,882
Change in operating assets and liabilities:
Deposits, net (314,274) 1,791,483
Loans, net (802,458) (1,991,106)
Securities sold under repurchase agreements, net 264,401 -
Securities purchased under resale agreements, net 163,318 (195,079)
Other items, net 10,114 36,721
(477,295) (162,423)
Cash Flows from Financing Activities
Common shares issued, net of issuance costs - 148,678
Preferred shares issued, net of issuance costs - 136,838
Contributions by non-controlling interests 3,401 -
Debt securities issued 463,158 634,476
Debt securities repaid (331,086) (243,097)
Debentures redeemed (75,000) (300,000)
Dividends (67,900) (63,221)
Dividends to non-controlling interests (607) (913)
(8,034) 312,761
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net 752,883 (132,025)
Securities, purchased (5,047,787) (7,231,486)
Securities, sale proceeds 4,026,773 5,706,543
Securities, matured 788,116 1,892,661
Property, equipment and intangible assets (19,003) (36,742)
Partial ownership increase (1,838) (353)
Acquisitions - (364,523)
Contingent consideration instalment payment (10,132) -
489,012 (165,925)
Change in Cash and Cash Equivalents 3,683 (15,587)
Cash and Cash Equivalents at Beginning of Period 1,857 (29,604)
Cash and Cash Equivalents at End of Period * $ 5,540 $ (45,191)
* Represented by:
Cash and non-interest bearing deposits with financial institutions $ 57,599 $ 38,025
Cheques and other items in transit (included in Cash Resources) 1,427 10,435
Cheques and other items in transit (included in Other Liabilities) (53,486) (93,651)
Cash and Cash Equivalents at End of Period $ 5,540 $ (45,191)
Supplemental Disclosure of Cash Flow Information
Interest and dividends received $ 761,594 $ 723,492
Interest paid 315,263 296,216
Income taxes paid 52,791 66,968

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

Notes to Interim Consolidated Financial Statements

(unaudited)

($ thousands, unless otherwise noted)

1. Basis of Presentation and Significant Accounting Policies

These unaudited condensed interim consolidated financial statements of Canadian Western Bank (CWB) have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) using the same accounting policies as the audited consolidated financial statements for the year ended October 31, 2016. These interim consolidated financial statements of CWB, domiciled in Canada, have also been prepared in accordance with subsection 308 (4) of the Bank Act and the accounting requirements of the Office of the Superintendent of Financial Institutions Canada (OSFI). Under International Financial Reporting Standards (IFRS), additional disclosures are required in annual financial statements and accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2016 as set out on pages 71 to 110 of CWB's 2016 Annual Report.

The interim consolidated financial statements were authorized for issue by the Board of Directors on August 30, 2017.

2. Future Accounting Changes

CWB continues to monitor the IASB's proposed changes to accounting standards. Although not expected to materially impact CWB's 2017 consolidated financial statements, proposed changes may have a significant impact on future financial statements. Additional discussion on certain accounting standards that may impact CWB is included in the audited consolidated financial statements within CWB's 2016 Annual Report and the Future Accounting Changes section of the Q3 2017 Management's Discussion and Analysis.

IFRS 9 - Financial Instruments

IFRS 9 will be mandatorily effective for CWB's fiscal year beginning on November 1, 2018, and early adoption is permitted. In January 2015, OSFI determined that Domestic Systemically Important Banks (D-SIBs) should adopt IFRS 9 beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year ends, such as CWB. CWB plans to adopt IFRS 9 on November 1, 2018.

3. Securities

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

As at
July 31
2017
As at
April 30
2017
As at
October 31 2016
Interest bearing deposits with regulated financial institutions $ (5) $ (510) $ (81)
Securities issued or guaranteed by
Canada (25,456) (4,692) 147
A province or municipality (6,373) 38 133
Other debt securities 1,837 2,349 1,522
Preferred shares (19,467) (25,479) (46,405)
Unrealized losses, net $ (49,464) $ (28,294) $ (44,684)

The securities portfolio is primarily comprised of high quality debt and equity instruments that are not held for trading purposes and, where applicable, are typically held until maturity. Fluctuations in value are generally attributed to changes in interest rates, market credit spreads and shifts in the interest rate curve as well as volatility in equity markets. As at July 31, 2017, CWB assessed the securities with unrealized losses and, based on available objective evidence, concluded that unrealized losses resulted from changes in interest rates and not from deterioration in creditworthiness of the issuers. No impairment losses were included in gains (losses) on securities, net during the three and nine months ended July 31, 2017 (2016 - nil).

4. Loans

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

Composition Percentage
($ millions) AB BC ON SK MB Other Total July 31 2017 April 30 2017 October 31 2016
Personal(1) $ 1,217 $ 1,222 $ 1,772 $ 193 $ 107 $ 95 $ 4,606 20 % 20 % 18 %
Business
Real estate 3,144 4,221 357 471 176 1 8,370 36 37 38
Commercial 2,245 1,908 984 259 264 243 5,903 26 25 26
Equipment financing(2) 1,105 640 852 390 180 665 3,832 17 17 17
Energy 113 - - 18 - - 131 1 1 1
6,607 6,769 2,193 1,138 620 909 18,236 80 80 82
Total Loans(3) $ 7,824 $ 7,991 $ 3,965 $ 1,331 $ 727 $ 1,004 $ 22,842 100 % 100 % 100 %
Composition Percentage
July 31, 2017 34 % 35 % 18 % 6 % 3 % 4 % 100 %
April 30, 2017 35 % 35 % 17 % 6 % 3 % 4 % 100 %
October 31, 2016 36 % 36 % 15 % 6 % 3 % 4 % 100 %
(1) Includes mortgages securitized through the National Housing Act Mortgage-backed Securities program reported on-balance sheet of $355 (April 30, 2017 - $373, October 31, 2016 - $391).
(2) Includes securitized leases reported on-balance sheet of $1,082 (April 30, 2017 - $906, October 31, 2016 - $1,030).
(3) This table does not include an allocation for credit losses.

5. Allowance for Credit Losses

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

For the three months ended
July 31, 2017
For the three months ended
April 30, 2017


Specific Allowance
Collective Allowance for Credit Losses Total

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 18,274 $ 118,119 $ 136,393 $ 14,168 $ 115,348 $ 129,516
Provision for credit losses 11,236 188 11,424 10,388 2,771 13,159
Write-offs (8,112) - (8,112) (7,772) - (7,772)
Recoveries 1,398 - 1,398 1,490 - 1,490
Balance at end of period $ 22,796 $ 118,307 $ 141,103 $ 18,274 $ 118,119 $ 136,393
Represented by:
Loans $ 22,796 $ 100,244 $ 123,040 $ 18,274 $ 94,673 $ 112,947
Committed but undrawn exposures - 18,063 18,063 - 23,446 23,446
Total allowance $ 22,796 $ 118,307 $ 141,103 $ 18,274 $ 118,119 $ 136,393
For the three months ended
July 31, 2016

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 45,927 $ 99,890 $ 145,817
Provision for credit losses 12,361 5,041 17,402
Write-offs (30,989) - (30,989)
Recoveries 458 - 458
Balance at end of period $ 27,757 $ 104,931 $ 132,688
Represented by:
Loans $ 27,757 $ 82,131 $ 109,888
Committed but undrawn exposures - 22,800 22,800
Total allowance $ 27,757 $ 104,931 $ 132,688
For the nine months ended
July 31, 2017
For the nine months ended
July 31, 2016


Specific Allowance
Collective Allowance for Credit Losses Total

Specific Allowance
Collective Allowance for Credit Losses Total
Balance at beginning of period $ 16,269 $ 110,943 $ 127,212 $ 15,806 $ 99,613 $ 115,419
Provision for credit losses 32,211 7,364 39,575 60,687 5,318 66,005
Write-offs (29,589) - (29,589) (51,018) - (51,018)
Recoveries 3,905 - 3,905 2,282 - 2,282
Balance at end of period $ 22,796 $ 118,307 $ 141,103 $ 27,757 $ 104,931 $ 132,688

6. Impaired and Past Due Loans

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

As at July 31, 2017 As at April 30, 2017
Gross Amount Gross Impaired Amount Specific Allowance Net Impaired Loans Gross Amount Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Personal $ 4,605,813 $ 19,800 $ 518 $ 19,282 $ 4,475,620 $ 21,732 $ 353 $ 21,379
Business
Real estate(1) 8,369,990 45,032 2,700 42,332 8,298,740 37,015 2,700 34,315
Commercial 5,903,074 49,138 6,201 42,937 5,605,488 32,406 5,790 26,616
Equipment financing 3,832,141 50,874 10,377 40,497 3,797,098 46,108 8,858 37,250
Energy 130,893 3,840 3,000 840 151,191 573 573 -
Total(2) $ 22,841,911 $ 168,684 $ 22,796 145,888 $ 22,328,137 $ 137,834 $ 18,274 119,560
Collective Allowance(3) (118,307) (118,119)
Net Impaired Loans After Collective Allowance $ 27,581 $ 1,441
As at October 31, 2016
Gross Amount Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Personal $ 4,063,552 $ 21,968 $ 204 $ 21,764
Business
Real estate(1) 8,424,777 29,784 2,989 26,795
Commercial 5,644,231 18,363 1,370 16,993
Equipment financing 3,711,504 40,201 9,563 30,638
Energy 221,072 16,896 2,143 14,753
Total(2) $ 22,065,136 $ 127,212 $ 16,269 110,943
Collective Allowance(3) (110,943)
Net Impaired Loans After Collective Allowance $ -
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans include foreclosed assets with a carrying value of $2,275 (April 30, 2017 - $3,436; and October 31, 2016 - $3,876) which are held for sale. CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(3) The collective allowance for credit loss includes amounts related to committed by undrawn credit exposures and is not allocated by loan type.

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

As at July 31, 2017 As at April 30, 2017
Gross Impaired Amount Specific Allowance Net
Impaired Loans
Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Alberta $ 94,986 $ 8,597 $ 86,389 $ 64,660 $ 4,524 $ 60,136
British Columbia 19,246 2,047 17,199 22,778 2,160 20,618
Ontario 23,643 6,427 17,216 24,314 6,077 18,237
Saskatchewan 9,376 1,426 7,950 9,959 1,592 8,367
Manitoba 10,313 1,124 9,189 3,336 1,031 2,305
Other 11,120 3,175 7,945 12,787 2,890 9,897
Total $ 168,684 $ 22,796 145,888 $ 137,834 $ 18,274 119,560
Collective Allowance(1) (118,307) (118,119)
Net Impaired Loans After Collective Allowance $ 27,581 $ 1,441
As at October 31, 2016
Gross Impaired Amount
Specific Allowance
Net Impaired Loans
Alberta $ 64,751 $ 6,137 $ 58,614
British Columbia 29,074 2,868 26,206
Ontario 16,596 4,680 11,916
Saskatchewan 8,688 712 7,976
Manitoba 3,903 543 3,360
Other 4,200 1,329 2,871
Total $ 127,212 $ 16,269 110,943
Collective Allowance(1) (110,943)
Net Impaired Loans After Collective Allowance $ -
(1) The collective allowance for credit loss includes amounts related to committed by undrawn credit exposures and is not allocated by province.

Loans are considered past due when a customer has not made a payment by the contractual due date. These loans are not classified as impaired as they are either less than 90 days past due or well secured and collection efforts are reasonably expected to result in repayment or restoring it to current status in accordance with CWB's policy. Details of such past due loans follow:

As at July 31, 2017
1 - 30 days 31 - 60 days 61 - 90 days More than
90 days
(1)
Total
Personal $ 58,743 $ 17,069 $ 726 $ 2,146 $ 78,684
Business 89,809 27,357 4,713 13,778 135,657
Total $ 148,552 $ 44,426 $ 5,439 $ 15,924 $ 214,341
Total as at April 30, 2017 $ 171,284 $ 43,396 $ 10,020 $ 2,823 $ 227,523
Total as at October 31, 2016 $ 168,153 $ 47,136 $ 9,309 $ 4,491 $ 229,089
(1) The Business balance as at July 31, 2017 includes approximately $11,000 related to a well-secured facility where collection efforts are reasonably expected to result in repayment.

7. Financial Assets Transferred But Not Derecognized

Securitization of leases

CWB securitizes leases to third parties. These securitizations do not qualify for derecognition as CWB continues to be exposed to certain risks associated with the leases, including an obligation to remit contractual cash flow payments regardless of whether the cash flows are collected from lessees and, therefore, has not transferred substantially all of the risk and rewards of ownership. As the leases do not qualify for derecognition, the assets are not removed from the consolidated balance sheet and a securitization liability is recognized within debt securities for the cash proceeds received.

Securitization of residential mortgages

CWB securitizes insured residential mortgages through the creation of mortgage-backed securities (MBS) under the National Housing Act (NHA) MBS program sponsored by Canada Mortgage Housing Corporation (CMHC). The MBS that are created through the NHA MBS program can be sold directly to third party investors or held by CWB.

In April 2017, CWB sold $88 million of securitized residential mortgages to a third party investor for cash proceeds of $90 million (2016 - nil).

The third party sale of the mortgage pools that comprise the NHA MBS does not qualify for derecognition as CWB retains the pre-payment and interest rate risks associated with the mortgages, which represent substantially all of the risks and rewards associated with the transferred assets. As a result, the mortgages remain on the consolidated balance sheet as personal loans and are carried at amortized cost. Cash proceeds from the third party sale of the mortgage pools are recognized within debt securities.

Securities sold under repurchase agreements

CWB enters into repurchase agreements under which it sells previously recognized securities, with a simultaneous agreement to purchase them back at a specific price on a future date, but retains substantially all of the credit, price, interest rate, and foreign exchange risks and rewards associated with the assets. These securities are not derecognized and the cash proceeds from the sale are recognized within other liabilities on the balance sheet.

Details about the nature of transferred financial assets that do not qualify for derecognition and the associated liabilities follow:

As at July 31, 2017 As at April 30, 2017
Carrying value Fair
Value
Carrying value Fair
Value
Transferred assets that do not qualify for derecognition
Securities issued or guaranteed by Canada $ 264,401 $ 264,401 $ 102,553 $ 102,553
Securitized leases 1,082,349 1,145,890 906,309 967,942
Securitized residential mortgages 84,543 82,798 88,183 85,968
1,431,293 1,493,089 1,097,045 1,156,463
Associated liabilities(1) 1,339,671 1,308,392 1,019,770 1,022,513
Net position $ 91,622 $ 184,697 $ 77,275 $ 133,950
As at October 31, 2016
Carrying value Fair
Value
Transferred assets that do not qualify for derecognition
Securitized leases $ 1,030,499 $ 1,099,240
Associated liabilities(1) 943,198 942,171
Net position $ 87,301 $ 157,069
(1) Associated liabilities consist of $264,401 related to securities sold under repurchase agreements (April 30, 2017 - $102,553; October 31, 2016 - nil), $987,788 related to securitized leases (April 30, 2017 - $827,214; October 31, 2016 - $943,198) and $87,482 related to residential mortgages securitized through the NHA MBS program (April 30, 2017 - $90,003; October 31, 2016 - nil).

Additionally, CWB has securitized residential mortgages through the NHA MBS program totaling $270 million with a fair value of $264 million (April 30, 2017 - $285 million with a fair value of $267 million; October 31, 2016 - $391 million with a fair value of $363 million) that were not transferred to third parties.

8. Derivative Financial Instruments

When designated as accounting hedges by CWB, certain derivative financial instruments are designated as either a hedge of the fair value of recognized assets or liabilities or firm commitments (fair value hedges), or a hedge of highly probable future cash flows attributable to a recognized asset or liability or a forecasted transaction (cash flow hedges). Changes in fair value attributed to both the interest rate swaps designated as fair value hedges and the associated hedged risk are included in non-interest income. Any difference between the two represents hedge ineffectiveness. Changes in fair value of the effective portion of equity and interest rate swap derivatives designated as cash flow hedges are recorded in other comprehensive income and are reclassified to net income in the same period that the hedged item affects income. On an ongoing basis, the derivatives used in hedging transactions are assessed to determine whether they are effective in offsetting changes in fair values or cash flows of the hedged items. If a designated cash flow hedging transaction becomes ineffective, any subsequent change in the fair value of the hedging instrument is recognized in net income.

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

As at July 31, 2017 As at April 30, 2017
Notional Amount Positive
Fair Value
Negative Fair Value Notional Amount Positive
Fair Value
Negative Fair Value
Cash flow hedges
Interest rate swaps(1) $ 3,243,000 $ - $ 30,051 $ 3,308,000 $ 4,625 $ 8,019
Equity swaps(2) 18,077 1,662 - 20,117 698 845
Not designated in a hedging relationship
Equity swaps(3) 4,237 349 20 3,628 112 -
Foreign exchange contracts(4) 108,224 4,608 1,625 54,033 2 606
Derivative related amounts $ 3,373,538 $ 6,619 $ 31,696 $ 3,385,778 $ 5,437 $ 9,470
As at October 31, 2016
Notional Amount Positive
Fair Value
Negative Fair Value
Cash flow hedges
Interest rate swaps $ 3,698,000 $ 10,335 $ 3,014
Equity swaps 20,117 - 1,449
Not designated in a hedging relationship
Equity swaps 3,628 - 134
Foreign exchange contracts 124,056 35 2,575
Derivative related amounts $ 3,845,801 $ 10,370 $ 7,172
(1) Interest rate swaps designated as cash flow hedges outstanding at July 31, 2017 mature between October 2017 and July 2022.
(2) Equity swaps designated as cash flow hedges outstanding at July 31, 2017 mature between June 2018 and June 2020.
(3) Equity swaps not designated as hedges outstanding at July 31, 2017 mature in December 2017 and June 2018.
(4) Foreign exchange contracts outstanding at July 31, 2017 mature between September 2017 and May 2018.

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

For the three months ended For the nine months ended
July 31
2017
July 31
2016
July 31
2017
July 31
2016
Fair value hedges
Change in fair value of the hedging instruments $ - $ - $ - $ 1,135
Change in fair value of the hedged items attributable to hedged risk - - - (501)
$ - $ - $ - $ 634
Cash flow hedges $ - $ - $ - $ -

At July 31, 2017, hedged cash flows are expected to occur and affect profit or loss within the next five years. There were no forecasted transactions that failed to occur during the three and nine months ended July 31, 2017.

CWB limits its exposure to credit losses related to derivative financial instruments by dealing with creditworthy counterparties and entering into contracts that provide for the exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed upon threshold. The impact of pledged and received collateral is discussed in Note 9.

9. Financial Instruments - Offsetting

The following table provides a summary of financial assets and liabilities which are subject to enforceable master netting agreements and similar arrangements, as well as financial collateral received to mitigate credit exposures related to these financial instruments. The agreements do not meet the netting criteria required by IAS 32 Financial Instruments: Presentation as the right to set-off is only enforceable in the event of default or occurrence of other predetermined events.

Amounts not offset in the consolidated balance sheet
As at July 31, 2017 Gross amounts reported on the consolidated balance sheets Impact of master netting agreements Cash
collateral
(1)
Securities received as collateral(1)(2)

Net amount
Financial Assets
Derivative instruments $ 6,619 $ 3,770 $ 2,571 $ - $ 278
Financial Liabilities
Derivative instruments $ 31,696 $ 3,770 $ 20,970 $ - $ 6,956
As at April 30, 2017
Financial Assets
Derivative instruments $ 5,437 $ 2,398 $ 3,021 $ - $ 18
Financial Liabilities
Derivative instruments $ 9,470 $ 2,398 $ 7,004 $ - $ 68
As at October 31, 2016
Financial Assets
Derivative instruments $ 10,370 $ 4,345 $ 5,730 $ 49 $ 246
Financial Liabilities
Derivative instruments $ 7,172 $ 4,345 $ 2,121 $ - $ 706
(1) Financial collateral is reflected at fair value. The amount of financial instruments and cash collateral disclosed is limited to the net balance sheet exposure and any over-collateralization is excluded from the table.
(2) Collateral received in the form of securities is not recognized on the consolidated balance sheets.

10. Capital Stock

Share Capital

For the nine months ended
July 31, 2017 July 31, 2016
Number of
Shares
Amount Number of Shares Amount
Preferred Shares - Series 5
Outstanding at beginning and end of period 5,000,000 $ 125,000 5,000,000 $ 125,000
Preferred Shares - Series 7
Outstanding at beginning of period 5,600,000 140,000 - -
Issued - - 5,600,000 140,000
Outstanding at end of period 5,600,000 140,000 5,600,000 140,000
10,600,000 265,000 10,600,000 265,000
Common Shares
Outstanding at beginning of period 88,103,120 718,377 80,526,069 537,511
Issued under dividend reinvestment plan 129,100 3,684 138,296 3,333
Issued on exercise or exchange of options(1) (Note 11) 128,463 5,478 16,539 695
Issued to public - - 6,125,000 150,063
Issued on acquisition of subsidiary - - 1,250,312 25,606
Outstanding at end of period 88,360,683 727,539 88,056,216 717,208
Share Capital $ 992,539 $ 982,208
(1) Represents shares issued and amounts transferred from the share-based payment reserve to share capital upon cashless settlement of option exercises.

11. Share-based Payments

Stock Options

For the three months ended
July 31, 2017 July 31, 2016


Number of Options
Weighted Average Exercise Price

Number of Options
Weighted
Average Exercise Price
Options
Balance at beginning of period 4,245,851 $ 30.42 5,481,286 $ 29.69
Granted - - - -
Exercised or exchanged - - (1,996) 25.91
Expired (161,831) 26.57 (208,370) 30.72
Forfeited (11,177) 31.09 (44,952) 31.78
Balance at end of period 4,072,843 $ 30.58 5,225,968 $ 29.63
For the nine months ended
July 31, 2017 July 31, 2016


Number of Options
Weighted Average Exercise Price

Number of Options
Weighted Average Exercise Price
Options
Balance at beginning of period 5,205,794 $ 29.63 5,232,366 $ 30.26
Granted 339,630 30.84 610,731 23.70
Exercised or exchanged (1,176,504) 26.56 (146,947) 25.52
Expired (271,055) 29.67 (396,158) 29.78
Forfeited (25,022) 35.62 (74,024) 32.84
Balance at end of period 4,072,843 $ 30.58 5,225,968 $ 29.63

All exercised options are settled via cashless settlement, which provides the option holder the number of shares equivalent to the excess of the market value of the shares under option, determined at the exercise date, over the exercise price. During the nine months ended July 31, 2017, option holders exchanged the rights to 1,176,504 (2016 - 146,947) options and received 128,463 (2016 - 16,539) shares in return by way of cashless settlement.

For the nine months ended July 31, 2017, salary expense of $1,527 (2016 - $2,108) was recognized related to the estimated fair value of options granted. The fair value of options granted during the nine months ended July 31, 2017, which expire seven years after the grant date, was estimated using a binomial option pricing model with the following weighted average variables and assumptions: (i) risk-free interest rate of 1.3% (2016 - 0.8%) (ii) expected option life of 5.0 years (2016 - 5.0 years), (iii) expected annual volatility of 26% (2016 - 26%), and (iv) expected annual dividends of 3.1% (2016 - 3.8%). The weighted average fair value of options granted was estimated at $4.77 per share (2016 - $3.47).

Further details related to stock options outstanding and exercisable at July 31, 2017 follow:

Options Outstanding Options Exercisable
Range of Exercise Prices


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



Number of Options

Weighted Average Exercise
Price
$23.70 to $26.13 1,263,411 4.1 $ 24.97 - $ -
$28.09 to $30.85 1,586,181 2.0 28.87 1,246,551 28.33
$37.50 to $39.42 1,223,251 1.6 38.58 1,223,251 38.58
Total 4,072,843 2.5 $ 30.58 2,469,802 $ 33.41

12. Contingent Liabilities and Commitments

In the normal course of business, CWB enters into various commitments and has contingent liabilities, which are not reflected in the consolidated balance sheets. At July 31, 2017, these items include guarantees and standby letters of credit of $469,170 (April 30, 2017 - $455,753; October 31, 2016 - $492,327). Significant contingent liabilities and commitments, including guarantees provided to third parties, are discussed in Note 20 of CWB's audited consolidated financial statements for the year ended October 31, 2016 (see page 99 of the 2016 Annual Report).

In the ordinary course of business, CWB and its subsidiaries are party to legal proceedings. Based on current knowledge, CWB does not expect the outcome of any of these proceedings to have a material effect on the consolidated financial position or results of operations.

13. Fair Value of Financial Instruments

Financial Assets and Liabilities by Measurement Basis

The table below provides the carrying amount of financial instruments by category as defined in IAS 39 - Financial Instruments: Recognition and Measurement and by balance sheet heading. The table does not include assets and liabilities that are not considered financial instruments. The table also excludes assets and liabilities which are considered financial instruments, but are not recorded at fair value and for which the carrying amount approximates fair value.

As at July 31, 2017



Derivatives
Loans and Receivables and Non-trading Liabilities


Available-for-sale


Total Carrying Amount




Fair Value
Fair Value Over (Under) Carrying Amount
Financial Assets
Cash resources $ - $ - $ 196,659 $ 196,659 $ 196,659 $ -
Securities - - 1,933,496 1,933,496 1,933,496 -
Loans(1) - 22,772,047 - 22,772,047 23,078,477 306,430
Derivative related 6,619 - - 6,619 6,619 -
Total $ 6,619 $ 22,772,047 $ 2,130,155 $ 24,908,821 $ 25,215,251 $ 306,430
Financial Liabilities
Deposits(1) $ - $ 20,879,196 $ - $ 20,879,196 $ 20,859,025 $ (20,171)
Debt - 1,325,270 - 1,325,270 1,333,518 8,248
Securities sold under repurchase agreements - 264,401 - 264,401 264,401 -
Derivative related 31,696 - - 31,696 31,696 -
Contingent consideration - 27,710 - 27,710 27,710 -
Total $ 31,696 $ 22,496,577 $ - $ 22,528,273 $ 22,516,350 $ (11,923)
As at April 30, 2017
Total Financial Assets $ 5,437 $ 22,286,778 $ 1,935,080 $ 24,227,295 $ 24,577,392 $ 350,097
Total Financial Liabilities $ 9,470 $ 21,787,020 $ - $ 21,796,490 $ 21,872,991 $ 76,501
As at October 31, 2016
Total Financial Assets $ 10,370 $ 22,049,997 $ 2,791,968 $ 24,852,335 $ 25,179,091 $ 326,756
Total Financial Liabilities $ 7,172 $ 22,508,297 $ - $ 22,515,469 $ 22,584,300 $ 68,831
(1) Loans and deposits exclude deferred premiums, deferred revenue, allowances for credit losses, which are not financial instruments.

Fair values are based on management's best estimates based on market conditions and pricing policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgment and, as such, may not be reflective of future fair values. Further information on how the fair value of financial instruments is determined is included in Note 27 of the October 31, 2016 consolidated audited financial statements (see page 105 of the 2016 Annual Report).

Fair Value Hierarchy

CWB categorizes its fair value measurements of financial instruments recorded on the consolidated balance sheets according to a three-level hierarchy. Level 1 fair value measurements reflect unadjusted quoted prices in active markets for identical assets and liabilities that CWB can access at the measurement date. Level 2 fair value measurements were estimated using observable inputs, including quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model inputs that are either observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 fair value measurements were determined using one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. There were no transfers between Level 1, Level 2 or Level 3 during 2017 or 2016.

13. Fair Value of Financial Instruments - continued

The following table presents CWB's financial assets and liabilities that are either carried at fair value on the balance sheet or for which fair value is disclosed, categorized by level under the fair value hierarchy:

Fair Value Hierarchy

Valuation Technique
As at July 31, 2017 Fair Value Level 1 Level 2 Level 3
Financial Assets
Cash resources $ 196,659 $ 71,150 $ 125,509 $ -
Securities 1,933,496 139,092 1,794,404 -
Loans 23,078,477 - - 23,078,477
Derivative related 6,619 - 6,619 -
Total $ 25,215,251 $ 210,242 $ 1,926,532 $ 23,078,477
Financial Liabilities
Deposits $ 20,859,025 $ - $ 20,859,025 $ -
Debt 1,333,518 - 1,333,518 -
Securities sold under repurchase agreements 264,401 - 264,401 -
Derivative related 31,696 - 31,696 -
Contingent consideration 27,710 - - 27,710
Total $ 22,516,350 $ - $ 22,488,640 $ 27,710
As at April 30, 2017
Financial assets $ 24,577,392 $ 264,890 $ 1,675,627 $ 22,636,875
Financial liabilities $ 21,872,991 $ - $ 21,849,858 $ 23,133
As at October 31, 2016
Financial assets $ 25,179,091 $ 367,935 $ 2,434,403 $ 22,376,753
Financial liabilities $ 22,584,300 $ - $ 22,560,043 $ 24,257

Financial instruments that are not carried on the balance sheet at fair value, but for which fair value is disclosed above, include loans, deposits and debt.

Level 3 Financial Instruments

The level 3 financial liabilities measured at fair value on the consolidated balance sheets are comprised of contingent consideration on business acquisitions and dispositions. The following table shows a reconciliation of the fair value measurements related to the Level 3 valued instruments:

For the nine months ended
July 31
2017 2016
Business acquisition
Balance at beginning of period $ 24,257 $ -
Business acquisition - 16,400
Acquisition-related fair value changes 13,585 3,940
Contingent consideration instalment payment (10,132) -
27,710 20,340
Business disposition
Balance at beginning and end of period - 650
Contingent consideration fair value changes - (650)
- -
Balance at end of period $ 27,710 $ 20,340

14. Interest Rate Sensitivity

CWB's exposure to interest rate risk as a result of a difference or gap between the maturity or repricing behavior of interest sensitive assets and liabilities, including derivative financial instruments, is discussed in Note 26 of the audited consolidated financial statements for the year ended October 31, 2016 (see page 104 of the 2016 Annual Report). The following table shows the gap position for selected time intervals.

Asset Liability Gap Positions

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

Total Within 1 Year
1 Year to 5 Years

More than
5 Years

Non-interest Sensitive



Total
July 31, 2017
Assets
Cash resources and securities $ 124 $ 234 $ 8 $ 366 $ 1,737 $ 26 $ 1 $ 2,130
Loans 10,664 1,152 3,640 15,456 7,006 310 (53) 22,719
Other assets - - - - - - 496 496
Derivative financial instruments(1) - 125 1,630 1,755 1,488 - 131 3,374
Total 10,788 1,511 5,278 17,577 10,231 336 575 28,719
Liabilities and Equity
Deposits 7,277 784 5,266 13,327 7,552 - 1 20,880
Other liabilities 264 - - 264 - - 462 726
Debt 35 68 261 364 932 - 29 1,325
Equity - - - - 265 - 2,149 2,414
Derivative financial instruments(1) 3,265 - - 3,265 - - 109 3,374
Total 10,841 852 5,527 17,220 8,749 - 2,750 28,719
Interest Rate Sensitive Gap $ (53) $ 659 $ (249) $ 357 $ 1,482 $ 336 $ (2,175) $ -
Cumulative Gap $ (53) $ 606 $ 357 $ 357 $ 1,839 $ 2,175 $ - $ -
Cumulative Gap as a Percentage of Total Assets