CWB Reports Third Quarter Financial Performance

September 1, 2016

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

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

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

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

Third Quarter 2016 Highlights^1,2 for Continuing Operations (compared to the same period in the prior year unless otherwise noted)

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

Highlights include certain non-IFRS measures – refer to definitions page 23.
As a result of the sales of Canadian Direct Insurance (CDI) and the stock transfer business of Valiant Trust Company (Valiant) on May 1, 2015, CWB has defined the contributions of these businesses as “Discontinued Operations”, the remaining operations as “Continuing Operations”, and the total Continuing Operations and Discontinued Operations as “Combined Operations”.

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

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

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

Medium-term Performance Target Ranges for Continuing Operations

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


	Medium-term Performance Target Ranges	Current Context
Adjusted cash earnings per common share growth^{(1) (2)}	7 – 12%	Earnings growth and profitability for 2016 reflect the credit performance of CWB’s oil and gas production loans and lower net interest margin.
Adjusted return on common shareholders’ equity⁽³⁾	12 – 15%
Operating leverage⁽⁴⁾	Positive	Current operating leverage is positive.
Common equity Tier 1 capital ratio under the Standardized approach⁽⁵⁾	Strong	Q3 2016 ratio of 9.0% is very strong.
Common share dividend payout ratio⁽⁶⁾	~30%	Q3 2016 ratio of 40% includes the impact of credit performance of oil and gas production loans.

Performance for adjusted cash earnings per common share is the current year results over the same period in the prior year.
Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the acquisition-related amortization of intangible assets and the contingent consideration fair value changes, net of tax, which represent charges that are not considered to be indicative of ongoing operating performance.
Adjusted return on common shareholders’ equity is calculated as annualized common shareholders’ net income excluding the acquisition-related amortization of intangible assets and the contingent consideration fair value changes, net of tax, divided by average common shareholders’ equity.
Operating leverage is calculated as total revenue (teb) growth over the past twelve months, less non-interest expense growth over the past twelve months, excluding the pre-tax amortization of acquisition-related intangible assets.
Common equity Tier 1 capital ratio is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) using the Standardized approach for credit risk.
Common share dividend payout ratio is calculated as common share dividends declared during the past twelve months divided by common shareholders’ net income from Continuing Operations earned over the same period.

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

Continuing Operations

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

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

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

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

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

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

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

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

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

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

Credit stress remains confined to oil and gas production loans

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

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

Efficient Operations and Positive Operating Leverage

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

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

Prudent Capital Management and Dividends

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

About CWB Group

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

Fiscal 2016 Third Quarter Results Conference Call

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

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

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

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


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

On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB’s stock transfer business as described in the 2015 Annual Report. The 2015 contributions of both the insurance and stock transfer businesses, including gains on sale, are defined as “Discontinued Operations”, the remaining operations are defined as “Continuing Operations”, and the total Continuing Operations and Discontinued Operations are defined as “Combined Operations”. Return on shareholders’ equity reflects equity from Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated.
See definitions on page 23.
bp – basis point change.

Management’s Discussion and Analysis

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

Continuing and Discontinued Operations

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

Forward-looking Statements

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

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

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

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

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

Acquisitions of CWB Maxium Financial and CWB Franchise Finance

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

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

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

Overview of Continuing Operations

Q3 2016 vs. Q3 2015

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

Q3 2016 vs. Q2 2016

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

YTD 2016 vs. YTD 2015

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

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

ROE and ROA

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

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

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

Outlook for Profitability Ratios

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

Total Revenue (teb) from Continuing Operations

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

Net Interest Income (teb)

Q3 2016 vs. Q3 2015

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

Q3 2016 vs. Q2 2016

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

YTD 2016 vs. YTD 2015

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

Interest rate sensitivity

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

a constant structure in the interest sensitive asset and liability portfolios;
interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount, except floor levels for various deposit liabilities and certain floating rate loans, and applied at the appropriate repricing dates; and,
no early redemptions.


($ thousands)		July 31 2016			April 30 2016			July 31 2015

Estimated impact on net interest income of a 1% increase in interest rates
1 year	$	12,180		$	8,032		$	1,024
1 year percentage change		2.09	%		1.39	%		0.2	%

Estimated impact on net interest income of a 1% decrease in interest rates
1 year	$	(6,416	)	$	(6,981	)	$	2,049
1 year percentage change		(1.10	)%		(1.21	)%		0.4	%

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

Outlook for net interest margin (teb)

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

Provision for Credit Losses

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

Acquisition-related Fair Value Changes

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

Non-interest Income from Continuing Operations

Q3 2016 vs. Q3 2015

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

Q3 2016 vs. Q2 2016

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

YTD 2016 vs. YTD 2015

Non-interest income of $53.5 million was 7% higher, reflecting gains in most categories including a $1.5 decrease in net losses on securities and a $1.0 million increase in ‘other’ non-interest income. Higher ‘other’ non-interest income relates to gains on the sales of residential mortgages discussed above.

Outlook for non-interest income from Continuing Operations

The outlook for growth in banking-related fee income is relatively consistent with anticipated loan and deposit growth. Trust services and CWB Wealth Management are also expected to continue to provide consistent contributions.

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

Non-interest Expenses from Continuing Operations

Q3 2016 vs. Q3 2015

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

Q3 2016 vs. Q2 2016

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

YTD 2016 vs. YTD 2015

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

Outlook for non-interest expenses from Continuing Operations

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

Combined amortization and sustainment costs related to the new core banking system are expected to add approximately $2.0 million to non-interest expenses on a quarterly basis commencing next quarter. Upgrades and expansion of branch infrastructure continue, including the addition this quarter of a new full-service branch in Lloydminster, Saskatchewan. Compliance with an increasing level of regulatory rules and oversight for all Canadian banks requires the investment of both time and resources, which further contributes to higher non-interest expenses.

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

Core banking system implementation

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

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

Efficiency ratio and operating leverage

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

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

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

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

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

Outlook for the efficiency ratio and operating leverage

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

Income Taxes

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

Outlook for income taxes

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

Overview of Discontinued Operations

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


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

Earnings per common Share
		Basic	$	–	$	–	$	1.33	(100	)%	$	–	$	1.38	(100	)%
		Diluted		–		–		1.33	(100	)		–		1.38	(100	)
		Adjusted cash		–		–		1.33	(100	)		–		1.38	(100	)

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

Overview of Combined Operations

Q3 2016 vs. Q3 2015

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

Q3 2016 vs. Q2 2016

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

YTD 2016 vs. YTD 2015

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

ROE and ROA

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

Comprehensive Income

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

Q3 2016 vs. Q3 2015

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

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

YTD 2016 vs. YTD 2015

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

Balance Sheet

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

Cash and Securities

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

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

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

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

Treasury Management

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

Loans

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

In dollar terms, year-over-year growth by lending sector was led by real estate project loans ($1,123 million) as CWB continued to identify opportunities to finance well-capitalized developers on the basis of sound loan structures and acceptable pre-sale/lease levels. Growth in general commercial loans ($917 million) was also strong, as was the increase in personal loans and mortgages ($612 million). Commercial mortgages were up $231 million, and equipment financing and leasing grew $29 million. Corporate lending declined by $158 million and exposure to oil and gas production loans decreased $53 million to $257 million.

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


(unaudited) (millions)		July 31 2016		April 30 2016		July 31 2015	Change from July 31 2015

General commercial loans	$	4,689	$	4,167	$	3,772	24	%
Real estate project loans		4,296		4,138		3,173	35
Commercial mortgages		4,006		4,066		3,775	6
Equipment financing and leasing		3,724		3,761		3,695	1
Personal loans and mortgages		3,776		3,700		3,164	19
Corporate lending⁽¹⁾		1,106		1,217		1,264	(13	)
Oil and gas production loans		257		327		310	(17	)
Total loans outstanding⁽²⁾	$	21,854	$	21,376	$	19,153	14	%

Corporate lending represents a diversified portfolio that is centrally sourced and administered through a designated lending group located in Edmonton. These loans include participation in select syndications that are structured and led primarily by the major Canadian banks, but exclude participation in various other syndicated facilities sourced through relationships developed at CWB branches.
Total loans outstanding by lending sector exclude the allowance for credit losses.

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


(unaudited) (millions)		July 31 2016		April 30 2016		July 31 2015	Change from July 31 2015

Alberta	$	8,201	$	8,441	$	7,978	3	%
British Columbia		7,793		7,532		6,360	23
Ontario		2,962		2,661		2,283	30
Saskatchewan		1,364		1,335		1,290	6
Manitoba		671		619		519	29
Other		863		788		723	19
Total loans outstanding⁽¹⁾	$	21,854	$	21,376	$	19,153	14	%

Total loans outstanding by province exclude the allowance for credit losses.

Optimum Mortgage

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

Outlook for Optimum Mortgage

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

Outlook for loans

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

Credit Quality

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

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

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

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


		For the three months ended
(unaudited) ($ thousands)			July 31 2016			April 30 2016			July 31 2015		Change from July 31 2015

	Gross impaired loans, beginning of period	$	144,963		$	111,507		$	92,855		56	%
	New formations		14,288			69,905			18,687		(24)
	Reductions, impaired accounts paid down or returned to performing status		(21,551)			(20,741)			(15,421)		(40)
	Write-offs		(30,989)			(15,708)			(3,853)		(704)
Total⁽¹⁾		$	106,711		$	144,963		$	92,268		16	%

Balance of the ten largest impaired accounts		$	54,106		$	85,756		$	53,222		2	%
Total number of accounts classified as impaired⁽³⁾			180			166			114		58
Gross impaired loans as a percentage of total loans			0.49	%		0.68	%		0.48	%	1	bp⁽²⁾

Gross impaired loans include foreclosed assets held for sale (primarily residential mortgages) with a carrying value of $2,877 (April 30, 2016 – $3,392 and July 31, 2015 – $1,109).
bp – basis point change.
Total number of accounts excludes National Leasing.

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

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

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

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

Outlook for credit quality

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

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

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

Deposits and Funding

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

	As at
(unaudited) ($ millions)		July 31 2016		April 30 2016		July 31 2015	Change from July 31 2015
Deposits by type
Demand and notice deposits	$	7,187	$	6,941	$	6,651	8	%
Term deposits		12,077		11,480		9,787	23
Capital markets		1,893		1,920		2,412	(22	)
Total Deposits	$	21,157	$	20,341	$	18,850	12	%

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

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

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

Securitization

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

Outlook for deposits and funding

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

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

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

Other Assets and Other Liabilities

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

Off-Balance Sheet

Off-balance sheet items include assets under administration and assets under management. Total assets under administration, which are comprised of trust assets and third-party leases under administration, and mortgages under service agreements, totaled $10,305 million at July 31, 2016, compared to $9,449 million one year ago and $10,288 million last quarter. Assets under management were $1,889 million at quarter end, compared to $1,912 million a year earlier and $1,834 million last quarter.

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

For additional information regarding other off-balance sheet items refer to Note 11 of the unaudited interim consolidated financial statements for the period ended July 31, 2016, as well as Note 20 of the audited consolidated financial statements in CWB’s 2015 Annual Report.

Capital Management

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

Issuance of Common Shares

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

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

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


(unaudited) ($ millions)			As at July 31 2016			As at April 30 2016			As at July 31 2015
Regulatory capital
	CET1 capital before deductions	$	2,037		$	1,849		$	1,755
	Net CET1 deductions		(211	)		(209	)		(129	)
CET1 capital			1,826			1,640			1,626
Tier 1 capital⁽¹⁾			2,196			2,010			1,856
Total capital⁽¹⁾			2,626			2,435			2,428
Risk-weighted assets		$	20,395		$	19,934		$	19,024
Capital adequacy ratios
	CET1		9.0	%		8.2	%		8.5	%
	Tier 1		10.8			10.1			9.8
	Total		12.9			12.2			12.8

The 2016 inclusion of non-common equity instruments that do not include non-viability contingent capital clauses is capped at 60% of the January 1, 2013 outstanding balances (2015 – 70%). The balance of subordinated debentures outstanding at July 31, 2016 was within the inclusion threshold and no amounts were excluded from regulatory capital (July 31, 2015 – $153 million excluded). For all periods, there was no exclusion from regulatory capital related to the Innovative Tier 1 capital (disclosed in deposits).

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

CWB continues to monitor changes proposed to both the Standardized and AIRB approaches for credit risk by the Basel Committee on Banking Supervision. CWB’s multi-year transition to an AIRB methodology for managing credit risk and calculating risk-weighted assets is underway. Implementation of CWB’s new core banking system, successfully completed this quarter, is a critical component for a number of requirements necessary for AIRB compliance, including the collection and analysis of certain types of data.

Further information relating to CWB’s capital position is provided in Note 14 of the unaudited interim consolidated financial statements for the period ended July 31, 2016 as well as the audited consolidated financial statements and MD&A for the year ended October 31, 2015.

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

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

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

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

Significant Changes in Accounting Policies and Financial Statement Presentation

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

Future Accounting Changes

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

IFRS 16 – Leases

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

IFRS 15 – Revenue from Contracts with Customers

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

IFRS 2 – Share-based Payment Transactions

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

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

Controls and Procedures

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

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

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

Third-party Credit Ratings

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

Updated Share Information

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

Dividend Reinvestment Plan

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

Summary of Quarterly Financial Information


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

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

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

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

Taxable Equivalent Basis (teb)

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

Non-IFRS Measures

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

taxable equivalent basis – described above;
pre-tax, pre-provision earnings – common shareholders’ net income plus the provision for credit losses and income taxes (teb) (see calculation below);
adjusted cash earnings per common share – diluted earnings per common share excluding the acquisition-related amortization of intangible assets and contingent consideration fair value changes, net of tax (see calculation below). Excluded items are not considered to be indicative of ongoing business performance;
return on common shareholders’ equity – annualized common shareholders’ net income divided by average common shareholders’ equity;
adjusted return on common shareholders’ equity – annualized common shareholders’ net income excluding the acquisition-related amortization of intangible assets and contingent consideration fair value changes, net of tax (see calculation below), divided by average common shareholders’ equity.
return on assets – annualized common shareholders’ net income divided by average total assets;
efficiency ratio – non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets (see calculation below), divided by total revenues, including the net gain related to the sales of the property and casualty insurance subsidiary and CWB’s stock transfer business;
net interest margin – annualized net interest income divided by average total assets;
Basel III common equity Tier 1, Tier 1 and total capital ratios – in accordance with Basel III guidelines issued by OSFI;
operating leverage – total revenue (teb) growth less non-interest expense growth, excluding the pre-tax amortization of acquisition-related intangible assets, over the past twelve months;
common share dividend payout ratio – common share dividends declared during the past twelve months divided by common shareholders’ net income earned over the same period; and
average balances – average daily balances.


Adjusted Financial Measures
(Continuing Operations)	For the three months ended											For the nine months ended
(unaudited) ($ thousands)		July 31 2016			April 30 2016			July 31 2015		Change from July 31 2015			July 31 2016			July 31 2015		Change from July 31 2015
Non-interest expenses	$	78,504		$	78,461		$	74,472		5	%	$	232,518		$	217,715		7	%
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets		(1,776	)		(1,605	)		(1,097	)	62			(4,559	)		(3,441	)	32
Adjusted non-interest expenses	$	76,728		$	76,856		$	73,375		5	%	$	227,959		$	214,274		6	%

Common shareholders’ net income from Continuing Operations	$	45,582		$	32,213		$	51,170		(11	)%	$	129,927		$	155,095		(16	)%
Adjustments (after-tax):
Amortization of acquisition-related intangible assets		1,307			1,182			719		82			3,358			2,292		47
Acquisition-related fair value changes		2,896			–			–		100			2,896			638		354
Adjusted common shareholders’ net income from Continuing Operations	$	49,785		$	33,395		$	51,889		(4	)%	$	136,181		$	158,025		(14	)%


Adjusted Financial Measures
(Combined Operations)		For the three months ended											For the nine months ended
(unaudited) ($ thousands)			July 31 2016			April 30 2016			July 31 2015		Change from July 31 2015			July 31 2016			July 31 2015		Change from July 31 2015
Non-interest expenses		$	78,504		$	78,461		$	74,472		5	%	$	232,518		$	228,819		2	%
Adjustments (pre-tax):
	Amortization of acquisition-related intangible assets (pre-tax)		(1,776	)		(1,605	)		(1,097	)	62			(4,559	)		(3,441	)	32
Adjusted non-interest expenses		$	76,728		$	76,856		$	73,375		5	%	$	227,959		$	225,378		1	%

Common shareholders’ net income from Combined Operations		$	45,582		$	32,213		$	158,809		(71	)%	$	129,927		$	266,563		(51	)%
Adjustments (after-tax):
	Amortization of acquisition-related intangible assets		1,307			1,182			719		82			3,358			2,292		47
	Acquisition-related fair value changes		2,896			–			–		100			2,896			638		354
Adjusted common shareholders’ net income from Combined Operations		$	49,785		$	33,395		$	159,528		(69	)%	$	136,181		$	269,493		(49	)%


Pre-tax, pre-provision (PTPP) earnings
(Continuing Operations)			For the three months ended											For the nine months ended
(unaudited) ($ thousands)			July 31 2016			April 30 2016			July 31 2015		Change from July 31 2015			July 31 2016			July 31 2015		Change from July 31 2015
Common shareholders’ net income from Continuing Operations		$	45,582		$	32,213		$	51,170		(11	)%	$	129,927		$	155,095		(16	)%
Adjustments:
	Provision for credit losses		17,402			39,671			8,018		117			66,005			22,373		195
	Income taxes (teb)		19,168			12,603			18,410		4			52,169			56,916		(8	)
Pre-tax, pre-provision earnings		$	82,152		$	84,487		$	77,598		6	%	$	248,101		$	234,384		6	%



Consolidated Balance Sheets

(unaudited) ($ thousands)				As at July 31 2016			As at April 30 2016			As at October 31 2015			As at July 31 2015⁽¹⁾		Change from July 31 2015
Assets
Cash Resources
	Cash and non-interest bearing deposits with financial institutions		$	38,025		$	6,271		$	23,949		$	6,532		482	%
	Interest bearing deposits with regulated financial institutions	(Note 4)		544,793			169,997			412,768			536,773		1
	Cheques and other items in transit			10,435			19,844			6,705			1,603		551
				593,253			196,112			443,422			544,908		9
Securities		(Note 4)
	Issued or guaranteed by Canada			1,306,045			1,522,143			1,364,862			1,207,993		8
	Issued or guaranteed by a province or municipality			546,335			360,837			620,904			474,230		15
	Other debt securities			214,244			173,040			346,299			152,434		41
	Preferred shares			123,580			131,437			143,868			163,706		(25	)
	Common shares			–			–			75,179			142,549		(100	)
				2,190,204			2,187,457			2,551,112			2,140,912		2

Securities Purchased Under Resale Agreements				195,079			142,915			–			170,000		15

Loans		(Notes 5 and 7)
	Personal			3,775,988			3,699,902			3,318,254			3,164,137		19
	Business			18,078,402			17,675,776			16,251,530			15,989,397		13
				21,854,390			21,375,678			19,569,784			19,153,534		14
	Allowance for credit losses	(Note 6)		(109,888	)		(127,673	)		(94,401	)		(87,330	)	26
				21,744,502			21,248,005			19,475,383			19,066,204		14
Other
	Property and equipment			57,808			59,053			61,356			61,637		(6	)
	Goodwill			84,488			84,488			43,781			43,825		93
	Intangible assets			148,941			143,580			106,103			98,575		51
	Derivative related	(Note 8)		13,155			28,308			23,245			24,054		(45	)
	Other assets			158,011			146,983			134,125			129,573		22
				462,403			462,412			368,610			357,664		29
Total Assets			$	25,185,441		$	24,236,901		$	22,838,527		$	22,279,688		13	%

Liabilities and Equity
Deposits
	Personal		$	13,098,162		$	12,463,248		$	11,416,621		$	10,909,081		20	%
	Business and government			8,058,728			7,877,677			7,948,786			7,940,987		1
				21,156,890			20,340,925			19,365,407			18,850,068		12
Other
	Cheques and other items in transit			93,651			122,309			60,258			44,591		110
	Securities sold under repurchase agreements			–			99,003			–			–		–
	Derivative related	(Note 8)		7,062			7,757			4,503			4,259		66
	Other liabilities			341,159			338,938			308,837			293,376		16
				441,872			568,007			373,598			342,226		29
Debt
	Debt securities			954,002			885,202			562,623			565,449		69
	Subordinated debentures			325,000			325,000			625,000			625,000		(48	)
				1,279,002			1,210,202			1,187,623			1,190,449		7
Equity
	Preferred shares	(Note 9)		265,000			265,000			125,000			125,000		112
	Common shares	(Note 9)		717,208			565,927			537,511			536,365		34
	Retained earnings			1,327,554			1,305,522			1,261,678			1,226,244		8
	Share-based payment reserve			30,623			30,014			29,210			28,331		8
	Other reserves			(33,130	)		(49,054	)		(42,492	)		(19,729	)	68
Total Shareholders’ Equity				2,307,255			2,117,409			1,910,907			1,896,211		22
	Non-controlling interests			422			358			992			734		(43	)
Total Equity				2,307,677			2,117,767			1,911,899			1,896,945		22
Total Liabilities and Equity			$	25,185,441		$	24,236,901		$	22,838,527		$	22,279,688		13	%

During the fourth quarter of 2015, the collective allowance for credit losses related to committed but undrawn exposures was reclassified from Loans to Other Liabilities. This reclassification is reflected for all periods (see Note 6).

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


Consolidated Statements of Income

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

Diluted
	– Continuing Operations			0.55		0.40		0.64		(14	)		1.59			1.93		(18	)
	– Combined Operations			0.55		0.40		1.97		(72	)		1.59			3.31		(52	)
	– Discontinued Operations			–		–		1.33		(100	)		–			1.38		(100	)

nm – not meaningful

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


Consolidated Statements of Comprehensive Income

		For the three months ended							For the nine months ended
(unaudited) ($ thousands)			July 31 2016			July 31 2015			July 31 2016			July 31 2015
Net Income from Continuing Operations		$	50,074		$	52,872		$	137,673		$	160,313
Common Shareholders’ Net Income from Discontinued Operations			–			107,639			–			111,468
Net Income			50,074			160,511			137,673			271,781
Other Comprehensive Income (Loss), net of tax
	Available-for-sale securities:
	Gains (losses) from change in fair value⁽¹⁾		14,444			(9,566	)		14,914			(39,790	)
	Reclassification to net income⁽²⁾		(2	)		6,896			2,196			6,630
			14,442			(2,670	)		17,110			(33,160	)
	Derivatives designated as cash flow hedges:
	Gains (losses) from change in fair value⁽³⁾		782			5,171			(7,882	)		10,877
	Reclassification to net income⁽⁴⁾		700			1,750			134			3,551
			1,482			6,921			(7,748	)		14,428
			15,924			4,251			9,362			(18,732	)
Comprehensive Income for the Period		$	65,998		$	164,762		$	147,035		$	253,049

	Comprehensive income for the period attributable to:
	Shareholders of CWB	$	65,806		$	164,435		$	146,339		$	251,956
	Non-controlling interests		192			327			696			1,093
Comprehensive Income for the Period		$	65,998		$	164,762		$	147,035		$	253,049

Net of income tax of $5,354 and $5,544 for the three and nine months ended July 31, 2016, respectively (2015 – $4,454 and $14,747).
Net of income tax of $1 and $810 for the three and nine months ended July 31, 2016, respectively (2015 – $2,502 and $2,411).
Net of income tax of $288 and $2,900 for the three and nine months ended July 31, 2016, respectively (2015 – $2,075 and $4,003).
Net of income tax of $257 and $49 for the three and nine months ended July 31, 2016, respectively (2015 – $698 and $1,306).

Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statement of Income when specific conditions are met.

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


Consolidated Statements of Changes in Equity

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

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

Consolidated Statements of Cash Flow

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

Supplemental Disclosure of Cash Flow Information (Combined Operations)
	Interest and dividends received			$	723,492		$	690,117
	Interest paid				296,216			277,747
	Income taxes paid				66,968			71,696

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

Notes to Interim Consolidated Financial Statements

(unaudited)

($ thousands, unless otherwise noted)

1. Basis of Presentation and Significant Accounting Policies

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

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

2. Future Accounting Changes

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

IFRS 16 – Leases

IFRS 15 – Revenue from Contracts with Customers

IFRS 2 – Share-based Payment Transactions

3. Acquisitions

Maxium Financial Services Inc. and Desante Financial Services Inc.

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

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

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

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


Fair value of initial consideration transferred		$	61,506

Assets and liabilities acquired at fair values
	Intangible assets		21,700
	Deferred income tax asset		723
	Other items, net		214
Goodwill		$	38,869

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

CWB Franchise Finance

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

4. Securities

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


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

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

5. Loans

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


																							Composition Percentage
($ millions)			AB			BC			ON			SK			MB			Other			Total		July 31 2016		April 30 2016		October 31 2015

Personal⁽¹⁾		$	1,219		$	1,077		$	1,116		$	189		$	98		$	77		$	3,776		17	%	17	%	17	%

Business
	Real estate		3,362			4,157			432			496			177			22			8,646		40		40		38
	Commercial		2,201			1,910			649			283			234			174			5,451		25		24		24
	Equipment financing⁽²⁾		1,184			649			765			374			162			590			3,724		17		17		19
	Energy		235			–			–			22			–			–			257		1		2		2
			6,982			6,716			1,846			1,175			573			786			18,078		83		83		83
Total Loans⁽³⁾		$	8,201		$	7,793		$	2,962		$	1,364		$	671		$	863		$	21,854		100	%	100	%	100	%
Composition Percentage
	July 31, 2016		38	%		36	%		13	%		6	%		3	%		4	%		100	%
	April 30, 2016		40	%		35	%		12	%		6	%		3	%		4	%		100	%
	October 31, 2015		41	%		33	%		12	%		7	%		3	%		4	%		100	%

Includes securitized mortgages reported on-balance sheet of $165 (April 30, 2016 – $171 and October 31, 2015 – nil) that were not transferred to external parties.
Includes securitized leases reported on-balance sheet of $1,045 (April 30, 2016 – $969 and October 31, 2015 – $635).
This table does not include an allocation for credit losses.

6. Allowance for Credit Losses

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


		For the three months ended July 31, 2016								For the three months ended April 30, 2016
			Specific Allowance			Collective Allowance for Credit Losses		Total			Specific Allowance			Collective Allowance for Credit Losses		Total
Balance at beginning of period		$	45,927		$	99,890	$	145,817		$	20,881		$	99,729	$	120,610
Provision for credit losses			12,361			5,041		17,402			39,510			161		39,671
Write-offs			(30,989	)		–		(30,989	)		(15,708	)		–		(15,708	)
Recoveries			458			–		458			1,244			–		1,244
Balance at end of period		$	27,757		$	104,931	$	132,688		$	45,927		$	99,890	$	145,817

Represented by:
	Loans	$	27,757		$	82,131	$	109,888		$	45,927		$	81,746	$	127,673
	Committed but undrawn exposures		–			22,800		22,800			–			18,144		18,144
Total allowance		$	27,757		$	104,931	$	132,688		$	45,927		$	99,890	$	145,817


											For the three months ended July 31, 2015⁽¹⁾
											Specific Allowance			Collective Allowance for Credit Losses		Total
Balance at beginning of period										$	13,319		$	94,539	$	107,858
Provision for credit losses											2,994			5,024		8,018
Write-offs											(3,853	)		–		(3,853	)
Recoveries											1,148			–		1,148
Balance at end of period										$	13,608		$	99,563	$	113,171

Represented by:
	Loans									$	13,608		$	73,722	$	87,330
	Committed but undrawn exposures⁽¹⁾										–			25,841		25,841
Total allowance										$	13,608		$	99,563	$	113,171

			For the nine months ended July 31, 2016								For the nine months ended July 31, 2015⁽¹⁾
			Specific Allowance			Collective Allowance for Credit Losses		Total			Specific Allowance			Collective Allowance for Credit Losses		Total
Balance at beginning of period		$	15,806		$	99,613	$	115,419		$	5,523		$	90,075	$	95,598
Provision for credit losses			60,687			5,318		66,005			12,885			9,488		22,373
Write-offs			(51,018	)		–		(51,018	)		(8,707	)		–		(8,707	)
Recoveries			2,282			–		2,282			3,907			–		3,907
Balance at end of period		$	27,757		$	104,931	$	132,688		$	13,608		$	99,563	$	113,171

Comparative information has been restated to reflect the presentation of the allowance for credit losses related to committed but undrawn credit exposures.

7. Impaired and Past Due Loans

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


		As at July 31, 2016									As at April 30, 2016
			Gross Amount		Gross Impaired Amount		Specific Allowance	Net Impaired Loans				Gross Amount		Gross Impaired Amount	Specific Allowance			Net Impaired Loans
Personal		$	3,775,988	$	13,823	$	468	$	13,355		$	3,699,902	$	17,058	$	435	$	16,623
Business
	Real estate⁽¹⁾		8,646,531		34,966		4,950		30,016			8,476,151		37,026		4,950		32,076
	Commercial		5,450,698		5,091		240		4,851			5,079,166		2,863		718		2,145
	Equipment financing		3,723,707		35,675		8,027		27,648			3,793,828		34,258		6,953		27,305
	Energy		257,466		17,156		14,072		3,084			326,631		53,758		32,871		20,887
Total⁽²⁾		$	21,854,390	$	106,711	$	27,757		78,954		$	21,375,678	$	144,963	$	45,927		99,036
Collective allowance⁽³⁾									(104,931	)								(99,890	)
Net impaired loans after collective allowance								$	(25,977	)							$	(854	)

												As at October 31, 2015
												Gross Amount		Gross Impaired Amount		Specific Allowance		Net Impaired Loans
Personal											$	3,318,254	$	16,145	$	262	$	15,883
Business
	Real estate⁽¹⁾											7,460,414		32,541		1,770		30,771
	Commercial											4,658,219		3,870		128		3,742
	Equipment financing											3,819,966		19,573		4,346		15,227
	Energy											312,931		22,776		9,300		13,476
Total⁽²⁾											$	19,569,784	$	94,905	$	15,806		79,099
Collective allowance⁽³⁾																		(99,613	)
Net impaired loans after collective allowance																	$	(20,514	)

Multi-family residential mortgages are included in real estate loans.
Gross impaired loans include foreclosed assets with a carrying value of $2,877 (April 30, 2016 – $3,392; and October 31, 2015 – $979) which are held for sale. CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
The collective allowance for credit loss includes amounts related to committed but 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, 2016							As at April 30, 2016
	Gross Impaired Amount		Specific Allowance		Net Impaired Loans				Gross Impaired Amount	Specific Allowance			Net Impaired Loans
Alberta	$	42,581	$	17,111	$	25,470		$	80,391	$	34,821	$	45,570
British Columbia		31,685		4,120		27,565			34,341		5,348		28,993
Ontario		13,931		4,024		9,907			14,393		2,657		11,736
Saskatchewan		9,719		582		9,137			8,332		987		7,345
Manitoba		3,939		551		3,388			2,048		523		1,525
Other		4,856		1,369		3,487			5,458		1,591		3,867
Total	$	106,711	$	27,757		78,954		$	144,963	$	45,927		99,036
Collective allowance⁽¹⁾						(104,931	)						(99,890	)
Net impaired loans after collective allowance					$	(25,977	)					$	(854	)

									As at October 31, 2015
									Gross Impaired Amount		Specific Allowance		Net Impaired Loans
Alberta								$	41,749	$	11,020	$	30,729
British Columbia									30,539		1,932		28,607
Ontario									9,256		1,019		8,237
Saskatchewan									8,437		606		7,831
Manitoba									1,539		240		1,299
Other									3,385		989		2,396
Total								$	94,905	$	15,806		79,099
Collective allowance⁽¹⁾													(99,613	)
Net impaired loans after collective allowance												$	(20,514	)

The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and is not allocated by province.

Gross impaired loans exclude certain past due loans where payment of interest or principal is contractually in arrears. Details of such past due loans that have not been included in the gross impaired amount follow:


	As at July 31, 2016
	1 – 30 days		31 – 60 days		61 – 90 days		More than 90 days			Total
Personal	$	96,208	$	19,701	$	4,026	$	2,484	$	122,419
Business		110,084		33,170		7,632		3,055		153,941
	$	206,292	$	52,871	$	11,658	$	5,539	$	276,360

Total as at April 30, 2016	$	124,869	$	36,278	$	24,600	$	476	$	186,223
Total as at October 31, 2015	$	81,469	$	46,723	$	8,874	$	3,495	$	140,561

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. When a fair value hedge is discontinued, the hedged item is no longer adjusted to reflect changes in fair value. Any cumulative fair value adjustment recorded up to the point of discontinuation to the hedged item is amortized to net interest income over its remaining useful life. 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, 2016						As at April 30, 2016
			Notional Amount		Positive Fair Value		Negative Fair Value		Notional Amount		Positive Fair Value		Negative Fair Value
Cash flow hedges
	Interest rate swaps⁽¹⁾	$	3,530,000	$	11,542	$	3,510	$	3,280,000	$	11,580	$	5,981
	Equity swaps⁽²⁾		20,117		–		1,784		19,860		263		1,690
Not designated in a hedging relationship
	Equity swaps⁽³⁾		3,628		–		196		3,024		24		–
	Foreign exchange contracts⁽⁴⁾		154,983		1,613		1,572		247,380		16,441		86
Derivative related amounts		$	3,708,728	$	13,155	$	7,062	$	3,550,264	$	28,308	$	7,757

									As at October 31, 2015
									Notional Amount		Positive Fair Value		Negative Fair Value
Cash flow hedges
	Interest rate swaps							$	2,805,000	$	20,073	$	733
	Equity swaps								19,860		–		3,317
Not designated in a hedging relationship
	Equity swaps								3,024		–		307
	Foreign exchange contracts								233,129		3,172		146
Derivative related amounts								$	3,061,013	$	23,245	$	4,503

Interest rate swaps designated as cash flow hedges outstanding at July 31, 2016 mature between August 2016 and April 2021.
Equity swaps designated as cash flow hedges outstanding at July 31, 2016 mature between June 2017 and June 2019.
Equity swaps not designated as hedges outstanding at July 31, 2016 mature in June 2017 and December 2017.
Foreign exchange contracts outstanding at July 31, 2016 mature between August 2016 and January 2017.

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
2016

July 31
2015

July 31
2016

July 31
2015

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, 2016, hedged cash flows are expected to occur and affect profit or loss within the next five years.

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. At July 31, 2016, the Bank held $8,951 (April 30, 2016 – $17,001 and October 31, 2015 – $9,870) of collateral related to derivative financial instruments with a positive fair value and pledged $970 (April 30, 2016 – $2,200 and October 31, 2015 – nil) of cash collateral related to derivative financial instruments with a negative fair value.

There were no forecasted transactions that failed to occur during the three and nine months ended July 31, 2016.

9. Capital Stock

Share Capital

For the nine months ended

July 31, 2016

July 31, 2015

Number of
Shares

Amount

Number of Shares

Amount

Preferred Shares

Outstanding at beginning of period

5,000,000

125,000

5,000,000

125,000

Issued

5,600,000

140,000

–

Outstanding at end of period

10,600,000

265,000

5,000,000

125,000

Common Shares

Outstanding at beginning of period

80,526,069

537,511

80,369,305

533,038

Issued to public

6,125,000

150,063

–

Issued on acquisition of subsidiary

(Note 3)

1,250,312

25,606

–

Issued under dividend reinvestment plan

138,296

3,333

85,787

2,504

Issued on exercise or exchange of options⁽¹⁾

(Note 10)

16,539

695

23,443

823

Outstanding at end of period

88,056,216

717,208

80,478,535

536,365

Share Capital

982,208

661,365

Represents shares issued and amounts transferred from the share-based payment reserve to share capital upon cashless settlement of option exercises.

Common share issuance

On July 7, 2016, CWB issued 6,125,000 common shares at a price of $24.50 per share for gross proceeds of $150,063.

Preferred share issuance

On March 31, 2016, CWB issued 5,600,000 non-cumulative, five year rate reset First Preferred Shares Series 7 (Non-Viability Contingent Capital (NVCC)) (Series 7 Preferred Shares) at $25.00 per share, for gross proceeds of $140,000. Holders of Series 7 Preferred Shares are entitled to receive a non-cumulative fixed dividend in the amount of $0.5223 on July 31, 2016 and thereafter, dividends will be at an annual rate of $1.5625 per share, payable quarterly, when declared by the Board of Directors of CWB, for the initial period ending July 31, 2021. The quarterly dividend represents an annual yield of 6.25% based on the stated issue price per share. Thereafter, the dividend rate will reset every five years at a level of 547 basis points over the then five year Government of Canada bond yield.

CWB maintains the right to redeem, subject to the approval of OSFI, up to all of the then outstanding Series 7 Preferred Shares on July 31, 2021, and on July 31 every five years thereafter at a price of $25.00 per share. Should CWB choose not to exercise its right to redeem the Series 7 Preferred Shares, holders of these shares will have the right to convert their shares into an equal number of non-cumulative, floating rate First Preferred Shares Series 8 (Series 8 Preferred Shares), subject to certain conditions, on July 31, 2021, and on July 31 every five years thereafter. Holders of the Series 8 Preferred Shares will be entitled to receive quarterly floating dividends, as and when declared by the Board of Directors of CWB, equal to the 90-day Government of Canada Treasury Bill rate plus 547 basis points.

Upon the occurrence of a trigger event (as defined by OSFI), each Series 7 or 8 Preferred Share will be automatically converted, without the consent of the holders, into CWB common shares. Conversion to common shares will be determined by dividing the preferred share conversion value ($25.00 per preferred share plus any declared but unpaid dividends) by the common share value (the greater of (i) the floor price of $5.00 and (ii) the current market price calculated as the volume-weighted average trading price for the ten consecutive trading days ending on the day immediately prior to the date of the conversion).

10. Share-based Payments

Stock Options

For the three months ended

July 31, 2016

July 31, 2015

Number of Options

Weighted Average Exercise Price

Number of Options

Weighted Average Exercise Price

Options

Balance at beginning of period

5,481,286

29.69

5,318,318

30.23

Granted

–

Exercised or exchanged

(1,996

)

25.91

(48,388

)

23.84

Expired

(208,370

)

30.72

–

Forfeited

(44,952

)

31.78

(18,945

)

33.28

Balance at end of period

5,225,968

29.63

5,250,985

30.27

For the nine months ended

July 31, 2016

July 31, 2015

Number of Options

Weighted Average Exercise Price

Number of Options

Weighted Average Exercise Price

Options

Balance at beginning of period

5,232,366

30.26

4,743,277

30.76

Granted

610,731

23.70

705,725

26.13

Exercised or exchanged

(146,947

)

25.52

(128,100

)

24.23

Expired

(396,158

)

29.78

–

Forfeited

(74,024

)

32.84

(69,917

)

32.29

Balance at end of period

5,225,968

29.63

5,250,985

30.27

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, 2016, option holders exchanged the rights to 146,947 (2015 – 128,100) options and received 16,539 (2015 – 23,443) shares in return by way of cashless settlement.

For the nine months ended July 31, 2016, salary expense of $2,108 (2015 – $3,815) was recognized related to the estimated fair value of options granted. The fair value of options granted during the nine months ended July 31, 2016, which expire seven years after the grant date, was estimated using a binomial option pricing model with the following variables and assumptions: (i) risk-free interest rate of 0.8% (2015 – 0.7%) (ii) expected option life of 5.0 years (2015 – 4.0 years), (iii) expected annual volatility of 26% (2015 – 24%), and (iv) expected annual dividends of 3.8% (2015 – 3.4%). The weighted average fair value of options granted was estimated at $3.47 per share (2015 – $2.96).

Further details related to stock options outstanding and exercisable at July 31, 2016 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	1,786,518	3.8	25.13	486,574	25.46
$26.40 to $28.09	2,127,798	1.5	27.88	2,127,798	27.88
$30.75 to $39.42	1,311,652	2.6	38.59	–	–
Total	5,225,968	2.6	29.63	2,614,372	27.43

11. 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, 2016, these items include guarantees and standby letters of credit of $516,719 (April 30, 2016 – $475,957 and October 31, 2015 – $465,649). 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, 2015 (see page 97 of the 2015 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.

12. 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, 2016			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	$	–	$	–	$	593,253	$	593,253	$	593,253	$	–
	Securities		–		–		2,190,204		2,190,204		2,190,204		–
	Securities purchased under resale agreements		–		–		195,079		195,079		195,079		–
	Loans⁽¹⁾		–		21,816,345		–		21,816,345		22,175,803		359,458
	Derivative related		13,155		–		–		13,155		13,155		–
Total Financial Assets		$	13,155	$	21,816,345	$	2,978,536	$	24,808,036	$	25,167,494	$	359,458

Financial Liabilities
	Deposits⁽¹⁾	$	–	$	21,179,747	$	–	$	21,179,747	$	21,199,583	$	19,836
	Debt		–		1,279,002		–		1,279,002		1,280,251		1,249
	Derivative related		7,062		–		–		7,062		7,062		–
	Contingent consideration		–		20,340		–		20,340		20,340		–
Total Financial Liabilities		$	7,062	$	22,479,089	$	–	$	22,486,151	$	22,507,236	$	21,085
As at April 30, 2016
Total Financial Assets		$	28,308	$	21,366,014	$	2,526,484	$	23,920,806	$	24,238,429	$	317,623
Total Financial Liabilities		$	7,757	$	21,591,410	$	99,003	$	21,698,170	$	21,729,546	$	31,376
As at October 31, 2015
Total Financial Assets		$	23,245	$	19,541,676	$	2,994,534	$	22,559,455	$	22,906,855	$	347,400
Total Financial Liabilities		$	4,503	$	20,572,741	$	–	$	20,577,244	$	20,668,356	$	91,112

Loans and deposits exclude deferred premiums, deferred revenue and fair value hedge adjustments, 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, 2015 consolidated audited financial statements (see page 103 of the 2015 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 the three and nine months ended July 31, 2016 or 2015.

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, 2016			Fair Value		Level 1		Level 2		Level 3
Financial assets
	Cash resources	$	593,253	$	59,603	$	533,650	$	–
	Securities		2,190,204		123,580		2,066,624		–
	Securities purchased under resale agreements		195,079		–		195,079		–
	Loans		22,175,803		–		–		22,175,803
	Derivative related		13,155		–		13,155		–
		$	25,167,494	$	183,183	$	2,808,508	$	22,175,803

Financial liabilities
	Deposits	$	21,199,583	$	–	$	21,199,583	$	–
	Debt		1,280,251		–		1,280,251		–
	Derivative related		7,062		–		7,062		–
	Contingent consideration		20,340		–		–		20,340
		$	22,507,236	$	–	$	22,486,896	$	20,340
As at April 30, 2016
Financial assets		$	24,238,429	$	164,841	$	2,389,951	$	21,683,637
Financial liabilities		$	21,729,546	$	–	$	21,712,821	$	16,725

As at October 31, 2015
Financial assets		$	22,906,855	$	246,980	$	2,770,799	$	19,889,076
Financial liabilities		$	20,668,356	$	–	$	20,667,706	$	650

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 liability measured at fair value on the consolidated balance sheet as at July 31, 2016 is related to the acquisition of CWB Maxium as described in Note 3. Contingent consideration related to a business sold in 2015 was extinguished during the quarter ended July 31, 2016 with no payment required. Fair value is determined by estimating the expected value of the contingent consideration, taking into consideration the potential financial outcomes and their associated probabilities. 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
				2016			2015
Business acquisitions
Balance at beginning of period			$	–		$	2,679
	Business acquisition	(Note 3)		16,400			–
	Contingent consideration fair value changes	(Note 3)		3,940			638
	Settlement of contingent consideration			–			(3,317	)
			$	20,340		$	–

Business sale
Balance at beginning of period			$	650		$	–
	Contingent consideration fair value changes			–			1,650
	Extinguishment of contingent consideration			(650	)		–
			$	–		$	1,650

Balance at end of period			$	20,340		$	1,650

13. 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, 2015 (see page 102 of the 2015 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, 2016
Assets
Cash resources and securities	$	985		$	969		$	16		$	1,970		$	672		$	318		$	19		$	2,979
Loans⁽¹⁾		10,484			1,379			2,939			14,802			6,863			152			(72	)		21,745
Other assets⁽²⁾		–			–			–			–			–			–			462			462
Derivative financial instruments⁽³⁾		100			250			1,488			1,838			1,716			–			155			3,709
Total		11,569			2,598			4,443			18,610			9,251			470			564			28,895
Liabilities and Equity
Deposits		7,537			1,250			5,004			13,791			7,389			–			(23	)		21,157
Other liabilities⁽²⁾		–			–			–			–			–			–			442			442
Debt⁽¹⁾		29			64			323			416			863			–			–			1,279
Equity		–			–			–			–			265			–			2,043			2,308
Derivative financial instruments⁽³⁾		3,554			–			–			3,554			–			–			155			3,709
Total		11,120			1,314			5,327			17,761			8,517			–			2,617			28,895
Interest Rate Sensitive Gap	$	449		$	1,284		$	(884	)	$	849		$	734		$	470		$	(2,053	)	$	–
Cumulative Gap	$	449		$	1,733		$	849		$	849		$	1,583		$	2,053		$	–		$	–
Cumulative Gap as a Percentage of Total Assets		1.6	%		6.0	%		2.9	%		2.9	%		5.5	%		7.1	%		–	%		–	%

April 30, 2016
Cumulative Gap	$	399		$	1,222		$	366		$	366		$	1,694		$	2,080		$	–		$	–
Cumulative Gap as a Percentage of Total Assets		1.4	%		4.4	%		1.3	%		1.3	%		6.1	%		7.5	%		–	%		–	%

October 31, 2015
Cumulative Gap	$	(380	)	$	(373	)	$	(906	)	$	(906	)	$	1,650		$	1,930		$	–		$	–
Cumulative Gap as a Percentage of Total Assets		(1.5	)%		(1.4	)%		(3.5	)%		(3.5	)%		6.4	%		7.5	%		–	%		–	%

Potential prepayments of fixed rate loans and early redemption of redeemable fixed term deposits have not been estimated. Redemptions of fixed term deposits where depositors have this option are not expected to be material. The majority of fixed rate loans, mortgages and leases are either closed or carry prepayment penalties.
Accrued interest is excluded in calculating interest sensitive assets and liabilities.
Derivative financial instruments are included in this table at the notional amount.

The effective weighted average interest rates of financial assets and liabilities are shown below:


July 31, 2016	Floating Rate and Within 1 Month		1 to 3 Months		3 Months to 1 Year		Total Within 1 Year		1 Year to 5 Years		More than 5 Years		Total
Total assets	3.2	%	2.3	%	3.4	%	3.1	%	3.8	%	2.2	%	3.3	%
Total liabilities	1.0		1.7		1.9		1.3		2.2		–		2.0
Interest rate sensitive gap	2.2	%	0.6	%	1.5	%	1.8	%	1.6	%	2.2	%	1.3	%

April 30, 2016
Total assets	3.5	%	2.3	%	3.5	%	3.3	%	3.6	%	1.4	%	3.4	%
Total liabilities	1.0		1.7		2.0		1.3		2.2		–		2.0
Interest rate sensitive gap	2.5	%	0.6	%	1.5	%	2.0	%	1.4	%	1.4	%	1.4	%

October 31, 2015
Total assets	3.4	%	2.7	%	3.7	%	3.4	%	3.4	%	1.8	%	3.4	%
Total liabilities	1.1		1.7		1.8		1.3		2.3		–		1.6
Interest rate sensitive gap	2.3	%	1.0	%	1.9	%	2.1	%	1.1	%	1.8	%	1.8	%

14. Capital Management

Capital for Canadian financial institutions is managed and reported in accordance with a capital management framework specified by OSFI commonly called Basel III. Additional information about CWB’s capital management practices is provided in Note 29 to the fiscal 2015 audited consolidated financial statements within the 2015 Annual Report (see page 107 of the 2015 Annual Report) and in the Capital Management section in the Q2 2016 Management’s Discussion and Analysis.

Capital funds are managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and markets. The goal is to maintain adequate regulatory capital to be considered well capitalized, protect customer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all while providing a satisfactory return for shareholders.

On July 7, 2016, CWB issued 6,125,000 common shares at a price of $24.50 per share for gross proceeds of $150,063 (see Note 9).

On November 30, 2015, CWB redeemed all $300 million of 4.389% subordinated debentures which did not qualify as non-viability contingent capital under the Basel III regulatory capital requirements.

Capital Structure and Regulatory Ratios


			As at July 31 2016			As at April 30 2016			As at July 31 2015
Regulatory capital, net of deductions
	Common equity Tier 1	$	1,826,043		$	1,639,805		$	1,625,694
	Tier 1		2,196,103			2,009,858			1,855,849
	Total		2,626,048			2,434,761			2,427,948
Capital ratios
	Common equity Tier 1		9.0	%		8.2	%		8.5	%
	Tier 1		10.8			10.1			9.8
	Total		12.9			12.2			12.8
Leverage ratio			8.4			8.0			8.0

During the nine months ended July 31, 2016, CWB complied with all internal and external capital requirements.

15. Comparative Figures

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

Shareholder Information

Head Office

Canadian Western Bank Group

Suite 3000, Canadian Western Bank Place

10303 Jasper Avenue

Edmonton, AB T5J 3X6

Telephone: (780) 423-8888

Fax: (780) 423-8897

http://www.cwb.com/

Contact Information

National Leasing Group Inc.

1525 Buffalo Place

Winnipeg, MB R3T 1L9

Toll-free: 1-800-665-1326

Toll-free fax: 1-866-408-0729

http://www.nationalleasing.com

CWB Maxium Financial Inc.

30 Vogell Road, Suite 1

Richmond Hill, ON L4B 3K6

Toll-free: 1-800-379-5888

Fax: (905) 780-3273

http://www.maxium.net/

CWB Optimum Mortgage

Suite 1010, Canadian Western Bank Place

10303 Jasper Avenue

Edmonton, AB T5J 3X6

Toll-free: 1-866-441-3775

Fax: 1-866-477-8897

http://www.optimummortgage.ca/

Canadian Western Trust Company

Suite 600, 750 Cambie Street

Vancouver, BC V6B 0A2

Toll-free: 1-800-663-1124

Fax: (604) 669-6069

http://www.cwt.ca/

CWB Wealth Management Ltd.

Suite 3000, Canadian Western Bank Place

10303 Jasper Avenue

Edmonton, AB T5J 3N6

Telephone: (855) 292-9655

http://www.cwbwealth.com/

Adroit Investment Management Ltd.

Suite 1250, Canadian Western Bank Place

10303 Jasper Avenue

Edmonton, AB T5J 3N6

Telephone: (780) 429-3500

Fax: (780) 429-9680

http://www.adroitinvestments.ca/

McLean & Partners Wealth Management Ltd.

801 10th Avenue SW

Calgary, AB T2R 0B4

Telephone: (403) 234-0005

Fax: (403) 234-0606

http://www.mcleanpartners.com/

Stock Exchange Listings

The Toronto Stock Exchange

Common Shares: CWB

Series 5 Preferred Shares: CWB.PR.B

Series 7 Preferred Shares: CWB.PR.C

Transfer Agent and Registrar

Computershare

100 University Avenue, 8^th Floor

Toronto, ON M5J 2Y1

Telephone: (416) 263-9200

Fax: 1-888-453-0330

Website: http://www.computershare.com/

Eligible Dividends Designation

CWB designates all dividends for both common and preferred shares paid to Canadian residents as “eligible dividends”, as defined in the Income Tax Act (Canada), unless otherwise noted.

Dividend Reinvestment Plan

CWB’s dividend reinvestment plan allows common and preferred shareholders to purchase additional common shares by reinvesting their cash dividend without incurring brokerage and commission fees. For information about participation in the plan, please contact the Transfer Agent and Registrar or visit http://www.cwb.com/.

Investor Relations

Investor & Public Relations

Canadian Western Bank

Telephone: (780) 969-8337

Toll-free: 1-800-836-1886

Fax: (780) 969-8326

Email: [email protected]

Online Investor Information

Additional investor information including supplemental financial information and corporate presentations are available on CWB’s website at wwwcwb.com.

Quarterly Conference Call and Webcast

CWB’s quarterly conference call and live audio webcast will take place on September 1, 2016 at 2:00 p.m. ET (12:00 noon MT). The webcast will be archived on CWB’s website at http://www.cwb.com/ for sixty days. A replay of the conference call will be available until September 16, 2016 by dialing 416-621-4642 (Toronto) or 1-800-585-8367 (toll-free) and entering passcode 65983631.

Canadian Western Bank
Matt Evans, CFA
Senior AVP, Strategy & Investor Relations
(780) 969-8337
[email protected]

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