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CWB reports very strong third quarter financial performance






EDMONTON, ALBERTA — (Marketwired) — 08/31/17 — “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 Highlights(1)(compared to the same period in the prior year)

(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:

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 .

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:

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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

(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 and CWB–s website at .

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:

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.

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.

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.

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:

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 fundi

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Posted by on Aug 31 2017. Filed under Commercial & Investment Banking, Picture Gallery. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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