Bank Trust Wealth Management
cwb.com
Four Year Financial Summary
($ thousands, except per share amounts)
2016
2015
2014
2013
Results from Continuing Operations(1)
Net interest income (teb)(2)
Less teb adjustment
Net interest income per financial statements
Other income
Pre-tax, pre-provision income (teb)
Total revenues (teb)
Total revenues
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(3)
Return on common shareholders' equity(4)
Adjusted return on common shareholders' equity(5)
Return on average total assets(6)
Efficiency ratio (teb)(7)
Efficiency ratio(7)
Net interest margin (teb)(8)
Net interest margin(8)
Number of full-time equivalent staff
Results from Combined Operations(1)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(3)
Return on common shareholders' equity(4)
Adjusted return on common shareholders' equity(5)
Return on average total assets(6)
Results from Discontinued Operations(1)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(3)
Per Common Share
Average common shares outstanding (thousands)
Cash dividends
Book value
Market price
High
Low
Close
$
588,464
3,240
585,224
72,672
353,843
661,136
657,896
177,761
2.13
2.13
2.26
$
$
549,052
5,580
543,472
67,948
328,059
617,000
611,420
208,064
$
506,308
6,743
499,565
84,305
325,720
590,343
583,600
205,288
463,938
7,174
456,764
70,051
294,647
533,989
526,815
177,467
2.59
2.59
2.63
12.4%
12.6
0.97
46.8
47.3
2.56
2.53
1,928
2.57
2.54
2.59
13.9%
14.2
1.05
44.8
45.4
2.59
2.56
1,788
2.24
2.23
2.27
13.5%
13.7
1.02
44.8
45.4
2.66
2.62
1,715
3.97
3.97
4.01
19.1%
19.3
1.48
2.73
2.70
2.76
14.8%
15.1
1.10
2.36
2.35
2.39
14.2%
14.4
1.06
$
111,637
$
13,261
$
9,696
1.38
1.38
1.38
80,442
0.86
22.18
38.16
21.04
25.13
$
0.16
0.16
0.17
80,034
0.78
19.52
43.30
32.61
37.75
$
0.12
0.12
0.12
79,147
0.70
17.45
33.75
27.04
33.44
9.3%
9.9
0.73
46.5
46.7
2.43
2.41
1,966
2.13
2.13
2.26
9.3%
9.9
0.73
-
-
-
-
$
83,411
0.92
23.58
29.30
19.26
25.45
$
177,761
$
319,701
$
218,549
$
187,163
$
$
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and repurchase agreements
Loans
Deposits
Debt
Shareholders' equity
Assets under administration
Assets under management
Capital Adequacy
Common equity Tier 1 ratio
Tier 1 ratio
Total ratio
Other Information
Provision for credit losses as a percentage of average loans
Net impaired loans as a percentage of total loans
Number of CWB branches
$ 25,222,549
2,791,968
21,961,348
21,194,553
1,268,198
2,342,040
10,689,398
1,924,181
$ 22,838,527
2,994,534
19,475,383
19,365,407
1,187,623
1,910,907
9,293,683
1,882,736
$ 20,635,046
2,697,185
17,536,489
17,373,014
1,036,990
1,693,527
10,101,698
1,795,975
$ 18,527,742
2,580,327
15,581,842
15,631,040
820,650
1,598,507
8,423,972
1,901,146
9.2%
11.0
13.1
0.38%
-
42
8.5%
9.7
12.7
0.17%
(0.11)
41
8.0%
9.3
12.8
0.15%
(0.19)
41
8.0%
9.7
13.9
0.19%
(0.14)
41
(1) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB’s stock transfer business
as described in Note 3 of the annual consolidated financial statements. Revenues, expenses and gains on
sale associated with the businesses sold are defined and classified on the consolidated statements of income
for prior periods as “Discontinued Operations”. The remaining operations are defined as “Continuing
Operations”, and the total Continuing Operations and Discontinued Operations are defined as “Combined
Operations”. Total revenues from Combined Operations include $107.8 million of divestiture gains in 2015.
Return on shareholders’ equity reflects equity from Combined Operations. All other measures reflect either
Continuing or Combined Operations as indicated.
(2) 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 statements 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 taxable equiv-
alent basis does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable
to similar measures presented by other banks.
(3) Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the
acquisition-related amortization of intangible assets and contingent consideration fair value changes, net of
tax. Excluded items are not considered to be indicative of ongoing business performance.
(4) Return on common shareholders’ equity is calculated as common shareholders’ net income divided by
average common shareholders’ equity.
(5) Adjusted return on common shareholders’ equity is calculated as common shareholders’ net income
excluding the acquisition-related amortization of intangible assets and contingent consideration fair value
changes, net of tax, divided by average common shareholders’ equity.
(6) Return on assets is calculated as common shareholders’ net income divided by average total assets.
(7) Efficiency ratio is calculated as non-interest expenses, excluding the pre-tax amortization of acquisition
related intangible assets, 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.
(8) Net interest margin is calculated as net interest income divided by average total assets.
CWB Financial Group 2016 Annual Report
i
Performance Dashboard(1)
Shareholders value CWB’s strong track record of high-quality growth,
conservative approach to risk management and consistent profitability. We
define success as a well-funded, well-capitalized mid-market commercial
banking franchise which delivers strong core operating performance and
consistent growth of earnings and profitability from current levels.
Employees
~2,000
2006 – ~1,100
CWB branches
Assets under administration
Assets under management
42
2006 – 33
$10.7B
2006 – $3.3B
$1.9B
2006 – nil
Total assets
$25.2B
2006 – $7.3B
13% 10yr CAGR(5)
Total loans
(excluding the allowance for credit losses)
$22.1B
2006 – $5.8B
14% 10yr CAGR(5)
Total deposits
$21.2B
2006 – $6.3B
13% 10yr CAGR(5)
Diversifying loans by province (%)
Diversifying loans by lending sector (%)
34%
10yr CAGR(6)
of loans
outside of
Western
Canada
Alberta
British Columbia
Ontario and other
Saskatchewan
Manitoba
14%
10yr CAGR(6)
of general
commercial
loans
2006
2016
2006
2016
54
35
4
4
3
36
36
19
6
3
General commercial loans
Real estate project loans
Commercial mortgages
Personal loans and mortgages
Equipment financing and leasing
Corporate loans
Oil and gas production loans
22
17
22
12
20
4
3
22
19
18
18
17
5
1
Growth and diversification of funding sources - composition of deposits (%)
55% Total branch-raised deposits
36%
19%
36%
9%
Branch demand and notice
Branch term
Broker term
Capital markets term
Credit ratings (DBRS) - stable trend (confirmed November 17, 2016)
A (low)
Long-term debt /
senior deposits
R-1 (low)
Short-term debt
BBB (high)
Subordinated
debentures
Pfd-3
Preferred shares
ii
CWB Financial Group 2016 Annual Report
Employees
~2,000
2006 – ~1,100
CWB branches
Assets under administration
Assets under management
42
2006 – 33
$10.7B
2006 – $3.3B
$1.9B
2006 – nil
Total assets
$25.2B
2006 – $7.3B
13% 10yr CAGR(5)
Total loans
(excluding the allowance for credit losses)
$22.1B
2006 – $5.8B
14% 10yr CAGR(5)
Total deposits
$21.2B
2006 – $6.3B
13% 10yr CAGR(5)
Strong credit quality
0.49%
5yr Average gross impaired
loans as a % of average loans
0.17%
5yr Average write-offs as
a % of average loans
2.0
1.0
0.0
Q4-07
Q4-08
Q4-09
Q4-10
Q4-11
Q4-12
Q4-13
Q4-14
Q4-15
Q4-16
$ Gross impaired loans as a % of average loans
$ Write-offs as a % of average loans
Low provision for credit losses (5yr avg. as a % of avg. loans)
Strong efficiency ratio(2)
0.22%
46.5% 56.1%
0.39
0.40
0.41
0.32
0.22
0.23
0.29
0.25
57.0
43.8
57.1
44.8
57.9
44.8
58.2
46.8
56.1
46.5
CWB
CDN Bank
Average(3)
BMO
CIBC
National
RBC
Scotia
TD
2012(5)
2013
2014
2015
2016
CWB
CDN Bank Average(3)
Low leverage (total assets-to-equity)
10.8%
Canadian Western Bank
17.8%
Canadian Bank Average(3)
30.0
15.0
0.0
2007
2008
2009
2010
2011(4)
2012
2013
2014
2015
2016
Strong regulatory capital ratios (CWB | regulatory minimum)
9.2% | 7.0%
Common equity
Tier 1 capital (CET1)
11.0% | 8.5%
Tier 1 capital
13.1% | 10.5%
Total capital
8.6% | 3.0%
Basel III
leverage ratio
CWB Financial Group 2016 Annual Report
iii
Employees
~2,000
2006 – ~1,100
CWB branches
Assets under administration
Assets under management
42
2006 – 33
$10.7B
2006 – $3.3B
$1.9B
2006 – nil
Total assets
$25.2B
2006 – $7.3B
13% 10yr CAGR(5)
Total loans
(excluding the allowance for credit losses)
$22.1B
2006 – $5.8B
14% 10yr CAGR(5)
Total deposits
$21.2B
2006 – $6.3B
13% 10yr CAGR(5)
Consistent growth of total loans ($ millions)
Consistent growth of total deposits ($ millions)
$22,065
$21,195
14,035
15,653
17,606
19,570
22,065
2012
2013
2014
2015
2016
15,631
17,373
19,365
21,195
5,010
2013
5,762
2014
6,719
2015
7,694
2016
14,250
4,459
2012
(excluding the allowance for credit losses)
deposits
notice and demand deposits
Common shareholders’ net income ($ millions)
Provision for credit losses (as a % of average loans)
$178 2016 growth constrained by energy-related
provisions and net interest margin pressure.
0.38%
2016 increase entirely attributed to
energy-related provisions.
172
177
205
208
178
0.38
0.19
0.19
0.15
0.17
2012(5)
2013
2014
2015
2016
2012
2013
2014
2015
2016
Consistent growth of book value / share
Consistent growth of dividends paid / common share
$23.58 | 11% 10yr CAGR(6)
(4)
$0.92 | 14% 10yr CAGR(6)
14.08
15.94
8.39
10.70
23.58
19.52
2006
2008
2010
2012
2014
2016
0.92
0.78
0.42
0.44
0.62
0.25
2006
2008
2010
2012
2014
2016
(1) Financial performance from Continuing Operations. Financial results presented include certain metrics which do not
(3) “CDN Bank Average” is calculated based on information contained in the publicly available company reports of
have standardized meanings prescribed by IFRS and, therefore, may not be comparable to similar measures presented
by other financial institutions.
(2) Efficiency ratio is calculated as non-interest expenses, excluding the pre-tax amortization of acquisition
related intangible assets, 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.
Canada’s six largest banks (TSX trading symbols: BMO, CM, NA, RY, BNS, TD).
(4) As of 2011, financial results are reported under IFRS, as opposed to GAAP, and are not directly comparable.
(5) Based on Combined Operations
(6) CAGR - compound annual growth rate
CWB Financial Group 2016 Annual Report
iv
About CWB Financial Group
CWB Financial Group (TSX:CWB) represents the only Schedule 1 bank
in Canada specializing in mid-market commercial banking. Clients
recognize CWB for our in-depth knowledge of targeted segments within
Canada’s commercial banking industry and our unique brand of personal
service. Shareholders value CWB’s strong track record of high-quality,
industry-leading growth, conservative approach to risk management and
consistent profitability.
CWB has grown to become the seventh largest financial services
organization in Canada, in terms of market capitalization, by taking a
relationship-based approach to business and personal banking. We offer
highly responsive specialized financing solutions through CWB Equipment
Financing, National Leasing, CWB Maxium Financial, CWB Franchise
Finance and CWB Optimum Mortgage, trust services through Canadian
Western Trust and comprehensive wealth advisory services through CWB
Wealth Management.
British Columbia (18)
Vancouver (4)
Abbotsford
Coquitlam
Courtenay
Cranbrook
Kamloops
Kelowna (2)
Langley
Nanaimo
Prince George
Richmond
Surrey (2)
Victoria
Alberta (18)
Edmonton (5)
Calgary (6)
Grande Prairie
Leduc
Lethbridge
Medicine Hat
Red Deer
Sherwood Park
St. Albert
(8)
(6)
Saskatchewan (5)
Regina
Saskatoon (2)
Yorkton
Lloydminster
Manitoba (2)
Winnipeg (2)
(10)
(2)
(2)
Ontario (10)
Barrie
Greater Toronto Area (2)
London
Orillia
Oshawa
Ottawa
Mississauga
Richmond Hill
Woodbridge
(2)
2
CWB Financial Group 2016 Annual Report Company / Office
Regional Offices
CWB Branch Network
Province(s)
BC / AB / ON
Western Canada
Canadian Direct Financial (CDF)
ALL (except QC)
Canadian Western Trust
ALL
CWB Optimum Mortgage
ALL (except QC)
CWB Wealth Management and CWF
Western Canada
Adroit Investment Management
Western Canada, ON, QC
McLean & Partners Wealth Management
Western Canada, ON
National Leasing Group
CWB Maxium Financial
CWB Franchise Finance
ALL
ALL (primarily ON)
ALL (primarily outside of Western Canada)
Number of companies / divisions
Total provinces
9
10
Maritimes (8)
St. John’s, NL
Charlottetown, PEI
Halifax, NS (3)
Fredericton, NB
Moncton, NB
Saint John, NB
(2)
(3)
Quebec (3)
Montreal
Quebec City (2)
(8)
Table of Contents
Four Year Financial Summary ............................................... i
Performance Dashboard ...................................................... ii
About CWB Financial Group ................................................ 2
Strategic Priorities and Highlights ......................................... 5
Lines of Business .................................................................. 6
Awards and Accolades ......................................................... 7
Message from Chris Fowler, President and CEO .................. 8
Message from Robert Phillips, Chair of the Board .............. 10
Board of Directors and Corporate Governance ................... 12
Executive Committee ......................................................... 13
Management’s Discussion and Analysis ............................. 14
Consolidated Financial Statements .................................... 71
Shareholder Information ................................................. 111
Locations ........................................................................ 112
3
CWB Financial Group 2016 Annual Report Our Vision
To be seen as crucial to
our clients’ futures.
4
CWB Financial Group 2016 Annual Report CWB’s Balanced
Growth Strategy
Strategic Priorities
and Highlights
Operating from our headquarters in Edmonton, Alberta, CWB is the
trusted financial partner to a growing base of business and personal
clients. We deliver responsive service and sensible solutions, and we
remain committed to our fundamental identity as a conservative,
growth-oriented organization. We maintain a supportive environment
for employees within a results-oriented culture. We aim to provide strong
long-term returns for shareholders and give back in the communities
where we live and work.
Further geographic and business sector diversification within targeted
segments of Canada’s commercial banking industry is the foundation
of CWB’s balanced growth strategy. Ongoing strong growth of both
loans and funding sources remain important strategic objectives, along
with specific goals related to risk and capital management, and business
transformation through targeted use of technology throughout the
organization.
Our teams focus on key activities which contribute the greatest impact
toward the achievement of our vision to be seen as crucial to our clients’
future. We track both financial and non-financial measures within four
interdependent realms of activity (People, Support, Clients, Financial) to
monitor progress toward achievement of our strategic objectives:
CWB
relationships
i
n
v
e
s
t
m
e
n
t
p
r
o
fi
t
a
b
e
l
g
r
o
w
t
h
People (P)
Invest in our people;
Live our values
Clients (C)
Be the trusted
financial partner
Strategic Priorities
• Strong, balanced growth of CWB’s targeted, mid-market
commercial banking franchise with further geographic and business
diversification.
• Growth of multi-product client relationships.
• Enhanced profitability through targeted growth of preferred types of
branch-raised deposits.
• Enhanced capital and risk management through transition to the
Advanced Internal Ratings Based (AIRB) approach for calculating risk-
weighted assets.
• Business transformation through increased use of technology to
improve client service, banking convenience, cross-sell opportunities
and overall efficiency within the branch network.
2016 Financial Highlights
• Completed the acquisitions now referred to as CWB Maxium Financial
and CWB Franchise Finance in support of further business and
geographic diversification.
• Achieved double-digit loan growth on a percentage basis for the 26th
time in 27 years.
• Diversified CWB’s funding mix with continued strong growth in
preferred types of branch-raised deposits.
• Strengthened CWB’s capital position in support of further profitable
growth through issuance of $140 million of preferred shares and
$150 million of common shares.
• Extended CWB’s strong track record for stable profitability with our
115th consecutive profitable quarter.
• Returned $0.92 in dividends per common share to CWB shareholders,
an increase of 7% over last year.
2016 Non-financial Highlights
• Opened CWB’s 42nd full-service branch through expansion of services
in Lloydminster, Saskatchewan.
• Successfully implemented CWB’s new core banking system in support
of deeper client relationships and enhanced product and service offerings.
•
•
Initiated CWB’s three-year program to transition from the
Standardized approach for calculating risk-weighted assets to the
AIRB approach, with expected benefits to risk management processes,
capital flexibility and overall profitability.
Introduced CWB Wealth Management to integrate the knowledge
and expertise of each wealth management entity, and provide
comprehensive financial planning and wealth advisory services.
Support (S)
Balance risk and reward;
Drive operational efficiency;
Build funding sources
Financial (F)
Deliver profitable growth
• Donated $421,000 to Big Brothers Big Sisters through the ongoing
success of the Greater Interest GIC, bringing total program donations
to more than $2.5 million.
• Donated $25,000 to the Canadian Red Cross to support communities
affected by the wildfires in Fort McMurray.
5
CWB Financial Group 2016 Annual Report
Lines of Business
Banking
We set ourselves apart through our commitment to service excellence,
coupled with our in-depth understanding of the markets where our
clients do business. We specialize in business banking services and
equipment financing for small- to medium-sized businesses, and offer
a full complement of personal banking products and services through
42 branches and Internet banking services provided by Canadian Direct
Financial (CDF). We pride ourselves on offering relevant products that
help our clients manage their day-to-day finances while also preparing for
what’s to come.
Business Banking
CWB’s targeted complement of products and services help businesses
with their operating and capital needs. We specialize in general
commercial banking, financing for commercial real estate and real estate
construction.
CWB Maxium Financial provides financing solutions to more than 35,000
clients representing a diversified portfolio in specialized areas of health
care, golf, transportation, real estate, and general corporate financing.
CWB Maxium’s head office is located in Richmond Hill, Ontario, and the
majority of its business is outside of Western Canada.
CWB Franchise Finance provides financing across Canada to a diverse
group of established companies in the hospitality and restaurant
industries.
Equipment Financing and Leasing
With operations across Canada, our equipment leasing subsidiary,
National Leasing, is the largest Canadian lessor in small and mid-size
commercial equipment transactions. Financing solutions are available
in all business sectors, with a focus on general commercial, agriculture,
health care, and golf and turf.
Our branch-based equipment lenders specialize in financing standard
industrial equipment for borrowers operating within our branch footprint
in Western Canada.
Our Calgary-based Broker Buying Centre selectively acquires loan
portfolios from the finance divisions of original equipment manufacturers.
Personal Banking
CWB offers a full complement of personal banking services including
chequing and savings accounts, mortgages, home equity lines of credit,
personal loans and investment products through our branch network
across Western Canada.
CWB Optimum Mortgage, our broker-sourced alternative mortgage
provider, offers personalized borrowing solutions for clients who fall
outside of traditional lending guidelines.
CDF offers services to clients across Canada seeking enhanced flexibility
for their personal banking and investment needs. Round-the-clock online
account access and a dedicated customer service team available by phone
five days a week allow our clients to manage their finances with ease.
6
Trust Services
We offer personalized pension, trustee and custodial solutions for
individuals and businesses through Canadian Western Trust (CWT). CWT
has a proven reputation for delivering value and service. We build trusted
business relationships and work with clients to offer a flexible, solutions-
oriented approach.
Wealth Management
Rooted in planning ahead to make the most of every opportunity, CWB
Wealth Management takes a unified approach to deliver sound service,
helpful solutions and ongoing support to help clients achieve their vision
for the future.
Financial planning and investment products are offered at CWB branches
through our licensed mutual fund representatives. Under the Canadian
Western Financial banner, clients have access to a range of investment
products from Canada’s leading mutual fund companies including CWB’s
proprietary Core Funds and Onyx Portfolio Series mutual funds.
High net-worth individuals and institutions looking for discretionary
wealth management will find value in working with our boutique
companies, Adroit Investment Management and McLean & Partners
Wealth Management. With distinct investment strategies, clients have
access to various approaches that are well-suited to their risk appetite.
CWB Financial Group 2016 Annual Report
CWB honoured with The Community Partnership Award recognizing significant contributions to and support of
mentorship programming across Western Canada
Awarded by Big Brothers Big Sisters of Canada
Awards and Accolades
CWB recognized at the Employment Equity Achievement Awards
CWB received a National Philanthropy Day Award for support of
in the category of Improved Representation for initiatives to
the Royal Alexandra Hospital’s Addiction Recovery and Community
create a diverse workplace between 2010 and 2014
Health Program
Awarded by Employment and Social Development Canada
CWB Optimum Mortgage ranked as the top alternative lender,
earning three gold and seven silver medals, as well as highest
overall score
Awarded by the Edmonton chapter of the Association of Fundraising
Professionals
CWB received LEED® Canada Silver certification for its Edmonton
Main Branch
Awarded by Canadian Mortgage Professionals Magazine
Awarded by Canada Green Building Council
National Leasing awarded the ELFA Technology award for National
Leasing Interactive
Awarded by the Equipment Leasing and Finance Association
CWB Corporate Communications recognized with the Award of
Excellence in Communication Skills – Digital Communication
Awarded by International Association of Business Communicators
Edmonton
7
CWB Financial Group 2016 Annual Report Message from Chris Fowler,
President and CEO
Building on our strengths
We took a number of important steps forward in fiscal 2016, and we
faced a number of significant challenges. Our successes included the
acquisitions of CWB Maxium and CWB Franchise Finance, as well as the
implementation of our new core banking system. Challenges included
the negative impact of low oil prices and regulatory factors on our small
portfolio of loans to oil and gas producers. We took a proactive approach
to resolve these positions, which resulted in higher-than-expected
provisions for credit losses and contributed to a decrease of 15% in
annual common shareholders’ net income. While this was a difficult
experience, it demonstrated that CWB’s unique mid-market commercial
banking business model is highly resilient. I’m extremely proud of the way
our teams stepped up. Thanks to their outstanding effort, we overcame
our challenges and moved CWB’s well-defined growth strategy forward.
CWB’s value proposition to shareholders is based on our strategy to
deliver strong growth in earnings per common share and progressive
increases in return on common shareholders’ equity from current levels,
along with a disciplined approach to capital and risk management. We
define success as a well-funded, well-capitalized mid-market commercial
banking franchise. We seek to earn a premium price-to-earnings multiple
on the basis of predictable earnings growth with business and geographic
diversification that leverages our strengths, meets our risk appetite and
fits our economic and regulatory environment.
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. Both of the commercial lending
acquisitions we completed this year will directly support these goals.
We recorded several significant milestones in key performance metrics.
Total assets surpassed $25 billion with another year of strong, double-
digit loan growth of 13%. Total deposits exceeded $21 billion, including
12% annual growth of branch-raised deposits. Growth of pre-tax, pre-
provision earnings was strong at 8%. We also strengthened our capital
position to support ongoing high-quality asset growth, through issuance
of both common and preferred shares.
8
CWB Financial Group 2016 Annual Report To this end, our commitment to business process and talent
transformation includes efforts to establish the most effective team
structures, appropriate incentives, and efficient business processes that
make use of scalable technology solutions. The purpose of this effort is to
create the best possible client experience across our lines of business, and
to translate our traditional, client service-related competitive strengths
into a differentiated offering that will drive our continued growth.
Targeted acquisitions in support
of growth and diversification
Both of our fiscal 2016 acquisitions, CWB Maxium Financial and CWB
Franchise Finance, are integral components of our balanced growth
strategy. With 70 – 80% of each portfolio based outside of Western
Canada and the majority of originations focused within the general
commercial sector, these businesses will contribute to the strategic
expansion of our geographic footprint, with a particular focus in Ontario,
and further diversification of our asset mix.
CWB’s competitive strength in Western Canada has always been based
on specialized industry knowledge and a targeted approach to niche
markets. Management at CWB Maxium Financial and CWB Franchise
Finance have established track records for success within their markets
based on the same value proposition. The addition of these experienced
management teams has deepened our leadership capabilities and
expanded our growth opportunities. I look forward to meaningful
contributions from both segments to CWB’s ongoing growth of both
assets and earnings per share.
Looking ahead
We asked a lot of our teams over the past year, and I would like to
take this opportunity to recognize our people for their passion and
commitment in helping CWB achieve our strategic goals. Our teams are
currently working hard to ensure our new banking system performs to
its full capacity as quickly as possible, and I would like to thank them for
continuing to go beyond the call of duty. I would also like to express my
deepest gratitude to our clients for their enduring trust. Our clients are
the reason we exist. Their success inspires us, and we are motivated to
continually find ways to improve our service and help them grow.
I strongly believe we have established the appropriate foundation for
sustainable and profitable growth for CWB shareholders. We continue to
invest in technology and business process improvements to empower our
people to fully deliver the highest level of client service, accelerate growth
in multi-product client relationships, and optimize our capital and risk
management processes. We enter fiscal 2017 with a very strong capital
position and a promising pipeline of growth opportunities across the
country. We are looking forward to building on these accomplishments
and driving CWB to many more years of strong financial performance.
CWB’s balanced growth strategy
We have established specific strategic priorities, all of which extend
from our relationships with targeted mid-market commercial clients.
They include purposeful efforts to support net interest margin through
growth of diversified, lower cost funding sources with a particular focus
on branch-raised deposits; to allocate capital based on the appropriate
balance of risk and reward; and, to achieve necessary business process
and talent transformation to earn more business across the country.
Growth of lower-cost funding sources
Among the significant benefits of our new core banking technology is the
ability to leverage a client-centric view of our branch-based relationships.
This technology sets the stage for scalable growth by enabling us to
focus more of our energy on building relationships through delivery of
targeted financial solutions that match our clients’ needs. Ultimately, this
will support net interest margin through success against our strategic
objective to grow lower-cost funding sources, including branch-raised
deposits.
Capital and risk management
The new banking system also supports our capital and risk management
objectives, and positions us to improve our return on shareholders’ equity,
by facilitating an eventual transition to the Advanced Internal Ratings Based
(AIRB) methodology for managing credit risk and calculating risk-weighted
assets.
Our clients are the reason
we exist. Their success
inspires us, and we are
motivated to continually
find ways to improve our
service and help them grow.
The AIRB approach will put us on more equal footing with our competition.
It will add risk sensitivity to our framework for capital management,
increase our risk quantification processes, and improve our risk-
based pricing and economic capital estimations. These improved risk
management capabilities will better equip us to target business segments
that generate the most attractive risk-adjusted returns and allocate our
resources accordingly.
Business process and talent transformation
Highly responsive client service, quick turnaround and proactive delivery
of targeted, expert-based financial solutions have always set us apart
from our competitors. Our strategy is to leverage this advantage toward
development of multi-product client relationships centred around our
unique business banking specialty. Our future success will depend on
effective collaboration between engaged, well-trained and empowered
CWB teams.
9
CWB Financial Group 2016 Annual Report Message from Robert Phillips,
Chair of the Board
CWB’s vision is to be seen as
crucial to our clients’ futures
Balanced growth through
strategic investment
In 2011, your Board of Directors began to work with CWB’s management
to establish a plan for the next stage of CWB’s growth. We defined a
number of critical steps CWB should take over the ensuing five years
in order to be seen as crucial to our clients’ futures. We specifically
targeted strategic investment in technology, a thorough evaluation of
each Group company to determine the best mix of business lines to serve
our targeted commercial banking clients, and purposeful development of
CWB’s enterprise risk management framework. Five years on, I’m pleased
to report that we achieved a number of important milestones in each
of those categories in fiscal 2016, and we are now well-positioned to
embark on CWB’s next phase of balanced growth.
The impact of technological innovation within the financial services
industry is plainly evident today. With the successful implementation
of CWB’s new core banking system in May of this year, CWB is now
equipped to leverage current technology to enhance our product
and service offerings in support of our balanced growth strategy. It’s
important to note this significant technology deployment was facilitated
through several prior technology-related initiatives beginning several
years ago, including full replacement of CWB’s systems hardware and
implementation of an on-line loan origination system, both within CWB
and National Leasing. These steps were necessary precursors to the full
implementation of our new core banking system this year.
We also undertook a thorough review and evaluation of each Group
company. Ultimately we concluded that directing CWB’s focus toward
10
CWB Financial Group 2016 Annual Report Looking ahead
This year represents my first as Chair of the Board for CWB, a year
which certainly presented its challenges. CWB is the only Schedule 1
bank in Canada with a mid-market commercial banking focus, and
we are uniquely positioned in relation to the domestic economy. This
year, we weathered the significant economic impact in Alberta and
Saskatchewan of the protracted period of low oil prices. I believe the
conservative manner in which management addressed CWB’s direct oil
and gas exposure reflects CWB’s consistent, prudent approach to risk
management and was in the best interest of our shareholders.
Lower oil prices represent one dimension of change which has occurred
within CWB’s operating environment over the past several years. In
truth, change has been, and will continue to be, a constant theme in
our industry. Of course, with change comes opportunity. As a board, we
recognize CWB needs the right leaders to realize on our opportunities
and, over the past several years, we have worked with management
through renewal of CWB’s Executive Committee. I am confident we have
appointed the right leaders, and those leaders have established the correct
strategy for the next phase of CWB’s profitable and balanced growth.
In the coming years, CWB will continue to operate from an unshakeable
foundation of honesty, integrity and the desire to do the right thing for
our people, our clients, our shareholders and the communities in which
we work. We will maintain our focus on the mid-market commercial
banking industry in Canada, deliver balanced growth of both high-quality
loans and cost-effective funding sources, and achieve further geographic
and business sector diversification.
CWB remains a unique story in Canadian banking. On behalf of the
entire Board of Directors, I am pleased to say we are very excited about
the future.
targeted and complementary offerings in banking, trust and wealth
management was the best way to achieve CWB’s vision. To that end, we
sold our insurance and stock transfer businesses last year, and this year
completed the acquisitions we now refer to as CWB Maxium Financial
and CWB Franchise Finance.
Both new businesses support CWB’s established commercial banking
strategy and offer specialized financing originations with attractive
returns. These are highly strategic acquisitions that support CWB’s
relationship-focused strategic direction by positioning us to reach more
clients with an expanded service offering across the country, with a
particular focus on growth in Ontario.
Balanced growth through
enterprise risk management
Along with purposeful investment in technology and strategic refinement
of CWB’s lines of business, we also continue to develop CWB’s enterprise
risk management framework. At the Board level, we transitioned the
Directors’ Loans Committee into a Board Risk Committee. This has
enabled the Board to focus more of its energy on strategic issues that
are fundamental to CWB’s continued success while sustaining effective
oversight practices.
In 2016, this included working with management to determine the
appropriate level of capital to support CWB’s strong acquisition-related
and ongoing organic growth under the Standardized approach for
calculating risk weighted assets. Ultimately, we determined that issuances
of preferred and common shares were prudent, and we took these steps
in the second and third quarters, respectively.
We continued to contemplate CWB’s optimal capital structure in view of
the current and potential future regulatory framework. This year, CWB
established a formal program charter in support of its application for
transition to the Advanced Internal Ratings Based (AIRB) approach for
managing credit risk and calculating risk-weighted assets, including an
anticipated three-year time frame. Under the AIRB approach, CWB will
gain critical insight to enable management to more precisely calibrate
risk exposures within CWB’s growing portfolio and ensure those risks are
managed effectively as we achieve balanced and sustainable growth. Risk
measurement under the AIRB approach will also support effective capital
deployment to maximize shareholder return.
The AIRB transition will help to establish a more level competitive playing
field for CWB, and it’s important to note the core banking system
implementation represented a critical step in support of this objective. In
that way, CWB’s purposeful investment in technology and development of
its enterprise risk management framework will continue to go hand in hand.
The Board’s commitment to
governance best practices
At CWB, we have always placed significant value on strong board
governance and we continually assess the most appropriate manner of
incorporating best practices into our governance activities. I’m proud to
say that CWB has committed to The 30% Club, a global organization
which aims to promote more women to senior corporate roles. The
ultimate goal is to increase the proportion of women represented on
boards of directors to 30% over time. Women currently represent 29% of
CWB’s Executive Committee and 17% of the Board. In the coming year,
we plan to propose a new director for shareholder approval, and we are
working diligently to identify the most suitable candidate.
11
CWB Financial Group 2016 Annual ReportThank you from CWBIn March 2016, at CWB’s 32nd annual shareholders’ meeting, our previous Chairman, Allan Jackson, retired from the Board of Directors after 31 years of strong stewardship and unfailing commitment to CWB Financial Group, including five years as Chair. Allan first demonstrated his support as a founding shareholder and director of CWB’s predecessor institution in 1984. He consistently exemplified the highest standard of personal integrity, and played an important role in many major business decisions during his tenure. Mr. Jackson made invaluable contributions to this organization’s culture and success, and helped to create a strong footing upon which CWB will continue to grow. We are truly thankful for Mr. Jackson’s many years of dedication and service. In recognition of our gratitude, we have established an undergraduate scholarship in Mr. Jackson’s name at the Richard Ivey School of Business. Board of Directors
Board of Directors from left to right (October 31, 2016): Raymond J. Protti, Corporate Director; Andrew J. Bibby, CEO and Director, Grosvenor Americas Partners; Linda M.O. Hohol, Corporate
Director; H. Sanford Riley, President and CEO, Richardson Financial Group Limited; Albrecht W. A. Bellstedt, President, A.W.A. Bellstedt Professional Corporation; Chris H. Fowler, President and
CEO, Canadian Western Bank; Robert L. Phillips (Chair), President, R.L. Phillips Investments Inc.; Alan M. Rowe, Partner, Crown Realty Partners; Sarah A. Morgan-Silvester, Corporate Director;
Robert A. Manning, President, Cathton Investments Ltd.; Ian M. Reid, Corporate Director.
Corporate Governance
At CWB, we strive to earn and maintain the trust of our stakeholders
through high standards of corporate governance, and have embedded
rigorous oversight and governance practices into our business processes.
We work continuously to enhance and improve our governance practices
and the transparency of disclosure with the recognition that this
commitment directly contributes to the creation of long-term shareholder
value and the sound functioning of our organization.
Board Oversight
The Board of Directors (the Board) is responsible for the overall
stewardship of CWB, including approval and monitoring of CWB’s
overall strategy, review and approval of the risk management framework
and fostering a culture of ethical conduct and accountability. CWB’s
Management Proxy Circular for the 2017 Annual Meeting sets out the
director candidates proposed for election as well as detailed information
regarding the Board’s committees and activities during the past year.
Board Independence
Members of the Board have been carefully selected for their judgment,
integrity, leadership ability and general business expertise, as well as
their knowledge of financial services and/or key geographic markets
and businesses where CWB operates. All directors, other than CWB’s
President and CEO, are independent. All Board meetings include time for
the independent directors to meet without management present.
Ethical Conduct
At CWB, ethical conduct is not only a legal and regulatory requirement,
but a core value that facilitates the development of strong relationships
with clients and other stakeholders. The CWB Financial Group Code of
Conduct, called Living our Values, guides our decision-making and sets
the standards of integrity, honesty and accountability that CWB teams
and individuals are expected to follow. Every director and employee
commits to Living our Values each year by making an acknowledgment
that they have read, understood and complied with the Code of Conduct.
Compensation Programs
CWB’s director and executive compensation policies follow governance
best practices. Our compensation practices are designed to reward pay
for performance and discourage unreasonable risk taking. Directors
and senior officers are required to maintain a minimum level of share
ownership to encourage decision-making that aligns with the interests of
shareholders.
Shareholder Engagement
To encourage open dialogue with shareholders, the Board can be
contacted directly about corporate governance issues by emailing
ChairoftheBoard@cwbank.com. Detailed information about CWB’s
corporate governance practices is available in the Corporate Governance
section at cwb.com.
12
CWB Financial Group 2016 Annual Report Executive Committee
Chris Fowler
Carolyn Graham, FCPA, FCA
Kelly Blackett
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Chris Fowler became president and chief
executive officer of CWB in March 2013,
concurrent with his appointment as chair of
CWB’s Executive Committee and his election to
the Board of Directors.
Carolyn Graham plays a lead role in all financial
and regulatory matters, as well as strategic
planning and other initiatives. Her primary
responsibilities currently include finance,
treasury, capital management, investor
relations, internal audit, and legal services.
Executive Vice President, Human Resources and
Corporate Communications
Kelly Blackett is responsible for providing
executive leadership, vision and direction
regarding CWB’s overall approach to
Human Resources, including Learning and
Development. She is also responsible for
oversight of Corporate Communications.
Glen Eastwood
Darrell Jones
Stephen Murphy
Executive Vice President, Business Transformation
Executive Vice President and Chief Information Officer
Executive Vice President, Banking
Glen Eastwood is responsible for business
transformation activities that leverage our
people, technology and practices in the pursuit
of an excellent client experience. He is also
responsible for oversight of CWB Wealth
Management and Canadian Western Trust.
Darrell Jones is responsible for delivery of
technology and information across CWB.
He is also responsible for leading the facility
management function across the enterprise.
Stephen Murphy is responsible for all branch
operations, including business and personal
banking, product development, equipment
financing and corporate lending. He also
provides executive oversight for the business
operations of CWB Optimum Mortgage,
National Leasing, CWB Maxium Financial and
CWB Franchise Finance.
H. Bogie Ozdemir
Executive Vice President and Chief Risk Officer
Bogie Ozdemir is responsible for providing
leadership, vision and direction regarding
CWB’s overall approach to risk management
and compliance. In his role, he oversees credit
risk management, risk data aggregation
and analytics, group risk and regulatory
compliance.
13
CWB Financial Group 2016 Annual ReportKey RetirementsRandy Garvey, Executive Vice President, Corporate Services, and Greg Sprung, Executive Vice President, Banking, both retired from CWB’s Executive Committee on September 1, 2016. Both Randy and Greg made significant contributions during their time with CWB, and we would like to sincerely thank them, on behalf of the entire CWB Financial Group team, for their years of service.
Management’s Discussion and Analysis (MD&A)
TABLE OF CONTENTS
BUSINESS PROFILE AND STRATEGY 14
COMPREHENSIVE INCOME
VISION
FISCAL 2016 SIGNIFICANT EVENTS
FORWARD-LOOKING STATEMENTS
TAXABLE EQUIVALENT BASIS (TEB)
NON-IFRS MEASURES
CWB FINANCIAL GROUP
PERFORMANCE
OVERVIEW
NET INTEREST INCOME
NON-INTEREST INCOME
NON-INTEREST EXPENSES, EFFICIENCY
AND OPERATING LEVERAGE
ACQUISITION-RELATED FAIR VALUE
CHANGES
INCOME TAXES
RESULTS OF DISCONTINUED
15
15
16
16
16
18
18
23
24
26
28
28
CASH AND SECURITIES
LOANS
CREDIT QUALITY
DEPOSITS
30
30
31
35
38
CRITICAL ACCOUNTING ESTIMATES
50
CHANGES IN ACCOUNTING POLICIES
AND FINANCIAL STATEMENT
PRESENTATION
FUTURE CHANGES IN
OTHER ASSETS AND OTHER LIABILITIES 39
ACCOUNTING POLICIES
LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT
FINANCIAL INSTRUMENTS AND
OTHER INSTRUMENTS
ACQUISITIONS AND DIVESTITURES
OFF-BALANCE SHEET
40
42
45
46
46
RISK MANAGEMENT
RISK MANAGEMENT OVERVIEW
REPORT ON PRINCIPAL RISKS
CREDIT RISK
MARKET RISK
CAPITAL RISK
SUMMARY OF QUARTERLY
OPERATIONAL RISK
RESULTS AND FOURTH QUARTER 47
OTHER RISK FACTORS
QUARTERLY RESULTS
FOURTH QUARTER OF 2016
ACCOUNTING POLICIES
UPDATED SHARE INFORMATION
CONTROLS AND PROCEDURES
47
49
50
52
52
53
54
59
59
61
66
67
69
70
70
OPERATIONS
29
AND ESTIMATES
BUSINESS PROFILE AND STRATEGY
Canadian Western Bank (TSX:CWB) is the only Schedule 1 bank in
Canada specializing in mid-market commercial banking, real estate and
construction financing, and equipment financing and leasing. CWB,
along with its subsidiaries, National Leasing Group Inc. (National Leasing),
CWB Maxium Financial Inc. (CWB Maxium), Canadian Western Trust
Company (CWT), CWB Wealth Management Ltd. (CWB WM), Adroit
Investment Management Ltd. (Adroit), McLean & Partners Wealth
Management Ltd. (McLean & Partners) and Canadian Western Financial
Ltd. (CWF), are together known as CWB Financial Group (CWB).
Clients recognize CWB for our in-depth knowledge of targeted segments
within Canada’s commercial banking industry and our unique brand
of personal service. Shareholders value CWB’s strong track record of
high-quality, industry-leading growth, conservative approach to risk
management and consistent profitability. We define success as a well-
funded, well-capitalized mid-market commercial banking franchise
deserving of a premium price-to-earnings multiple based on strong
core operating performance and consistent growth of earnings and
profitability from current levels.
Our balanced growth strategy is based on delivery of responsive,
personalized service and sensible financial solutions. We remain
committed to our fundamental identity as a conservative, growth-
oriented organization, and we maintain a supportive environment for
employees within a results-oriented culture. Our focus is to empower
our people to deliver the highest level of client service, accelerate growth
of multi-product client relationships, and optimize our capital and risk
management processes. We aim to provide strong long-term returns for
shareholders and give back within the communities where we live and
work.
Our strategic objectives include strong, balanced growth of both loans
and funding sources, as well as progress toward a more balanced
geographic footprint with broader diversification across targeted
sectors of Canada’s commercial banking industry. These objectives are
14
complemented by specific goals related to risk and capital management,
and business transformation through targeted use of technology.
To complement our commercial banking focus, CWB’s full-service banking
strategy delivers a wide variety of personal financial products and
services, including personal loans and mortgages, deposit accounts and
investment products. Customer access to all banking services is primarily
provided through a network of 42 client-focused branches in select
locations across the four western provinces. Canadian Direct Financial®
(CDF) is CWB’s Internet-based division offering a range of deposit and
registered savings products directly to customers in all provinces and
territories except Quebec.
National Leasing specializes in small- and mid-sized commercial
equipment leases and is represented across all provinces of Canada.
CWB Maxium provides loans, leases and structured financing to clients
primarily in Ontario. CWB Franchise Finance is a specialty lending division
that provides loans and leases to hotel and restaurant franchises across
the country. CWB Optimum Mortgage (Optimum) underwrites and
administers residential mortgages sourced through an extensive network
of mortgage brokers located in Western Canada, Ontario and Atlantic
Canada. CWT provides trustee and custody services to independent
financial advisors, corporations, brokerage firms and individuals.
Comprehensive wealth advisory services are offered through CWB Wealth
Management. This includes discretionary wealth management primarily
for high net-worth individuals provided through Adroit and McLean &
Partners, as well as third-party mutual funds and the proprietary CWB
Core Funds and CWB Onyx Portfolio Series of mutual funds offered with
financial and investment planning advice through CWB’s branch network.
CWB Financial Group 2016 Annual Report
VISION
FISCAL 2016 SIGNIFICANT EVENTS
To be seen as crucial to our clients' futures.
Strategic Acquisitions
CWB is focused on becoming the trusted financial partner to a growing
base of clients. Our teams focus on key activities which contribute the
greatest impact toward the achievement of our vision to be seen as
crucial to our clients’ futures. We track both financial and non-financial
measures within four interdependent realms of activity (People, Support,
Clients, Financial) to monitor progress toward achievement of our
strategic objectives:
CWB
relationships
i
n
v
e
s
t
m
e
n
t
p
r
o
fi
t
a
b
e
l
g
r
o
w
t
h
People (P)
Invest in our people;
Live our values
Clients (C)
Be the trusted
financial partner
Support (S)
Balance risk and reward;
Drive operational efficiency;
Build funding sources
Financial (F)
Deliver profitable growth
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) and are presented
in Canadian dollars.
The following pages contain management’s discussion of the financial
performance of CWB and a summary of quarterly results. Additional
information relating to CWB, including the Annual Information Form, is
available on SEDAR at sedar.com and on CWB’s website at
cwb.com.
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 “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. On July 1,
2016, CWB acquired GE Capital’s Canadian Franchise Finance platform,
now “CWB Franchise Finance”. The business provides financing across
Canada to a diverse group of established companies in the franchised
hotel and restaurant industries.
These acquisitions are integral components of CWB’s balanced growth
strategy, and represent the strategic redeployment of divestiture gains
realized last year. With 70 − 80% of both portfolios based outside of
Western Canada and the majority of originations focused within the
general commercial sector, CWB Maxium and CWB Franchise Finance will
contribute to the targeted expansion of CWB’s geographic footprint and
further diversification of its asset mix. In combination, the acquisitions
were slightly accretive to adjusted cash earnings per share this year, with
accelerating contributions expected going forward. Details as to financial
consideration are disclosed within the Acquisitions and Divestitures
section of this MD&A.
Core Banking System Implementation
CWB’s earnings growth and business diversification are expected to
benefit from ongoing success in key strategic initiatives to broaden and
deepen multi-product client relationships and attract new clients. The
successful launch of CWB’s new core banking system on May 2, 2016, is
expected to facilitate these initiatives over the medium term and advance
efforts to build core funding sources, enhance product and service
offerings, and leverage current and future investment in technology. This
improved technology will enable CWB to benefit from a client-centric
view of branch-based relationships and achieve further operational
efficiencies. The new system will also support CWB’s application for
transition to the Advanced Internal Ratings Based (AIRB) methodology
for managing credit risk and calculating risk-weighted assets. A project
plan has been finalized in support of CWB’s application, including an
anticipated three-year time frame.
Oil and Gas-related Provisions for Credit Losses
Credit quality as measured by the provision for credit losses outside
of CWB’s small portfolio of oil and gas loans was consistent with
management’s expectations. This reflected CWB’s secured lending
business model, disciplined underwriting practices and proactive loan
management. However, significantly higher provisioning within the
oil and gas loans portfolio 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. In view of these factors, management took a
proactive approach to resolve positions within this portfolio and recorded
cumulative provisions for credit losses on oil and gas production loans
of $41.6 million. Prior to reporting second quarter financial results,
management announced revised expectations for the annual provision for
credit losses of 35 – 45 basis points, compared with previous expectations
of 18 – 23 basis points. The realized annual provision for credit losses of
38 basis points was consistent with these revised expectations, with the
increase from 17 basis points last year entirely attributed to the credit
performance of oil and gas loans.
CWB Financial Group 2016 Annual Report
15
FORWARD-LOOKING STATEMENTS
TAXABLE EQUIVALENT BASIS (TEB)
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 this 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, management 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.
16
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 statements 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 fiscal
2016 adjustment to taxable equivalent basis from Continuing Operations
of $3.2 million (2015 – $5.6 million) 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
banks. Total revenues, net interest income and income taxes are discussed
on a taxable equivalent basis throughout this MD&A.
NON-IFRS MEASURES
Taxable equivalent basis, adjusted cash earnings per common share,
pre-tax, pre-provision income, 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, operating leverage, common share dividend
payout ratio and average balances do not have standardized meanings
prescribed by IFRS and therefore may not be comparable to similar
measures presented by other financial institutions. The non-IFRS measures
used in this MD&A are calculated as follows:
• Taxable equivalent basis – described above.
• Pre-tax, pre-provision income – total revenue (teb) less non-interest
expenses, excluding the pre-tax amortization of acquisition-related
intangible assets (see calculation on page 17).
• 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 on page 17). Excluded items are not considered
to be indicative of ongoing business performance.
• Return on common shareholders’ equity – common shareholders’ net
income divided by average common shareholders’ equity.
• Adjusted return on common shareholders’ equity – common
shareholders’ net income excluding the acquisition-related
amortization of intangible assets and contingent consideration fair
value changes, net of tax (see calculation on page 17), divided by
average common shareholders’ equity.
• Return on assets – 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 on
page 17), 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.
• Operating leverage – total revenue (teb) growth less growth of non-
interest expenses, excluding the pre-tax amortization of acquisition-
related intangible assets.
• Net interest margin – net interest income divided by average total
assets.
• Basel III common equity Tier 1, Tier 1 and total capital ratios under
the Standardized approach for calculating risk-weighted assets – in
accordance with guidelines issued by the Office of the Superintendent
of Financial Institutions Canada (OSFI).
• Common share dividend payout ratio − common share dividends
declared during the year divided by common shareholders’ net income.
• Average balances – average daily balances.
CWB Financial Group 2016 Annual Report Table 1 - Adjusted Financial Measures (Continuing Operations)(1)
($ thousands)
Non-interest expenses
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets
Adjusted non-interest expenses
2016
2015
$
313,647
$
293,489
(6,354)
(4,548)
$
307,293
$
288,941
Common shareholders' net income from Continuing Operations
$
177,761
$
208,064
Adjustments (after-tax):
Amortization of acquisition-related intangible assets
Acquisition-related fair value changes
Adjusted common shareholders' net income
Table 2 - Adjusted Financial Measures (Combined Operations)(1)
($ thousands)
Non-interest expenses
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets
Adjusted non-interest expenses
4,682
5,775
3,006
638
$
188,218
$
211,708
2016
2015
$
313,647
$
304,593
(6,354)
(4,548)
$
307,293
$
300,045
Common shareholders' net income from Combined Operations
$
177,761
$
319,701
Adjustments (after-tax):
Amortization of acquisition-related intangible assets
Contingent consideration fair value changes
Adjusted common shareholders' net income
Table 3 - Pre-tax, Pre-provision (PPTP) Income (Continuing Operations)(1)
($ thousands)
Total revenue (teb)
Less:
Adjusted non-interest expenses (see above)
Pre-tax, pre-provision income
(1) See footnote 2 on page 19.
4,682
5,775
3,006
638
$
188,218
$
323,345
2016
2015
$
661,136
$
617,000
307,293
288,941
$
353,843
$
328,059
CWB Financial Group 2016 Annual Report
17
CWB FINANCIAL GROUP PERFORMANCE
OVERVIEW
Highlights of 2016 for Continuing Operations (compared to 2015)
• Completed the acquisitions now known as CWB Maxium Financial
and 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, a key
technology investment which is expected to facilitate business
process improvements that will empower CWB teams to deliver
the highest level of client service, accelerate growth of multi-
product client relationships, and optimize CWB’s capital and risk
management processes.
• Opened CWB’s 42nd full-service branch through expansion of
operations in Lloydminster, Saskatchewan.
• Very strong, well-diversified loan growth of 13%, marking the
achievement of double-digit annual loan growth for the 26th time
in 27 years.
• Very strong branch-raised deposit growth of 12%, including 15%
growth of targeted notice and demand deposits.
• Strong core operating performance, with pre-tax, pre-provision
income of $353.8 million, up 8%, and positive operating leverage.
• Common shareholders’ net income of $177.8 million, down 15%.
• Diluted earnings per common share of $2.13, down 18%, and
adjusted cash earnings per common share of $2.26, down 14%.
• Earnings growth constrained by credit performance of oil and gas
loans and continued net interest margin pressure.
• Provision for credit losses as a percentage of average loans of
38 basis points, up from 17 basis points due to losses related
to oil and gas loans. The full year provision was within CWB’s
expectation of 35 – 45 basis points, revised from 18 – 23 basis
points prior to CWB reporting second quarter financial results.
Excluding oil and gas-related credit losses, the annual provision
was 18 basis points of average loans. Gross impaired loans
represented 0.58% of total loans, up from 0.49%, primarily due
to increased impairments within Alberta.
• Net interest margin (teb) of 2.43%, down 13 basis points. The
change primarily reflects lower asset yields, partly due to the
impact of the Bank of Canada’s 2015 rate cuts, partially offset by
the positive impact of these rate cuts on some deposit costs and
favourable changes in deposit mix.
• Strengthened capital position through issuance of $150 million
of common shares and $140 million of preferred shares,
contributing to very strong Basel III regulatory capital ratios under
the Standardized approach for calculating risk-weighted assets
of 9.2% common equity Tier 1 (CET1), 11.0% Tier 1 and 13.1%
total capital.
18
CWB Financial Group 2016 Annual Report Table 4 - Select Annual Financial Information(1)
($ thousands, except per share amounts)
Key Performance Indicators (Continuing Operations)(2)
Total revenues (teb)
Total revenues
Pre-tax, pre-provision income (teb)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash
2016
2015
2014
$
%
Change from 2015
$
661,136
$ 617,000
$
590,343
$ 44,136
657,896
611,420
353,843
328,059
177,761
208,064
583,600
325,720
205,288
46,476
25,784
(30,303)
2.13
2.13
2.26
2.59
2.59
2.63
2.57
2.54
2.59
(0.46)
(0.46)
(0.37)
7%
8
8
(15)
(18)
(18)
(14)
Return on common shareholders' equity
9.3 %
12.4%
13.9 %
(310) bp(3)
Adjusted return on common shareholders' equity
Return on assets
Efficiency ratio (teb)(4)
Efficiency ratio(4)
Net interest margin (teb)
Net interest margin
Operating leverage
Provision for credit losses as a percentage of average loans
Key Performance Indicators (Combined Operations)(2)
9.9
0.73
46.5
46.7
2.43
2.41
1
0.38
12.6
0.97
46.8
47.3
2.56
2.53
(5)
0.17
14.2
1.05
44.8
45.4
2.59
2.56
-
0.15
(270)
(24)
(30)
(60)
(13)
(12)
600
21
Common shareholders' net income
$
177,761
$ 319,701
$
218,549
$ (141,940)
(44)%
Earnings per share
Basic
Diluted
Adjusted cash
2.13
2.13
2.26
3.97
3.97
4.01
Return on common shareholders' equity
9.3 %
19.1%
Adjusted return on common shareholders' equity
Return on assets
9.9
0.73
19.3
1.48
(1.84)
(1.84)
(1.75)
2.73
2.70
2.76
14.8 %
15.1
1.10
(46)
(46)
(44)
(980) bp(3)
(940)
(75)
Key Performance Indicators (Discontinued Operations)(2)
Common shareholders' net income
$
Earnings per common share
Basic
Diluted
Adjusted cash
-
-
-
-
$ 111,637
$
13,261
$ (111,637)
(100)%
1.38
1.38
1.38
0.16
0.16
0.17
(1.38)
(1.38)
(1.38)
Other Financial Information (Combined Operations)(2)
Total assets
Dividends per common share
$ 25,222,549
$ 22,838,527
$ 20,635,046
$ 2,384,022
0.92
0.86
0.78
0.06
(1) See page 16 for a discussion of teb and non-IFRS measures.
(2) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB’s stock transfer business as described in Note 3 of the annual consolidated financial statements. Revenues, expenses and gains on sale associated with
the businesses sold are defined and classified on the consolidated statements of income for prior periods as “Discontinued Operations”. The remaining operations are defined as “Continuing Operations”, and the total Continuing
Operations and Discontinued Operations are defined as “Combined Operations”. Total revenues from Combined Operations in 2015 include $107.8 million of divestiture gains. Return on shareholders’ equity reflects equity from
Combined Operations. All other measures reflect either Continuing or Combined Operations as indicated.
(3) bp – basis points.
(4) A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
CWB Financial Group 2016 Annual Report
19
(100)
(100)
(100)
10%
7
11.0% and 13.1%, respectively, were above both internal and regulatory
minimums. OSFI’s minimum Basel III regulatory capital ratios for CWB,
which include a 250 basis point capital conservation buffer, are 7.0%
CET1, 8.5% Tier 1 and 10.5% total capital. The increase in CWB’s CET1
capital ratio from last year mainly reflects the issuance of $150 million of
common shares. Higher Tier 1 and Total capital ratios compared to last
year reflect the issuance of $140 million of non-cumulative 5-year rate
reset First Preferred Shares Series 7 (Non-Viability Contingent Capital),
partially offset within Total capital by the redemption of $300 million of
subordinated debentures.
Summary of Combined Operations
Common shareholders’ net income of $177.8 million was down from
$319.7 million in 2015. Diluted earnings per share of $2.13 compared to
$3.97, and adjusted cash earnings per common share of $2.26 decreased
from $4.01. Excluding the impact of $107.8 million of divestiture gains
and six months of operating contributions from divested businesses last
year, the changes in common shareholders’ net income and earnings
per share reflect the factors discussed within the overview of Continuing
Operations above. Adjusted ROE for the year of 9.9% was down from
19.3% last year when divestiture gains were realized.
Summary of Continuing Operations
CWB’s core operating performance was strong based on achievement of
record total revenues and 8% growth of pre-tax, pre-provision income to
$353.8 million. However, common shareholders’ net income of $177.8
million was 15% lower. Growth of 7% in net interest income (teb) was
driven by very strong 13% loan growth, partially offset by the impact of
a 13 basis point reduction in net interest margin (teb) to 2.43%. Of note,
2016 marked the 26th time in 27 years CWB has achieved double-digit
loan growth. Loan growth within British Columbia (BC) and Ontario
accounted for more than 90% of the increase from 2015. The balance
of outstanding loans in Alberta was relatively unchanged compared
to last year. Very strong overall loan growth in view of the challenging
operating environment in the oil-producing provinces demonstrates the
benefit of CWB’s balanced growth strategy, which includes strategic
objectives to achieve a more balanced geographic footprint and broader
diversification within targeted sectors of Canada’s commercial banking
industry. Non-interest income was also 7% higher, mainly due to growth
of credit related fees, lower net losses on securities and increased trust
services revenue. These positive factors were more than offset by an
increase in the annual provision for credit losses to 38 basis points as a
percentage of average loans, compared to 17 basis points last year, and
a 7% increase in non-interest expenses. Although credit quality outside
of CWB’s portfolio of oil and gas loans remained stable, higher provisions
for credit losses resulted from losses recorded against oil and gas loans.
The increase in non-interest expenses primarily reflects higher salaries and
benefits, including the impact of acquisition-related increases in staffing,
as well as the addition of amortization and sustainment costs related to
the new core banking system and increased premises and other expenses
to facilitate business growth. Further constraining growth of common
shareholders’ net income, acquisition-related fair value changes were
$7.9 million, compared to $0.6 million last year, and preferred share
dividends of $10.6 million were up from $5.5 million. Diluted earnings
per common share of $2.13 were down 18%, and adjusted cash
earnings per common share of $2.26 were down 14%, reflecting the
factors described above and the issuance of common shares.
Adjusted return on common shareholders’ equity (ROE) of 9.9%
was down from 12.6% in 2015, reflecting both lower earnings, the
issuance of common shares and the impact of divestiture gains on
total shareholders’ equity prior to re-deployment through acquisition.
Total cash dividends paid to common shareholders of $0.92 per share
increased 7% from $0.86 per share paid in the prior year, and resulted in
a 2016 dividend payout ratio of 43% of total common shareholders’ net
income.
Total assets increased 10% to reach $25,223 million. Loan growth of
13% was very strong, and deposits grew 9%, to reach $21,961 million
and $21,195 million, respectively. Total branch-raised deposits increased
12%, while the demand and notice component within branch-raised
deposits was up 15%. Strong growth in branch-raised deposits, including
the demand and notice component, reflects the success of ongoing
strategies to further enhance and diversify core funding sources. Total
branch-raised deposits represented 55% of total deposits at October 31,
2016, up from 54% a year earlier. The demand and notice component
comprised 36% of total deposits, up from 35% last year. The balance
of deposits raised through the capital markets represented 9% of total
funding, compared to 10% at October 31, 2015, while the proportion
of total funding represented by personal fixed rate term deposits raised
through the deposit broker network was unchanged at 36%. The ratio
of total deposits to total loans at October 31, 2016 was effectively 1:1,
relatively unchanged from a year earlier.
The maintenance of solid capital levels is fundamental to CWB’s
objectives to effectively manage risks and support strong growth. CWB’s
Basel III CET1, Tier 1 and total capital ratios at October 31, 2016 of 9.2%,
20
CWB Financial Group 2016 Annual Report
Medium-term Performance Target Ranges
CWB’s medium-term performance target ranges are unchanged from
last year. Targets reflect key areas of shareholder value, 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)
Adjusted return on common
shareholders’ equity(2)
Operating leverage(3)
Common equity Tier 1 capital ratio under the
Standardized approach(4)
Common share dividend payout ratio(5)
7 - 12%
12 - 15%
Earnings and profitability for 2016 reflect the credit performance of CWB’s oil
and gas loans, lower net interest margin and the issuance of common shares.
Positive
Fiscal 2016 operating leverage was positive 1%.
Strong
Q4 2016 ratio of 9.2% is very strong.
~30%
Fiscal 2016 ratio of 43% includes the impact of credit performance of oil
and gas loans and the issuance of common shares.
(1) 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. Performance for adjusted cash earnings per common share is the current year results over the prior year results.
(2) Adjusted return on common shareholders’ equity is calculated as 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.
(3) Operating leverage is calculated as total revenue (teb) growth, less growth of non-interest expenses excluding the pre-tax amortization of acquisition-related intangible assets.
(4) Common equity Tier 1 capital ratio is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) using the Standardized approach for credit risk.
(5) Common share dividend payout ratio is calculated as common share dividends declared during the year divided by common shareholders’ net income.
Medium-term performance target ranges are based on expectations
for moderate economic growth and a relatively stable interest rate
environment in Canada over the three- to five-year forecast horizon.
Achievement of overall financial results within these target ranges
will be largely driven by CWB’s commitment to continue to deliver
ongoing strong loan growth at levels relatively consistent with recent
performance, further optimization of CWB’s funding mix, strong
credit quality, effective expense management in consideration of
revenue growth opportunities and prudent capital management.
Outlook for Continuing Operations
Financial performance over a three- to five-year time frame is
expected to be consistent with CWB’s medium-term targets, and
to benefit from an expanding geographic footprint with increased
business diversification. Ongoing success in key strategic initiatives
to enhance client offerings, build core funding sources, and leverage
current and future investment in technology is also expected to
support strong financial performance over the medium-term.
Management expects earnings growth and profitability to fall below
medium-term target ranges in fiscal 2017. This reflects expectations
for ongoing pressure on net interest margin, incremental increases in
CWB’s expense base, mainly related to implementation of the new
core banking system, a higher share count following the issuance
of common shares in 2016, as well as the impact of the current
recession in Alberta and Saskatchewan on loan growth and credit
quality within those provinces.
Management expects CWB’s earnings growth and business
diversification to benefit from expansion of existing client
relationships and the attraction of new clients. Successful
implementation of the new core banking system is expected to
facilitate initiatives in support of these objectives over the medium
term. This improved technology will enable CWB to benefit from
a client-centric view of branch-based relationships and achieve
further operational efficiencies. The new system will also support
CWB’s application for transition to the Advanced Internal Ratings
Based (AIRB) methodology for managing credit risk and calculating
risk-weighted assets. A project plan has been finalized in support of
CWB’s application, including an anticipated three-year time frame.
Strong Loan and Deposit Growth with Strategic
Diversification
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 CWB’s strategic direction. CWB will continue to
focus on prudent growth of secured loans that offer an appropriate
return and acceptable risk profile. Loan growth within Alberta and
Saskatchewan is expected to remain challenging due to the impact
of the current recession.
However, management expects to deliver solid overall loan growth
at levels relatively consistent with recent performance, primarily
based on higher relative contributions from non-oil producing
provinces across CWB’s growing geographic footprint. A key strategic
objective, supported by CWB’s investment in the new core banking
system, is to increase the level of branch-raised deposits as this core
source of funding is typically lower cost than non-branch-raised
funding. Branch-raised deposit products, including business savings,
cash management and bare trustee accounts, also represent tools
which help clients conveniently manage their business and personal
finances, and management considers growth within this category
to demonstrate success in strengthening key, multi-product client
relationships.
CWB Financial Group 2016 Annual Report
21
investment to facilitate ongoing implementation of CWB’s strategic
direction, 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. Management is committed to disciplined control of all
discretionary expenses, and positive operating leverage is expected
over the medium term.
Prudent Capital Management and Dividends
With a very strong capital position under the more conservative
Standardized approach for calculating risk-weighted assets and
a targeted dividend payout ratio of approximately 30%, CWB is
well-positioned to continue to execute against our balanced growth
strategy, strengthen shareholder returns and ensure resilience and
flexibility through the maintenance of strong regulatory capital ratios.
Ongoing support and development of each of CWB’s core businesses
will remain a key priority, while potential strategic acquisitions will
continue to be evaluated.
At October 31, 2016, CWB’s capital ratios were 9.2% CET1, 11.0%
Tier 1 and 13.1% total capital. Changes in CWB’s capital ratios
from last year mainly reflect an increase of approximately 70 basis
points related to the issuance of $150 million of common shares on
July 7, 2016. Higher Tier 1 and Total capital ratios compared to last
year also reflect 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.
Redemption of $105 million of CWB Capital Trust Securities Series 1
(the “WesTS”) on December 31, 2016 is expected to reduce CWB’s
Tier 1 and Total capital ratios by approximately 50 basis points.
Common share dividend increases are evaluated every quarter
against the dividend payout ratio target of approximately 30%.
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.
Further guidance related to management’s expectations for specific
measures of financial performance, as well as related risk factors, is
provided within the Outlook sections of this MD&A.
Net Interest Margin
CWB expects efforts to optimize the overall cost of funds through
targeted growth of lower-cost funding sources, along with selective,
geographically diversified growth in higher yielding loan portfolios
with an acceptable risk profile to mitigate the earnings impact of
ongoing margin pressure over the medium term. However, in the
near term, management expects these efforts to only partially offset
the impacts of ongoing very low interest rates, competitive influences
and a flat interest rate curve. As such, net interest margin pressure is
expected to persist in 2017.
Credit Quality
Overall credit quality is expected to reflect CWB’s secured lending
business model, disciplined underwriting practices and proactive loan
management. Gross impaired loans within Alberta have increased in
most portfolios compared to last year as the operating environment
has remained particularly challenging due to the current recession.
CWB continues to work with affected clients, and management will
continue to monitor the entire loan portfolio for signs of weakness
resulting from the first and second order impacts of lower oil prices.
CWB will also continue to closely observe 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 CWB
expects periodic increases in the balance of impaired loans across
the portfolio, loss rates on impaired loans outside of oil and gas
production lending are expected to be consistent with CWB’s prior
experience, where write-offs have been low as a percentage of
impaired loans. The 2017 provision for credit losses as a percentage
of average loans is expected to fall below the unusual level of 38
basis points experienced in 2016, within a range between 25 and 35
basis points.
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
is confident CWB will continue to deliver positive earnings for
shareholders while maintaining financial stability and a strong capital
position. Stress test assumptions include severe credit losses, a
persistent low interest rate environment and significantly slower loan
growth to reflect lower assumed levels of economic activity, as well
as increased competition for deposits and much higher levels of gross
impaired loans that could combine to result in significant compression
of net interest margin.
Efficient Operations and Operating Leverage
A key priority for CWB is to deliver consistent increases in adjusted
cash earnings per share through business growth and strategic in-
vestment while maintaining effective control of costs. CWB’s ongoing
investment in people, technology and infrastructure is expected to
contribute to long-term shareholder value through improved financial
performance in future periods. In view of the level of necessary future
Unless otherwise noted, the remainder of this MD&A refers to financial performance from, and the outlook for, Continuing Operations.
22
CWB Financial Group 2016 Annual Report NET INTEREST INCOME
Net interest income is the difference between interest and dividends earned on assets, and interest paid on deposits and other liabilities, including debt.
Net interest margin is net interest income as a percentage of average total assets.
Highlights of 2016
• Net interest income (teb) increased 7% to a record $588.5 million
primarily based on very strong 13% loan growth.
• Net interest margin (teb) of 2.43% was down 13 basis points as
the combined benefits of reduced deposit costs, lower average
balances of cash and securities as a percentage of total assets, and
beneficial changes in deposit mix were more than offset by lower
asset yields. Of note, loan yields remained under pressure due to
both the low interest rate environment and competitive factors.
Table 5 - Net Interest Income (teb)(1)
($ thousands)
2016
2015
Average
Balance
Mix
Interest
Interest
Rate
Average
Balance
Mix
Interest
Interest
Rate
Assets
Cash, securities and deposits with
regulated financial institutions
$ 2,719,327
11 % $
36,352
1.34 % $ 2,597,920
12 % $
48,142
1.85 %
Securities purchased under
resale agreements
131,891
1
620
0.47
46,359
-
341
0.74
Loans
Personal
Business
Total interest bearing assets
Other assets
Total Assets
Liabilities
Deposits
Personal
3,659,510
17,264,663
20,924,173
23,775,391
424,060
15
71
86
98
2
141,277
786,980
928,257
965,229
-
3.86
4.56
4.44
4.06
0.00
3,027,366
15,470,444
18,497,810
21,142,089
339,097
14
72
86
98
2
119,358
736,009
855,367
903,850
-
3.94
4.76
4.62
4.28
0.00
$ 24,199,451
100 % $
965,229
3.99 % $ 21,481,186
100 % $
903,850
4.21 %
$ 12,489,741
52 % $
231,429
1.85 % $ 10,614,819
50 % $
205,776
1.94 %
Business and government
Other liabilities
Debt
Shareholders' equity
Non-controlling interests
7,955,410
20,445,151
419,883
1,226,192
2,107,633
592
33
85
2
5
8
-
114,895
346,324
174
30,267
-
-
1.46
1.70
0.04
2.47
0.00
0.00
7,579,692
18,194,511
332,050
1,150,251
1,803,047
1,327
35
85
2
5
8
-
110,774
316,550
288
37,960
-
-
Total Liabilities and Equity
$ 24,199,451
100 % $
376,765
1.56 % $ 21,481,186
100 % $
354,798
Total Assets/Net Interest Income $ 24,199,451
$
588,464
2.43 % $ 21,481,186
$
549,052
1.46
1.74
0.09
3.30
0.00
0.00
1.65 %
2.56 %
(1) See page 16 for a discussion of teb and other non-IFRS measures.
Net interest income (teb) increased 7% to reach a record $588.5 million
driven by 12% growth in average interest-earning assets. The impact of
strong 13% loan growth was partially offset by a 13 basis point reduction
in net interest margin (teb) to 2.43%.
The yield on CWB’s average loans fell by 18 basis points in 2016, and the
yield on average cash, securities and deposits with regulated financial
institutions was down 51 basis points. The latter change reflects both the
lower interest rate environment and an increase in the proportion of cash
and debt securities held compared to higher yielding preferred shares and
common equities. CWB has liquidated its holdings of common equities
and has no plans to re-establish this portfolio.
Through strong growth of branch-raised deposits, including 15% growth
of targeted notice and demand deposits, CWB realized beneficial changes
in deposit mix. However, average deposit costs fell only four basis points
compared to the 18 basis point decline in loan yields mentioned above.
CWB Financial Group 2016 Annual Report
23
Outlook for Net Interest Income and Net Interest Margin
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. Loan growth will continue to have
a positive influence on net interest income, but the combination
of the persistent very low interest rate environment, ongoing
competition for both loans and deposits, and a relatively flat yield
curve is expected to result in further pressure on net interest margin
compared to the 2.43% level realized in 2016. Management
expects to sustain positive momentum toward beneficial changes
in deposit mix through strong growth in preferred types of branch-
raised deposits and ongoing development of new funding channels;
however, the current interest rate environment diminishes the
incremental benefit of low and no-cost deposits, as well as deposits
that are less interest sensitive. A sustained upward slope in the
interest rate curve, and/or an increase in the prime lending interest
rate would benefit CWB’s net interest margin. CWB’s projections
for 2017 assume no change in the prime rate. Competitive factors,
particularly in certain business areas, are expected to result in
continued downward pressure on loan pricing and upward pressure
on overall deposit costs. Changes in average balances of cash and
securities also have an impact on net interest margin, with lower
average balances generally enhancing margin, and higher average
balances having the opposite effect. Consistent with its liquidity risk
appetite, CWB expects to maintain average balances of cash and
securities at prudent levels, relatively consistent with 2016.
NON-INTEREST INCOME
Highlights of 2016
• Non-interest income of $72.7 million, up 7%.
• Non-interest income represented 11% of total revenues (teb),
• Strong growth in credit related income and lower net losses on
unchanged from 2015.
securities.
Table 6 - Non-interest Income
($ thousands)
Credit related
Wealth management
Retail services
Trust services
Losses on securities, net
Other(1)
Total Non-interest Income
Change from 2015
2016
2015
$
$
30,598
$
27,855
$
2,743
14,021
13,617
11,522
(2,830)
5,744
14,448
13,697
10,816
(4,324)
5,456
(427)
(80)
706
1,494
288
$
72,672
$
67,948
$
4,724
%
10%
(3)
(1)
7
(35)
5
7%
(1) Includes gains on loan portfolio sales, lease administration services, foreign exchange gains/losses, gains/losses on land, buildings and equipment disposals, and other miscellaneous non-interest revenues.
Non-interest income of $72.7 million was up 7% as the combined benefit
of strong growth in credit related income, lower net losses on securities
and higher trust services revenues more than offset slight decreases
in wealth management income and fees for retail services. Growth in
credit related income was consistent with strong lending activity. While
market conditions remained persistently challenging in 2016, lower net
losses on securities compared to last year reflect reduced equity market
exposure following liquidation of CWB’s holdings of common equities
and improved market conditions within the Canadian preferred share
market this year. Management has no plans to re-establish the portfolio
of common equities. ‘Other’ non-interest income mainly reflects gains on
the sale of residential mortgages.
Non-interest income as a percentage of total revenues (net interest
income (teb) and non-interest income) was 11%, unchanged from 2015.
24
CWB Financial Group 2016 Annual Report
Outlook for Non-interest Income
Growth of non-interest income is expected to reflect the extension
and deepening of CWB’s relationships with both new and existing
clients. Increases are expected across most categories of non-interest
income reflecting CWB’s continued focus on strong, high quality loan
growth with associated fee income, as well as enhanced transactional
capabilities in cash management and other retail services, including
CWB’s branch-raised deposit franchise.
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 are not expected to contribute materially to non-interest
income in 2017; however, the magnitude and timing of gains or
losses are dependent on market factors that are difficult to predict.
Continued solid growth is expected from Trust Services, resulting
from ongoing business development. Management expects further
increases in wealth management revenues to result from solid
performance within CWB Wealth Management, including organic
growth at McLean & Partners and Adroit, as well as the introduction
of discretionary investment services to more CWB banking clients.
Further development of CWB’s regional wealth management
specialist channel is expected to improve CWB Wealth Management’s
ability to attract new clients through enhanced delivery of value-
added financial and investment planning services. CWB’s branch-
based mutual fund dealer, CWF, is expected to perform well within
this segment. Management expects CWF to leverage the introduction
of proprietary CWB Core Funds and Onyx Portfolio Series mutual
funds within CWB’s branch network in support of further growth in,
and profitability of, assets under management.
CWB maintains its long-term objective to diversify total revenues
and will continue with initiatives to further develop and/or acquire
additional sources of complementary non-interest income.
CWB Financial Group 2016 Annual Report
25
NON-INTEREST EXPENSES, EFFICIENCY AND OPERATING LEVERAGE
Highlights of 2016
• The efficiency ratio (teb) of 46.5% improved 30 basis points
• Operating leverage was positive 1%.
compared to 2015, primarily reflecting the benefit of total revenue
growth and disciplined control of non-interest expenses.
Table 7 - Non-interest Expenses and Efficiency Ratio
($ thousands)
Salaries and Employee Benefits
Salaries
Employee benefits
Premises
Rent
Depreciation
Other
Equipment and Software
Depreciation
Other
General
Professional fees and services
Marketing and business development
Amortization of acquisition-related intangible assets
Regulatory costs
Banking charges
Postage and stationery
Travel
Loan-related credit reports
Community investment
Communications
Employee training
Capital and business taxes
Staff relations
General insurance
Parking
Acquisition-related
Employee recruitment
Other
2016
2015
$
Change from 2015
$
171,332
$
160,352
$
10,980
33,571
204,903
30,937
191,289
19,688
5,277
3,314
28,279
12,950
11,310
24,260
8,234
6,939
6,354
6,281
5,429
2,898
2,832
2,431
2,281
1,717
1,303
1,284
1,279
1,036
908
695
641
18,434
6,293
3,130
27,857
9,362
10,259
19,621
8,731
7,880
4,548
4,748
4,987
2,756
2,668
2,525
2,224
1,810
1,894
1,195
1,606
919
897
340
802
3,663
56,205
4,192
54,722
2,634
13,614
1,254
(1,016)
184
422
3,588
1,051
4,639
(497)
(941)
1,806
1,533
442
142
164
(94)
57
(93)
(591)
89
(327)
117
11
355
(161)
(529)
1,483
Total Non-interest Expenses
$
313,647
$
293,489
$
20,158
Efficiency Ratio (teb)(1)(2)
46.5%
46.8%
(1) See page 16 for a discussion of non-IFRS measures.
(2) A decrease in this ratio reflects improved efficiency, while an increase reflects deterioration.
(3) bp – basis points.
26
%
7%
9
7
7
(16)
6
2
38
10
24
(6)
(12)
40
32
9
5
6
(4)
3
(5)
(31)
7
(20)
13
1
104
(20)
(13)
3
7%
(30) bp(3)
CWB Financial Group 2016 Annual Report
Total non-interest expenses of $313.6 million were up 7%. The 7%
increase in salary and benefit costs reflects the combined impact of
acquisition-related increases in staffing, hiring activity in support of
business growth and annual salary increments. CWB Maxium accounted
for approximately 30% of the total increase in non-interest expenses.
The net increase in full-time equivalent employees (FTEs) was modest
at only 2% (38 FTEs) as the addition of more than 50 FTEs through
acquisition was partially offset by the release of contract staff related
to the core banking system project. Premises expense was relatively
stable, up only 2% including depreciation. Ongoing investment in
technology infrastructure necessary to position CWB for future growth
also contributed to the increase in non-interest expenses. Equipment
expenses increased 24%, including depreciation, primarily reflecting
implementation of CWB’s new core banking system.
Figure 1 – Number of Full-time Equivalent Staff
Combined amortization and sustainment costs related to the new core
banking system after implementation accounted for approximately 15%
of the total increase in non-interest expenses. Growth of general non-
interest expenses was also moderate at 3%. Amortization of acquisition-
related intangible assets was $1.8 million higher due to the acquisition
of CWB Maxium, and regulatory costs increased $1.5 million. Disciplined
management of discretionary expenses partially offset these factors and
small increases in other categories.
The efficiency ratio (teb) of 46.5% improved 30 basis points compared
to 2015, primarily reflecting the benefit of total revenue growth despite
persistent net interest margin pressure and disciplined control of non-
interest expenses. Operating leverage for the year was positive 1%.
2,037*
(+8%)
1,715
(+8%)
2,094*
(+3%)
1,788
(+4%)
1,885*
(+5%)
1,583
(+6%)
1,928
(+8%)
1,966
(+2%)
Continuing Operations
Discontinued Operations
*
Combined Operations
2012
2013
2014
2015
2016
CWB Financial Group 2016 Annual Report
27
Outlook for Non-interest Expenses, Efficiency and Operating Leverage
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.
The major program to implement a new core banking system
culminated with implementation of the system in the third quarter.
The core banking and other technology investments are expected to
provide considerable efficiencies in the future, including improved
client relationship management capabilities and enhanced data
management. While the beneficial impact of these efficiencies
on CWB’s cost structure and revenues will be realized over time,
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 compared to pre-
implementation levels.
Certain technology investments, including the new core banking
system, are also key requirements to facilitate an eventual transition
to the AIRB methodology for managing credit risk and calculating
risk-weighted assets.
CWB opened its 42nd full-service branch through expansion
of operations in Lloydminster, Saskatchewan during the third
quarter. Additional opportunities to upgrade and expand branch
infrastructure continue to be reviewed.
Compliance with an increasing level of regulatory rules and oversight
for all Canadian banks requires the investment of both time and
resources.
Anticipated growth in total revenues (teb) should largely offset the
impact of increased investment necessary for effective execution of
CWB’s balanced growth strategy over the medium term. However,
in consideration of expense growth related to newly acquired
businesses, ongoing investment in growth initiatives, including
those discussed above, and expectations for constrained net interest
margin in the absence of increases in the prime lending interest rate
and/or sustained steepening of the yield curve, periods of negative
operating leverage may occur over the short term. Management
remains committed to disciplined management of all discretionary
expenses based on total revenue growth, and has targeted positive
operating leverage over a medium-term, three- to five-year time
horizon.
ACQUISITION-RELATED FAIR VALUE CHANGES
The tax deductible change in the estimated fair value of contingent
consideration since the acquisition of CWB Maxium was $7.9 million.
The change in fair value reflects the expected value of the contingent
consideration after evaluating actual earnings to date and the estimated
probability-weighted future operating performance of this newly acquired
business. Quarterly fair value changes similar in magnitude through
the remainder of the three-year earn out period would approximate an
amount near the maximum available through the purchase agreement.
INCOME TAXES
The 2016 effective income tax rate (teb) was 27.3% compared to
26.3% in 2015 while the effective tax rate before the teb adjustment
was 26.4% compared to 24.9% last year. The 20% increase in Alberta’s
provincial corporate income tax rate, from 10% to 12%, effective July
1, 2015, reduced CWB’s common shareholders’ net income in 2016
by approximately 1.4% ($3.6 million). The tax increase did not have a
material impact on common shareholders’ net income in fiscal 2015, as
the increase was offset by the related recovery on the deferred tax asset
revaluation in that year.
Deferred tax assets and liabilities represent the cumulative amount of
tax applicable to temporary differences between the carrying amount of
assets and liabilities, and their values for tax purposes. CWB’s deferred
income tax assets and liabilities relate primarily to the collective allowance
for credit losses and intangible assets. Deferred tax assets and liabilities
are measured using enacted or substantively enacted tax rates anticipated
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Changes in deferred
income taxes related to a change in tax rates are recognized as income in
the period of the tax rate change.
Outlook for Income Taxes
CWB’s expected income tax rate (teb) for fiscal 2017 is approximately 27.5%, relatively unchanged from 2016.
28
CWB Financial Group 2016 Annual Report RESULTS OF DISCONTINUED OPERATIONS
Table 8 summarizes the components of net income from Discontinued Operations included in the consolidated statements of income, which are
attributable entirely to CWB common shareholders.
Table 8 - Results of Discontinued Operations
($ thousands)
Non-interest income (teb)
Non-interest income
Insurance revenues, net
Trust services
Losses on securities, net
Total revenue (teb)
Non-interest expenses
Net income before income taxes
Income taxes (teb)
Net Income from Discontinued Operations before Net Gain on Sale
Net gain on sale, after tax
Common Shareholders’ Net Income from Discontinued Operations
Earnings Per Common Share
Basic
Diluted
Adjusted cash
$
$
2016
2015
$
$
- $
3,875 $
(3,875)
%
(100)%
Change from 2015
-
-
-
-
-
-
-
-
-
- $
- $
-
-
9,416
3,221
(283)
16,229
11,104
5,125
1,296
3,829
(9,416)
(3,221)
283
(16,229)
(11,104)
(5,125)
(1,296)
(3,829)
107,808
(107,808)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
(100)
111,637 $
(111,637)
(100)%
1.38 $
1.38
1.38
(1.38)
(1.38)
(1.38)
(100)%
(100)
(100)
Common shareholders’ net income from Discontinued Operations for 2016 was nil compared to $1.38 per common share in 2015. Earnings from
Discontinued Operations last year were comprised of $1.33 per common share of divestiture gains and six months of operating contributions from the
divested businesses.
CWB Financial Group 2016 Annual Report
29
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other
comprehensive income (OCI), all net of income taxes. CWB’s OCI includes
changes in unrealized gains and losses on available-for-sale cash and
securities, and fair value changes for derivative instruments designated
as cash flow hedges. The 2016 decrease in comprehensive income
was primarily driven by 42% ($137.3 million) lower net income from
Combined Operations, primarily reflecting $107.8 million of divestiture
gains from Discontinued Operations realized last year, as well as lower net
income from Continuing Operations this year, mainly due to the credit
performance of oil and gas production loans.
Table 9 - Comprehensive Income
($ thousands)
Net Income from Continuing Operations
Common Shareholders' Net Income from Discontinued Operations
Net Income from Combined Operations
Other Comprehensive Income (Loss)
Available-for-sale securities
Gains (losses) from change in fair value, net of tax
Reclassification to net income, net of tax
Derivatives designated as cash flow hedges
Gains (losses) from change in fair value, net of tax
Reclassification to net income, net of tax
Other Comprehensive Income (Loss), net of tax
Total Comprehensive Income
These changes were partially offset by a $56.4 million increase in OCI.
Changes in OCI included an $80.4 million increase in fair value of
available-for-sale securities, partially offset by a $16.0 million decrease
in fair value of derivatives designated as cash flow hedges. While the
dollar amount of CWB’s investment in available-for-sale securities,
which includes preferred shares and included common shares prior to
liquidation of these holdings in 2016, is relatively small in relation to total
liquid assets, these investments can lead to fluctuations in OCI.
2016
2015
Change from
2015
$
189,334
$
214,965
$
(25,631)
-
189,334
111,637
326,602
(111,637)
(137,268)
20,799
2,158
22,957
(8,157)
113
(8,044)
14,913
(59,593)
6,612
(52,981)
7,846
3,640
11,486
(41,495)
80,392
(4,454)
75,938
(16,003)
(3,527)
(19,530)
56,408
$
204,247
$
285,107
$
(80,860)
CASH AND SECURITIES
Cash, securities and securities purchased under resale agreements
totalled $2,792 million at October 31, 2016, compared to $2,995 million
one year ago. The cash and securities portfolio is mainly comprised of
high-quality debt instruments and a comparatively smaller component
of preferred shares. The portfolio previously included a small portfolio
of common shares; however, CWB liquidated these holdings in 2016
and has no plans to re-establish this portfolio. Securities are not held for
trading purposes and, where applicable, are typically held until maturity.
Fluctuations in the value of securities are generally attributed to changes
in interest rates and movements in market credit spreads. Volatility in
equity markets caused fluctuations in the value of common shares during
the period in which CWB held these investments. Total net unrealized
losses before tax recorded on the balance sheet at October 31, 2016
were $44.7 million, compared to $76.2 million last year. Net unrealized
gains or losses are reflected in Table 10.
Table 10 - Unrealized Gains (Losses) on Available-for-Sale Cash and Securities
($ thousands)
Deposits with Regulated Financial Institutions
$
890,597
$
(81)
$
890,516
$
413,145
$
(377)
$
412,768
As at October 31, 2016
As at October 31, 2015
Amortized
Cost
Net
Unrealized
Gains (Losses)
Fair
Value
Amortized
Cost
Net
Unrealized
Gains (Losses)
Fair
Value
Securities Issued or Guaranteed by
Canada
A province or municipality
Other Debt Securities
Preferred Shares
Common Shares
Total
30
1,142,651
291,814
153,126
165,606
-
147
133
1,522
(46,405)
-
1,142,798
1,373,476
291,947
154,648
119,201
-
626,300
347,322
198,325
81,528
(8,614)
(5,396)
(1,023)
(54,457)
(6,349)
1,364,862
620,904
346,299
143,868
75,179
$ 2,643,794
$
(44,684)
$ 2,599,110
$ 3,040,096
$
(76,216)
$
2,963,880
CWB Financial Group 2016 Annual Report
See Table 28 – Valuation of Financial Instruments of this MD&A for
additional information on significant financial assets and liabilities
reported at fair value.
The balance and mix of cash and securities are managed as part of CWB’s
overall liquidity management process; additional information, including
management’s outlook for 2017, is included in the Liquidity Management
discussion of this MD&A.
The decrease in unrealized losses on securities compared to 2015
primarily relates to the impact of changes in interest rates on pricing
within the debt securities market, improvements in market conditions
within the Canadian preferred share market and liquidation of CWB’s
common share holdings. The level of unrealized losses on securities is
regularly reviewed. Impairment charges on debt securities and preferred
shares are reflected in net gains/losses on securities only in the case of an
issuer credit event. CWB has no direct investment in any non-Canadian
sovereign debt or other securities issued outside of Canada or the United
States (U.S..
Net losses on securities of $2.8 million were realized in 2016, compared
to net losses of $4.3 million in the prior year. While market conditions
remained persistently challenging in 2016, lower net losses on securities
compared to last year reflect reduced equity market exposure following
liquidation of CWB’s holdings of common equities and certain preferred
shares, as well as improved market conditions within the Canadian
preferred share market this year.
LOANS
Highlights of 2016
• Very strong, well-diversified 13% loan growth, largely driven by
very strong performance in British Columbia and Ontario, with
contributions led by general commercial loans, real estate project
loans and personal loans and mortgages.
• Double-digit loan growth achieved in 26 of the past 27 years
(the exception being 2009 when loan growth during the global
financial crisis was 7%).
Table 11 - Outstanding Loans by Portfolio
($ millions)
General commercial loans
Real estate project loans
Personal loans and mortgages
Commercial mortgages
Equipment financing and leasing
Corporate lending
Oil and gas production loans
Total Outstanding Loans
Change from 2015
2016
2015
$
$
4,808
$
3,805
$
1,003
4,181
4,064
3,999
3,693
1,099
221
3,266
3,318
3,839
3,772
1,257
313
915
746
160
(79)
(158)
(92)
%
26%
28
22
4
(2)
(13)
(29)
$
22,065
$
19,570
$
2,495
13%
Total loans before the allowance for credit losses increased 13% to reach
$22,065 million at year end. Acquisition of the CWB Franchise Finance
portfolio contributed approximately $350 million for the year, and net
originations within CWB Maxium were approximately $300 million, both
primarily within the general commercial category. Securitized assets
originated by the CWB Maxium team prior to March 1, 2016, were not
included as part of the acquisition; however, CWB holds renewal rights
related to these assets. General commercial loans made the greatest
contribution to annual loan growth measured in dollars, as shown in
Table 11, followed by very strong performance in real estate project loans,
and personal loans and mortgages. Of note, loan growth within BC and
Ontario accounted for more than 90% of the increase from 2015.
General commercial loans increased 26%. Based on industry sector, as
shown in Table 12, general commercial loans include categories such
as manufacturing, finance and insurance, and wholesale and retail
trade. CWB’s promising pipeline of new commercial loans, including
opportunities within CWB Maxium and CWB Franchise Finance,
along with management’s ongoing efforts to emphasize the strategic
relevance of this area to CWB’s funding diversification objectives, support
expectations for strong relative growth in this portfolio over time.
Growth in real estate project loans remained strong as CWB has
continued to finance well-capitalized developers on the basis of sound
loan structures and acceptable pre-sale/lease levels. Growth within
this segment slowed late in the year, in a manner consistent with
management’s expectations. Total exposure to real estate project loans
remains within CWB’s established risk appetite.
Personal loans and mortgages include CWB’s broker-sourced residential
mortgage business, Optimum, lending activity in banking branches,
and CWB’s participation in the National Housing Act Mortgage-backed
Securities (NHA MBS) program. Participation in the NHA MBS program
contributed $391 million to growth in 2016 (2015 – nil). Net of the sale
of three portfolios totalling $71 million, total loans of $2,283 million in
Optimum represented net growth of 18% ($355 million). Net growth
CWB Financial Group 2016 Annual Report
31
was mainly driven by alternative mortgages secured via conventional
residential first mortgages carrying a weighted average loan-to-value
ratio at initiation of approximately 69%. The book value of alternative
mortgages represented approximately 92% (2015 – 88%) of Optimum’s
total portfolio. Ontario continues to account for over half of Optimum’s
new originations. At approximately 49% of the total, Ontario represents
the largest geographic exposure by province within Optimum’s portfolio,
followed by Alberta at 23% and BC at 17%. The average size of
Optimum mortgages originated in 2016 was approximately $308,000,
and the average size of mortgages outstanding at October 31, 2016
was approximately $241,000. Management remains committed to the
ongoing development of this business, including further expansion in
Ontario, as it continues to produce solid returns while maintaining an
acceptable risk profile.
The balance of loans in equipment financing and leasing includes the
branch-based heavy equipment financing business and $1,720 million
of small- and mid-ticket leases within National Leasing. Strong, double-
digit growth of 10% within National Leasing reflects the company’s solid
market position and coast-to-coast footprint. Areas outside of Western
Canada account for more than half of National Leasing’s leasing exposure
by geography. The balance of branch-based equipment finance loans
contracted, primarily due to the challenging operating environment
within Alberta.
Corporate lending represents a diversified portfolio that is centrally
sourced and administered through designated lending groups. Corporate
lending includes participation in select syndications structured and
led primarily by the major Canadian banks, but excludes participation
in various other syndicated facilities sourced through relationships
developed at CWB branches. Syndicated facilities sourced in branches
Figure 2 - Outstanding Loans by Portfolio
(October 31, 2015 in brackets)
1% (2%)
5% (6%)
Oil & Gas Production
Corporate Loans
19% (17%)
Real Estate Project Loans
are primarily real estate project loans, and oil and gas production loans,
which are both included as separate classifications in Table 11.
Management took a conservative approach to resolving positions within
CWB’s small portfolio of oil and gas production loans in 2016. The
balance of loans in this category now represents 1% of the total portfolio
(2015 – 2%).
The mix of CWB’s portfolio (see Figure 2) shifted in a manner generally
consistent with management’s strategic diversification objectives during
the year. Strong growth in general commercial loans, real estate project
loans, and personal loans and mortgages combined with a more modest
increase in commercial mortgages and contractions in corporate lending,
equipment financing and leasing, and oil and gas production loans to
result in decreased concentrations in the latter four categories. The lower
balance of outstanding loans within equipment financing and leasing
primarily reflects the impact of the current recession in Alberta. Alberta
borrowers within this segment have been proactive in reducing the size of
their fleets, with a resulting increase in early pay-outs.
Based on the location of security (see Figure 3), Alberta and BC each
represented 36% of total loans at year end, compared to 41% and 33%,
respectively, in 2015. The material shift resulted from the combined
impact of strong growth in Ontario related to contributions from CWB
Franchise Finance, CWB Maxium, Optimum and National Leasing, strong
growth in BC primarily driven by real estate project loans, and a slight net
contraction of CWB’s portfolio in Alberta.
General Commercial Loans
Commercial Mortgages
22% (19%)
18% (20%)
18% (17%)
Personal Loans and Mortgages
Equipment Financing
17% (19%)
32
CWB Financial Group 2016 Annual Report Outlook for Loans
CWB will continue to support high-quality borrowers operating
within targeted industry segments across Canada. Management
will selectively pursue opportunities for prudent growth of secured
loans that offer an appropriate return and acceptable risk profile.
Growth in Canada’s domestic economy is expected to continue at
a moderate pace in 2017. 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 and Ontario. Taken together, these two provinces now account
for greater than half of CWB’s geographic exposure, and the current
overall outlook for generating new business opportunities continues
to be positive. Management believes ongoing strong overall loan
growth at levels relatively consistent with CWB’s recent performance
will be supported over the medium term through further geographic
diversification and incremental market share gained from the
combined positive influences of an expanded market presence and
the effective execution of CWB’s strategic plan focused on targeted
client solutions and superior customer service.
The protracted period of low energy and other commodity prices
poses a risk to the outlook for economic growth in Canada overall,
and Alberta and Saskatchewan in particular. Loan growth across all
portfolio segments within Alberta and Saskatchewan is expected
to remain challenging in view of the current recession. CWB’s
direct exposure to the energy industry is small relative to its overall
portfolio at approximately 3% of total loans outstanding, including
direct loans to oil and gas producers and lending to service-related
companies. However, negative impacts on employment, in-migration,
housing sector activity and consumer spending in the oil-producing
provinces are apparent as a result of the material contraction in the
level of overall capital expenditure within the energy industry, despite
ongoing maintenance expenditures in the oil sands.
Canadian residential real estate markets have been resilient
and affordability in most geographic areas outside of certain
neighbourhoods in Toronto and Vancouver remains within historical
ranges, largely reflecting very low interest rates. Moderately reduced
housing sector activity and softer pricing is apparent in Greater
Vancouver, Alberta and Saskatchewan. Reduced activity is particularly
apparent within higher-priced segments of the housing market. The
combination of historically high price levels, sentiment related to
potential economic headwinds caused by low energy prices, recent
counter-cyclical measures undertaken by the federal government and
tax changes within British Columbia could lead to further moderation
of housing sector activity in these and other markets. Recent
regulatory changes target both insured mortgages and mortgages
funded through securitization, neither of which represents a core
business focus for CWB. In isolation, management expects these
changes will have no material impact to CWB’s outlook for residential
mortgage originations.
Potential risks that could have a material adverse impact on loan
growth expectations include further material weakening of energy
and other commodity prices compared to recent levels, a slowing
rate of economic growth in the U.S., material changes to standing
free trade agreements which could affect the outlook for Canadian
exports, a significant and sustained deterioration in Canadian
residential real estate prices, or a significant disruption in major
global economies.
Diversification of Portfolio
Figure 3 - Geographical Distribution of Loans Based on Location of Security
(October 31, 2015 in brackets)
3% (3%)
4% (4%)
6% (7%)
Manitoba
Other
Saskatchewan
15% (12%)
Ontario
British Columbia
36% (33%)
Alberta
36% (41%)
CWB Financial Group 2016 Annual Report
33
Table 12 - Total Advances Based on Industry Sector(1)
(% at October 31)
Construction
Real estate operations
Consumer loans and residential mortgages(2)
Finance and insurance
Transportation and storage
Hotel/motel
Health and social services
Retail trade
Other services
Wholesale trade
Manufacturing
Agriculture
Oil and gas service
Logging/forestry
Oil and gas production
All other
Total
2016
2015
21 %
22 %
21
21
18
16
7
6
6
7
5
4
4
4
3
2
3
2
2
2
2
2
2
2
2
3
2
2
1
2
1
3
100 %
100 %
(1) Table is based on the North American Industry Classification System (NAICS) codes.
(2) Residential mortgages in this table include only single-family properties.
The loan portfolio is focused on areas of demonstrated lending expertise,
while concentrations measured by geographic area and industry sector
are managed within specified tolerance levels. The portfolio is well-
diversified with a mix of business and personal loans. Heavy equipment
financing is primarily sourced by specialized lenders within branches
or through stand-alone equipment financing centres, while small- and
mid-sized leases are offered across Canada through National Leasing. Oil
and gas production lending is conducted by specialists located in Calgary.
Real estate specialists are established in the major centres of Vancouver,
Edmonton and Calgary. Optimum maintained centralized administration
based in Alberta in 2016, and sourced residential mortgages throughout
Western Canada and select regions of Ontario and Atlantic Canada
through an established network of mortgage brokers.
Outlook for Diversification of Portfolio
Strong loan growth this 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,
National Leasing and CWB’s newly acquired businesses. Growth is
expected across all lending sectors in 2017 with the exception of oil
and gas production loans. Relatively stronger economic activity in
BC and increased lending exposure in Ontario are expected to lead
to comparatively faster growth in these areas. In combination with
the impact of the current recession in Alberta, this may result in a
further reduction to the relative concentration of CWB’s Alberta-
based lending exposures. Management has targeted higher net
growth in areas such as general commercial loans, personal loans
and mortgages, and equipment financing and leasing, compared
to commercial mortgages and real estate project loans. Combined
annual general commercial lending originations from CWB Maxium
and CWB Franchise Finance are expected to exceed $500 million
in fiscal 2017, and management expects CWB Maxium to surpass
$1,000 million of total on-balance sheet loans and leases by 2019.
Approximately 70 − 80% of the current business in both cases is
outside of Western Canada. Originations within these new businesses
are therefore expected to contribute both to strong growth in
general commercial loans and further geographic diversification.
Growth of personal loans and mortgages is expected to benefit from
continued expansion of Optimum. Of note, Optimum expects to
add an Ontario-based underwriting centre in 2017, making use of
space within the CWB Maxium premises in Richmond Hill. Equipment
financing and leasing exposures comprise CWB’s branch-based heavy
equipment lending operations, a specialized underwriting centre
which partners with the finance companies of original equipment
manufacturers, National Leasing, and a portion of the business of
CWB Maxium. Expectations for slower growth in real estate project
loans compared to that achieved in 2016 reflect the combined
impact of this portfolio’s relatively short duration and forecasted
moderation in Canadian residential real estate activity, partly as a
result of recent regulatory changes intended to constrain growth
of the housing sector. Within the parameters of its established risk
appetite, CWB will continue to finance well-capitalized developers on
the basis of sound loan structures and acceptable pre-sale/lease levels
as such opportunities arise. Commercial mortgages are often subject
to a higher level of pricing competition compared to other types of
lending, and CWB will remain focused on maintaining this portfolio
based on client relationships and adequate returns. CWB maintains
its long-term objective to deliver further industry and geographic
diversification, and management will continue with initiatives to
develop and/or acquire complementary sources of high-quality
growth.
34
CWB Financial Group 2016 Annual Report CREDIT QUALITY
Highlights of 2016
• Credit quality reflected strain within CWB’s small portfolio of oil
and gas loans, and management’s proactive approach to resolving
positions within this portfolio. Very low commodity prices early in
2016 affected producer cash flows, and certain regulatory factors
affected the liquidity of assets securing these exposures. Loss rates
related to impaired loans within this portfolio exceeded those
experienced during prior economic cycles and the overall level of
provisioning was elevated compared to historical experience.
• Prior to reporting second quarter financial results, management
announced revised expectations for the annual provision for credit
losses of 35 – 45 basis points, compared to previous expectations
of 18 – 23 basis points.
• The total provision for credit losses of $79.1 million represented 38
basis points of average loans, consistent with revised expectations
and up from 17 basis points in 2015.
Impaired Loans
The loan portfolio is delineated through the assignment of internal risk
ratings to each borrower. The rating is based on assessments of key
evaluation factors for the nature of the exposure applied on a consistent
basis across the portfolio. The current rating system has 12 levels of risk
and ratings are updated at least annually for all loans, with the exception
of consumer loans and single-unit residential mortgages.
As shown in the table below, gross impaired loans totalled $127.2 million
and represented 0.58% of total loans, compared to $94.9 million or
0.49% at the end of 2015. Total gross impaired loans within Alberta of
$64.8 million increased from $41.7 million last year. Gross impaired loans
Table 13 - Change in Gross Impaired Loans
($ thousands)
• The total provision for credit losses included cumulative provisions
of $41.6 million recorded against oil and gas production loans.
• Credit quality as measured by the provision for credit losses was
stable outside of the oil and gas production loan portfolio.
• Gross impaired loans increased 34% and represented 58 basis
points as a percentage of total loans, compared to 49 basis points
one year ago.
• Growth in the collective allowance of 11% generally reflected the
level of overall loan growth.
• The total allowance for credit losses as a percentage of gross
impaired loans (coverage ratio) was 100%, down from 122% in
2015.
within the oil and gas production lending portfolio totalled $16.9 million,
compared to $22.8 million last year. The increase in write-offs this year
primarily related to losses within this portfolio. Gross impaired loans from
CWB’s equipment financing and leasing exposures were $40.2 million
compared to $19.6 million last year. Approximately 52% of the impaired
balance in this category is comprised of Alberta exposures, compared to
24% last year. The ten largest accounts classified as impaired, measured
by dollars outstanding, represented approximately 48% of total gross
impaired loans at year end, down from 59%. New formations of impaired
loans totalled $164.4 million, compared to $120.3 million last year.
Gross impaired loans, beginning of period
$
94,905
$
62,120
$
32,785
2016
2015
$
Change from 2015
164,386
120,338
44,048
(61,619)
(70,460)
(71,744)
(15,809)
10,125
(54,651)
$
127,212
$
94,905
$
32,307
34%
%
53%
37
(14)
346
New formations
Reductions, impaired accounts paid down
or returned to performing status
Write-offs
Total, end of period(1)
Balance of the ten largest impaired accounts
$
61,397
$
55,665
$
5,732
Total number of accounts classified as impaired(2)
Total number of accounts classified as impaired under $1 million(2)
Gross impaired loans as a percentage of total loans(3)
232
217
0.58%
117
104
0.49%
115
113
10%
98
109
9 bp(4)
(1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $3,876 (2015 – $979). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(2) Total number of accounts excludes National Leasing accounts.
(3) Total loans do not include an allocation for credit losses or deferred revenue and premiums.
(4) bp – basis points.
The dollar 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 higher balance of gross impaired loans reflects
the increase in new formations, partially offset by the success of ongoing
loan realization efforts and work-out programs. Outside of the oil and
gas portfolio, actual credit losses as a percentage of total loans continue
to demonstrate the benefits of CWB’s secured lending practices and
disciplined underwriting.
CWB Financial Group 2016 Annual Report
35
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. An impaired loans report
is reviewed quarterly by the Board Risk Committee. Please see the Risk
Management section of this MD&A for further information.
Outlook for Impaired Loans
Gross impaired loans remain low as a percentage of total loans, with
the current level of 0.58% 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, 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. Gross impaired loans within Optimum are expected
to increase in view of softer housing market conditions, particularly
in Alberta. Management remains confident in the strength, diversity
and underwriting structure of the overall loan portfolio and lending
exposures will continue to be closely monitored.
Potential risks that could have a material adverse impact on loan
growth expectations include further material weakening of energy
and other commodity prices compared to recent levels, a slowing
rate of economic growth in the U.S., material changes to standing
free trade agreements which could affect the outlook for Canadian
exports, a significant and sustained deterioration in Canadian
residential real estate prices, or a significant disruption in major
global economies.
Allowance for Credit Losses
Current estimates of expected write-offs for existing loans classified as
impaired are reflected in the specific provisions for credit losses, which
totalled $16.3 million at year end, compared to $15.8 million a year
earlier. Estimates are established through detailed analyses of both the
overall quality and ultimate marketability of the security held against each
Table 14 - Allowance for Credit Losses
($ thousands)
Specific Allowance
Equipment financing
Energy
Real estate
Commercial
Consumer and personal
Collective Allowance
Total
Represented by:
Loans
impaired account. The year-over-year change in the allowance for credit
losses split between the specific allowance by category of impaired loans
and the collective allowance for credit risk is provided in Table 14.
2016
Opening
Balance
Provision
for Credit
Losses
Write-Offs,
net of
Recoveries(1)
$
4,346
$
19,904
$
(14,687)
$
9,300
1,770
128
262
15,806
99,613
41,558
4,026
1,726
571
67,785
11,330
(48,715)
(2,807)
(484)
(629)
(67,322)
-
2016
Ending
Balance
9,563
2,143
2,989
1,370
204
16,269
110,943
$
115,419
$
79,115
$
(67,322)
$
127,212
Committed but undrawn credit exposures(2)
Total
(1) Recoveries in 2016 totalled $3,138.
(2) The collective allowance for credit losses related to committed but undrawn credit exposures is included in Other Liabilities on the consolidated balance sheets.
$
103,788
23,424
$
127,212
Allowances for credit losses are maintained to absorb both identified
and unidentified losses in the loan portfolio and, at October 31, 2016,
consisted of $16.3 million (2015 – $15.8 million) of specific allowances
and $110.9 million (2015 – $99.6 million) in the collective allowance for
credit losses. The specific allowance includes the amount of accumulated
provisions for losses required to reduce the carrying value of identified
impaired loans to their estimated realizable value. The collective
36
allowance includes allowances for losses inherent in the portfolio that are
not presently identifiable on an account-by-account basis. Policies and
methodology governing the management of the collective allowance are
in place.
CWB Financial Group 2016 Annual Report
Growth in the collective allowance of 11% generally reflected the level of
overall loan growth. The total allowance for credit losses as a percentage
of gross impaired loans (coverage ratio) was 100%, down from 122% in
2015.
An assessment of the adequacy of the collective allowance for credit
losses is conducted quarterly in consideration of:
• historical trends in loss experience during economic cycles;
• the current portfolio composition and profile;
• historical loss experience in portfolios that display similar credit risk
characteristics;
• the estimated period of time between when the impairment occurs
and when the loss is identified; and,
• management's judgment as to whether current economic and credit
conditions are such that the actual level of inherent losses at the
balance sheet date is likely to be greater or less than that suggested by
historical experience.
Outlook for Allowance for Credit Losses
Specific allowances will continue to be determined on an account-by-
account basis and reviewed at least quarterly. Lower levels of specific
allowances are expected in strong economic times and higher levels
of specific allowances in weaker economic times. As such, the level
of specific allowances may increase as a result of relative economic
weakness within the oil exporting provinces in Western Canada. The
collective allowance is expected to fluctuate as a result of portfolio
growth and normal progress through the credit cycle. Based on
management’s current outlook for credit performance and CWB’s
actual historical loss experience, the existing level of the collective
allowance is considered sufficient to mitigate losses inherent in the
portfolio that are not presently identifiable.
Provision for Credit Losses
The 2016 provision for credit losses of $79.1 million increased 155%,
primarily due to $41.6 million of specific provisions related to oil and gas
production loans. Significantly higher provisioning within the oil and gas
portfolio resulted from the impact of persistently low and volatile energy
commodity prices on producer cash flows, as well as the influence of
regulatory factors on the liquidity of assets securing these exposures.
The provision for credit losses represented 38 basis points of average
loans in 2016 (see Table 15), up 21 basis points from the previous year.
Net new specific provisions represented 32 basis points of average loans,
compared to 12 basis points in 2015. CWB has a long history of strong
credit quality and low loan losses, both of which compare very favourably
to the Canadian banking industry. Of the 32 basis points of net new
specific provisions this year, approximately 20 basis points related to
oil and gas production loans. Approximately 99% of CWB’s portfolio
is comprised of non-oil and gas loans, and this portion accounted for
approximately 12 basis points of net new specific provisions this year,
consistent with 2015. Increases to the collective allowance comprised
the remainder of the total provision. Macroeconomic and other external
factors that may impact core geographic regions and/or industry sectors
in which CWB customers operate are continually analyzed.
Table 15 - Provision for Credit Losses
($ thousands)
Provision for credit losses(1)
Net new specific provisions (net of recoveries)(2)
2016
0.38 %
0.32
2015
0.17 %
0.12
2014
0.15%
0.07
2013
0.19 %
0.13
2012
0.19 %
0.14
Collective allowance
Coverage ratio(3)
$
110,943
$
99,613
$
90,075
$
76,217
$
67,344
100 %
122 %
154 %
134 %
122 %
(1) As a percentage of average loans.
(2) Portion of the year’s provision for credit losses allocated to specific provisions as a percentage of average loans.
(3) Allowance for credit losses as a percentage of gross impaired loans.
Outlook for the Provision for Credit Losses
Credit quality is expected to continue to reflect CWB’s secured
lending business model and disciplined underwriting processes.
Based on CWB’s current economic outlook, management’s
assessment of the overall quality of the portfolio and its underlying
security, and the adequacy of the collective allowance for credit
losses, management expects the provision for credit losses to
decrease moderately compared to 2016, and for loss rates on
impaired loans outside of oil and gas production lending to be
consistent with our prior experience. The 2017 provision as a
percentage of average loans is expected to fall within a range of
25 – 35 basis points. The assessment process is continuous and
updated expectations are communicated no less than quarterly.
Potential risks that could have a material adverse impact on credit
quality expectations include further material weakening of energy
and other commodity prices compared to recent levels, a slowing
rate of economic growth in the U.S., material changes to standing
free trade agreements which could affect the outlook for Canadian
exports, a significant and sustained deterioration in Canadian
residential real estate prices, or a significant disruption in major
global economies.
CWB Financial Group 2016 Annual Report
37
DEPOSITS
Highlights of 2016
• Strong branch-raised deposit growth of 12%, including very
strong 15% growth of targeted notice and demand deposits.
• Branch-raised deposits were 55% of total deposits, up from 54%
in 2015.
• Capital markets deposits were reduced to 9% of total deposits
by source (2015 – 10%), while broker deposits were unchanged
at 36% reflecting current deposit pricing advantages in the latter
funding market as compared to the former.
Table 16 - Deposits
($ thousands)
Personal
Business and government
Capital markets
Total Deposits
% of Total
Personal
Business and government
Capital markets
Total Deposits
% of Total
Demand
Notice
Term
2016
Total
$
34,681
$
3,866,441
$
9,322,580
$ 13,223,702
761,523
3,031,090
-
-
2,317,038
1,861,200
6,109,651
1,861,200
% of
Total
62 %
29
9
$
796,204
$
6,897,531
$ 13,500,818
$ 21,194,553
100 %
4%
32%
64%
100%
Demand
Notice
Term
2015
Total
$
33,129
$
3,188,276
$
8,195,216
$ 11,416,621
590,411
2,907,597
-
-
2,431,917
2,018,861
5,929,925
2,018,861
% of
Total
59 %
31
10
$
623,540
$
6,095,873
$ 12,645,994
$ 19,365,407
100 %
3%
32%
65%
100%
Total deposits of $21,195 million increased 9% over 2015 reflecting 16%
growth in personal deposits, which include those issued through the
deposit broker network, and 3% growth in business and government
deposits, partially offset by an 8% decrease in capital markets deposits
outstanding.
Table 17 - Deposits by Source
(as a percentage of total deposits at October 31)
Branches
Deposit brokers
Capital markets
Total
2016
55 %
36
9
100 %
2015
54 %
36
10
100 %
References to branch-raised deposits within this MD&A include all
deposits generated through the branch network, as well as those raised
via CWT, CDF and Valiant's deposit taking franchise. Increasing the level
of branch-raised personal deposits and certain types of business deposits
is an ongoing strategic focus for CWB as success in this area provides the
most reliable and stable sources of funding. The importance of growing
these funding sources increased under the Basel III rules governing
liquidity implemented in 2015 (see the Liquidity Management section of
this MD&A). CWT raises deposits through notice accounts (comprised
primarily of cash balances held in self-directed registered accounts),
corporate trust deposits and through CWB's branch network. CDF, the
Internet-based banking division of CWB, currently offers various deposit
products to customers in all provinces and territories except Quebec.
Client deposits in CDF at October 31, 2016 totalled $324 million, a
9% decrease compared to a year earlier. Management has elected to
continue to emphasize client retention over growth within this channel as
pricing competition from new and existing market participants continues
to be intense. Valiant’s deposit taking franchise provides an additional
channel to raise insured deposits through CWB branches, and is separate
from Valiant’s stock transfer business which was sold last year.
Consistent with CWB’s commercial focus, a considerable portion of
branch-raised deposits are generated from corporate clients that tend
to hold larger balances compared to personal clients (see the Liquidity
Management section of this MD&A).
Growth in total branch-raised deposits was 12% in 2016, while the
demand and notice component within branch-raised deposits increased
by a very strong 15%. Notice deposits raised within CWT accounted for
a material portion of this growth. Demand and notice deposits, which
include lower-cost funding sources, comprised 36% of total deposits
at year end, up from 35% in the previous year. Branch-raised deposits
comprised 55% of total deposits, up from 54% in 2015. The level of
growth in demand and notice deposits reflects ongoing execution of
38
CWB Financial Group 2016 Annual Report strategies to further enhance and diversify CWB’s core sources of funding.
Other types of deposits are primarily sourced through a deposit broker
network and debt capital markets. Insured deposits raised through
deposit brokers remain an efficient source of funding. Although these
funds are subject to commissions, this cost is countered by a reduced
dependence on a more extensive branch network and the benefit of
generating insured fixed term retail deposits over a wide geographic base.
Additional sources of funding in 2016 included $734 million from the
securitization of equipment leases (2015 – $371 million), maintenance of
CWB’s bearer deposit note program, issuance of $250 million of senior
deposit notes in the capital markets (2015 – $300 million), and whole
loan sales of $71 million (2015 – $29 million) of residential mortgages.
Outlook for Deposits and Funding
The strategic focus to increase branch-raised deposits will continue,
with particular emphasis on the demand and notice component,
which is often lower cost and provides associated transactional fee
income. Various strategic initiatives, which include the offering of
enhanced cash management products and a competitive business
savings account, are also intended to further augment growth of
desired branch-raised funding. CWB’s growing market presence,
which includes the expansion of full-service branches, also supports
objectives to generate branch-raised deposits. The successful launch
of CWB’s new core banking system has facilitated a client-centric
view of branch-based relationships, and is expected to enhance
the effectiveness of efforts to build core funding sources. CWB will
re-establish CDF as an effective channel for funding growth through
a planned strategic brand repositioning in 2017. The deposit broker
network remains an efficient source for raising insured fixed term
retail deposits and has proven to be a reliable and effective way to
access funding and liquidity over a wide geographic base. Selectively
utilizing the debt capital markets is also part of management’s
strategy to further augment and diversify both the long- and short-
term funding base over time. National Leasing will continue to utilize
securitization channels for a portion of its funding requirements,
provided that both related costs and the regulatory capital impact
remain satisfactory. CWB commenced securitization of residential
mortgages in 2016 through the NHA MBS program, and expects to
initiate participation in the Canada Mortgage Bond (CMB) Program
in 2017.
OTHER ASSETS AND OTHER LIABILITIES
Other assets at October 31, 2016 totalled $469 million (2015 – $369
million). The amount of goodwill and intangible assets recorded on the
balance sheet at October 31, 2016 was $85 million (2015 – $44 million)
and $149 million (2015 – $106 million), respectively. The increase in
goodwill primarily relates to the acquisition of CWB Maxium. Higher
intangible assets relate to both investment in CWB’s core banking system
and the CWB Maxium acquisition.
Other liabilities totalled $417 million at October 31, 2016 (2015 – $374
million).
CWB Financial Group 2016 Annual Report
39
LIQUIDITY MANAGEMENT
Highlights of 2016
• Maintained a prudent liquidity position and conservative
investment profile.
•
Initial utilization of CWB’s NHA MBS allocation for liquidity
purposes.
• Maintained compliance with OSFI’s Liquidity Adequacy
• CWB liquidated its holdings of common equities in 2016 and has
Requirement Guideline.
no plans to re-establish this portfolio.
A schedule outlining the consolidated securities portfolio at October 31,
2016 is provided in Note 5 to the consolidated financial statements. A
conservative investment profile is maintained by ensuring:
• all investments are high quality and include government debt
securities, short-term money market instruments, preferred shares, and
other marketable securities;
CWB’s liquidity management is a comprehensive process that includes,
but is not limited to:
• maintaining a pool of high-quality liquid assets;
• comprehensive liquidity scenario stress testing;
• monitoring the quality of the cash and securities portfolio;
• specific investment criteria and procedures are in place;
• monitoring liability diversification and maturity profile;
• regular review, monitoring and approval of investment policies is
completed by CWB’s Asset Liability Committee (ALCo); and,
• quarterly reports on the composition of the portfolio are provided to
the Board Risk Committee. The Board Risk Committee annually reviews
and approves investment policies.
• monitoring deposit behaviour;
• maintaining access to deposit and capital market funding sources; and,
• monitoring microeconomic and macroeconomic factors and early
warning indicators.
Table 18 - High-quality Liquid Assets
($ thousands)
2016
2015
Change
from 2015
Cash and non-interest bearing deposits with financial institutions
$
11,490
$
23,949
$
(12,459)
Interest bearing deposits with regulated financial institutions
Cheques and other items in transit
Total Cash Resources
890,516
18,050
920,056
412,768
6,705
443,422
Government of Canada, provincial and municipal debt, term to maturity 1 year or less
420,108
33,007
Government of Canada, provincial and municipal debt, term to maturity more than 1 year
1,014,637
1,952,759
Other debt securities
Common shares(1)
Securities purchased under resale agreements
141,094
-
163,318
346,299
33,707
-
Total Securities Purchased Under Resale Agreements and Marketable Securities
1,739,157
2,365,772
477,748
11,345
476,634
387,101
(938,122)
(205,205)
(33,707)
163,318
(626,615)
Total Liquid Assets
Total Assets
Liquid Assets as a Percentage of Total Assets
Total Deposit Liabilities
$
2,659,213
$
2,809,194
$
(149,981)
$ 25,222,549
$ 22,838,527
$ 2,384,022
11 %
12 %
(100) bp(2)
$ 21,194,553
$ 19,365,407
$ 1,829,146
Liquid Assets as a Percentage of Total Deposit Liabilities
13 %
15 %
(200) bp(2)
(1) Represents the portion of the common share portfolio which supported compliance with the OSFI Liquidity Adequacy Requirements, effective January 1, 2015.
(2) bp - basis points.
As shown in Table 18, high-quality liquid assets, as defined by OSFI,
comprised of cash, deposits, securities purchased (or sold) under resale
agreements and marketable securities totalled $2,659 million at October
31, 2016 (2015 – $2,809). High-quality liquid assets represented 11%
(2015 – 12%) of total assets and 13% (2015 – 15%) of total deposit
liabilities at year end.
The composition of total high-quality liquid assets supports ongoing
compliance with the OSFI Liquidity Adequacy Requirements. Key changes
in the composition of liquid assets at October 31, 2016 compared to the
prior year generally reflect reduced duration of CWB’s holdings, including:
40
• maturities within one year comprising 61% (2015 – 18%);
• Government of Canada, provincial and municipal debt securities
comprising 54% (2015 – 70%);
• deposits with regulated financial institutions comprising 33% (2015 –
15%); and,
• other marketable securities comprising 5% with liquidation of
common share holdings (2015 – 14%).
CWB Financial Group 2016 Annual Report
Additional sources of liquidity and funding in 2016 included $734 million
from the securitization of equipment leases (2015 – $371 million), $391
million of residential mortgages which represent utilization of CWB’s
NHA MBS allocation, and $71 million (2015 – $29 million) of residential
mortgages sold via whole loan sales. The primary source of incremental
new funding was branch-raised deposits supported by the issuance
of personal fixed term deposits through the broker deposit market. A
summary of all outstanding deposits by contractual maturity date is
presented in Tables 19 and 20.
Table 19 - Deposit Maturities Within One Year
($ millions)
October 31, 2016
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
October 31, 2015 Total
Table 20 - Total Deposit Maturities
($ millions)
Within
1 Month
1 to 3
Months
Cumulative
3 Months
to 1 Year Within 1 Year
$
796
$
6,898
643
$
-
-
$
-
-
1,408
4,116
796
6,898
6,167
$
$
8,337
$
1,408
$
4,116
$
13,861
7,327
$
893
$
4,739
$
12,959
October 31, 2016
Demand deposits
Notice deposits
Deposits payable on a fixed date
Within
1 year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5
Years
More than
5 Years
$
796
$
6,898
6,167
$
-
-
$
-
-
$
-
-
$
-
-
3,515
1,554
1,008
1,257
Total
$
13,861
$
3,515
$
1,554
$
1,008
$
1,257
$
$
Total
796
6,898
13,501
$
21,195
-
-
-
-
October 31, 2015 Total
$
12,959
$
3,582
$
1,369
$
726
$
729
$
-
$
19,365
A breakdown of deposits by source is provided in Table 17. Target limits
by source have been established as part of the overall liquidity policy
and are monitored regularly to ensure an acceptable level of funding
diversification is maintained. Management continues to develop and
implement strategies to ensure branch-raised deposits remain the core
source of funding. Deposits raised through deposit brokers remain an
effective incremental funding source. Senior and bearer deposit notes
raised in the capital markets provide a further source of funding and
liquidity.
Table 21 - Subordinated Debentures Outstanding
($ thousands)
In addition to deposit liabilities, CWB has subordinated debentures and
debt securities related to the securitization of leases to third parties
(refer to Note 16 of the consolidated financial statements for additional
information). A summary of subordinated debentures outstanding is
presented in Table 21.
Interest
Rate
3.463%(1)
5.571%(2)
4.389%(3)
Total
Maturity
Date
Earliest Date
Redeemable
by CWB at Par
As at
October 31
2016
As at
October 31
2015
December 17, 2024
December 17, 2019
$
250,000
$
250,000
March 21, 2022
March 22, 2017
75,000
November 30, 2020
November 30, 2015
-
75,000
300,000
$
325,000
$
625,000
(1) These conventional debentures have a 12-year term with a fixed interest rate for the first seven years. Thereafter, the interest rate will be reset quarterly at the 3-month Canadian dollar CDOR rate plus 160 basis points.
(2) These conventional debentures have a 15-year term with a fixed interest rate for the first 10 years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 180 basis
points.
(3) These conventional debentures had a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate would have reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 193 basis
points. These debentures were fully redeemed at par on November 30, 2015.
Outlook for Liquidity Management
Internal methodologies for managing liquidity risk are continuously
refined. CWB utilizes comprehensive stress testing to manage,
measure and monitor liquidity risk to ensure a prudent approach.
CWB will maintain prudent liquidity levels in 2017 while maintaining
compliance with the OSFI Liquidity Adequacy Guideline.
Management has initiated a multi-year program to upgrade CWB’s
treasury infrastructure, with expected benefits related to all aspects
of liquidity and asset/liability management.
CWB Financial Group 2016 Annual Report
41
CAPITAL MANAGEMENT
Highlights of 2016
• Very strong Basel III common equity Tier 1, Tier 1 and total capital
adequacy ratios of 9.2%, 11.0% and 13.1%, respectively.
•
Implementation of initiatives which resulted in lower overall capital
requirements for CWB’s existing pool of securitized leases.
• Redemption of $300 million of 4.389% subordinated debentures
• Cash dividends of $0.92 per share paid to common shareholders,
in November 2015.
up 7%.
•
Issuance of $140 million of non-viability contingent capital (NVCC)
preferred shares Series 7 in March 2016.
• Very conservative Basel III leverage ratio of 8.6%, compared to the
regulatory minimum of 3%.
•
Issuance of $150 million of common shares in July 2016.
Subsequent Highlights
• On December 31, 2016, CWB will redeem through CWB Capital
Trust all $105 million outstanding 6.199% Trust Capital Securities
(the WesTS) at par plus accrued interest. The redemption will
result in an approximate 50 basis point reduction to CWB’s Tier 1
and total capital ratios; however, CWB’s capital ratios will remain
strong.
Capital is managed in accordance with policies and plans that are
regularly reviewed and approved by the Board Risk Committee.
Capital management takes into account forecasted capital needs with
consideration of anticipated profitability, asset growth, market and
economic conditions, regulatory changes, and common and preferred
share dividends. The overriding goal is to remain well-capitalized in
order to protect depositors and policyholders, and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the capital markets, all while providing a
satisfactory return for common shareholders. CWB has implemented an
Internal Capital Adequacy Assessment Process (ICAAP) to establish target
capital levels deemed prudent to effectively manage risks, including
potential capital shocks from unexpected macroeconomic and/or CWB-
specific events.
CWB provides a share incentive plan to officers and employees who are
in a position to materially impact the longer-term financial success of the
organization, as measured by overall profitability, earnings growth, share
price appreciation and dividends. Note 18 to the consolidated financial
statements details the number of options outstanding, the weighted
average exercise price and the amounts exercisable at year end.
Holders of CWB common shares and holders of any other class of
shares deemed eligible by the Board are offered the choice to direct
cash dividends paid toward the purchase of common shares through a
dividend reinvestment plan (DRIP). Further details regarding CWB’s DRIP
are available at cwb.com/investor_relations.
•
In November 2016, the Board of Directors declared a quarterly
cash dividend of $0.23 per common share, unchanged from the
prior quarter and the dividend declared last year. The Board also
declared a cash dividend of $0.275 per Series 5 Preferred Share,
and a cash dividend of $0.390625 per Series 7 Preferred Share.
Basel III Capital Adequacy Accord
Regulatory capital and capital ratios are calculated in accordance with the
requirements of OSFI, and capital is managed and reported in accordance
with the requirements of the Basel III Capital Adequacy Accord (Basel III).
CWB’s minimum Basel III regulatory capital ratios, including a 250
basis point capital conservation buffer, are 7.0% CET1, 8.5% Tier 1
and 10.5% total capital, and a 3.0% leverage ratio. The Basel III rules
provide for transitional adjustments whereby certain aspects of the
new rules are phased in between 2013 and 2019. The only available
transition adjustment in the Basel III capital standards permitted by OSFI
for Canadian banks relates to the multi-year phase-out of non-qualifying
capital instruments.
CWB currently reports its regulatory capital ratios using the Standardized
approach for calculating risk-weighted assets. This approach requires
CWB to carry significantly more capital for certain credit exposures
compared to requirements under the AIRB methodology used by larger
Canadian financial institutions. For this reason, regulatory capital
ratios of banks that utilize the Standardized approach versus the AIRB
methodology are not directly comparable.
CWB complied with all internal and external capital requirements in
2016.
42
CWB Financial Group 2016 Annual Report
Table 22 - Capital Structure and Basel III Regulatory Ratios at Year End
($ thousands)
As at
October 31
2016
As at
October 31
2015
$ 1,863,264
2,233,364
2,669,334
$ 1,636,718
1,866,873
2,439,022
9.2 %
8.5 %
11.0
13.1
8.6
9.7
12.7
7.9
Changes in CWB’s Tier 1 and total capital ratios reflect the common
share issuance, as well as the issuance of $140 million of NVCC preferred
shares, partially offset by capital invested in support of acquisitions, and,
within total capital, the redemption of $300 million outstanding 4.389%
subordinated debentures.
Regulatory capital, net of deductions
Common equity Tier 1
Tier 1
Total
Capital ratios
Common equity Tier 1
Tier 1
Total
Leverage ratio
The net change in CWB’s 2016 CET1 capital ratio reflects increases of
approximately 70 basis points from the common share issuance, 15 basis
points from initiatives which resulted in lower overall capital requirements
for CWB’s existing pool of securitized leases and 10 basis points from
the reduction of unrealized losses on available-for-sale securities. These
increases were partially offset by approximately 40 basis points of capital
invested in support of strategic acquisitions and 10 basis points absorbed
by other items.
Table 23 - Regulatory Capital
($ thousands)
Common Equity Tier 1 Capital Instruments and Reserves
Directly issued qualifying common share capital plus related share-based payment reserve
Retained earnings
Accumulated other comprehensive income and other reserves
Common equity Tier 1 capital before regulatory adjustments
Regulatory adjustments to common equity Tier 1(1)
Common equity Tier 1 capital
Additional Tier 1 Capital Instruments
Directly issued capital instruments qualifying as Additional Tier 1 instruments
Directly issued capital instruments subject to phase-out from Additional Tier 1(2)(3)
Additional Tier 1 instruments issued by subsidiaries and held by third parties
Additional Tier 1 capital
Tier 1 capital
Tier 2 Capital Instruments and Allowances
Directly issued capital instruments subject to phase-out from Tier 2(2)
Tier 2 instruments issued by subsidiaries and held by third parties
Collective allowance for credit losses
Tier 2 capital before regulatory adjustments
Total capital
As at
October 31
2016
As at
October 31
2015
$
749,653
$ 566,721
1,354,966
1,261,678
(32,710)
(55,667)
2,071,909
1,772,732
(208,645)
(136,014)
1,863,264
1,636,718
265,000
125,000
105,000
105,000
100
155
370,100
230,155
2,233,364
1,866,873
325,000
472,500
27
110,943
435,970
36
99,613
572,149
$ 2,669,334
$ 2,439,022
(1) CET1 deductions include goodwill and intangible assets, net of related tax.
(2) Basel III capital balances exclude 40% (2015 – 30%) of the balance of non-common equity instruments outstanding at January 1, 2013 that do not include non-viability contingent capital clauses. At October 31, 2016 and 2015, there
was no exclusion from Tier 1 regulatory capital related to the WesTS (disclosed in deposits). At October 31, 2016, no outstanding subordinated debentures were excluded from regulatory capital (October 31, 2015 – $153 million).
(3) CWB has obtained regulatory approval to proceed with the redemption of the $105,000 senior deposit note held by CWB Capital Trust and all outstanding WesTS on December 31, 2016, which will reduce both the Tier 1 and Total
capital ratios by approximately 50 bp.
CWB Financial Group 2016 Annual Report
43
Table 24 - Risk-Weighted Assets
($ thousands)
Corporate
Sovereign
Bank
Retail residential mortgages
Other retail
Excluding small business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
As at October 31, 2016
As at October 31, 2015
Table 25 - Risk-Weighting Category
($ thousands)
Cash,
Securities
and Resale
Agreements
Loans
Other
Items
Total
Risk-
Weighted
Assets
As at October 31, 2016
$
141,166
$ 14,553,429
$
1,733,179
744,666
27,504
77,708
5,369
4,025,861
186,144
2,198,647
-
330,145
-
-
133,411
-
-
-
-
-
-
-
-
-
-
-
-
$ 14,694,595
$ 14,605,432
1,760,683
5,501
822,374
193,976
4,031,230
1,222,422
186,144
128,626
2,198,647
1,699,096
133,411
330,145
133,411
325,611
-
89,568
89,568
1,119,599
102,593
175,445
-
455,369
102,593
630,814
531,070
396,839
$
2,757,791
$ 21,677,476
$
2,997,607
$ 19,510,753
$
$
544,937
$ 24,980,204
$ 20,361,583
439,753
$ 22,948,113
$ 19,198,092
0 %
20 %
35 %
50 %
75 %
As at October 31, 2016
150% and
100 % greater
Balance Weighted
$
49,272
1,733,179
163,327
$
7,701
27,504
581,339
$
$
-
-
-
$ 138,756
-
-
-
-
-
$ 14,427,569
-
77,708
$
71,297 $ 14,694,595 $ 14,605,432
5,501
193,976
1,760,683
822,374
-
-
615,816
-
3,362,699
-
28,953
23,762
-
4,031,230
1,222,422
14,086
7,577
-
-
-
-
251,518
1,284
1,306
-
-
-
-
37,173
-
-
-
-
-
-
-
-
-
-
-
-
-
-
170,389
2,016,264
-
18,207
-
-
34,297
-
147,226
133,411
311,902
-
65,334
271,169
385
26,274
-
36
89,568
37,259
36,657
186,144
2,198,647
133,411
330,145
89,568
102,593
630,814
128,626
1,699,096
133,411
325,611
1,119,599
531,070
396,839
Corporate
Sovereign
Bank
Retail residential
mortgages
Other retail
Excluding small
business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
As at October 31, 2016 $ 2,834,775
$ 656,307
$ 3,362,699
$ 138,756
$ 2,268,110
$ 15,458,081
$ 261,476 $ 24,980,204 $ 20,361,583
As at October 31, 2015
$ 2,681,408
$ 563,429
$ 2,565,052
$ 90,918
$ 2,878,813
$ 13,929,747
$ 238,746 $ 22,948,113 $ 19,198,092
44
CWB Financial Group 2016 Annual Report Outlook for Capital Management
CWB will maintain strong capital ratios under the Standardized
approach for calculating risk-weighted assets, above its target
thresholds and OSFI’s required minimums, and is well positioned
to manage future business growth and unexpected events. Target
capital ratios, including an appropriate capital buffer over the
prescribed OSFI minimums, are reconfirmed regularly through CWB’s
Regulatory Capital Plan. The ongoing retention of earnings, net
of expected common and preferred share dividends, is expected
to support capital requirements associated with the anticipated
achievement of CWB’s medium-term performance target range for a
strong common equity Tier 1 ratio. With a very conservative Basel III
leverage ratio of 8.6% at October 31, 2016, CWB is not constrained
by OSFI’s stated requirement for banks to maintain a minimum
leverage ratio of 3%.
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 time frame, management
is confident CWB will continue to deliver positive earnings for
shareholders while maintaining financial stability and a strong capital
position.
Stress test assumptions include severe credit losses, a persistent low
interest rate environment and significantly slower loan growth to
reflect lower assumed levels of economic activity, as well as increased
competition for deposits and much higher levels of gross impaired
loans that could combine to result in significant compression of net
interest margin.
The resilience of CWB’s capital position under the severe conditions
assumed within its stress tests reflects both CWB’s commercial
lending focus and its use of the Standardized approach for
calculating risk-weighted assets. Under the Standardized approach,
most of CWB’s commercial lending exposures are risk-weighted at
100%. In view of the assumption for constrained loan growth in the
stress scenario, incremental increases in risk-weighted assets mainly
result from a 50% increase in risk weights on loans assumed to be
in default. This increase is effectively offset by the runoff of CWB’s
relatively short duration portfolio, resulting in stable regulatory capital
ratios over a multi-year time frame.
Management continues to evaluate alternatives to deploy capital for
the long-term benefit of CWB shareholders, which includes
a medium-term target range for the common share dividend
payout ratio of approximately 30% and the potential for strategic
acquisitions.
AIRB Transition Plan
A project plan has been finalized in support of CWB’s application
for transition to an AIRB methodology for managing credit risk and
calculating risk-weighted assets, including an anticipated three-year
time frame. CWB’s new core banking system is a critical component
for a number of requirements necessary for AIRB compliance,
including the collection of certain types of data. The AIRB approach
will put CWB on more equal footing with its competition. It will
add risk sensitivity to CWB’s framework for capital management,
increase risk quantification processes, improve risk-based pricing
capabilities and economic capital estimations, and enhance CWB’s
ability to comply with new accounting standards. These improved risk
management capabilities will better equip CWB to target business
segments that generate the most attractive risk-adjusted returns and
allocate resources accordingly.
CWB’s AIRB transition project is separated into several discrete
phases, including: establishment of formalized project governance;
creation of models including data collection, development, validation,
deployment, operationalization and use test; commencement of
model validation; implementation of risk-weighted asset calculator;
and, submission of final application to OSFI.
In 2016, management commenced development of an enhanced
enterprise data warehouse to serve as a repository for the required
data. Development, validation and deployment of AIRB models for
Optimum, National Leasing and branch-based residential mortgages
was also undertaken, with initiation of a pilot phase of model use
underway for Optimum and branch-based residential mortgages.
Management expects all models to be developed and deployed with
operational testing underway by the end of 2017.
Readers are cautioned that CWB’s move to the AIRB approach is
dependent on regulatory approval with the potential impact also
dependent upon future changes in both the Standardized and/or
AIRB approaches. Both approaches are currently under review by the
Basel Committee.
FINANCIAL INSTRUMENTS AND
OTHER INSTRUMENTS
As a financial institution, most of CWB’s balance sheet is comprised
of financial instruments and the majority of net income results from
revenues, expenses, gains and losses related to the same.
Financial instrument assets include cash resources, securities, securities
purchased under resale agreements, loans, derivative financial
instruments and certain other assets. Financial instrument liabilities
include deposits, debt, derivative financial instruments and certain other
liabilities.
The use of financial instruments exposes CWB to credit, liquidity and
market risk. A discussion of how these and other risks are managed can
be found in the Risk Management section of this MD&A.
Further information on how the fair value of financial instruments is
determined is included in the Financial Instruments Measured at Fair
Value discussion in the Critical Accounting Estimates section of this
MD&A.
Income and expenses are classified as to source, either securities or loans
for income, and deposits or borrower funds for expense. Net realized
gains (losses) on securities are shown separately in non-interest income.
Derivative Financial Instruments
More detailed information on the nature of derivative financial
instruments is shown in Note 11 to the consolidated financial statements.
The notional amounts of derivative financial instruments are not reflected
on the consolidated balance sheets.
CWB Financial Group 2016 Annual Report
45
Table 26 - Derivative Financial Instruments
($ thousands)
Notional Amounts
Interest rate contracts designated as accounting hedges(1)
Equity swaps designated as accounting hedges(2)
Equity swaps not designated as accounting hedges(3)
Foreign exchange contracts(4)
Total
2016
2015
$ 3,698,000
$
2,805,000
20,117
3,628
19,860
3,024
124,056
233,129
$
3,845,801
$
3,061,013
(1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between November 2016 and September 2021.
(2) Equity swaps designated as hedges mature between June 2017 and June 2019. Equity swaps are used to reduce the earnings volatility from restricted share units linked to CWB’s common share price.
(3) Equity swaps not designated as hedges mature between June and December 2017. Equity swaps are used to reduce the earnings volatility from deferred share units linked to CWB’s common share price.
(4) U.S. dollar foreign exchange contracts are used from time to time to manage the difference between U.S. dollar assets and liabilities. Forward foreign exchange contracts outstanding mature between November 2016 and April 2017.
The active use of interest rate contracts remains an integral component
to manage the interest rate gap position. The increase in the volume of
outstanding contracts (measured by the notional amount) reflects normal
course management of interest rate risk. Derivative financial instruments
are entered into only for CWB’s own account. CWB does not act as an
intermediary in derivatives markets. Transactions are entered into on
the basis of industry standard contracts with approved counterparties
subject to periodic and at least annual review, including an assessment
of the credit worthiness of the counterparty. Policies regarding the use of
derivative financial instruments are approved, reviewed and monitored
on a regular basis by ALCo, and are reviewed and approved by the Board
Risk Committee no less than annually.
ACQUISITIONS AND DIVESTITURES
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 of approximately
$1,000 million that were originated prior to March 1, 2016 were not
included in the transaction; however, CWB holds rights of renewal
related to these assets. The maximum total consideration is $120 million.
The acquisition was funded at closing with 1,250,312 common shares
valued at $26 million and $20 million in cash. Remaining consideration
consists of contingent payments to the vendors that could total up to
$71 million, with an estimated fair value at the acquisition date of $16
million. Contingent payment instalments 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
OFF-BALANCE SHEET
of the transaction is provided in Note 3 of the audited consolidated
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 were
included in the purchase structure.
The sales of CWB’s property and casualty insurance subsidiary, Canadian
Direct Insurance (CDI), and the stock transfer business of its subsidiary,
Valiant Trust Company, closed effective May 1, 2015. The transactions
consisted of the sale of 100% of the shares of CDI as well as the transfer
of certain operating assets, systems and employees that supported the
stock transfer business.
Off-balance sheet items include assets under administration and assets
under management. Total assets under administration, which are
comprised of trust assets under administration, third-party leases under
administration, and mortgages under service agreements, totalled
$10,689 million at October 31, 2016, compared to $9,294 million one
year ago.
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 20 of
the audited consolidated financial statements.
Assets under management held within Adroit and McLean & Partners
were $1,924 million at year end, compared to $1,883 million last year.
46
CWB Financial Group 2016 Annual Report SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER
QUARTERLY RESULTS
The financial results for each of the last eight quarters are summarized
in Table 27. In general, CWB’s performance reflects a consistent growth
trend, although the second quarter contains three fewer revenue-earning
days, or two fewer days during leap years. Results from Combined
Operations for the third quarter of 2015 reflect the impact of divestiture
gains. Results from Continuing Operations in the second and third
quarters of 2016 reflect the credit performance of oil and gas production
loans.
Quarterly financial results were subject to some fluctuation due to
exposure to property and casualty insurance prior to the divestiture
of Canadian Direct Insurance, completed on May 1, 2015. Insurance
operations, which were primarily reflected in non-interest income within
the results of Discontinued and Combined Operations, were subject to
seasonal weather conditions, cyclical patterns of the industry and natural
catastrophes.
Among other things, quarterly results can also fluctuate from the
recognition of periodic income tax items.
Detailed management’s discussion and analysis along with unaudited
interim consolidated financial statements for each quarter, except for
the fourth quarters, are available for review on SEDAR at sedar.com
and on CWB’s website at cwb.com. Copies of the quarterly reports
to shareholders can also be obtained, free of charge, by contacting
InvestorRelations@cwbank.com.
CWB Financial Group 2016 Annual Report
47
Table 27 - Quarterly Financial Highlights(1)
($ thousands, except per share amounts)
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Results from Continuing Operations
Net interest income (teb)
$ 149,704
$ 149,547
$ 145,106
$ 144,107
$ 141,096
$ 140,503
$ 133,064
$ 134,389
Less teb adjustment
Net interest income
Non-interest income
Total revenues (teb)
Total revenues
579
676
754
1,231
1,377
1,280
1,455
1,468
149,125
148,871
144,352
142,876
139,719
139,223
131,609
132,921
19,127
19,541
19,378
14,626
17,949
13,269
18,435
18,295
168,831
169,088
164,484
158,733
159,045
153,772
151,499
152,684
168,252
168,412
163,730
157,502
157,668
152,492
150,044
151,216
Pre-tax, pre-provision income (teb)
89,497
92,360
87,628
84,358
84,378
80,397
81,174
82,110
Common shareholders' net income
47,834
45,582
32,213
52,132
52,969
51,170
51,520
52,405
Earnings per common share
Basic
Diluted
Adjusted cash
Return on common
shareholders' equity
Adjusted return on common
shareholders' equity
Return on average total assets
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Provision for credit losses as
0.54
0.54
0.59
0.55
0.55
0.60
0.40
0.40
0.41
0.65
0.65
0.66
0.66
0.66
0.67
0.64
0.64
0.65
0.64
0.64
0.65
0.65
0.65
0.66
9.3 %
9.4 %
7.1 %
11.5 %
11.9 %
11.7 %
13.1 %
13.1 %
10.1
0.76
47.0
47.2
2.36
2.35
10.3
0.73
45.4
45.6
2.40
2.39
7.4
0.55
46.7
46.9
2.47
2.45
11.7
0.90
46.9
47.2
2.48
2.46
12.0
0.94
46.9
47.4
2.49
2.47
11.9
0.94
47.7
48.1
2.57
2.55
13.3
1.00
46.4
46.9
2.57
2.54
13.4
1.01
46.2
46.7
2.59
2.56
a percentage of average loans
0.24
0.32
0.78
0.18
0.18
0.17
0.17
0.16
Results from Combined Operations
Net interest income (teb)
Non-interest income
$ 149,704
$ 149,547
$ 145,106
$ 144,107
$ 141,096
$ 140,503
$ 134,886
$ 136,442
19,127
19,541
19,378
14,626
17,949
13,269
25,362
23,722
Net gain on sale of businesses, after tax
-
-
-
-
169
107,639
-
-
Total revenues (teb)
Total revenues
168,831
169,088
164,484
158,733
159,214
261,411
160,248
160,164
168,252
168,412
163,730
157,502
157,837
260,131
158,598
158,478
Common shareholders' net income
47,834
45,582
32,213
52,132
53,138
158,809
53,545
54,209
Earnings per common share
Basic
Diluted
Adjusted cash
Return on common
shareholders' equity
Adjusted return on common
shareholders' equity
Return on average total assets
Results from Discontinued Operations
Total revenues (teb)
Total revenues
Common shareholders' net income
Earnings per common share
$
Basic
Diluted
Adjusted cash
(1) See page 16 for a discussion of teb and non-IFRS measures.
48
0.54
0.54
0.59
0.55
0.55
0.60
0.40
0.40
0.41
0.65
0.65
0.66
0.66
0.66
0.67
1.97
1.97
1.98
0.67
0.67
0.68
0.67
0.67
0.69
9.3 %
9.4 %
7.1 %
11.5 %
11.9 %
36.3 %
13.6 %
13.5 %
10.1
0.76
10.3
0.73
7.4
0.55
11.7
0.90
12.1
0.94
36.5
2.90
13.9
1.02
13.9
1.03
$
-
-
-
-
-
-
$
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
169
$ 107,639
$
8,749
$
7,480
169
169
107,639
107,639
8,554
2,025
7,262
1,804
-
-
-
1.33
1.33
1.33
0.03
0.03
0.03
0.02
0.02
0.03
CWB Financial Group 2016 Annual Report Net Interest Margin
Fourth quarter net interest margin (teb) of 2.36% declined 13 basis
points compared to last year primarily due to lower asset yields and
slightly increased marginal funding costs, partially offset by favourable
changes in deposit mix. Loan yields remained under pressure due to both
the low interest rate environment and competitive factors. Net interest
margin (teb) was down four basis points from the prior quarter reflecting
similar factors, partially offset by the absence of the one-time impact of a
change in methodology for the recognition of certain loan fees recorded
last quarter.
Efficient Operations and Positive Operating Leverage
The quarterly efficiency ratio (teb), which measures non-interest expenses
as a percentage of total revenues (teb), excluding acquisition-related fair
value changes, was 47.0%, relatively unchanged from the fourth quarter
last year.
Overview of Combined Operations
Q4 2016 vs. Q4 2015 and Q4 2016 vs. Q3 2016
The results of Combined Operations did not differ materially from
Continuing Operations.
ROE and ROA
The quarterly adjusted ROE and ROA were materially consistent with the
results of Continuing Operations.
FOURTH QUARTER OF 2016
Overview of Continuing Operations
Q4 2016 vs. Q4 2015
Core operating performance was strong based on 6% growth of pre-tax,
pre-provision (PTPP) income to $89.5 million. Common shareholders’
net income of $47.8 million was down 10% from $53.0 million a year
ago. Net interest income and non-interest income both increased 7%;
however, the combined impact of moderate growth of non-interest
expenses, increased provisions for credit losses, acquisition-related fair
value changes and higher preferred share dividends resulted in lower
earnings. Higher net interest income reflects the benefit of very strong
13% loan growth, partially offset by a 13 basis point decrease in net
interest margin (teb) to 2.36%. Increased non-interest income mainly
reflects growth in credit related fees and trust services revenue, partially
offset by a decrease in ‘other’ non-interest income. Increased non-interest
expenses primarily relate to higher salaries and benefits reflecting the
combined impact of acquisition-related increases in staffing, hiring activity
in support of business growth and annual salary increments. The fourth
quarter provision for credit losses was 24 basis points, compared to 18
basis points last year. Of the provision this quarter, 13 basis points related
to non-oil and gas loans, and 11 basis points comprised an increase in the
collective allowance. The latter factor is consistent with expectations for
the collective allowance to fluctuate as a result of portfolio growth and
normal progress through the credit cycle. Provisions for direct oil and gas
exposures were not material this quarter. Diluted earnings per common
share of $0.54 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 $0.59 declined
18% and 12%, respectively. This reflects the factors discussed above, as
well as the issuance of common shares this year.
Q4 2016 vs. Q3 2016
Common shareholders’ net income increased 5% mainly due to lower
provisions for credit losses. Net interest income was relatively unchanged
as 1% loan growth was offset by a four basis point decline in net interest
margin (teb). Non-interest income was also relatively consistent with the
prior quarter, as the positive impact of increased credit related and retail
services fees was offset by lower ‘other’ non-interest income. Gains on
the sale of residential mortgages led to elevated ‘other’ non-interest
income last quarter. Non-interest expenses increased 3% primarily due to
higher full-time salaries as certain previously capitalized salaries related
to the new core banking system are now expensed. Diluted and adjusted
cash earnings per common share were both down 2%. PTPP income was
3% lower as total revenues were relatively unchanged while non-interest
expenses increased 3%.
ROE and ROA
The quarterly adjusted return on common shareholders’ equity (ROE)
of 10.1% decreased 190 basis points from a year earlier and was down
from 10.3% in the prior quarter. Fourth quarter return on assets (ROA)
was 0.76%, compared to 0.94% last year and 0.73% in the previous
quarter.
CWB Financial Group 2016 Annual Report
49
Financial Instruments Measured at Fair Value
Cash resources, securities, securities purchased under resale agreements,
acquisition-related contingent consideration and derivative financial
instruments are reported on the consolidated balance sheets at fair value.
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 published market
prices quoted in active markets. Level 2 fair value measurements were
estimated using a valuation technique based on observable market data.
Level 3 fair value measurements were determined using a valuation
technique based on non-market observable input.
ACCOUNTING POLICIES AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
CWB’s significant accounting policies are outlined in Note 1 to the
audited consolidated financial statements with related financial note
disclosures by major caption. The policies discussed below are considered
particularly important, as they require management to make significant
estimates or judgments, some of which may relate to matters that are
inherently uncertain.
Allowance for Credit Losses
An allowance for credit losses is maintained to absorb probable credit-
related losses in the loan portfolio based on management’s estimate at
the balance sheet date. In assessing existing credit losses, management
must rely on estimates and exercise judgment regarding matters for
which the ultimate outcome is unknown. These matters include economic
factors, developments affecting particular industries and specific issues
with respect to single borrowers. Changes in circumstances may cause
future assessments of credit risk to be significantly different than current
assessments and may require an increase or decrease in the allowance
for credit losses. Establishing a range for the allowance for credit losses
is difficult due to the number of uncertainties involved. The collective
allowance for credit losses is intended to address this uncertainty. At
October 31, 2016 CWB’s total allowance for credit losses was $127.2
million (2015 – $115.4 million) which included specific allowances of
$16.3 million (2015 – $15.8 million) and a collective allowance of $110.9
million (2015 – $99.6 million). Additional information on the process
and methodology for determining the allowance for credit losses can be
found in the discussion of Credit Quality in this MD&A and in Note 8 to
the consolidated financial statements.
50
CWB Financial Group 2016 Annual Report Table 28 summarizes the significant financial assets and liabilities recorded on the consolidated balance sheets at fair value.
Table 28 - Valuation of Financial Instruments
($ thousands)
As at October 31, 2016
Financial Assets
Cash resources
Securities
Securities purchased under resale agreements
Loans
Derivative related
Total Financial Assets
Financial Liabilities(1)
Deposits
Debt
Other liability
Derivative related
Total Financial Liabilities
As at October 31, 2015
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities(1)
Deposits
Debt
Other liability
Derivative related
Total Financial Liabilities
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
-
-
-
$
920,056
$
45,426
$
874,630
$
1,708,594
322,509
1,386,085
163,318
22,376,753
10,370
-
-
-
163,318
-
22,376,753
10,370
-
$ 25,179,091
$
367,935
$
2,434,403
$ 22,376,753
$ 21,281,835
$
1,271,036
24,257
7,172
$ 22,584,300
$
-
-
-
-
-
$ 21,281,835
$
1,271,036
-
-
-
24,257
7,172
-
$ 22,560,043
$
24,257
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
443,422
$
27,939
$
415,483
$
2,551,112
219,041
2,332,071
-
-
19,889,076
23,245
-
-
-
19,889,076
23,245
-
$ 22,906,855
$
246,980
$
2,770,799
$ 19,889,076
$ 19,457,102
$
1,206,101
650
4,503
$ 20,668,356
$
-
-
-
-
-
$ 19,457,102
$
1,206,101
-
4,503
$ 20,667,706
$
-
-
650
-
650
(1) The Level 3 financial liability at October 31, 2016 is related to the acquisition of CWB Maxium. At October 31, 2015, the Level 3 financial liability was comprised of contingent consideration related to a business sold in 2015.
Notes 2, 4, 5, 6, 11 and 27 to the consolidated financial statements provide additional information regarding these financial instruments.
CWB Financial Group 2016 Annual Report
51
CHANGES IN ACCOUNTING POLICIES AND
FINANCIAL STATEMENT PRESENTATION
New and amended accounting pronouncements issued by the
International Accounting Standards Board (IASB) did not result in a
change in CWB’s accounting policies during 2016.
transition to IFRS 9. The transition project focuses on the three main
areas of IFRS 9: classification and measurement, impairment, and hedge
accounting. IFRS 9 training for affected stakeholders has been and will
continue to be delivered on an ongoing basis throughout the transition.
The transition impact of IFRS 9 on CWB’s consolidated financial
statements has not been determined.
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. The impact on CWB of the new standard has not yet been
determined.
IFRS 15 – Revenue from Contracts with Customers
The IASB has established principles for reporting about the nature,
amount, timing and uncertainty of revenue and cash flows arising from
an entity’s contracts with customers. The standard provides a single,
principles-based model for revenue recognition to be applied to contracts
with customers. The new standard does not apply to financial instruments
or lease contracts, which fall in the scope of other IFRSs.
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 the new
standard 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 IASB ongoing activity and proposed changes
to IFRS. Several accounting standards that are in the process of being
amended by the IASB, such as macro-hedging, may have an impact on
CWB’s future consolidated financial statements.
FUTURE CHANGES IN ACCOUNTING POLICIES
A number of standards and amendments have been issued by the IASB,
and the following changes may have an impact on CWB’s future financial
statements. CWB is currently reviewing these standards to determine the
impact, if any, on the financial statements.
IFRS 9 – Financial Instruments
In July 2014, the IASB issued the complete version of IFRS 9, which will
replace IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 addresses classification and measurement of financial assets and
liabilities, impairment and hedge accounting.
Additional guidance from regulatory bodies has been issued since
the final release of IFRS 9. In December 2015, the Basel Committee
on Banking Supervision (BCBS) issued “Guidance on credit risk and
accounting for expected credit losses” and, in June 2016, OSFI issued
“IFRS 9 Financial Instruments and Disclosure”. OSFI’s guidance sets the
Canadian expectations for IFRS 9 adoption and is consistent with the
BCBS guidance.
IFRS 9 specifies that financial assets be classified into one of three
categories (amortized cost, fair value through profit or loss or fair
value through other comprehensive income) based on the cash flow
characteristics and the business model under which the assets are held.
The final standard also introduces a new “expected credit loss” (ECL)
model for calculating impairment on all financial assets classified at
amortized cost or fair value through comprehensive income, with the
most significant impact being to loans. The new impairment model
categorizes a financial asset into three stages based on changes in credit
risk since inception. Under stage one, if there has not been a significant
increase in credit risk at the reporting date, the ECL will be measured
and recognized at 12-month expected credit losses. A financial asset
will move to stage two if it has experienced a significant increase in
credit risk since inception and recognition of lifetime expected losses is
required. When a financial asset is identified as credit impaired, it will
move to stage three where interest income is recognized on the carrying
amount of the asset, net of the impairment allowance. A financial asset
can move between stages depending on improvement or deterioration
of credit risk. CWB plans to leverage models being developed for AIRB to
satisfy IFRS 9 requirements.
IFRS 9 also introduces a new hedge accounting model that expands the
scope of eligible hedged items and risks eligible for hedge accounting,
and aligns hedge accounting more closely with risk management.
IFRS 9 will be mandatorily effective for CWB’s fiscal year beginning on
November 1, 2018, and early adoption is permitted. In January 2015,
OSFI determined that Domestic Systemically Important Banks (D-SIBs)
should adopt IFRS 9 beginning November 1, 2017, while early adoption is
permitted but not required for other federally regulated Canadian banks
with October year ends, such as CWB. CWB plans to adopt IFRS 9 on
November 1, 2018.
During 2015, CWB commenced its IFRS 9 transition project and
established a formal project governance structure, including a Steering
Committee, to monitor the progress and critical decisions during the
52
CWB Financial Group 2016 Annual Report RISK MANAGEMENT
Our Approach to Risk Management
Maintenance of an integrated and disciplined approach to risk
management is a key success factor for CWB. Our risk management
framework guides us in prudent, balanced and measured risk-
taking aligned with CWB’s business strategy. The Enterprise Risk
Management (ERM) group develops CWB’s risk metrics, risk appetite,
risk policies and limits, and provides independent review and
oversight across the enterprise on risk-related issues.
CWB's vision – to be seen as crucial to our clients’ futures –
requires continuous consideration, understanding and responsible
management of all key risks at both the strategic and operational
levels. CWB’s core strategic objective to balance risk and reward
requires each team member to make common-sense business
decisions by assessing risk and reward trade-offs considering
CWB’s strategy, risk appetite and regulatory/legal requirements. We
consciously accept risks to add value for stakeholders and support
Highlights of 2016
Further enhancements to CWB’s risk management framework
were undertaken in 2016 as part of the ongoing development and
implementation of CWB’s risk management processes, including the
following key initiatives:
• Further enhanced CWB’s three lines of defence risk governance
framework;
• Established an integrated risk management function as the second
line of defence for structural market risk and operational risk, as
well as for CWB's Internal Capital Adequacy Assessment Process
(ICAAP) and stress testing under AIRB;
• Established market risk metrics with corresponding risk appetite
and limits for structural market risk exposures;
• Monitored and reported structural market risk exposures against
the risk appetite and limits, independent of the first line of
defence;
•
Initiated the multi-year project plan in support of application
for transition to the AIRB approach for managing credit risk and
calculating risk-weighted assets. Transition to the AIRB approach
will enhance CWB’s competitive position and facilitate risk-based
pricing, enable further optimization of capital allocation, and
enhance CWB’s risk quantification and stress testing capabilities;
the responsible and efficient delivery of products and services
provided those risks:
• Are aligned with our strategic objectives;
• Are thoroughly understood, measured and managed within the
confines of well-communicated CWB risk tolerances, including the
highest ethical standards; and,
• Serve the interests of stakeholders, including our clients,
shareholders, creditors, employees, regulators and communities.
•
Initiated development of certain AIRB models and AIRB-based
stress testing capabilities for Optimum Mortgage, branch-based
mortgage and National Leasing portfolios;
• Developed IFRS 9 models for Optimum Mortgage, branch-based
mortgage and National Leasing portfolios;
• Further developed an information services and data risk
management platform and initiated an information services and
data platform for the estimation of risk-weighted assets under the
AIRB approach; and,
• Revised the mandate of, and re-named, CWB’s Credit Analytics
Department as the Risk Data Aggregation, Analytics, and
Reporting Group (RDAAR).
CWB Financial Group 2016 Annual Report
53
The shaded areas of this MD&A represent a discussion of risk management policies and procedures relating to credit, market and liquidity risks as required under IFRS, which permits these specific disclosures to be included in the MD&A. Therefore, the shaded areas presented on pages 53 to 70 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2016. Outlook for Risk Management
With ongoing enhancement of CWB’s enterprise-wide risk
management framework in 2017, ERM will contribute to further
progress toward CWB’s eventual transition to the AIRB approach and
enhancements to stress testing processes.
Further development of an enhanced operational risk management
framework consistent with industry best practices is underway.
RISK MANAGEMENT OVERVIEW
Risk management processes are designed to complement CWB’s overall
size, level of complexity, risk profile and philosophy regarding risk.
CWB’s risk management philosophy emphasizes risk measurement,
sound controls, effective governance, transparency and accountability.
Selectively choosing and managing acceptable risks has been integral to
CWB’s ability to grow profitably in both favourable and adverse market
conditions. A strong risk culture continues to be a cornerstone of CWB’s
approach to risk management.
As with all financial institutions, CWB is in the business of managing risk
and is therefore exposed to various risk factors that could adversely affect
its operating environment, financial condition and financial performance.
Exposure to risk may also influence a client’s decision to make deposits
and/or an investor’s decision to buy, sell or hold CWB shares or other
securities. Each of CWB’s businesses is subject to certain risks that require
unique mitigation strategies.
CWB has demonstrated its ability to effectively manage risks through
conservative management practices based on a strong risk culture and
a disciplined risk management approach; however, not all risks are
within CWB’s direct control. A description of key external risk factors
management considers is included in this risk management discussion.
CWB actively evaluates existing and potential risks to develop, implement
and continually enhance appropriate risk mitigation strategies.
Risk Management Strengths
Risk Management Challenges
• Ongoing global macroeconomic volatility, especially the persistence of
low oil prices and related economic challenges within parts of Western
Canada;
•
Increasing volume and complexity of regulatory requirements and
expectations; and,
• Capital requirements under the Standardized approach decoupled
from the underlying economic risk.
Risk Management Principles
The following principles guide the management of risks across all
operations and companies of CWB (enterprise-wide):
• An effective balance of risk and reward through alignment of business
strategy with risk appetite, diversifying risk, pricing appropriately
for risk, and mitigating risk through sound preventive and detection
controls;
• An enterprise-wide view of risk and the acceptance of risks required to
build the business with continuous consideration for how those risks
may affect CWB’s reputation;
• The belief that every employee is accountable to understand the risks
inherent in their respective day-to-day activities;
• Use of common sense, sound judgment and fulsome risk-based
• Strong risk culture with robust risk management framework which
discussions;
addresses risks throughout CWB;
• Low operational risk profile;
•
In-depth knowledge of our clients;
• Secured lending business model;
• Disciplined underwriting with demonstrated strength through multiple
credit cycles;
•
Increasing geographic diversification;
• Low balance sheet leverage;
• Low average duration of lending portfolios; and,
• Relatively low exposure to economically sensitive retail lending
portfolios.
• Recognition that “knowing your client” reduces risks by ensuring the
services provided are suitable for, and understood by, the client; and,
• Ongoing commitment to a three lines of defence risk governance
framework with independent oversight and effective challenge from
the second line.
The mandate of CWB’s ERM function is to enhance existing processes
and structure to help identify and appropriately mitigate risks on an
enterprise-wide basis. The intent is to provide a suitable framework
for CWB to properly balance risk and reward while ensuring risk
management practices satisfy regulatory requirements.
54
CWB Financial Group 2016 Annual Report Risk Management Framework
The primary goal of risk management is to ensure that the outcomes of
risk-taking are consistent with CWB’s business activities, strategies and
risk appetite. The enterprise-wide risk management framework provides
the foundation for achieving this goal. CWB utilizes the ISO 31000
Standard for Risk Management as a comprehensive framework to help
ensure risk is managed effectively and efficiently.
Figure 4 – Risk Management Framework
Figure 4 depicts the four main elements which comprise CWB's
enterprise-wide risk management framework:
Risk Governance
Risk Appetite Framework
Principal Risks and Risk Management Processes
Strong Risk Culture
Risk Culture
Principal Risks
A strong risk culture emphasizes transparency and accountability.
Organizations with a strong risk culture have a consistent and repeatable
approach to risk management when making key business decisions,
including regular discussions of risk and reviews of risk scenarios that
can help management and the Board understand the inter relationships
and potential impacts of risks. CWB’s strong risk culture starts with an
appropriate “tone at the top” that demonstrates and sends consistent
and clear messages throughout the organization. Risk culture is
communicated throughout CWB and is emphasized by the actions of
senior management and the Board.
Figure 5 – Principal Risks
The ability to identify, measure and monitor risks is a key component of
effective enterprise-wide risk management. Certain principal risks have
been identified that have the greatest potential to materially impact
operations.
Figure 5 is a visual representation of CWB’s principal risk exposures by
business line:
CWB
Credit Risk
Market Risk
Capital Risk
Operational Risk
Business
and Personal
Banking
Trust
Services
Wealth
Management
Credit Risk
Operational Risk
Credit Risk
Operational Risk
Operational Risk
CWB Financial Group 2016 Annual Report
55
Reputational risk is also a principal risk, which arises as a consequence
of not managing other risks effectively. There are three main subsets of
operational risk: regulatory risk, people risk, and technology risk. Other
types of operational risk include cybersecurity risk and reputation risk.
CWB’s risk management processes incorporate various forms of stress
testing to assist in making informed risk management and capital
planning decisions, which are developed and managed as part of sound
business strategy. Stress testing is performed across key functional areas
of CWB based on both quantitative and qualitative inputs.
Risk Appetite
Our Risk Appetite Framework consists of our Risk Appetite Statement,
as well as all supporting key risk metrics and corporate policies and
standards, including limits. Our risk appetite defines the amount of risk
that CWB is willing to assume for all risk types, given our guiding risk
management principles and capital capacity. Key attributes of CWB’s
overall risk appetite include the following:
• Careful and diligent management of risks at all levels led by a
knowledgeable and experienced management team committed to
sound management practices and the promotion of a highly ethical
culture;
• A continuous commitment and focus on the achievement of high-
quality, sustainable long-term financial results;
• A conservative risk culture that is prevalent throughout CWB, from the
• Targeted financial performance which supports maintenance of
Board to senior management to front-line staff;
• No direct exposure to wholesale banking businesses (investment
banking, brokerage and trading) which are subject to significant
earnings volatility and can lead to large unexpected losses compared to
typical spread lending;
• A philosophy of only taking risks that are transparent and understood,
and that can be measured, monitored and managed. Management
strives to thoroughly understand the risks of the businesses in which
CWB chooses to engage and has extensive knowledge and experience
in CWB’s chosen lending sectors, key geographic regions and other
complementary business areas;
investment grade credit ratings to allow for competitive access to
funding;
• Maintenance of effective policies, procedures, guidelines, compliance
standards and controls, training and oversight to guide the business
practices and risk-taking activities of all employees in support of CWB’s
reputation, and adherence to all legal and regulatory obligations; and,
• Risk Appetites for key risk types are established based on both
quantitative and qualitative risk types by ERM as the second line of
defence, endorsed by senior management and ultimately approved by
the Board Risk Committee.
56
CWB Financial Group 2016 Annual Report CWB Financial Group 2016 Annual Report
57
Risk Management Governance StructureThe foundation of our enterprise-wide risk management framework is a governance framework which includes a robust committee structure and a comprehensive set of corporate policies and limits approved by the Board of Directors or its committees, as well assupporting corporate standards and operating guidelines. This enterprise-wide risk management framework is governed through a hierarchy of committees and individual responsibilities as outlined in Figure 6.Figure 6 – Enterprise-Wide Risk Management FrameworkChief ExecutiveOfficeGroupCredit RiskCommittee CreditCapitalOperational• Regulatory• Technology• PeopleMarketLiquidityFunding GroupALCO GroupCapital RiskCommittee GroupOperationalRiskCommittee GroupDisclosureCommittee Board RiskCommittee Executive RiskCommittee Board of DirectorsBoard AuditCommittee ReputationalBusiness andSupport Areas Enterprise RiskManagement (ERM) InternalAudit 1st Line of Defence 2nd Line of Defence 3rd Line of DefenceChief Risk OfficerBoard of Directors – Responsible for supervising management and the business of CWB. The Board, either directly or through its committees, is responsible for oversight in the following areas: strategic planning, risk appetite, identification and management of risk, capital management, promoting a culture of integrity, internal controls, evaluation of senior management and succession planning, public disclosure and corporate governance.Board Risk Committee – Assists the Board in fulfilling its oversight responsibilities in relation to CWB’s identification and management of risk, adherence to corporate risk management policies and procedures, and compliance with risk-related regulatory requirements. Prior to formation of this committee, its responsibilities were owned either by the full Board or other committees of the Board. The Board Risk Committee includes a loan adjudication panel. Board Audit Committee – Assists the Board in fulfilling its oversight responsibilities for the integrity of CWB’s financial reporting, effectiveness of CWB’s internal controls and the performance of its internal and external audit functions.Chief Executive Officer – Directly accountable to the Board for all of CWB’s risk-taking activities. The Chief Executive Officer is supported by the Executive Risk Committee and its subcommittees, as well as ERM.Chief Risk Officer – Directly accountable to the Chief Executive Officer. As head of ERM, the Chief Risk Officer is responsible for providing independent review and oversight of enterprise-wide risks and leadership on risk issues, developing and maintaining a risk management framework which includes key risk metrics and risk policies and fostering a strong risk culture across the enterprise. The Chief Risk Officer reports functionally to the Board Risk Committee. CWB’s risk management framework is anchored in the Three Lines of Defence approach to managing risk, which is fundamental to our operating model,
as described in Table 29.
Table 29 – Three Lines of Defence
First Line
Business and Support Areas
Second Line
ERM
Third Line
Internal Audit
Own and manage all risks within their lines of
business
Pursue suitable business opportunities within
their established risk appetite and limits
Act within their delegated risk-taking authority
as set out in established policies
Establish appropriate operating policies and
internal control structures in accordance with
the risk policies
Set key risk metrics on which risk appetite
and limits are based; ERM establishes policies,
processes and practices that address all
significant risks across the enterprise
Provide independent assurance to the Audit
Committee and the Board Risk Committee as to
the effectiveness and appropriateness of (and
adherence to) the risk framework
Independently assess, quantify, monitor, control
and report all significant risk exposures against
the risk appetite and limits
Independently reviews adherence to controls,
policies, rules and regulations
Provide independent oversight, effective
challenge and independent assessment of risk
Identifies operational weaknesses; recommends
and tracks remediation actions
The following CWB oversight functions provide key support within the
enterprise-wide risk management framework:
• Regulatory Compliance – Establishes risk-based processes to actively
manage known and emerging risks related to applicable regulatory
requirements. The group is headed by the Chief Compliance Risk
Officer (CCRO). Prior to August, 2016, the Chief Risk Officer fulfilled
the responsibilities of the CCRO.
• Finance – Provides independent oversight of processes to manage
financial reporting and capital risk. Provides oversight on financial
reporting, capital adequacy, external credit ratings, regulatory reporting
on finance related issues, tax and accounting related functions. The
CFO reports functionally to the Audit Committee.
58
CWB Financial Group 2016 Annual ReportExecutive Risk Committee – CWB’s senior risk committee provides risk oversight and governance at the highest levels of management. The Executive Risk Committee reviews and discusses significant risk issues and action plans that arise in executing the enterprise-wide strategy. The Committee is chaired by the Chief Risk Officer and membership includes the Chief Executive Officer and the Chief Financial Officer.Subcommittees of the Executive Risk Committee – The Executive Risk Committee and its sub-committees provide oversight of the processes whereby the risks assumed across the enterprise are identified, measured, monitored, held within delegated limits and reported in accordance with policy guidelines. They include:Group Credit Risk Committee – Approves loans within delegated limits and is responsible for ensuring that appropriate credit policies are in place.Group Asset Liability Committee (ALCo) – Responsible for the establishment and maintenance of operational policies and programs for liquidity management and control, funding sources, investments, foreign exchange risk, structural interest rate risk and derivatives risk. Group Capital Risk Committee – Responsible for the oversight of capital adequacy, CWB’s regulatory capital plan, ICAAP and stress testing.Group Operational Risk Committee – Reviews the group operational risk management framework, operational loss reporting and business continuity plans. Reviews action plans for mitigating and improving the management of operational risk. Responsible for the emerged/emerging risk identification processes. Group Disclosure Committee – Supports CEO/Chief Financial Officer (CFO) certification over public disclosures. Responsible for reviewing CWB’s internal control over financial reports and disclosure controls and procedures to help ensure the accuracy, completeness and timeliness of related public disclosures. REPORT ON PRINCIPAL RISKS
While CWB’s operations are exposed to numerous types of risk, certain risks, identified as principal risks, have the greatest potential to materially impact
operations and financial performance:
CREDIT RISK
Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to discharge its contractual commitment or
obligation to CWB.
Risk Overview
The main source of credit risk exposure for CWB results from granting
loans and leases. CWB’s credit risk management culture reflects the
unique combination of policies, practices, experience and management
attitudes that support growth within chosen industries and geographic
markets. Underwriting standards are designed to ensure an appropriate
balance of risk and return, and are supported by established loan
exposure limits in areas of demonstrated lending expertise. Concentration
is measured against specified tolerance levels by geographic region,
industry sector and product type. In order to minimize its potential loss
given default, the vast majority of loans are secured by tangible collateral.
CWB’s approach to managing credit risk has proven to be very effective,
as demonstrated by CWB’s relatively stable long-term average annual
provision for credit losses and customarily low write-offs measured as a
percentage of total loans.
Refer to the Loans and Credit Quality sections of this MD&A for
additional information.
CWB Financial Group 2016 Annual Report
59
Risk GovernanceThe credit approval process is centrally controlled, with all significant credit requests submitted to Credit Risk Management for adjudication. Credit Risk Management is independent of the originating business. Requests for credit approval beyond the lending limit of the CEO are referred to the Group Credit Risk Committee or the Board Risk Committee’s loan adjudication panel.Risk ManagementCWB is committed to a number of important principles to manage credit exposures, which include:• Oversight provided by the Board Risk Committee; • Delegated lending authorities that are clearly communicated to lenders and other personnel engaged in the credit granting process;• Credit policies, guidelines and directives which are communicated within all branches, business lines and to officers whose activities and responsibilities include credit granting and risk assessment;• Appointment of personnel engaged in credit granting who are both qualified and experienced;• A standard credit risk-rating classification established for all credits;• A review at least annually of credit risk-rating classifications and individual credit facilities (except consumer loans and single-unit residential mortgages);• Quarterly review of risk diversification by geographic area, industry sector and product measured against assigned portfolio limits;• Ongoing development of credit analytics reporting to assess portfolio risks at a granular level;• Pricing of credits commensurate with risk to ensure an appropriate financial return;• Management of growth while maintaining the quality of loans;• Early recognition of problem accounts and immediate action to protect the safety of CWB’s capital;• Delegation of loans deemed to carry higher risks to a specialized loan workout group that performs an appropriate level of regular monitoring and close management; • Independent reviews of credit evaluation, risk classification and credit management procedures by Internal Audit, which includes direct reporting of results to senior management, the CEO and the Audit Committee of the Board; and,• Detailed quarterly reviews of accounts rated less than satisfactory. Reviews include a recap of action plans for each less than satisfactory account, the completion of a watch list report recording accounts with evidence of weakness and an impaired report covering loans that show impairment to the point where a loss is possible. A summary report of less than satisfactory accounts is reviewed on a quarterly basis by the Board Risk Committee. Environmental Risk
Portfolio Quality
While the day-to-day operations of CWB do not have a material impact
on the environment, environmental risks include the risk of loss given
default if a borrower is unable to repay loans due to environmental
cleanup costs, and the risk of damage to CWB’s reputation resulting
from the same. In order to manage these risks, and to help mitigate
CWB’s overall impact on the environment, CWB evaluates potential
environmental risks as part of its credit granting process. If potential
environmental risks are identified that cannot be resolved to CWB’s
satisfaction, the application will be denied.
Reports on environmental inspections and findings are provided quarterly
to the Board Risk Committee. Where financing is provided, Internal Audit
will sample test loan files to ensure environmental studies required as
a condition of financing are in place, including review for a transmittal
letter from the author of the environmental study indicating that it may
be relied upon for financing purposes.
CWB’s strategy is to maintain a quality, secured and diversified loan
portfolio by engaging experienced personnel who provide a hands-on
approach in credit granting, account management and timely action
when problems develop. Lending is targeted to small- and medium-sized
businesses, and to individuals. Relationship banking and “knowing your
client” are important tenets of effective account management. Earning
an appropriate financial return for the level of risk is also fundamental.
Geographic diversification of the loan portfolio outside of Western
Canada is achieved through National Leasing’s representation across all
provinces of Canada, residential mortgages underwritten and serviced by
Optimum in select regions of Ontario and Atlantic Canada, participation
in syndicated lending facilities primarily led by other Canadian banks, and
increasingly through CWB Maxium and CWB Franchise Finance.
For additional information, see the Loans and Credit Quality sections of
this MD&A.
60
CWB Financial Group 2016 Annual ReportCredit Risk ConcentrationRisk diversification is addressed by establishing portfolio limits by geographic area, industry sector and product. The policy is to limit loans to connected corporate borrowers to not more than 10% of CWB’s shareholders’ equity. Generally, CWB’s lending limit is $50 million for a single risk exposure. However, for certain quality connections that confirm debt service capacity and loan security from more than one source, the limit is generally $100 million. CWB clients with larger borrowing requirements can be accommodated through loan syndications with other financial institutions. MARKET RISK
Market risk is the impact on earnings and economic value of equity resulting from changes in financial market variables such as interest rates
and foreign exchange rates. CWB’s Market Risk is primarily comprised of structural interest rate risk on the balance sheet, and liquidity and
funding risk. A smaller amount of market risk relates to investment risk in the relatively small securities portfolio, and foreign exchange.
Risk Overview
Market risk arises when extending loans, taking deposits and making
investments. The most material market risks for CWB are those related
to changes in interest rates. CWB does not have a trading book; it does
not undertake market activities such as market making, arbitrage or
proprietary trading and, therefore, does not have direct risks related to
those activities. A diversified cash and securities portfolio is maintained
that is primarily comprised of high-quality debt instruments, with some
exposure to preferred shares. These instruments are subject to price
fluctuations based on movements in interest rates and volatility in
financial markets. CWB liquidated its holdings of common equities in
2016 and has no plans to re-establish this portfolio. CWB has limited
direct exposure to foreign exchange risk.
Subcategories of Market Risk
Interest Rate Risk
Interest rate risk is the impact on earnings and economic value of equity resulting from changes in interest rates.
Structural interest rate risk arises when changes in interest rates affect
the cash flows, earnings and values of assets and liabilities. The objective
of structural interest rate risk management is to maintain high-quality
earnings, maximize sustainable product spreads and maintain an
appropriate balance between earnings volatility and economic value
volatility while keeping both within their respective risk appetite limits.
Structural Interest Rate Risk arises due to the duration mismatch between
our assets and liabilities. Adverse interest rate movements may cause a
reduction in earnings; and/or a reduction in the economic value of CWB’s
assets; and/or an increase in the economic value of CWB’s liabilities.
Structural interest rate risk is primarily comprised of duration mismatch
risk and product embedded option risk. Duration mismatch risk arises
when there are differences in the scheduled maturity, repricing dates
or reference rates of assets, liabilities and derivatives. The net duration
mismatch, representing residual assets funded by common shareholders’
equity, is managed to a target profile through interest rate swaps and
CWB’s cash and securities portfolio. Product embedded option risk arises
when product features allow customers to alter scheduled maturity or
repricing dates. Product embedded options include loan prepayment,
deposit redemption privileges and committed rates on unadvanced
mortgages.
Variation in market interest rates can affect net interest income by
altering cash flows and spreads. Variation in market interest rates can
also affect the economic value of a bank’s assets, liabilities, and off-
balance sheet (OBS) positions. Thus, the sensitivity of a bank’s economic
value to fluctuations in interest rates is an important consideration of
shareholders, management and regulators. The economic value of an
instrument represents an assessment of the present value of its expected
net cash flows, discounted to reflect market rates. By extension, the
economic value of CWB’s equity can be viewed as the present value
of CWB’s expected net cash flows, defined as the expected cash flows
on interest-sensitive assets minus the expected cash flows on interest-
sensitive liabilities plus the expected net cash flows on OBS positions.
In this sense, the economic value perspective reflects one view of the
sensitivity of net worth to fluctuations in interest rates.
Management of structural interest rate risk is a balancing act between
short-term income volatility and volatility in the long-term value of CWB’s
equity. Treasury manages the economic value of the banking book to a
“benchmark duration” which reflects this trade-off. Benchmark duration
is recommended by Treasury and approved by ALCo. The benchmark
duration considers an appropriate trade-off between:
• earnings volatility and volatility in the economic value of CWB’s equity;
• risk and return (e.g. increasing duration increases the exposure to
rising interest rates, but also enables an interest income pick-up from a
positively sloping yield curve); and,
• expected interest rate movements.
While management of the benchmark duration is the responsibility of the
first line of defence (recommended by Treasury and approved by ALCo)
and detailed in the operational policies, it is important that the resulting
risk exposures stay within CWB’s risk appetite.
CWB Financial Group 2016 Annual Report
61
Risk GovernanceMarket risk is managed in accordance with the approved market risk policy and the corresponding operational policies. As the first line of defence, Treasury owns and manages the market risk on a dailybasis. ALCo provides tactical and strategic direction and is responsible for ongoing oversight, and reviews and endorses the operational policies. Risk Metrics
CWB’s Interest Rate Risk Exposures
Structural interest rate risk is measured using simulations, earnings
sensitivity and economic value sensitivity analysis, stress testing and gap
analysis, in addition to other traditional risk metrics.
• Earnings at Risk - Earnings at risk (EaR) is defined as the potential
reduction in net interest income due to adverse interest rate
movements over a one-year horizon. It is measured both against
stress scenarios historically observed (historical simulation or historical
Value at Risk (VaR)) and standard parallel interest shocks (interest rate
sensitivity).
• Economic Value of Equity at Risk - Economic value of equity at risk
(EVaR) is defined as the potential reduction in economic value of
CWB’s equity due to adverse interest rate movements. This is not an
earnings measure, but rather a value measure; and it is also measured
against both stress scenarios historically observed (historical simulation
or historical VaR) and standard parallel interest shocks (interest rate
sensitivity).
Exposure to interest rate risk is controlled by managing the size of the
static gap positions between interest sensitive assets and interest sensitive
liabilities for future periods. This is supplemented by historical VaR for
economic value of CWB’s equity, estimated by applying historical interest
rate scenarios to interest sensitive assets and interest sensitive liabilities.
These analyses are supplemented by stress testing of the asset liability
portfolio structure, duration analysis and dollar estimates of net interest
income sensitivity for periods of up to one year after Treasury hedging
activity. The interest rate gap is measured at least monthly. Note 26 to the
consolidated financial statements shows the gap position at October 31,
2016 for select time intervals.
The analysis in Note 26 is a static measurement of interest rate sensitivity
gaps at a specific point in time, and there is potential for these gaps to
change significantly over a short period. The impact on earnings from
changes in market interest rates will depend on both the magnitude
of and speed with which interest rates change, as well as the size and
maturity structure of the cumulative interest rate gap position and the
management of those positions over time.
The one-year and under cumulative gap represented 3.5% of total assets
at October 31, 2016, compared to negative 3.5% one year ago, while
the one-month and under gap was 0.8%, compared to negative 1.5% a
year earlier.
The estimated sensitivity of net interest income to a change in interest
rates is presented in Table 30. The amounts represent the estimated
change in net interest income over the time period shown resulting 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 liability portfolio;
• Floor levels for various deposit liabilities;
•
Interest rate changes affecting interest sensitive assets and liabilities
by proportionally the same amount and applied at the appropriate
repricing dates; and,
• No early redemptions.
62
CWB Financial Group 2016 Annual ReportInterest rate risk is managed to ensure sustainable earnings over time, balancing the impact on current year earnings against changes in economic value at risk over the life of the asset and liability portfolios. Table 30 - Estimated Sensitivity of Net Interest Income as a Result of One Percentage Point Change in Interest Rates
($ thousands)
Impact of 1% increase in interest rates
Period
90 days
1 year
1 year percentage change
Impact of 1% decrease in interest rates
Period
90 days
1 year
1 year percentage change
2016
$
7,608
$
12,582
2.15 %
2016
$
(3,570)
$
(5,150)
(0.88)%
2015
(518)
(2,989)
(0.61)%
2015
(43)
(201)
(0.04)%
Higher sensitivity to an increase in rates reflects reduction in CWB’s
duration of equity.
It is estimated that a one-percentage point increase in all interest
rates at October 31, 2016 would decrease unrealized gains related to
available-for-sale debt securities and the fair value of interest rate swaps
designated as hedges, and result in a reduction in other comprehensive
income of approximately $57.1 million, net of tax (October 31, 2015 –
$90.1 million); it is estimated that a one-percentage point decrease in
all interest rates at October 31, 2016 would result in a higher level of
unrealized gains related to available-for-sale debt securities and increase
the fair value of interest rate swaps designated as hedges, which would
increase other comprehensive income by approximately $58.6 million, net
of tax (October 31, 2015 – $87.1 million).
Treasury maintains the asset liability structure and interest rate sensitivity
within CWB’s established policies through pricing and product initiatives,
as well as the use of interest rate swaps and other appropriate strategies.
Differences in the respective sensitivity of net interest income and other
comprehensive income to changes in interest rates compared to last year
primarily reflects the increased use of interest rate swaps to maintain
management’s targeted asset liability structure and interest rate sensitivity.
Foreign Exchange Risk
Foreign exchange risk is the risk to changes in earnings or economic value arising from changes in foreign exchange rates. This risk arises when
various assets and liabilities are denominated in different currencies.
CWB Financial Group 2016 Annual Report
63
In providing financial services to its customers, CWB has assets and liabilities denominated in U.S. dollars. At October 31, 2016, assets denominated in U.S. dollars were 1.4% (2015 – 1.0%) of total assets and U.S. dollar liabilities were 1.5% (2015 – 1.1%) of total liabilities. Currencies other than U.S. dollars are not bought or sold other than to meet specific client needs. CWB has no material exposure to currencies other than U.S. dollars.Policies have been established that include limits on the maximum allowable differences between U.S. dollar assets and liabilities. The difference is measured daily and managed by use of U.S. dollar forward contracts or other means. Policy respecting foreign exchange exposure is reviewed and approved at least annually by the Board Risk Committee. Any deviations from policy are reported regularly to ALCo and quarterly to the Board Risk Committee.
Liquidity And Funding Risk
Liquidity risk is the risk that CWB cannot meet a demand for cash or fund its financial obligations in a cost efficient or timely manner as they
become due. These financial obligations can arise from withdrawals of deposits, debt maturities, and commitments to provide credit.
Risk Overview
CWB maintains a sound, prudent and conservative approach to
managing exposure to liquidity risk, including targeting a contingency
planning horizon under stressed operating conditions that may be caused
by company-specific or market-wide stress scenarios. The contingency
planning horizon and related liquidity and funding management
strategies comprise an integrated liquidity risk management program
designed to ensure that CWB manages liquidity risk within an appropriate
threshold.
CWB’s key risk mitigation strategies include:
• an appropriate balance between the level of risks CWB undertakes and
the corresponding cost of risk mitigation that considers the potential
impact of extreme but plausible events;
• broad funding access, including preserving and growing a reliable base
of core deposits and continual access to diversified sources of funding;
• a comprehensive group-wide liquidity contingency plan that is
supported by a pool of unencumbered high-quality liquid assets and
marketable securities that would provide assured access to liquidity in
a crisis; and,
• the maintenance of a liquidity position to manage current and future
liquidity requirements while also contributing to the flexibility, safety
and soundness of CWB under times of stress.
Refer to the Liquidity Management section of this MD&A for additional
information.
64
CWB Financial Group 2016 Annual ReportRisk GovernanceLiquidity management is centralized to better facilitate the effective management of liquidity risk. The Board Risk Committee approves market risk management policies and delegates liquidity risk authorities to senior management. As the first line of defence, Treasury is responsible for managing the liquidity and funding risk. ALCo oversees the treasury function and provides tactical and strategic guidance. ERM, as the second line of defence, is responsible for independent oversight. CWB has remained in compliance with OSFI’s Liquidity Coverage Ratio (LCR) and the Net Cumulative Cash Flow monitoring tool, since its introduction on
January 1, 2015.
Contractual Obligations
CWB enters into contracts in the normal course of business that give
rise to commitments of future minimum payments that affect the
liquidity position. In addition to the obligations related to deposits and
subordinated debentures discussed in the Deposits and Liquidity
Table 31 - Contractual Obligations
($ thousands)
Management sections of this MD&A, as well as Notes 13, 17, 21 and
30 of the consolidated financial statements, contractual obligations
outstanding at October 31, 2016 are disclosed in Table 31.
Lease commitments
$
13,205
$
23,754
$ 20,487
$
34,582
$
92,028
Purchase obligations for operating and capital expenditures
2,909
5,792
364
108
9,173
Within 1
Year
1 to 3
Years
4 to 5
Years
More than
5 Years
Total
October 31, 2016
October 31, 2015
Credit Ratings
$
16,114
$
29,546
$ 20,851
$
34,690
$
17,054
$
22,682
$ 19,428
$
40,479
$
$
101,201
99,643
CWB’s ability to efficiently access capital markets funding on a cost-
effective basis is partially dependent upon the maintenance of satisfactory
credit ratings. Such credit ratings, accompanied with a stable or positive
outlook, increase the breadth of clients and investors able to participate
in various deposit and debt offerings, while also lowering CWB’s overall
cost of capital.
CWB Financial Group 2016 Annual Report
65
Risk ManagementCWB has a comprehensive liquidity risk management policy. The key elements of managing liquidity risk for CWB include the following:• Policies – Liquidity risk management policies establish targets for minimum liquidity, set the monitoring regime, and define authority levels and responsibilities. Policies are reviewed at a minimum annually by ALCo, Executive Risk Committee and the Board Risk Committee. Limit setting establishes acceptable thresholds for liquidity risk;• Monitoring – Trends and behaviours regarding how clients manage their deposits and loans are monitored to determine appropriate liquidity levels. Active monitoring of the external environment is performed using a wide range of sources and economic barometers;• Measurement and modelling – CWB’s liquidity model measures and forecasts cash inflows and outflows, including any cash flows related to applicable off-balance sheet activities over various risk scenarios; • Reporting – Treasury oversight of all significant liquidity risks that support analysis, risk measurement, stress testing, monitoring and reporting to both ALCo and the Board Risk Committee;• Stress testing – CWB performs liquidity stress testing on a regular basis to evaluate the potential effect of both systemic and company-specific (idiosyncratic) disruptions on CWB’s liquidity position. Liquidity stress tests consider the effect of changes in funding assumptions, depositor behaviour and the market behaviour of liquid assets. CWB stress tests liquidity as per guidance from OSFI as described in the Liquidity Adequacy Requirement. Stress test results are reviewed by ALCo and considered in making liquidity management decisions. Liquidity stress testing has many purposes, including, but not limited to:• helping the Board Risk Committee and senior management understand the potential behavior of various positions on CWB’s balance sheet in circumstances of stress; and,• facilitating the development of effective funding, risk mitigation and contingency plans.• Contingency planning – A liquidity contingency plan is maintained that defines a liquidity event and specifies the desired approaches for analyzing and responding to actual and potential liquidity events. The plan outlines an appropriate governance structure for the management and monitoring of liquidity events, processes for effective internal and external communication, and identifies potential countermeasures to be considered at various stages of an event; • Funding diversification – CWB actively manages the diversification of its deposit liabilities by source, type of depositor, instrument and term. Supplementary funding sources currently include securitization, capital market issuance and whole loan sales; and, • Core liquidity – CWB maintains a pool of highly liquid, unencumbered assets that can be readily sold, or pledged to secure borrowings, under stressed market conditions or due to company-specific events. Credit ratings are largely determined by the quality of earnings, the
adequacy of capital, the effectiveness of risk management programs and
the opinions of rating agencies related to creditworthiness of the financial
sector as a whole. There can be no assurance that CWB’s credit ratings
and the corresponding outlook will not be changed, potentially resulting
in adverse consequences for funding capacity or access to capital
markets. Changes in credit ratings may also affect the ability and/or the
cost of establishing normal course derivative or hedging transactions.
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.
Table 32 summarizes the credit ratings issued for CWB, as well as the
corresponding rating agency outlook at October 31, 2016.
Table 32 – Credit Ratings
The following CWB ratings issued by DBRS, along with the corresponding outlook, were last confirmed on November 17, 2016.
Long-term senior
debt and deposits
Short-term debt
Subordinated
debentures
Preferred shares
Outlook
DBRS
A (low)
R1 (low)
BBB (high)
Pfd-3
Stable
CAPITAL RISK
Capital risk is the risk that CWB has insufficient capital resources, in either quantity or quality, to support economic risk taken, regulatory
requirements, strategic initiatives and current or planned operations.
Risk Overview
CWB follows three main principles to facilitate the effective management
of capital risk:
• The objective of capital management is to ensure:
- capital is, and will continue to be, adequate to maintain confidence
• Capital management involves a dynamic and ongoing process to
determine, allocate and maintain appropriate amounts of capital; and,
in the safety and stability of CWB while also complying with
required regulatory standards;
• The optimal amount and composition of capital must consider
regulatory and economic capital requirements, as well as the
expectation of CWB shareholders and other stakeholders.
- CWB has the capability to access appropriate sources of capital in a
timely and cost-effective manner; and,
-
return on capital is sufficient to support projected business growth
and satisfy the expectations of investors.
For additional information, please refer to the Capital Management section of this MD&A.
66
CWB Financial Group 2016 Annual ReportRisk GovernanceThe Board approves the annual regulatory capital plan, Internal Capital Adequacy Assessment Process (ICAAP) and the Board Risk Committee approves capital management policies. The Group Capital Risk Committee is responsible for capital risk management. The CFO as the head of Finance is responsible for the available capital as the supply side, while the CRO as the head of Risk is responsible for risk capital as the demand side. In addition, Finance, Risk, Strategy and RDAAR Analytics comprise the ICAAP core team and are closely involved in capital management. The core team is closely supported by other key departments, including Treasury and Credit Risk Management.Risk ManagementThe following are key elements of capital risk management:• The annual regulatory capital plan, inclusive of the capital management policy and three-year capital projections; • A quarterly regulatory capital risk update provided to the Board Risk Committee;• Consolidated forecast models used to analyze the likely capital impact of projected operations, stress testing and/or significant transactions; and,• Regulatory capital ratios reported to senior management and the Board on a monthly basis.
OPERATIONAL RISK
Operational risk is the risk of loss resulting from human error, inadequate or failed processes, systems or controls, or external events. There are
three main subsets of operational risk: regulatory risk, people risk and technology risk. Other types of operational risk include cybersecurity risk
and reputation risk.
Risk Overview
Operational risk is inherent in all of CWB’s business activities including
banking, trust, wealth management and, up to May 1, 2015, insurance
operations, and is embedded in processes that support the management
of principal risks such as credit, liquidity, market, capital and reputational
risk. CWB is exposed to operational risk from internal business activities,
external threats and outsourced business activities. Its impact can be
financial loss, loss of reputation, loss of competitive position, regulatory
penalties, or failure in the management of other risks. While operational
risk cannot be completely eliminated, proactive operational risk
management is a key strategy to mitigate this risk. The primary financial
measure of operational risk is actual losses incurred. CWB incurred no
material losses related to operational risk in 2016 or 2015.
The regulatory framework requires certain amounts of capital to be
allocated to support operational risk. CWB uses the Standardized
approach to measure operational risk. CWB has a group-wide Operational
Risk Management Framework to ensure that all employees understand
their responsibilities with respect to operational risk management. The
Operational Risk Management Framework encompasses a common
language of risk coupled with programs and methodologies for
identification, measurement, control, and management of operational
risk. This is supported by specific operational risk training for all staff.
Key elements of the Operational Risk Management Framework include:
Additional key components include:
• Common definitions of operational risk - CWB incorporates
standard risk terms and certain key operational risk definitions as part
of its Group Operational Risk Management Framework and supporting
policies.
•
implementation of policies and procedural controls appropriate to
address identified risks (including segregation of duties and other
fundamental checks and balances);
• continual enhancements to fraud prevention processes, policies and
• Risk assessments - Risk control self-assessments are utilized
throughout CWB with the objective to proactively identify key
operational risk exposures and assess whether appropriate risk-
mitigating internal controls are in place and operating effectively.
Action plans may result where additional strategies are identified to
reduce risk exposure.
• Operational risk reporting - Loss data monitoring is important
to maintain awareness of identified operational risks and to assist
management in taking constructive action to reduce exposures to
future losses.
communication;
• established “whistleblower” processes and employee code of conduct;
• maintenance of an outsourcing management program;
• at least annual assessment and benchmarking of business insurance;
• human resource policies and processes to ensure staff are adequately
trained for the tasks for which they are responsible and to enable
retention and recruitment;
• a Regulatory Compliance team focused on key regulatory compliance
areas such as privacy, anti-money laundering, anti-terrorist financing
and consumer regulations;
CWB Financial Group 2016 Annual Report
67
Risk GovernanceBusiness and support areas as the first line of defence are fully accountable for the management and control of operational risks to which they are exposed. The Group Operational Risk Committee has responsibility for operational risk, with oversight by the Board Risk Committee, the Executive Risk Committee and senior management. ERM, as the second line of defence, is responsible for the continual enhancement of the Group Operational Risk Framework and supporting policies. The Board Risk Committee has ultimate oversight and approves the Group’s Operational Risk Management Framework.Risk ManagementFollowing is a summary of strategies and factors that assist with the effective management of operational risk:• Management remains close to operations, which helps to facilitate effective internal communication and operational control; • Surveys on employee engagement and corporate culture;• Communication of, and specific training related to, the importance of effective operational risk management to all levels; • Management that is very engaged with promoting CWB’s operational risk tolerance and appetite; and,• Ongoing enhancement of group-wide operational risk management processes. • use of technology that incorporates automated systems with built-
in controls and active management of configuration and change
management along with information security management programs;
• enhanced focus on data quality as an important and strategic asset;
• effective project management processes supported by a designated
committee comprised of representatives of senior management; and,
• continual updating and testing of procedures and contingency plans
for disaster recovery and business continuity (including pandemic
planning).
Subcategories of Operational Risk
Regulatory Compliance Risk
Regulatory compliance risk is the risk of negative impact to business activities, earnings or capital, regulatory relationships or reputation as a
result of non-compliance with applicable regulatory requirements.
The businesses operated by CWB are highly regulated through laws and
regulations that have been put in place by various federal and provincial
governments and regulators. Changes to laws and regulations, including
changes in their interpretation or implementation, could adversely affect
CWB. CWB’s failure to comply with applicable laws, regulations, industry
codes or regulatory expectations could result in sanctions, financial
penalties and costs associated with litigation that could adversely impact
earnings and damage reputation. Although most sources of regulatory
risk are outside of management’s direct control, CWB takes what it
believes to be reasonable and prudent measures designed to support
compliance with governing laws and regulations.
Over the past several years, the intensity of supervisory oversight of
all federally regulated Canadian financial institutions has increased
significantly in terms of both regulation and new standards. This
includes amplified supervisory activities, an increase in the volume of
regulation, more frequent data and information requests from regulators,
and shorter implementation time frames for regulatory requirements,
including the Basel III capital and liquidity standards. Certain regulations
may also impact CWB’s ability to compete against both non-OSFI and
other OSFI regulated entities. Effective management of regulatory risk
and compliance in the current environment requires, and is expected
to continue to require, considerable internal resources and the active
involvement of senior management and the Board.
Notwithstanding the additional resources, the volume, pace and
implementation of new and amended regulations and standards
increases the risk of unintended consequences and non-compliance
for all regulated entities. CWB has intensified its efforts for regulatory
compliance risk management. A number of initiatives are underway to
further its compliance risk management capabilities.
People Risk
People risk is the risk that CWB is not able to attract and retain sufficient qualified employees to implement its strategies and/or achieve its objectives.
Competition for qualified employees in CWB’s key markets remains
apparent, reflecting the general level of economic activity and the
needs of other financial services participants within and outside CWB’s
geographic footprint.
CWB intends to continually attract and retain sufficient qualified
employees to successfully execute against its strategic direction. Inability
to maintain an appropriate staff complement would adversely affect
CWB’s ability to achieve its strategic objectives.
Technology Risk
Technology risk is related to the operational performance, confidentiality, integrity and availability of our information, systems and infrastructure.
CWB is highly dependent upon information technology and supporting
infrastructure, such as voice, data and network access. In addition to
internal resources, various third parties provide key components of the
infrastructure and applications. Disruptions in information technology
and infrastructure, whether attributed to internal or external factors,
and including potential disruptions in the services provided by various
third parties, could adversely affect the ability of CWB to conduct regular
business and/or deliver products and services to clients. Ongoing diligence
is required to ensure systems are secure from threats. Implementation of
CWB’s new core banking system reduces technology risk compared to the
legacy system; however, CWB currently has a number of other technology
projects underway which increase risk exposure related to information
systems and technology.
68
CWB Financial Group 2016 Annual Report Cybersecurity Risk
Cybersecurity risk is related to the ongoing threat that systems and their data may be attacked, damaged or subject to unauthorized access.
CWB manages cyber security risk by ensuring appropriate technologies,
processes and practices are effectively designed and implemented to help
prevent, detect and respond to threats as they emerge and evolve. CWB
relies upon a complete suite of advanced controls to protect itself and its
customers from attack and has partnered with leading third-party service
providers to provide counsel and support should the need arise. CWB
regularly tests the completeness and effectiveness of its cybersecurity
program and, through ongoing vigilance, has not experienced a
cybersecurity event of any materiality.
Reputation Risk
Reputation risk is the consequence of not managing risks effectively and cannot be considered in isolation from other risks.
Negative public opinion can result from actual or alleged misconduct
in any number of activities, either on the part of employees or external
partners, but often involves questions about business ethics and integrity,
competence, corporate governance practices, quality and accuracy of
financial reporting disclosures, or quality of products and service.
Negative public opinion could adversely affect CWB’s ability to attract and
retain clients and/or employees and could expose CWB to litigation and/
or regulatory action. Responsibility for governance and management of
reputation risk falls to all CWB employees, including senior management
and the Board.
All directors, officers and employees have a responsibility to conduct their
activities in accordance with the CWB Group’s personal conduct policies
and in a manner that minimizes reputational risk. In addition to members
of senior management, the Legal, Strategy and Investor Relations, and
Regulatory Compliance departments are particularly involved in the
management of reputation risk.
OTHER RISK FACTORS
In addition to the risks described above, other risk factors, including those
below and those identified in the forward-looking statements section,
may adversely affect CWB’s businesses and financial results.
General Business and Economic Conditions
The majority of CWB’s business is conducted in Western Canada, with
a growing business presence in Ontario. Accordingly, CWB’s overall
financial performance is impacted by general business and economic
conditions across the country. Several factors that could impact general
business and economic conditions in CWB’s markets include, but are not
limited to, changes in: short-term and long-term interest rates; energy
and other commodity prices; real estate prices; adverse global economic
events and/or elevated economic uncertainties; inflation; exchange
rates; levels of consumer, business and government spending; levels of
consumer, business and government debt; and consumer confidence.
Level of Competition
CWB’s performance is impacted by the intensity of competition in the
markets in which it operates. Client retention may be influenced by
many factors, including relative service levels, the prices and attributes
of products and services, changes in products and services, and actions
taken by competitors.
Accuracy and Completeness of Information on Clients
and Counterparties
CWB depends on the accuracy and completeness of information about
customers and counterparties. In deciding whether to extend credit or
enter into other transactions with clients and counterparties, CWB may
rely on information furnished by them, including financial statements,
appraisals, external credit ratings and other financial information. CWB
may also rely on the representations of clients and counterparties as to
the accuracy and completeness of that information and, with respect to
financial statements, on the reports of auditors. CWB’s financial condition
and earnings could be negatively impacted to the extent it relies on
financial statements that do not comply with standard accounting
practices, that are materially misleading, or that do not fairly present, in
all material respects, the financial condition and results of operations of
the customer or counterparties.
Ability to Execute Growth Initiatives
As part of its long-term corporate strategy, CWB intends to continue
growing its business through a combination of organic growth and
strategic acquisitions. The ability to successfully grow its business will be
dependent on a number of factors, including identification of accretive
new business or acquisition opportunities, negotiation of purchase
agreements on satisfactory terms and prices, approval of acquisitions
by regulatory authorities, securing satisfactory regulatory capital and
financing arrangements, and effective integration of newly acquired
operations into the existing business. All of these activities may be more
difficult to implement or may take longer to execute than management
anticipates. Further, any significant expansion of the business may
increase the operating complexity and divert management’s attention
away from established or ongoing business activities. Any failure to
successfully manage acquisition strategies could have a material adverse
impact on CWB’s business, financial condition and results of operations.
Adequacy of CWB’s Risk Management Framework
The Risk Management Framework is made up of various processes and
strategies for managing risk exposure. Given the structure and scope of
its operations, CWB is primarily subject to credit, market (mainly interest
rate), liquidity, operational, reputation, regulatory, environmental, and
other risks. There can be no assurance that the framework to manage
risks, including the framework’s underlying assumptions and models,
will be effective under all conditions and circumstances. If the risk
management framework proves ineffective, CWB could be materially
affected by unexpected financial losses and/or other harm.
CWB Financial Group 2016 Annual Report
69
Changes in accounting standards and accounting
policies and estimates
The IASB continues to change the financial accounting and reporting
standards that govern the preparation of CWB’s financial statements.
These types of changes can be significant and may materially impact how
CWB records and reports its financial condition and results of operations.
Where CWB is required to retroactively apply a new or revised standard, it
may be required to restate prior period financial statements.
Other Factors
CWB cautions that the above discussion of risk factors is not exhaustive.
Other factors beyond CWB’s control that may affect future results
include changes in tax laws, technological changes, unexpected changes
in consumer spending and saving habits, timely development and
introduction of new products, and the anticipation of and success in
managing the associated risks.
UPDATED SHARE INFORMATION
As at November 24, 2016, there were 88,122,562 common shares and
4,946,904 stock options outstanding. On November 30, 2016, CWB’s
Board of Directors declared a cash dividend of $0.23 per common share,
payable on January 5, 2017 to shareholders of record on December 15,
2016. This quarterly dividend is consistent with the prior quarter and the
dividend declared one year ago. 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 January 31,
2017 to shareholders of record on January 20, 2017.
CONTROLS AND PROCEDURES
During the year ended October 31, 2016, 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.
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
in 2017 within the time frame permitted by regulation. CWB Maxium
contributed approximately 1% to CWB’s consolidated total revenue
for the eight months ended October 31, 2016 and its contribution to
consolidated net income primarily comprised the after-tax impact of
the $7.9 million acquisition-related fair value change, or $5.8 million.
Additionally, at October 31, 2016, CWB Maxium’s contribution to
consolidated total assets and liabilities was 2% and less than 1%,
respectively.
As of October 31, 2016, an evaluation was carried out on the
effectiveness of CWB’s disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have certified that the design and operating
effectiveness of those disclosure controls and procedures were effective.
Also at October 31, 2016, an evaluation was carried out on the
effectiveness of internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements in accordance with IFRS. Based
on that evaluation, the CEO and CFO will certify that the design and
operating effectiveness of internal controls over financial reporting were
effective.
There were no other changes in CWB’s ongoing internal controls over
financial reporting that occurred during the year ended October 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 MD&A was reviewed by the Audit Committee and, on the Audit
Committee’s recommendation, approved by the Board of Directors of
CWB.
This Management’s Discussion and Analysis is dated December 1, 2016.
70
CWB Financial Group 2016 Annual Report Consolidated Financial Statements
MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL REPORTING
The consolidated financial statements of Canadian Western Bank (CWB)
and related financial information presented in this annual report have
been prepared by management, who are responsible for the integrity
and fair presentation of the information presented, which includes the
consolidated financial statements, Management’s Discussion and Analysis
(MD&A) and other information. The consolidated financial statements
were prepared in accordance with International Financial Reporting
Standards, including the requirements of the Bank Act and related rules
and regulations issued by the Office of the Superintendent of Financial
Institutions Canada. The MD&A has been prepared in accordance with
the requirements of securities regulators, including National Instrument
51-102 of the Canadian Securities Administrators (CSA).
The consolidated financial statements, MD&A and related financial
information reflect amounts which must, of necessity, be based on
informed estimates and judgments of management with appropriate
consideration to materiality. The financial information represented
elsewhere in this annual report is fairly presented and consistent with that
in the consolidated financial statements.
Management has designed the accounting system and related internal
controls, and supporting procedures are maintained to provide reasonable
assurance that financial records are complete and accurate, assets are
safeguarded and CWB is in compliance with all regulatory requirements.
These supporting procedures include the careful selection and training of
qualified staff, defined division of responsibilities and accountability for
performance, and the written communication of policies and guidelines
of business conduct and risk management throughout CWB.
We, as CWB’s Chief Executive Officer and Chief Financial Officer, will
certify CWB’s annual filings with the CSA as required by National
Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and
Interim Filings).
The system of internal controls is also supported by our internal audit
department, which carries out periodic internal audits of all aspects of
CWB’s operations. The Chief Internal Auditor has full and free access to
the Audit Committee and to the external auditors.
The Audit Committee, appointed by the Board of Directors, is comprised
entirely of independent directors who are not officers or employees
of CWB. The Committee is responsible for reviewing the financial
statements and annual report, including the MD&A, and recommending
them to the Board of Directors for approval. Other key responsibilities
of the Audit Committee include meeting with management, the Chief
Internal Auditor and the external auditors to discuss the effectiveness
of certain internal controls over the financial reporting process and the
planning and results of the external audit. The Committee also meets
regularly with the Chief Financial Officer, Chief Internal Auditor and the
external auditors without management present.
The Governance Committee, appointed by the Board of Directors, is
comprised of directors who are not officers or employees of CWB. Their
responsibilities include reviewing related party transactions and reporting
to the Board of Directors those transactions which may have a material
impact on CWB.
The Office of the Superintendent of Financial Institutions Canada, at
least once a year, makes such examination and inquiry into the affairs of
CWB and its federally regulated subsidiaries as is deemed necessary or
expedient to satisfy themselves that the provisions of the relevant Acts,
having reference to the safety of depositors and policyholders, are being
duly observed and that CWB is in a sound financial condition.
KPMG LLP, the independent auditors appointed by the shareholders of
CWB, have performed an audit of the consolidated financial statements
and their report follows. The external auditors have full and free access
to, and meet periodically with, the Audit Committee to discuss their audit
and matters arising therefrom.
Chris Fowler
President and Chief Executive Officer
December 1, 2016
Carolyn J. Graham, FCPA, FCA
Executive Vice President and Chief Financial Officer
CWB Financial Group 2016 Annual Report
71
Independent Auditors’ Report
TO THE SHAREHOLDERS OF CANADIAN
WESTERN BANK
We have audited the accompanying consolidated financial statements
of Canadian Western Bank, which comprise the consolidated balance
sheets as at October 31, 2016 and October 31, 2015, the consolidated
statements of income and comprehensive income, changes in equity and
cash flows for the years then ended, and notes, comprising a summary of
significant accounting policies and other explanatory information.
MANAGEMENT’S RESPONSIBILITY FOR THE
CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation
of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those
risk assessments, we consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained in our audits is
sufficient and appropriate to provide a basis for our audit opinion.
AUDITORS’ RESPONSIBILITY
OPINION
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Canadian
Western Bank as at October 31, 2016 and October 31, 2015, and its
consolidated financial performance and its consolidated cash flows for
the years then ended in accordance with International Financial Reporting
Standards.
Chartered Professional Accountants
December 1, 2016
Edmonton, Canada
72
CWB Financial Group 2016 Annual Report CONSOLIDATED BALANCE SHEETS
($ thousands)
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions
Interest bearing deposits with regulated financial institutions
Cheques and other items in transit
Securities
Issued or guaranteed by Canada
Issued or guaranteed by a province or municipality
Other debt securities
Preferred shares
Common shares
Securities Purchased under Resale Agreements
Loans
Personal
Business
Allowance for credit losses
Other
Property and equipment
Goodwill
Intangible assets
Derivative related
Other assets
Total Assets
Liabilities and Equity
Deposits
Personal
Business and government
Other
Cheques and other items in transit
Derivative related
Other liabilities
Debt
Debt securities
Subordinated debentures
Equity
Preferred shares
Common shares
Retained earnings
Share-based payment reserve
Other reserves
Total Shareholders' Equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
(Note 4)
(Note 5)
As at
October 31
2016
As at
October 31
2015
$
11,490
$
23,949
890,516
412,768
18,050
6,705
920,056
443,422
1,142,798
1,364,862
291,947
620,904
154,648
346,299
119,201
143,868
-
75,179
1,708,594
2,551,112
(Note 6)
163,318
-
(Note 7)
4,063,552
3,318,254
18,001,584
16,251,530
22,065,136
(103,788)
19,569,784
(94,401)
(Note 8)
21,961,348
19,475,383
(Note 9)
57,330
61,356
(Note 10)
84,762
43,781
(Note 10)
149,312
106,103
(Note 11)
10,370
23,245
(Note 12)
167,459
134,125
469,233
368,610
$ 25,222,549
$ 22,838,527
(Note 13)
$ 13,223,702
$ 11,416,621
7,970,851
7,948,786
21,194,553
19,365,407
27,683
60,258
(Note 11)
7,172
4,503
(Note 15)
382,130
308,837
416,985
373,598
(Note 16)
943,198
562,623
325,000
625,000
1,268,198
1,187,623
(Note 17)
265,000
125,000
(Note 17)
718,377
537,511
1,354,966
1,261,678
31,276
29,210
(27,579)
(42,492)
2,342,040
773
1,910,907
992
2,342,813
1,911,899
$ 25,222,549
$ 22,838,527
(Note 19)
The accompanying notes are an integral part of the consolidated financial statements.
Robert L. Phillips
Chair of the Board
Chris Fowler
President and Chief Executive Officer
CWB Financial Group 2016 Annual Report
73
2016
2015
$
928,257
$
855,367
28,703
40,381
5,029
2,522
961,989
898,270
346,498
316,838
30,267
37,960
376,765
354,798
585,224
543,472
30,598
14,021
13,617
27,855
14,448
13,697
11,522
10,816
(2,830)
5,744
72,672
(4,324)
5,456
67,948
657,896
611,420
(Note 8)
79,115
(Note 3)
7,857
31,009
638
(Note 22)
(Note 3)
(Note 23)
204,903
191,289
52,539
47,478
56,205
313,647
54,722
293,489
257,277
67,943
286,284
71,319
189,334
961
214,965
1,401
188,373
10,612
213,564
5,500
177,761
-
208,064
111,637
$
177,761
$
319,701
83,411
83,419
80,442
80,582
$
2.13
$
2.59
2.13
3.97
-
1.38
2.13
2.59
2.13
3.97
-
1.38
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended October 31
($ thousands, except per share amounts)
Interest Income
Loans
Securities
Deposits with regulated financial institutions
Interest Expense
Deposits
Debt
Net Interest Income
Non-interest Income
Credit related
Wealth management
Retail services
Trust services
Losses on securities, net
Other
Total Revenue
Provision for Credit Losses
Acquisition-related Fair Value Changes
Non-interest Expenses
Salaries and employee benefits
Premises and equipment
Other expenses
Net Income before Income Taxes from Continuing Operations
Income Taxes
Net Income from Continuing Operations
Net Income Attributable to Non-controlling Interests
Shareholders' Net Income from Continuing Operations
Preferred share dividends
Common Shareholders' Net Income from Continuing Operations
Common Shareholders' Net Income from Discontinued Operations
Common Shareholders' Net Income
Average number of common shares (in thousands)
Average number of diluted common shares (in thousands)
Earnings Per Common Share
Basic
- Continuing Operations
- Combined Operations
- Discontinued Operations
Diluted - Continuing Operations
- Combined Operations
- Discontinued Operations
The accompanying notes are an integral part of the consolidated financial statements.
74
CWB Financial Group 2016 Annual Report
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Year Ended October 31
($ thousands)
Net Income from Continuing Operations
Common Shareholders' Net Income from Discontinued Operations
Net Income from Combined Operations
Available-for-sale securities
Gains (losses) from change in fair value(1)
Reclassification to net income(2)
Derivatives designated as cash flow hedges
Gains (losses) from change in fair value(3)
Reclassification to net income(4)
Other Comprehensive Income (Loss), Net of Tax, for the Year
Comprehensive Income for the Year
Comprehensive income for the year attributable to:
Shareholders of CWB
Non-controlling interests
Comprehensive Income for the Year
(1) Net of income tax of $7,699 (2015 - $22,033).
(2) Net of income tax of $796 (2015 - $2,403).
(3) Net of income tax of $3,002 (2015 - $2,887).
(4) Net of income tax of $42 (2015 - $1,339).
2016
2015
$
189,334
$
214,965
-
189,334
111,637
326,602
20,799
2,158
22,957
(8,157)
113
(8,044)
14,913
(59,593)
6,612
(52,981)
7,846
3,640
11,486
(41,495)
$
204,247
$
285,107
$
203,286
$
283,706
961
1,401
$
204,247
$
285,107
Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statements of Income when specific conditions are
met.
The accompanying notes are an integral part of the consolidated financial statements.
CWB Financial Group 2016 Annual Report
75
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Year Ended October 31
($ thousands)
Retained Earnings
Balance at beginning of year
Shareholders' net income from Continuing Operations
Common shareholders' net income from Discontinued Operations
Dividends - Preferred shares
- Common shares
Issuance costs on common and preferred shares
Balance at end of year
Other Reserves
Balance at beginning of year
Changes in available-for-sale securities
Changes in derivatives designated as cash flow hedges
Balance at end of year
Preferred Shares
Balance at beginning of year
Issued
Balance at end of year
Common Shares
Balance at beginning of year
Issued to public
Issued on acquisition of subsidiary
Issued under dividend reinvestment plan
Transferred from share-based payment reserve on the exercise or exchange of options
Balance at end of year
Share-based Payment Reserve
Balance at beginning of year
Amortization of fair value of options
Transferred to common shares on the exercise or exchange of options
Balance at end of year
Total Shareholders' Equity
Non-controlling Interests
Balance at beginning of year
Net income attributable to non-controlling interests
Dividends to non-controlling interests
Partial ownership increase
Balance at end of year
Total Equity
The accompanying notes are an integral part of the consolidated financial statements.
2016
2015
$ 1,261,678
$ 1,011,147
188,373
213,564
-
111,637
(Note 17)
(10,612)
(5,500)
(Note 17)
(76,424)
(69,170)
(8,049)
-
1,354,966
1,261,678
(Note 17)
(Note 17)
(Note 18)
(42,492)
(997)
22,957
(52,981)
(8,044)
11,486
(27,579)
(42,492)
125,000
125,000
140,000
-
265,000
125,000
537,511
533,038
150,063
-
25,606
-
4,491
3,650
706
823
718,377
537,511
29,210
25,339
2,772
4,694
(706)
(823)
31,276
29,210
2,342,040
1,910,907
992
1,066
961
1,401
(1,033)
(1,376)
(147)
(99)
773
992
$ 2,342,813
$ 1,911,899
76
CWB Financial Group 2016 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended October 31
($ thousands)
Cash Flows from Operating Activities
Net income from Continuing Operations
Common shareholders' net income from Discontinued Operations
Adjustments to determine net cash flows:
Gain on sale of Discontinued Operations
Provision for credit losses
Depreciation and amortization
Current income taxes receivable and payable
Amortization of fair value of employee stock options
Accrued interest receivable and payable, net
Losses on securities, net
Deferred taxes, net
Acquisition-related fair value changes
Change in operating assets and liabilities
Deposits, net
Loans, net
Securities purchased under resale agreements, net
Other items, net
Cash Flows from Financing Activities
Common shares issued, net of issuance costs
Preferred shares issued, net of issuance costs
Debt securities issued
Debt securities repaid
Debentures redeemed
Dividends
Distributions to non-controlling interests
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net
Securities, purchased
Securities, sales proceeds
Securities, matured
Proceeds from disposal of Discontinued Operations
Property, equipment and intangibles
Partial ownership increase
Acquisitions
Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year *
* Represented by:
Cash and non-interest bearing deposits with financial institutions
Cheques and other items in transit (included in Cash Resources)
Cheques and other items in transit (included in Other Liabilities)
Cash and Cash Equivalents at End of Year
Supplemental Disclosure of Cash Flow Information
Interest and dividends received
Interest paid
Income taxes paid
The accompanying notes are an integral part of the consolidated financial statements.
2016
2015
$
189,334
$
214,965
-
111,637
(Note 3)
-
(107,808)
(Note 8)
79,115
24,581
(17,424)
31,009
21,417
1,054
(Note 18)
2,772
4,694
7,705
3,157
2,830
(3,045)
(Note 3)
7,857
4,607
(4,589)
638
1,829,146
1,992,393
(2,218,973)
(1,969,903)
(163,318)
29,242
99,566
(9,549)
(230,178)
393,288
(Note 17)
145,176
(Note 17)
136,838
3,650
-
734,376
371,336
(Note 16)
(353,801)
(300,000)
(82,545)
(1,033)
279,011
(220,703)
-
(74,670)
(1,376)
78,237
(477,748)
44,411
(10,760,756)
(6,663,035)
8,638,234
4,979,789
2,990,500
1,001,632
-
(38,507)
(4,572)
215,710
(41,153)
(816)
(Note 3)
(Note 3)
(364,523)
-
(17,372)
31,461
(29,604)
(463,462)
8,063
(37,667)
$
1,857
$
(29,604)
$
11,490
$
18,050
(27,683)
23,949
6,705
(60,258)
$
1,857
$
(29,604)
$
975,727
$
918,485
366,737
345,762
88,674
81,455
CWB Financial Group 2016 Annual Report
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2016 and 2015
($ thousands, except per share amounts)
1. NATURE OF OPERATIONS AND BASIS OF
PRESENTATION
a) Reporting Entity
Canadian Western Bank (CWB) is a publicly traded Canadian bank
headquartered in Edmonton, Alberta. CWB offers a diversified range of
financial services.
The consolidated financial statements were authorized for issue by the
Board of Directors on December 1, 2016.
b) Basis of Consolidation
The consolidated financial statements include the assets, liabilities
and results of operations of CWB and all of its subsidiaries, after the
elimination of intercompany transactions and balances. Subsidiaries
are defined as entities whose operations are controlled by CWB and
are corporations in which CWB is the beneficial owner. Non-controlling
interest in subsidiaries is presented on the consolidated balance sheets as
a separate component of equity that is distinct from shareholders’ equity.
The net income attributable to non-controlling interest in subsidiaries is
presented separately in the consolidated income statements. See Note 31
for details of the subsidiaries.
The consolidated financial statements have been prepared on a historic
cost basis, except the revaluation of the following items: available-for-
sale financial assets; derivative financial instruments and contingent
consideration.
c) Statement of Compliance
These consolidated financial statements of CWB have been prepared in
accordance with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB) and 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).
The significant accounting policies used in the preparation of these
financial statements, including the accounting requirements of OSFI, are
summarized below and in the following notes.
d) Use of Estimates and Assumptions
The preparation of financial statements in conformity with IFRS requires
CWB to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities as at the date of the consolidated financial statements as
well as the reported amount of revenues and expenses during the period.
Key areas of estimation where CWB has made subjective judgments,
often as a result of matters that are inherently uncertain, include
those relating to the allowance for credit losses, fair value of financial
instruments, goodwill and intangible assets, deferred tax assets and
liabilities, impairment of available-for-sale securities and fair value of stock
options. Therefore, actual results could differ from these estimates.
e) Significant Judgments
Information on critical judgments in applying accounting policies that
have the most significant effect on the amounts recognized in the
consolidated financial statements is described in the following notes:
•
Impairment of loans (Note 7)
• Allowance for credit losses (Note 8)
78
f) Business Combinations
Business combinations are accounted for using the acquisition
method. The cost of an acquisition is measured at the fair value of the
consideration, including contingent consideration, given at the acquisition
date. Contingent consideration is considered a financial instrument
and, as such, is remeasured each period thereafter with the adjustment
recorded to acquisition-related fair value changes in the consolidated
statements of income. Acquisition-related costs are recognized as an
expense in the income statement in the period in which they are incurred.
The acquired identifiable assets, liabilities and contingent liabilities are
measured at their fair values at the date of acquisition. Goodwill is
measured as the excess of the aggregate of the consideration transferred,
including any amount of any non-controlling interest in the acquiree, over
the net of the recognized amounts of the identifiable assets acquired and
the liabilities assumed.
CWB elects on a transaction-by-transaction basis whether to measure
non-controlling interest at its fair value or at its proportionate share of the
recognized amount of the identifiable net assets, at the acquisition date.
g) Held for Sale Classification and Discontinued
Operations
Assets and liabilities subject to a plan of disposal are classified as held for
sale if their carrying amounts will be recovered principally through a sale
transaction rather than through continuing use. This condition is satisfied
when a sale is highly probable and the assets are available for immediate
sale in their present condition, subject only to terms that are usual and
customary for sales of this nature. Assets and liabilities classified as held
for sale are measured at the lower of their carrying amount and fair value
less costs to sell. Any impairment loss is recognized as a reduction to the
carrying amount of the assets held for sale.
Discontinued Operations are presented if the operations and cash flows
can be clearly distinguished operationally and financially from the rest of
CWB, and if it represents a separate major line of business or geographic
area of operations that either has been disposed of, is classified as held
for sale, or is part of a single coordinated plan of disposal.
h) Functional and Foreign Currencies
The consolidated financial statements are presented in Canadian dollars,
which is CWB’s functional currency. Assets and liabilities denominated in
foreign currencies are translated into Canadian dollars at rates prevailing
at the balance sheet date. Revenues and expenses in foreign currencies
are translated at the average exchange rates prevailing during the period.
Realized and unrealized gains and losses on foreign currency positions are
included in non-interest income, except for unrealized foreign exchange
gains and losses on available-for-sale equity securities that are included in
other comprehensive income.
i) Provisions and Contingent Liabilities
Management exercises judgment in determining whether a past event or
transaction may result in the recognition of a provision or the disclosure
of a contingent liability. Provisions are recognized in the consolidated
financial statements when management determines that it becomes
probable that an outflow of resources will be required to settle the
obligation and the amount can be reliably estimated, considering all
relevant risks and uncertainties. Management as well as internal and
external experts are involved in estimating any amounts required. The
actual costs of resolving these obligations may be significantly higher or
lower than the recognized provision.
CWB Financial Group 2016 Annual Report
j) Specific Accounting Policies
The accounting policies set out below have been applied consistently to
all periods presented in these consolidated financial statements, except
as noted. To facilitate a better understanding of CWB’s consolidated
financial statements, the significant accounting policies are disclosed in
the notes, where applicable, with related financial disclosures by major
caption:
Note
Topic
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Financial instruments
Strategic transactions
Cash resources
Securities
Securities purchased under resale agreements
Loans
Allowance for credit losses
Property and equipment
Goodwill and intangible assets
Derivative financial instruments
Other assets
Deposits
Interest in unconsolidated structured entity
Other liabilities
Debt
Capital stock
Share-based payments
Non-controlling interests
Contingent liabilities and commitments
Employee future benefits
Income taxes
Earnings per common share
Assets under administration and management
Related party transactions
Interest rate sensitivity
Fair value of financial instruments
Financial instruments - offsetting
Risk management
Capital management
Subsidiaries
k) Future Accounting Changes
A number of standards and amendments have been issued by the IASB,
and the following changes may have an impact on CWB’s future financial
statements. CWB is currently reviewing these standards to determine the
impact on the financial statements.
IFRS 9 – Financial Instruments
In July 2014, the IASB issued the complete version of IFRS 9, which will
replace IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 addresses classification and measurement of financial assets and
liabilities, impairment and hedge accounting.
Under the finalized guidance, IFRS 9 specifies that financial assets be
classified into one of three categories (amortized cost, fair value through
profit or loss, or fair value through other comprehensive income) based
on the cash flow characteristics and the business model under which
the assets are held. Classification of financial liabilities is unchanged, but
for financial liabilities measured at fair value, changes in fair value of an
entity’s own credit risk will be recognized in other comprehensive income
rather than in profit or loss. The final standard also introduces a new
“expected credit loss” model for calculating impairment on all financial
assets classified at amortized cost or fair value through comprehensive
income, with the most significant impact being to loans. Specifically, IFRS
9 requires entities to recognize 12-month expected credit losses from
the date a financial asset is first recognized and to recognize lifetime
expected credit losses if there is a significant increase in credit risk
since inception. IFRS 9 also introduces a new hedge accounting model
that expands the scope of eligible hedged items and risks eligible for
hedge accounting, and aligns hedge accounting more closely with risk
management.
IFRS 9 will be mandatorily effective for CWB’s fiscal year beginning on
November 1, 2018, and early adoption is permitted. In January 2015,
OSFI determined that Domestic Systemically Important Banks (D-SIBs)
should adopt IFRS 9 beginning November 1, 2017, while early adoption is
permitted but not required for other federally regulated Canadian banks
with October year ends, such as CWB. CWB plans to adopt IFRS 9 on
November 1, 2018.
During 2015, CWB commenced its IFRS 9 transition project focused
on the three main areas of IFRS 9: classification and measurement,
impairment, and hedge accounting. CWB continues to analyze the
impact of the accounting policy changes under IFRS 9 on its consolidated
financial statements and is currently on track with its project plan.
Further details will be provided as the project progresses.
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.
The impact on CWB of the new standard has not yet been determined.
IFRS 15 – Revenue from Contracts with Customers
The IASB has established principles for reporting about the nature,
amount, timing and uncertainty of revenue and cash flows arising from
an entity’s contracts with customers. The standard provides a single,
principles-based model for revenue recognition to be applied to contracts
with customers. The new standard does not apply to financial instruments
or lease contracts, which fall in the scope of other IFRSs.
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 the new
standard 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 Financial Group 2016 Annual Report
79
2. FINANCIAL INSTRUMENTS
As a financial institution, most of CWB’s balance sheet is comprised of
financial instruments and the majority of net income results from gains,
losses, income and expenses related to the same.
market risk. A discussion of how these are managed can be found in
the Risk Management section of Management's Discussion and Analysis
(MD&A).
Financial assets include cash resources, securities, securities purchased
under resale agreements, loans, derivative financial instruments and
certain other assets. Financial liabilities include deposits, derivative
financial instruments, debt and certain other liabilities.
The use of financial instruments exposes CWB to credit, liquidity and
Income and expenses are classified as to source, either securities or loans
for income, and deposits or debt for expense. Gains (losses) on the sale
of securities, net and fair value changes in certain derivatives are classified
to non-interest income. Contingent consideration fair value changes are
classified as acquisition-related fair value changes in the consolidated
statements of income.
3. STRATEGIC TRANSACTIONS
a) 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 instalments with determination of the total amount payable based
on CWB Maxium’s cumulative business performance over a 36-month
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 2016, the fair value of contingent
consideration was increased by $7,857, which was recognized as an
acquisition-related fair value change on the consolidated statements of
income (see Note 27).
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
Assets and Liabilities Acquired at Fair Values
Intangible assets
Deferred income tax asset
Other items, net
Goodwill
$
61,506
21,700
723
214
$
38,869
Intangible assets include customer relationships, a trademark, 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. No goodwill or intangible assets
were included in the purchase structure. No allowance for credit losses
was recorded on the acquisition date and loans are evaluated for
impairment at each balance sheet date using the same methodology as
loans originated by CWB.
80
CWB Financial Group 2016 Annual Report b) Dispositions
The sales of CWB’s property and casualty insurance subsidiary, Canadian
Direct Insurance (CDI), and the stock transfer business of its subsidiary,
Valiant Trust Company, closed effective May 1, 2015. The transactions
consisted of the sale of 100% of the shares of CDI as well as the transfer
of certain operating assets, systems and employees that supported the
stock transfer business.
Revenues, expenses and net gains on sale associated with the businesses
sold are reflected in common shareholders’ net income from Discontinued
Operations in the 2015 consolidated statement of income.
The components of net income from Discontinued Operations, which are attributable entirely to CWB common shareholders, are as follows:
Interest Income
Securities
Deposits with regulated financial institutions
Non-interest Income
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
Insurance revenues, net
Trust services
Gains (losses) on securities, net
Net Interest and Non-interest Income
Non-interest Expenses
Salaries and employee benefits
Premises and equipment
Other expenses
Net Income from Discontinued Operations before Income Taxes
Income taxes
Net Income from Discontinued Operations before Net Gains on Sale
Net gains on sale
Common Shareholders’ Net Income from Discontinued Operations
(1) Fiscal 2015 results include operations from November 1, 2014 to April 30, 2015.
2016
2015(1)
$
-
$
3,389
-
-
73
3,462
-
66,262
-
742
-
(44,451)
-
(13,137)
-
9,416
-
3,221
-
(283)
-
12,354
-
15,816
-
6,596
-
2,572
-
1,936
-
11,104
-
4,712
-
-
883
3,829
-
107,808
$
-
$
111,637
The details of the cash flows from Discontinued Operations, excluding the net proceeds of $215,710, included in the consolidated statements of cash
flows are as follows:
Net cash used in operating activities
Net cash used in financing activities
Net cash provided by investing activities
Increase in Cash and Cash Equivalents
2016
2015
$
$
-
$
(13,975)
-
(8,000)
-
22,028
-
$
53
CWB Financial Group 2016 Annual Report
81
4. CASH RESOURCES
Cash resources include highly liquid investments that are readily
convertible to cash and which are subject to an insignificant risk of
change in value. Cheques and other items in transit included in cash
resources are recorded at cost and represent the net position of uncleared
cheques and other items in transit.
Interest-bearing deposits with regulated financial institutions included
in cash resources have been designated as available-for-sale and are
reported on the consolidated balance sheets at fair value with changes in
5. SECURITIES
Available-for-sale securities are accounted for at settlement date and
recorded on the consolidated balance sheets at fair value with changes
in fair value recorded in other comprehensive income, net of income
taxes, until the security is sold or becomes impaired. Interest income
from securities, which includes amortization of premiums and discounts,
is recognized using the effective interest method in the consolidated
statements of income. Dividend income is recognized when the right to
receive payment is established, which is typically on the ex-dividend date.
Securities are purchased with the original intention to hold the instrument
to maturity or until market conditions render alternative investments
more attractive. Gains and losses realized on disposal of securities and
adjustments to record any impairment in value are included in non-
interest income.
At each reporting date, CWB assesses whether there is objective evidence
that available-for-sale securities are impaired. Objective evidence that a
security is impaired can include significant financial difficulty of the issuer,
indications that an issuer will enter bankruptcy or the lack of an active
market for a security. In addition, for certain equity securities, a significant
or prolonged decline in fair value below cost is objective evidence of
impairment.
fair value reported in other comprehensive income, net of income taxes.
At October 31, 2016, the fair value of deposits with regulated financial
institutions was $890,516 (October 31, 2015 – $412,768), which is
$81 lower (October 31, 2015 – $377) than amortized cost. At October
31, 2016, $16,262 of interest-bearing deposits with regulated financial
institutions was restricted from use in relation to a debt securitization
agreement (October 31, 2015 – nil).
Impairment losses on available-for-sale securities are recognized by
reclassifying the cumulative loss recognized in other comprehensive
income to the income statement as ‘gains (losses) on securities, net’.
The reclassified amount is the difference between the cost, net of
any principal repayment and amortization, and the fair value, less any
impairment previously recognized in net income.
If, in a subsequent period, the fair value of an impaired available-for-
sale debt security increases and the increase can be objectively related
to an event occurring after the impairment loss was recognized in net
income, the impairment loss is reversed, with the reversal recognized
in net income. However, if, in a subsequent period, the fair value of
an impaired available-for-sale equity security increases, the recovery is
recognized in accumulated other comprehensive income until the equity
security is sold or redeemed.
The analysis of securities at carrying value, by type and maturity or reprice date, is as follows:
Securities Issued or Guaranteed by
Canada
A province or municipality
Other Debt Securities
Preferred Shares
Common Shares
Total
Maturities
Within
1 Year
1 to
3 Years
3 to
5 Years
Over 5
Years
As at
October 31
2016
As at
October 31
2015
$
339,687
$
175,357
$
575,790
$
51,964
$ 1,142,798 $
1,364,862
80,421
126,079
11,711
-
68,912
5,019
56,836
-
142,614
23,550
50,654
-
-
-
-
-
291,947
154,648
119,201
-
620,904
346,299
143,868
75,179
$
557,898
$
306,124
$
792,608
$
51,964
$ 1,708,594 $
2,551,112
82
CWB Financial Group 2016 Annual Report The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
As at October 31, 2016
As at October 31, 2015
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Securities Issued or Guaranteed by
Canada
$ 1,142,651
$
676
$
529
$ 1,142,798
$ 1,373,476
$
296
$
8,910
$ 1,364,862
A province or municipality
Other Debt Securities
Preferred Shares
Common Shares
Total
291,814
153,126
165,606
-
274
1,589
-
-
141
67
291,947
626,300
154,648
347,322
46,405
119,201
198,325
84
12
-
5,480
1,035
620,904
346,299
54,457
143,868
-
-
81,528
800
7,149
75,179
$ 1,753,197
$
2,539
$
47,142
$ 1,708,594
$ 2,626,951
$
1,192
$
77,031
$ 2,551,112
The securities portfolio is primarily comprised of high-quality debt
and equity instruments that are not held for trading purposes and,
where applicable, are typically held until maturity. Fluctuations in
value are generally attributed to changes in interest rates, market
credit spreads and shifts in the interest rate curve. As at October 31,
2016, CWB assessed the securities with unrealized losses and based
on available objective evidence, concluded that the unrealized losses
resulted from changes in interest rates and not from deterioration in the
creditworthiness of the issuers. No impairment charges were included in
gains (losses) on securities, net (2015 – nil).
6. SECURITIES PURCHASED UNDER RESALE AGREEMENTS
Securities purchased under resale agreements represent a purchase of
Government of Canada securities by CWB effected with a simultaneous
agreement to sell them back at a specified price on a future date, which
is generally short term. The difference between the cost of the purchase
and the predetermined proceeds to be received on a resale agreement is
recorded as securities interest income.
7. LOANS
Loans, including leases, are recorded at amortized cost and stated net
of unearned income, unamortized premiums and allowance for credit
losses (see Note 8). Interest income is recorded using the effective interest
method.
Loans are determined to be impaired when payments are contractually
past due 90 days, or where CWB has commenced realization
proceedings, or where CWB is of the opinion that the loan should be
regarded as impaired based on objective evidence. Objective evidence
that a loan is impaired can include significant financial difficulty of the
borrower, default or delinquency of a borrower, breach of loan covenants
or conditions, or indications that a borrower will enter bankruptcy. An
exception may be made where CWB determines that the loan is well
secured and in the process of collection, and the collection efforts are
reasonably expected to result in either repayment of the loan or restoring
it to current status within 180 days from the date the payment went
in arrears. All loans are classified as impaired when a payment is 180
days in arrears other than loans guaranteed or insured for both principal
and interest by the Canadian government, a province or a Canadian
government agency. These loans are classified as impaired when payment
is 365 days in arrears.
Securities purchased under resale agreements have been designated as
available-for-sale and are reported on the consolidated balance sheets
at fair value with changes in fair value reported in other comprehensive
income, net of income taxes.
Impairment is measured as the difference between the carrying value of
the loan at the time it is classified as impaired and the present value of
the expected cash flows (estimated realizable amount), using the original
effective interest rate of the loan. When the amounts and timing of
future cash flows cannot be reliably estimated, either the fair value of the
security underlying the loan, net of any expected realization costs, or the
current market price for the loan may be used to measure the estimated
realizable amount. Impaired loans are returned to performing status
when the timely collection of both principal and interest is reasonably
assured, all delinquent principal and interest payments are brought
current, and all charges for loan impairment have been reversed.
Loan fees integral to the yield on the loan, net of directly related costs,
are amortized to interest income using the effective interest method.
Premiums paid on the acquisition of loan portfolios are amortized to
interest income using the effective interest method.
CWB Financial Group 2016 Annual Report
83
Outstanding gross loans and impaired loans, net of the allowances for credit losses, by loan type, are as follows:
As at October 31, 2016
As at October 31, 2015
Gross
Amount
Gross
Impaired
Amount(2)
Specific
Allowance
Net
Impaired
Loans
Gross
Amount
Gross
Impaired
Amount(2)
Specific
Allowance
Net
Impaired
Loans
$ 4,063,552
$
21,968
$
204
$
21,764
$ 3,318,254
$
16,145
$
262
$
15,883
8,424,777
5,644,231
3,711,504
221,072
29,784
18,363
40,201
16,896
2,989
1,370
9,563
2,143
26,795
7,460,414
32,541
16,993
4,658,219
30,638
3,819,965
14,753
312,932
3,870
19,573
22,776
1,770
128
4,346
9,300
$ 22,065,136
$ 127,212
$
16,269
110,943 $ 19,569,784
$
94,905
$
15,806
(110,943)
$
-
30,771
3,742
15,227
13,476
79,099
(99,613)
$
(20,514)
Personal
Business
Real estate(1)
Commercial
Equipment financing
Energy
Total
Collective Allowance(3)
Net Impaired Loans After
Collective Allowance
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans include foreclosed assets with a carrying value of $3,876 (October 31, 2015 - $979). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(3) The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and is not allocated by loan type (see Note 8).
During the year, interest recognized as income on impaired loans totalled $1,801 (2015 - $2,019).
Outstanding impaired loans, net of the allowance for credit losses, by provincial location of security, are as follows:
Alberta
British Columbia
Ontario
Saskatchewan
Manitoba
Other
Total
As at October 31, 2016
As at October 31, 2015
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
$
64,751
$
6,137
$
58,614
$
41,749
$
11,020
$
30,729
29,074
2,868
26,206
30,539
1,932
28,607
16,596
4,680
11,916
9,256
1,019
8,237
8,688
712
7,976
8,437
606
7,831
3,903
543
3,360
1,539
240
1,299
4,200
1,329
2,871
3,385
989
2,396
$
127,212
$
16,269
110,943
$
94,905
$
15,806
79,099
Collective Allowance(1)
Net Impaired Loans After Collective Allowance
(110,943)
$
-
(99,613)
$
(20,514)
(1) 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, which are not classified as
impaired. Details of such past due loans that have not been included in the gross impaired amount are as follows:
As at October 31, 2016
1 - 30 days
31 - 60 days
61 - 90 days
More than
90 days
Total
Personal
Business
$ 66,647
$ 23,735
$ 1,508
$ 2,981
$ 94,871
101,506
23,401
7,801
1,510
134,218
$ 168,153
$
47,136
$ 9,309
$ 4,491
$ 229,089
As at October 31, 2015
$ 81,469
$ 46,723
$ 8,874
$ 3,495
$ 140,561
84
CWB Financial Group 2016 Annual Report
The composition of CWB’s loan portfolio by geographic region and industry sector is as follows:
October 31, 2016
($ millions)
Personal(1)
Business
Real estate
Commercial
Equipment financing (2)
Energy
BC
AB
ON
SK
MB
Other
Total
Composition Percentage
Oct. 31
2016
Oct. 31
2015
$ 1,154
$
1,219
$
1,317
$
190
$
102
$
82
$
4,064
18 %
17 %
4,102
1,925
627
-
6,654
3,259
2,173
1,148
200
6,780
410
831
789
-
478
284
382
21
2,030
1,165
175
259
168
-
602
1
172
597
-
8,425
5,644
3,711
221
770
18,001
38
26
17
1
82
38
24
19
2
83
Total Loans(3)
$ 7,808
$
7,999
$
3,347
$
1,355
$
704
$
852
$ 22,065
100 %
100 %
Composition Percentage
October 31, 2016
October 31, 2015
36 %
33 %
36 %
41 %
15 %
12 %
6 %
7 %
3 %
3 %
4 %
4 %
100 %
100 %
(1) Includes mortgages securitized through the National Housing Act Mortgage-backed Securities program reported on-balance sheet of $391 (October 31, 2015 - nil).
(2) Includes securitized leases reported on-balance sheet of $1,030 (October 31, 2015 - $635) (see Note 16).
(3) This table does not include an allocation of the allowance for credit losses.
8. ALLOWANCE FOR CREDIT LOSSES
An allowance for credit losses is maintained which, in CWB’s opinion, is
adequate to absorb credit-related impairment losses incurred in its loan
portfolio. The allowance for credit losses is calculated on individual loans
(specific allowance) and on groups of loans and committed but undrawn
credit exposures assessed collectively (collective allowance). The adequacy
of the allowance for credit losses is reviewed at least quarterly. The
allowance for credit losses related to drawn exposures is deducted from
the outstanding loan balance. The allowance for credit losses related to
committed but undrawn credit exposures is included with other liabilities.
Losses expected from future events are not recognized.
Collective Allowance
The collective allowance for credit risk includes provisions for losses that
have been incurred but have not yet been identified on an individual
loan or account basis by CWB. As soon as information becomes available
which identifies losses on individual loans within the collective group,
those loans are removed from the group and assessed on an individual
basis for impairment.
The collective allowance for credit risk is established by taking into
consideration:
Specific Allowance
• historical trends in the loss experience during economic cycles;
The specific allowance includes all the accumulated provisions for losses
on identified impaired loans required to reduce the carrying value of
those loans to their estimated realizable amount. See Note 7 for the
identification process of impaired loans.
• the current portfolio profile;
• historical loss experience in portfolios of similar credit risk
characteristics;
If the amount of an impairment loss decreases in a subsequent period,
and the decrease can be objectively related to an event occurring after
the impairment was recognized, the specific loan impairment allowance
is reduced accordingly. The reversal of impairment is recognized in the
consolidated statements of income in provision for credit losses.
• the estimated period between impairment occurring and the loss being
identified; and
• CWB’s management judgment as to whether current economic and
credit conditions are such that the actual level of inherent losses at the
balance sheet date is likely to be greater or less than that suggested by
historical experience.
CWB Financial Group 2016 Annual Report
85
The following table shows the changes in the allowance for credit losses during the year:
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
2016
2015
Specific
Allowance
Collective
Allowance
Total
Specific
Allowance
Collective
Allowance
Total
$
15,806
$
99,613
$
115,419
$
5,523
$
90,075
$
95,598
67,785
(70,460)
3,138
11,330
-
-
79,115
(70,460)
3,138
21,471
(15,810)
4,622
9,538
-
-
31,009
(15,810)
4,622
Balance at End of Year
$
16,269
$
110,943
$
127,212
$
15,806
$
99,613
$
115,419
Represented by:
Loans
$
16,269
$
87,519
$
103,788
$
15,806
$
78,595
$
94,401
Committed but undrawn credit exposures (Note 15)
-
23,424
23,424
-
21,018
21,018
Total Allowance
$
16,269
$
110,943
$
127,212
$
15,806
$
99,613
$
115,419
9. PROPERTY AND EQUIPMENT
Land is carried at cost. Buildings, equipment and furniture, and leasehold
improvements are carried at cost less accumulated depreciation and
impairment.
Depreciation is calculated primarily using the straight-line method over
the estimated useful life of the asset, as follows:
• Buildings: 20 years
• Equipment and furniture: 3 to 10 years
• Leasehold improvements: over the shorter of the term of the lease and
the remaining useful life
When components of an item of property and equipment have different
useful lives, they are accounted for as separate items. Gains and losses
on disposal are recorded in non-interest income in the period of disposal.
Property and equipment is subject to an impairment review if there are
events or changes in circumstances which indicate that the carrying
amount may not be recoverable.
Net Carrying Amount at October 31, 2016
$
26,747
$
13,685
$
6,398
$
10,500
$
Cost
Balance at November 1, 2015
Additions
Business acquisition
Disposals
Balance at October 31, 2016
Accumulated Depreciation and Impairment
Balance at November 1, 2015
Depreciation for the year
Disposals
Balance at October 31, 2016
Cost
Balance at November 1, 2014
Additions
Disposals
Sale of businesses
Balance at October 31, 2015
Accumulated Depreciation and Impairment
Balance at November 1, 2014
Depreciation for the year
Disposals
Sale of businesses
Balance at October 31, 2015
Leasehold
Improvements
Land and
Buildings
Computer
Equipment
Office
Equipment
Total
$
68,794
$
18,663
$
26,045
$
37,114
$
150,616
(Note 3)
1,345
7
-
38
-
-
70,146
18,701
39,092
4,307
-
43,399
4,418
598
-
5,016
2,269
50
(45)
28,319
19,853
2,113
(45)
21,921
1,901
86
-
5,553
143
(45)
39,101
156,267
25,897
2,704
-
28,601
$
69,000
$
18,539
$
31,073
$
37,696
$
156,308
(Note 3)
(Note 3)
3,213
-
(3,419)
68,794
36,558
5,542
-
(3,008)
39,092
124
-
-
18,663
3,830
588
-
-
4,418
2,179
-
(7,207)
26,045
23,760
2,418
-
(6,325)
19,853
2,770
(578)
(2,774)
37,114
25,903
2,859
(578)
(2,287)
25,897
89,260
9,722
(45)
98,937
57,330
8,286
(578)
(13,400)
150,616
90,051
11,407
(578)
(11,620)
89,260
61,356
Net Carrying Amount at October 31, 2015
$
29,702
$
14,245
$
6,192
$
11,217
$
86
CWB Financial Group 2016 Annual Report
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill
On the date of acquisition, goodwill arises on the acquisition of
subsidiaries and represents the excess of the fair value of the purchase
consideration, including any amount of any non-controlling interest in
the acquiree, over the net recognized amounts of the identifiable assets,
including identifiable intangible assets, and liabilities assumed. For the
purposes of calculating goodwill, fair values of acquired assets and
liabilities are determined by reference to market values or by discounting
expected future cash flows to present value. This discounting is
performed using either market rates, or risk-free rates with risk-adjusted
expected future cash flows.
Goodwill is stated at cost less accumulated impairment losses. Goodwill
is reviewed for impairment annually or more frequently if there are
indications that impairment may have occurred. Goodwill is allocated
to cash-generating units for the purpose of impairment testing
considering the business level at which goodwill is monitored for internal
management purposes. On this basis, CWB’s cash-generating units with
goodwill allocated are:
• CWB Maxium Financial Inc. (MX);
• National Leasing Group Inc. (NL);
• McLean & Partners Wealth Management Ltd. (M&P);
• Adroit Investment Management Ltd. (AIM);
• Valiant Trust Company (VTC); and
• Canadian Direct Insurance Incorporated (CDI).
Balance at November 1, 2015
$
-
$
35,776
$
4,194
$
3,811
$
Business acquisition
Partial ownership change
(Note 3)
38,869
-
-
-
-
2,112
-
-
Balance at October 31, 2016
$
38,869
$
35,776
$
6,306
$
3,811
$
-
-
-
-
$
$
-
-
-
-
$
43,781
38,869
2,112
$
84,762
MX
NL
M&P
AIM
VTC
CDI
Total
Balance at November 1, 2014
$
-
$
35,776
$
3,888
$
3,811
$
3,679
$
3,254
$
50,408
Sale of businesses
Partial ownership change
(Note 3)
-
-
-
-
-
306
-
-
Balance at October 31, 2015
$
-
$
35,776
$
4,194
$
3,811
$
(3,679)
(3,254)
-
-
$
-
-
(6,933)
306
$
43,781
Intangible assets
Intangible assets represent identifiable non-monetary assets and are
acquired either separately through a business combination, or generated
internally. Intangible assets with a finite useful life are recorded at cost
less any accumulated amortization and impairment losses. The assets’
useful lives are confirmed at least annually. Certain intangible assets,
such as trademarks and trade names, have an indefinite useful life. These
indefinite life intangibles are not amortized but are tested for impairment
at least annually or more frequently if events or changes in circumstances
indicate that impairment may have occurred.
Amortization of acquisition-related intangible assets with finite useful
lives is reported in other expenses and amortization of internally
generated software is included in premises and equipment expenses on
the consolidated statements of income and provided on a straight-line
basis from the date at which it is available for use as follows:
• Software and related assets: 3 to 15 years
• Customer relationships: 10 to 15 years
• Non-competition agreements: 4 to 5 years
• Other: 3 to 5 years
CWB Financial Group 2016 Annual Report
87
Software
and Related
Assets
Customer
Relationships
Non-
competition
Agreements
Trademarks
and
Tradenames
Other
Total
Cost
Balance at November 1, 2015
$
109,414
$
39,576
$
9,770
$
2,552
$
4,480
$
165,792
Additions
Business acquisition
Partial ownership change
Disposals
(Note 3)
32,954
-
-
-
(441)
17,250
2,080
-
Balance at October 31, 2016
141,927
58,906
Accumulated Amortization
Balance at November 1, 2015
Amortization
Disposals
Balance at October 31, 2016
34,493
8,505
(441)
42,557
15,256
4,351
-
19,607
-
100
1,052
-
10,922
7,525
1,243
-
8,768
-
3,680
282
-
6,514
-
-
-
-
-
670
-
-
32,954
21,700
3,414
(441)
5,150
223,419
2,415
760
-
3,175
59,689
14,859
(441)
74,107
Net Carrying Amount at October 31, 2016
$
99,370
$
39,299
$
2,154
$
6,514
$
1,975
$
149,312
Cost
Balance at November 1, 2014
$
88,740
$
43,196
$
9,719
$
2,811
$
4,680
$
149,146
Additions
Partial ownership change
Sale of businesses
Disposals
Balance at October 31, 2015
Accumulated Amortization
Balance at November 1, 2014
Amortization
Sale of businesses
Disposals
Balance at October 31, 2015
(Note 3)
(Note 3)
32,867
-
(10,798)
(1,395)
109,414
39,003
5,540
(8,655)
(1,395)
34,493
-
330
(3,950)
-
39,576
16,235
2,971
(3,950)
-
15,256
-
181
(130)
-
9,770
6,648
1,007
(130)
-
7,525
-
41
(300)
-
2,552
-
-
-
-
-
-
-
(200)
-
4,480
2,123
492
(200)
-
2,415
32,867
552
(15,378)
(1,395)
165,792
64,009
10,010
(12,935)
(1,395)
59,689
Net Carrying Amount at October 31, 2015
$
74,921
$
24,320
$
2,245
$
2,552
$
2,065
$
106,103
Impairment
The carrying amounts of CWB’s goodwill and intangible assets with finite
useful lives are reviewed at each reporting date to determine whether
there is any indication of impairment. If an indication exists, CWB tests
for impairment. For goodwill and intangible assets with indefinite useful
lives, the impairment tests are performed each year.
Impairment testing is performed by comparing the estimated recoverable
amount from a cash-generating unit with the carrying amount of its net
assets, including attributable goodwill. The recoverable amount of an
asset is the higher of its fair value less cost to sell, and its value in use. If
the recoverable amount is less than the carrying value, an impairment loss
is charged to the consolidated statements of income.
The recoverable amounts for CWB’s cash-generating units have been
calculated based on their value in use. Value in use for each unit
was determined by discounting the future cash flows expected to be
generated from the continuing use of the cash-generating unit. Unless
indicated otherwise, value in use was determined similarly as in the
comparative year. The calculation of the value in use was based on the
following key assumptions:
• Cash flows were projected based on past experience, actual operating
results and the five-year future business plan. Cash flows for a further
15-year period were extrapolated using a constant growth rate of
1.9%, which is based on the long-term forecast Canadian gross
domestic product growth rates. The forecast period is based on CWB’s
long-term perspective with respect to the operation of these cash-
generating units.
• A pre-tax discount rate of 11.0% was applied in determining the
recoverable amounts, which was comprised of a risk-free interest rate
and a market risk premium.
The key assumptions described above may change as economic and
market conditions change. CWB estimates that reasonable possible
changes in these assumptions are not expected to cause the recoverable
amounts of the cash-generating units to decline below the carrying
amounts.
No impairment losses on goodwill or intangible assets were identified
during 2016 or 2015.
88
CWB Financial Group 2016 Annual Report
11. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate, foreign exchange and equity swaps/contracts such as
futures, options, swaps, floors and rate locks are entered into for
risk management purposes in accordance with CWB’s asset liability
management policies. It is CWB’s policy not to utilize derivative financial
instruments for trading or speculative purposes. Interest rate swaps and
floors are primarily used to reduce the impact of fluctuating interest rates.
Equity swaps are used to reduce earnings volatility related to restricted
share units and deferred share units linked to CWB’s common share price.
Foreign exchange contracts are used for the purposes of meeting the
needs of clients, day-to-day business and liquidity management.
Use of Derivatives
CWB enters into derivative financial instruments for risk management
purposes. Derivative financial instruments are financial contracts whose
value is derived from an underlying interest rate, foreign exchange rate,
equity or commodity instrument or index.
Derivative financial instruments primarily used by CWB include:
•
interest rate swaps, which are agreements where two counterparties
exchange a series of payments based on different interest rates applied
to a notional amount;
• foreign exchange forwards and futures, which are contractual
obligations to exchange one currency for another at a specified price
for settlement at a predetermined future date; and,
• equity swaps, which are agreements where CWB makes periodic
interest payments to a counterparty and receives the capital gain or
loss plus dividends of a CWB common share.
Interest rate swaps are used as hedging instruments to manage interest
rate risk. CWB enters into these interest rate derivative instruments only
for its own account and does not act as an intermediary in this market.
The credit risk is limited to the amount of any adverse change in interest
rates applied on the notional contract should the counterparty default.
The Asset Liability Committee (ALCo) of CWB establishes and monitors
approved counterparties (including an assessment of credit worthiness)
and maximum notional limits. Approved counterparties are limited to
rated financial institutions or their associated parent/affiliate with a
minimum rating of A high or equivalent.
Exposure to foreign exchange risk is not material to CWB’s overall
financial position. Foreign exchange markets are not speculated in
by taking a trading position in currencies. Maximum exposure limits
are established and monitored by ALCo and are defined by allowable
unhedged amounts. The position is managed within the allowable target
range by spot and forward transactions or other hedging techniques.
Equity swap transactions are used as hedging instruments to manage risk
related to the payout of restricted share units and deferred share units
that have not yet vested. CWB enters into equity swap instruments only
for its own account and does not act as an intermediary in this market.
The risk is limited to the amount of an increase in CWB’s share price
applied on the notional contract amount and any re-invested dividends
should the counterparty default.
In addition to monitoring the creditworthiness of counterparties,
CWB limits its exposure to credit losses related to derivative financial
instruments by entering into Credit Support Annexes that provide for
the exchange of collateral between parties where the fair value of the
outstanding transactions exceeds an agreed upon threshold.
Designated Accounting Hedges
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 forecast transaction (cash flow hedges).
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 hedging transaction
becomes ineffective or if the derivative is not designated as a cash
flow hedge, any subsequent change in the fair value of the hedging
instrument is recognized in net income.
Interest income received or interest expense paid on derivative financial
instruments designated as cash flow hedges is accounted for on the
accrual basis and recognized as interest expense over the term of the
hedge contract. Premiums on purchased contracts are amortized to
interest expense over the term of the contract. Accrued interest receivable
and payable and deferred gains and losses for these contracts are
recorded in other assets or liabilities as appropriate.
When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
existing in other comprehensive income at that time is held separately in
accumulated other comprehensive income until the forecast transaction
is eventually recognized in the statements of income. When a forecast
transaction is no longer expected to occur, the cumulative gain or
loss that was reported in accumulated other comprehensive income is
immediately reclassified to the statements of income.
Embedded Derivatives
Certain derivatives embedded in other financial instruments are treated as
separate derivatives when their economic characteristics and risk are not
closely related to those of the host contract and the combined contract
is not carried at fair value. Identified embedded derivatives are separated
from the host contract and are recorded at fair value.
Fair Value
Derivative financial instruments are recorded on the balance sheet at
fair value as either other assets or other liabilities with changes in fair
value related to the effective portion of cash flow interest rate hedges
recorded in other comprehensive income, net of income taxes. Changes
in fair value related to the ineffective portion of a designated accounting
hedge, a derivative not designated as an accounting hedge and all other
derivative financial instruments are reported in other non-interest income
on the consolidated statements of income.
CWB Financial Group 2016 Annual Report
89
The following table summarizes the derivative financial instrument
portfolio and the related credit risk. Notional amounts represent the
amount to which a rate or price is applied in order to calculate the
exchange of cash flows. The notional amounts are not recorded on the
consolidated balance sheets. They represent the volume of outstanding
transactions and do not represent the potential gain or loss associated
with the market risk or credit risk of such instruments. The replacement
cost represents the cost of replacing, at current market rates, all contracts
with a positive fair value and is inclusive of interest receivable related to
the contracts, which is included with other assets on the consolidated
balance sheets. The future credit exposure represents the potential for
future changes in value and is based on a formula prescribed by OSFI.
The credit risk equivalent is the sum of the future credit exposure and the
replacement cost. The risk-weighted balance represents the credit risk
equivalent, net of cash collateral held related to contracts with a positive
fair value, weighted according to the creditworthiness of the counterparty
as prescribed by OSFI. Additional discussion of OSFI’s capital adequacy
requirements is provided within the Capital Management section of the
MD&A.
As at October 31, 2016
As at October 31, 2015
Notional
Amount
Replace-
ment
Cost
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Notional
Amount
Replace-
ment
Cost
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Interest rate swaps
Equity swaps
$ 3,698,000 $
23,745
12,800 $
-
10,490 $
1,642
23,290 $
1,642
3,244 $ 2,805,000 $
328
22,884
24,193 $
-
8,775 $
1,576
32,968 $
1,576
6,594
315
Foreign exchange
contracts
124,056
35
1,247
1,282
281
233,129
3,178
2,330
5,508
1,108
Total
$ 3,845,801 $
12,835 $
13,379 $
26,214 $
3,853 $ 3,061,013 $
27,371 $
12,681 $
40,052 $
8,017
The following table shows the derivative financial instruments split between those contracts that have a positive fair value (favourable contracts) and
those that have a negative fair value (unfavourable contracts):
As at October 31, 2016
As at October 31, 2015
Favourable Contracts
Unfavourable Contracts
Favourable Contracts
Unfavourable Contracts
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Interest rate swaps designated
as accounting hedges
$ 2,035,000
$
10,335
$ 1,663,000
$
(3,014)
$ 2,330,000
$
20,073
$ 475,000
$
(733)
Equity swaps designated
as accounting hedges
Equity swaps not designated
as accounting hedges
Foreign exchange contracts
-
-
20,117
(1,449)
-
-
19,860
(3,317)
-
1,330
-
35
3,628
122,726
(134)
(2,575)
-
213,183
-
3,172
3,024
19,946
(307)
(146)
Total
$ 2,036,330
$
10,370
$ 1,809,471
$
(7,172)
$ 2,543,183
$
23,245
$ 517,830
$
(4,503)
The aggregate contractual or notional amount of the derivative financial
instruments on hand, the extent to which instruments are favourable or
unfavourable and, thus, the aggregate fair values of these financial assets
and liabilities can fluctuate significantly from time to time.
The average fair values of the derivative financial instruments on hand during the year are set out in the following table:
Favourable derivative financial instruments (assets)
Unfavourable derivative financial instruments (liabilities)
2016
18,811
9,324
$
$
2015
16,621
3,477
$
$
90
CWB Financial Group 2016 Annual Report
The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on contracts:
As at October 31, 2016
Maturity
As at October 31, 2015
Maturity
1 Year or Less
More than 1 Year
1 Year or Less
More than 1 Year
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Interest rate swaps designated
as accounting hedges(1)
$ 1,600,000
1.35% $ 2,098,000
0.95% $ 1,050,000
1.32% $ 1,755,000
1.23%
Equity swaps designated
as accounting hedges(2)
10,053
1.65%
10,064
1.67%
9,736
1.72%
10,124
1.65%
Equity swaps not designated
as accounting hedges(3)
2,839
1.50%
Foreign exchange contracts(4)
124,056
789
-
Total
$ 1,736,948
$ 2,108,853
1.50%
3,024
1.44%
233,129
$ 1,295,889
-
-
$ 1,765,124
-
(1) CWB receives interest at a fixed contractual rate and pays interest on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps designated as accounting hedges outstanding at October 31, 2016 mature
between November 2016 and September 2021.
(2) Equity swaps designated as accounting hedges outstanding at October 31, 2016 mature between June 2017 and June 2019.
(3) Equity swaps not designated as accounting hedges outstanding at October 31, 2016 mature in June and December 2017.
(4) Foreign exchange contracts mature between November 2016 and April 2017. The contractual interest rate is not meaningful for foreign exchange contracts.
The impact of gains related to hedge ineffectiveness recognized in other non-interest income within the consolidated statements of income follows:
Fair Value Hedges
Change in fair value of hedging instruments
Change in fair value of hedged items attributable to hedged risk
Cash Flow Hedges
2016
2015
$
1,135
$
(501)
634
-
-
-
-
-
During the year, $8,157 net unrealized after-tax losses (2015 – $7,846
after-tax gains) were recorded in other comprehensive income for
changes in fair value of the effective portion of derivatives designated
as cash flow hedges. Amounts accumulated in other comprehensive
income are reclassified to net income in the same period that the hedged
items affect income. During the year, $113 of net losses after tax (2015 –
$3,640) were reclassified to net income.
At October 31, 2016, hedged cash flows are expected to occur and affect
profit or loss within the next five years (2015 – five years).
12. OTHER ASSETS
Accrued interest receivable
Accounts receivable
Deferred tax asset
Income tax receivable
Prepaid expenses
Financing costs(1)
Derivative collateral receivable
Other
Total
(1) Amortization for the year amounted to $1,962 (2015 - $2,246).
As at
October 31
2016
As at
October 31
2015
$
56,264
$
52,666
44,931
34,640
(Note 22)
31,704
27,417
14,191
10
11,034
10,943
4,605
4,423
2,540
-
2,190
4,026
$
167,459
$
134,125
CWB Financial Group 2016 Annual Report
91
13. DEPOSITS
Deposits are accounted for on an amortized cost basis. Costs relating to
the issuance of fixed term deposits are amortized over the expected life
of the deposit using the effective interest method.
Payable on demand
Payable after notice
Payable on a fixed date
Total
Payable on demand
Payable after notice
Payable on a fixed date
Total
As at October 31, 2016
Individuals
Business and
Government
Total
$
34,681
$
761,523
$
796,204
3,866,441
3,031,090
6,897,531
9,322,580
4,178,238
13,500,818
$ 13,223,702
$ 7,970,851
$ 21,194,553
As at October 31, 2015
Business and
Individuals
Government
Total
$
33,129
$
590,411
$
623,540
3,188,276
2,907,597
6,095,873
8,195,216
4,450,778
12,645,994
$ 11,416,621
$ 7,948,786
$ 19,365,407
A summary of all outstanding deposits payable on a fixed date by contractual maturity date is as follows:
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Total
14. INTEREST IN UNCONSOLIDATED STRUCTURED ENTITY
As at
October 31
2016
As at
October 31
2015
$ 6,167,088
3,515,358
$ 6,240,394
3,582,039
1,554,168
1,007,829
1,256,375
1,369,497
725,558
728,506
$ 13,500,818
$ 12,645,994
Holders of WesTS are eligible to receive semi-annual non-cumulative fixed
cash distributions. No cash distributions will be payable by CWB Capital
Trust on WesTS if CWB fails to declare regular dividends on its preferred
shares or, if no preferred shares are outstanding, on its common shares.
In this case, the net distributable funds of CWB Capital Trust will be
distributed to CWB as holder of the residual interest in CWB Capital Trust.
Should CWB Capital Trust fail to pay the semi-annual distributions in full,
CWB has contractually agreed not to declare dividends of any kind on
any of the preferred or common shares for a specified period of time.
In 2006, CWB arranged for the issuance of innovative capital instruments,
CWB Capital Trust Capital Securities Series 1 (WesTS), through Canadian
Western Bank Capital Trust (CWB Capital Trust), a structured entity
with a December 31 year end. CWB Capital Trust, an open-end trust,
issued non-voting WesTS and the proceeds were used to purchase a
senior deposit note from CWB. The deposit note of $105,000 (2015 -
$105,000) is included in Deposits in the consolidated balance sheets.
CWB has obtained regulatory approval to proceed with the redemption
of both the $105,000 senior deposit note held by CWB Capital Trust
and all outstanding WesTS on December 31, 2016. Subsequent to the
redemptions and the satisfaction of all outstanding liabilities of CWB
Capital Trust, the structured entity will be terminated, effective December
31, 2016, in accordance with the Amended and Restated Declaration of
Trust.
Based on the guidance provided in IFRS 10 Consolidated Financial
Statements, CWB has determined that it does not control, and
consequently does not consolidate, CWB Capital Trust. However, CWB
Capital Trust qualifies as an unconsolidated structured entity under
the guidance of IFRS 12 Disclosure of Interests in Other Entities and,
accordingly, additional disclosures regarding CWB Capital Trust are
provided herein.
92
CWB Financial Group 2016 Annual Report The following information presents the outstanding WesTS:
Issuance date
Distribution dates
Annual yield
Earliest date redeemable
at the option of the issuer
Earliest date exchangeable
at the option of the holder
August 31, 2006
June 30, December 31
6.199%
December 31, 2011
Any time
Trust capital securities outstanding
105,000
Principal amount
$105,000
The significant terms and conditions of the WesTS are:
1) Subject to the approval of OSFI, CWB Capital Trust may, in whole
(but not in part), on the redemption date specified above, and on any
distribution date thereafter, redeem the WesTS without the consent of
the holders.
2) Subject to the approval of OSFI, upon occurrence of a special event as
defined, prior to the redemption date specified above, CWB Capital
Trust may redeem all, but not part, of the WesTS without the consent
of the holders.
3) The WesTS may be redeemed for cash equivalent to (i) the early
redemption price if the redemption occurs prior to December 31,
2016 or (ii) the redemption price if the redemption occurs on or after
December 31, 2016. Redemption price refers to an amount equal to
one thousand dollars plus the unpaid distributions to the redemption
date. Early redemption price refers to an amount equal to the greater
of (i) the redemption price and (ii) the price calculated to provide an
annual yield, equal to the yield on a Government of Canada bond
issued on the redemption date with a maturity date of December 31,
2016, plus 0.50%.
15. OTHER LIABILITIES
4) Holders of WesTS may, at any time, exchange each one thousand
dollars of principal for 40 First Preferred Shares Series 1 of CWB.
CWB’s First Preferred Shares Series 1 pay semi-annual non-cumulative
cash dividends with an annual yield of 4.00% and will be redeemable
at the option of CWB, with OSFI approval, on or after December
31, 2011, but not at the option of the holders. This exchange right
will be effected through the conversion by CWB Capital Trust of
the corresponding amount of the deposit note of CWB. The WesTS
exchanged for CWB’s First Preferred Shares Series 1 will be cancelled
by CWB Capital Trust.
5) Each WesTS will be exchanged automatically without the consent of
the holders for 40 non-cumulative redeemable CWB First Preferred
Shares Series 2 upon occurrence of any one of the following events:
(i) proceedings are commenced for the winding up of CWB, (ii) OSFI
takes control of CWB, (iii) CWB has a Tier 1 capital ratio of less than
5% or Total capital ratio of less than 8%, or (iv) OSFI has directed
CWB to increase its capital or provide additional liquidity and CWB
elects such automatic exchange or CWB fails to comply with such
direction. Following the occurrence of an automatic exchange, CWB
would hold all of the Special Trust Securities and all of the WesTS,
and the primary asset of CWB Capital Trust would continue to be the
senior deposit note. CWB’s First Preferred Shares Series 2 pay semi-
annual non-cumulative cash dividends with an annual yield of 5.25%
and will be redeemable at the option of CWB, with OSFI approval, on
or after December 31, 2011, but not at the option of the holders.
6) For regulatory capital purposes, all of the outstanding WesTS amounts
are currently included in Tier 1 capital.
7) The non-cumulative cash distribution on the WesTS will be 6.199%
paid semi-annually until December 31, 2016 and, thereafter, at the
Canadian Dollar Offered Rate (CDOR) 180-day Bankers’ Acceptance
rate plus 255 basis points.
Accounts payable and accrued liabilities
Accrued interest payable
Contingent consideration
Provisions for committed but undrawn credit exposures
Deferred tax liability
Income taxes payable
Derivative collateral payable
Deferred revenue
Leasehold inducements
Other
Total
(Note 27)
(Note 8)
(Note 22)
As at
October 31
2016
As at
October 31
2015
$
166,544
$
125,184
134,077
124,050
24,257
23,424
9,658
7,726
7,070
3,110
2,939
3,325
650
21,018
8,354
10,970
9,870
3,816
2,871
2,054
$
382,130
$
308,837
CWB Financial Group 2016 Annual Report
93
16. DEBT
a) Subordinated Debentures
Financing costs relating to the issuance of subordinated debentures are
amortized over the expected life of the related subordinated debenture
using the effective interest method.
Each of the following qualifies as a bank debenture under the Bank
Act and is subordinate in right of payment to all deposit liabilities. All
redemptions are subject to the approval of OSFI. On November 30, 2015,
CWB redeemed all outstanding 4.389% subordinated debentures at par
plus accrued interest to, but excluding, the redemption date.
Interest Rate
3.463%(1)
5.571%(2)
4.389%(3)
Total
Maturity Date
Earliest Date Redeemable
by CWB at Par
As at
October 31
2016
As at
October 31
2015
December 17, 2024
December 17, 2019
$
250,000
$
250,000
March 21, 2022
March 22, 2017
75,000
November 30, 2020
November 30, 2015
-
75,000
300,000
$
325,000
$
625,000
(1) These conventional debentures have a 12-year term with a fixed interest rate for the first seven years. Thereafter, the interest rate will be reset quarterly at the 3-month CDOR rate plus 160 basis points.
(2) These conventional debentures have a 15-year term with a fixed interest rate for the first 10 years. Thereafter, the interest rate will be reset quarterly at the CDOR 90-day Bankers’ Acceptance rate plus 180 basis points.
(3) These conventional debentures had a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate would have reset quarterly at the 3-month CDOR rate plus 193 basis points.
b) Debt Securities
CWB securitizes leases to third parties. These securitizations do not
qualify for derecognition as CWB continues to be exposed to certain risks
associated with the leases, including an obligation to remit contractual
cash flow payments regardless of whether the underlying cash flows are
collected from lessees and, therefore, has not transferred substantially
all of the risk and rewards of ownership. As the leases do not qualify for
derecognition, the assets are not removed from the balance sheet and a
securitization liability is recognized for the cash proceeds received.
The carrying amount of the liability as at October 31, 2016 was $943,198
(October 31, 2015 – $562,623), and the associated carrying amount of
the lease assets recorded on the balance sheet was $1,030,499 (October
31, 2015 – $634,754), which does not include an allocation of the
allowance for credit losses.
94
CWB Financial Group 2016 Annual Report 17. CAPITAL STOCK
Authorized:
• An unlimited number of common shares without nominal or par value;
• 33,964,324 class A shares without nominal or par value; and
• An unlimited number of first preferred shares, without nominal or
par value, issuable in series, provided that the maximum aggregate
consideration for all outstanding first preferred shares at any time does
not exceed $1,000,000.
Issued and fully paid:
Preferred Shares - Series 5
Outstanding at beginning and end of year
Preferred Shares - Series 7
Outstanding at beginning of year
Issued
Outstanding at end of year
Common Shares
Outstanding at beginning of year
Issued to public
Issued on acquisition of subsidiary
Issued under dividend reinvestment plan
Issued on exercise or exchange of options(1)
Outstanding at end of year
Share Capital
2016
Number of
Shares
Amount
2015
Number of
Shares
Amount
5,000,000
$
125,000
5,000,000
$
125,000
-
5,600,000
5,600,000
80,526,069
6,125,000
1,250,312
185,111
16,628
88,103,120
$
-
140,000
140,000
537,511
150,063
25,606
4,491
706
718,377
983,377
-
-
-
-
-
-
80,369,305
533,038
-
-
133,321
23,443
80,526,069
-
-
3,650
823
537,511
662,511
$
(Note 3)
(1) Represents shares issued and amounts transferred from the share-based payment reserve to share capital upon cashless settlement of option exercises.
CWB is prohibited by the Bank Act from declaring any dividends on
common shares when CWB is or would be placed, as a result of the
declaration, in contravention of the capital adequacy and liquidity
regulations or any regulatory directives issued under the Bank Act.
In addition, should CWB Capital Trust fail to pay the semi-annual
distributions in full on the CWB Capital Trust Securities Series 1 (see Note
14), CWB has contractually agreed to not declare dividends on any of
its common and preferred shares for a specified period of time. These
limitations do not restrict the current level of dividends.
a) Common shares
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.
b) Preferred Shares
On March 31, 2016, CWB issued 5,600,000 non-cumulative, five-year
rate reset First Preferred Shares Series 7 (Non-Viability Contingent Capital)
(Series 7 Preferred Shares) at $25.00 per share, for gross proceeds of
$140,000.
Non-Viability Contingent Capital Preferred Share Rights and Privileges
Redemption
Amount
Quarterly
Non-cumulative
Dividend(1)
Annual
Yield(4)
Date
Redeemable/
Convertible(5)(6)
Convertible to(7)
Preferred Shares - Series 5
Preferred Shares - Series 7
$
$
25.00
25.00
$
$
0.275(2)
0.390625(3)
4.40%
April 30, 2019
Preferred Shares - Series 6
6.25%
July 31, 2021
Preferred Shares - Series 8
(1) Non-cumulative fixed dividends are payable quarterly as and when declared by the Board of Directors of CWB.
(2) The dividend rate will reset on the date redeemable and every five years thereafter at a level of 276 basis points over the then five-year Government of Canada bond yield.
(3) The dividend rate will reset on the date redeemable and every five years thereafter at a level of 547 basis points over the then five-year Government of Canada bond yield.
(4) Based on the stated issue price per share of $25.00.
(5) Redeemable by CWB, subject to the approval of OSFI, on the date noted and every five years thereafter.
(6) Convertible by the shareholders, subject to certain conditions, on the date noted and every five years thereafter if not redeemed by CWB to an equal number of First Preferred Shares Series 6 and Series 8, which are non-cumulative,
floating rate preferred shares.
(7) If converted, holders of the First Preferred Shares Series 6 and Series 8 will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of CWB, equal to the 90-day Government of Canada
Treasury Bill rate plus 276 and 547 basis points, respectively.
Upon the occurrence of a trigger event (as defined by OSFI), each
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).
CWB Financial Group 2016 Annual Report
95
c) Dividends
The following dividends were declared by CWB’s Board of Directors and paid by CWB during the year:
$0.92 per common share (2015 - $0.86)
$1.10 per preferred share - Series 5 (2015 - $1.10)
$0.91 per preferred share - Series 7 (2015 - nil)(1)
Total
2016
2015
$
76,424
$
69,170
5,500
5,112
5,500
-
$
87,036
$
74,670
(1) The Series 7 Preferred Share dividend payment is related to the period from the issuance on March 31, 2016 to October 31, 2016. Thereafter, the annual dividend rate will be $1.5625 per share, payable quarterly, for the initial period
ending July 31, 2021.
Subsequent to October 31, 2016, the Board of Directors of CWB declared
a dividend of $0.23 per common share payable on January 5, 2017 to
shareholders of record on December 15, 2016, a dividend of $0.275 per
Series 5 preferred share payable on January 31, 2017 to shareholders of
record on January 20, 2017, and a dividend of $0.390625 per Series 7
preferred share payable on January 31, 2017 to shareholders of record on
January 20, 2017. With respect to these dividend declarations, no liability
was recorded on the consolidated balance sheet at October 31, 2016.
d) Dividend Reinvestment Plan
Under the dividend reinvestment plan (plan), CWB provides holders of
CWB’s common shares and holders of any other class of shares deemed
eligible by CWB’s Board of Directors with the opportunity to direct cash
dividends paid on any class of their eligible shares towards the purchase
of additional common shares. Currently, the Board of Directors has
deemed that the holders of CWB’s Series 5 and Series 7 Preferred Shares
are also eligible to participate in the plan. The plan is only open to
shareholders residing in Canada.
At the option of CWB, the common shares may be issued from CWB’s
treasury at an average market price based on the closing prices of a
board lot of common shares on the Toronto Stock Exchange (TSX) for
the five trading days immediately preceding the dividend payment date,
with a discount of between 0% to 5% at CWB’s discretion. CWB also
has the option to fund the plan through the open market at market
prices. During the year, 185,111 (2015 – 133,321) common shares were
issued under the plan from CWB’s treasury with no discount (2015 – no
discount).
96
CWB Financial Group 2016 Annual Report 18. SHARE-BASED PAYMENTS
a) Stock Options
Stock options are accounted for using the fair value method. The
estimated value is recognized over the applicable vesting period as an
increase to both salary expense and share-based payment reserve. When
options are exercised, the proceeds received and the applicable amount in
share-based payment reserve are credited to common shares.
The details of, and changes in, the issued and outstanding options follow:
Options
Balance at beginning of year
Granted
Exercised or exchanged
Forfeited
Expired
Balance at End of Year
Exercisable at End of Year
Further details relating to stock options outstanding and exercisable follow:
CWB has authorized 6,790,509 common shares (2015 – 6,807,137)
for issuance under the share incentive plan. Of the amount authorized,
options exercisable into 5,205,794 shares (2015 – 5,232,366) are issued
and outstanding. The outstanding options vest within three years and are
exercisable at a fixed price equal to the average of the market price on
the day of and the four days preceding the grant date. Options granted
after 2015 expire within seven years of date of grant. Previously granted
options expire within five years of date of grant. Outstanding options
expire from December 2016 to March 2023.
2016
2015
Number
of Options
Weighted
Average
Exercise
Price
Number
of Options
5,232,366
$
30.26
4,743,277
$
610,731
(149,340)
(78,865)
(409,098)
23.70
25.52
33.21
29.71
705,725
(128,100)
(82,001)
(6,535)
5,205,794
2,599,039
$
$
29.63
5,232,366
27.44
1,488,783
$
$
Weighted
Average
Exercise
Price
30.76
26.13
24.23
32.77
28.99
30.26
26.90
Range of Exercise Prices
$23.70 to $26.13
$26.40 to $28.47
$37.50 to $39.42
Total
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
3.6
$
1.2
2.4
2.3
$
Weighted
Average
Exercise
Price
25.13
27.88
38.59
29.63
Number
of Options
481,854
$
2,117,185
-
Weighted
Average
Exercise
Price
25.46
27.88
-
2,599,039
$
27.44
Number
of Options
1,781,798
2,117,185
1,306,811
5,205,794
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 fiscal 2016, option holders exchanged the
rights to 149,340 (2015 – 128,100) options and received 16,628 (2015 –
23,443) shares in return by way of the cashless settlement.
Salary expense of $2,772 (2015 – $4,694) was recognized relating to the
estimated fair value of options granted. The fair value of options granted
during the year 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 (2015 – 4.0) years, (iii)
expected annual volatility of 26% (2015 – 24%), and (iv) expected annual
dividends of 3.8% (2015 – 3.4%). Expected volatility is estimated by
evaluating historical volatility of the share price over multi-year periods.
The weighted average fair value of options granted was estimated at
$3.47 (2015 – $2.96) per share.
During the year, $706 (2015 – $823) was transferred from the share-
based payment reserve to share capital, representing the estimated fair
value recognized for 149,340 (2015 – 128,100) options exercised during
the year.
CWB Financial Group 2016 Annual Report
97
b) Restricted Share Units
Under the Restricted Share Unit (RSU) plan, certain employees are eligible
to receive an award in the form of RSUs. Each RSU entitles the employee
to receive the cash equivalent of the market value of CWB’s common
shares at the vesting date. Throughout the vesting period, common share
dividend equivalents accrue to the employee in the form of additional
units. RSUs vest on each anniversary of the grant in equal one-third
instalments over a period of three years. Salary expense is recognized over
the vesting period except where the employee is eligible to retire prior to
the vesting date, in which case the expense is recognized between the
grant date and the date the employee is eligible to retire.
During the year, salary expense of $9,514 (2015 – $9,498) was
recognized related to RSUs. As at October 31, 2016, the liability for the
RSUs held under this plan was $9,436 (October 31, 2015 – $8,372). At
the end of each period, the liability and salary expense are adjusted to
reflect changes in the fair value of the RSUs.
Number of RSUs
Balance at beginning of year
Granted
Vested and paid out
Forfeited
Balance at End of Year
2016
638,807
442,559
2015
590,847
387,332
(308,988)
(318,555)
(31,134)
741,244
(20,817)
638,807
c) Performance Share Units
Under the Performance Share Unit (PSU) plan, certain employees are
eligible to receive an award in the form of PSUs on an annual basis. At
the time of a grant, each PSU represents a unit with an underlying value
equivalent to the value of a CWB common share. Throughout the vesting
period, common share dividend equivalents accrue to the employee in
the form of additional units. Under the PSU Plan, each PSU vests at the
end of a three-year period and is settled in cash.
At the end of each specified performance period, a multiplier based on
performance targets is applied to a portion of the PSUs originally granted
and any accrued notional dividends such that the total value of the PSUs
may vary from 0% to 200% of the value of an equal number of CWB
common shares.
During the year, salary expense of $990 (2015 – $372) was recognized
related to PSUs. As at October 31, 2016, the liability for the PSUs held
under this plan was $1,876 (October 31, 2015 – $829). At the end
of each period, the liability and salary expense are adjusted to reflect
changes in the fair value of the PSUs.
Number of PSUs
Balance at beginning of year
Granted
Balance at End of Year
d) Deferred Share Units
2016
91,404
86,175
177,579
2015
25,305
66,099
91,404
Under the Deferred Share Unit (DSU) plan, non-employee directors
receive at least 50% of their annual retainer in DSUs. The DSUs are
not redeemable until the individual is no longer a director and must be
redeemed for cash. Common share dividend equivalents accrue to the
directors in the form of additional units. The expense related to the DSUs
is recorded in the period the award is earned by the director.
During the year, other non-interest expenses included $624 (2015 –
$662) related to the DSUs. As at October 31, 2016, the liability for DSUs
held under this plan was $3,639 (October 31, 2015 – $2,893). At the end
of each period, the liability and expense are adjusted to reflect changes in
the market value of the DSUs.
2016
2015
115,123
101,844
27,846
27,629
-
(14,350)
142,969
115,123
Number of DSUs
Balance at beginning of year
Granted
Paid out
Balance at End of Year
98
CWB Financial Group 2016 Annual Report 19. NON-CONTROLLING INTERESTS
Non-controlling interests relate to the following:
McLean & Partners Wealth Management Ltd.
Adroit Investment Management Ltd.
Total
As at
October 31
2016
As at
October 31
2015
$
629
$
861
144
131
$
773
$
992
20. CONTINGENT LIABILITIES AND COMMITMENTS
a) Credit Instruments
In the normal course of business, CWB enters into various commitments
and has contingent liabilities, which are not reflected in the consolidated
balance sheets. These items are reported below and are expressed in
terms of the contractual amount of the related commitment.
Credit Instruments
Commitments to extend credit
Guarantees and standby letters of credit
Total
As at
October 31
2016
As at
October 31
2015
$ 4,739,091
$ 4,829,622
492,327
465,649
$ 5,231,418
$ 5,295,271
Commitments to extend credit to customers also arise in the normal
course of business and include undrawn availability under lines of
credit and commercial operating loans of $2,265,566 (October 31,
2015 - $2,547,444) and authorized but unfunded loan commitments
of $2,473,525 (October 31, 2015 – $2,282,178). In the majority of
instances, availability of undrawn commercial commitments is subject
to the borrower meeting specified financial tests or other covenants
regarding completion or satisfaction of certain conditions precedent. It
is also usual practice to include the right to review and withhold funding
in the event of a material adverse change in the financial condition
of the borrower. The allowance for credit losses related to committed
but undrawn credit exposures is included in other liabilities on the
consolidated balance sheets (see Note 15). From a liquidity perspective,
undrawn credit
authorizations will be funded over time, with draws in many cases
extending over a period of months. In some instances, authorizations are
never advanced or may be reduced because of changing requirements.
Revolving credit authorizations are subject to repayment which, on a
pooled basis, also decreases liquidity risk.
Guarantees and standby letters of credit represent CWB’s obligation
to make payments to third parties when a customer is unable to
make required payments or meet other contractual obligations. These
instruments carry the same credit risk, recourse and collateral security
requirements as loans extended to customers and generally have a
term that does not exceed one year. Losses, if any, resulting from these
transactions are not expected to be material.
CWB Financial Group 2016 Annual Report
99
b) Lease Commitments
CWB has obligations under long-term, non-cancellable operating leases
for the rental of premises. The leases typically run 10 to 15 years, with an
option to renew the lease for an additional five years. Operating leases
primarily comprise branch and office premises and are not capitalized.
Total costs, including free rent periods and step-rent increases, are
expensed on a straight-line basis over the lease term.
Minimum future lease commitments for each of the five succeeding years and thereafter are as follows:
2017
2018
2019
2020
2021
2022 and thereafter
Total
c) Guarantees
A guarantee is defined as a contract that contingently requires the
guarantor to make payments to a third party based on (i) changes in an
underlying economic characteristic that is related to an asset, liability or
equity security of the guaranteed party, (ii) failure of another party to
perform under an obligating agreement, or (iii) failure of another third
party to pay indebtedness when due.
Significant guarantees provided to third parties include guarantees and
standby letters of credit as discussed above.
In the ordinary course of business, CWB enters into contractual
arrangements under which CWB may agree to indemnify the other
party. Under these agreements, CWB may be required to compensate
counterparties for costs incurred as a result of various contingencies, such
as changes in laws and regulations and litigation claims. A maximum
potential liability cannot be identified as the terms of these arrangements
vary and generally no predetermined amounts or limits are identified. The
likelihood of occurrence of contingent events that would trigger payment
under these arrangements is either remote or difficult to predict and, in
the past, payments under these arrangements have been insignificant.
No amounts are reflected in the consolidated financial statements related
to these guarantees and indemnifications.
$
13,205
12,303
11,451
10,921
9,566
34,582
$
92,028
d) Legal and Regulatory Proceedings
In the ordinary course of business, CWB and its subsidiaries are party
to legal and regulatory 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.
21. EMPLOYEE FUTURE BENEFITS
All employee future benefits related to CWB’s group retirement savings
and employee share purchase plans are recognized in the periods during
which services are rendered by employees. CWB’s contributions to the
group retirement savings plan and employee share purchase plan totalled
$13,267 (2015 – $12,693).
100
CWB Financial Group 2016 Annual Report 22. INCOME TAXES
CWB follows the deferred method of accounting for income taxes
whereby current income taxes are recognized for the estimated income
taxes payable for the current period. Deferred tax assets and liabilities
represent the cumulative amount of tax applicable to temporary
differences between the carrying amount of the assets and liabilities,
and their values for tax purposes. Deferred tax assets and liabilities are
measured using enacted or substantively enacted tax rates anticipated to
apply to taxable income in the years in which those temporary differences
are anticipated to be recovered or settled. Changes in deferred taxes
related to a change in tax rates are recognized in income in the period of
the tax rate change. All deferred tax assets and liabilities are expected to
be realized in the normal course of operations.
The provision for income taxes consists of the following:
Consolidated statements of income
Current
Deferred
Other comprehensive income
Tax expense (recovery) related to:
Available-for-sale securities
Derivatives designated as cash flow hedges
Total
2016
2015
$
65,714
$
73,784
2,229
67,943
(2,465)
71,319
8,495
(2,960)
5,535
(19,630)
4,226
(15,404)
$
73,478
$
55,915
A reconciliation of the statutory tax rates and income tax that would be payable at these rates to the effective income tax rates and provision for income
taxes reported in the consolidated statements of income follows:
Combined Canadian federal and provincial income taxes and
statutory tax rate
Increase (decrease) arising from:
Tax-exempt income
Deferred tax related to tax rate increase(1)
Stock-based compensation
Other
Provision for Income Taxes and Effective Tax Rate
2016
2015
$
68,975
26.8% $
74,466
26.0%
(2,362)
-
745
585
$
67,943
(0.9)
-
0.3
0.2
(4,141)
(1,753)
1,209
1,538
(1.4)
(0.6)
0.4
0.5
26.4% $
71,319
24.9%
(1) The combined statutory tax rate changed in 2015 as a result of an increase in the Alberta provincial tax rate from 10% to 12% which was substantively enacted effective July 1, 2015.
Deferred tax balances are comprised of the following:
Deferred Tax Assets
Allowance for credit losses
Deferred loan fees
Deferred deposit broker commission
Leasing income
Other temporary differences
Deferred Tax Liabilities
Intangible assets
Other temporary differences
2016
2015
$
26,260
$
24,488
12,814
(6,844)
7,764
(8,290)
12,730
(5,102)
(665)
(4,034)
$
31,704
$
27,417
$
6,578
$
3,080
$
9,658
$
6,947
1,407
8,354
CWB Financial Group 2016 Annual Report
101
23. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated based on the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is calculated based on the treasury stock
method, which assumes that any proceeds from in-the-money stock
options are used to purchase CWB’s common shares at the average
market price during the period.
The calculation of earnings per common share follows:
Numerator
Common shareholders' net income from Continuing Operations
Common shareholders' net income from Discontinued Operations
Common Shareholders' Net Income
Denominator
2016
2015
$
177,761
$
208,064
-
111,637
$
177,761
$
319,701
Weighted average of common shares outstanding - basic
83,411,226
80,441,845
Dilutive instruments:
Stock options(1)
Weighted Average Number of Common Shares Outstanding - Diluted
Earnings Per Common Share
Basic
- Continuing Operations
- Combined Operations
- Discontinued Operations
Diluted - Continuing Operations
- Combined Operations
- Discontinued Operations
7,941
140,205
83,419,167
80,582,050
$
2.13
$
2.13
-
2.13
2.13
-
2.59
3.97
1.38
2.59
3.97
1.38
(1) At October 31, 2016, the denominator excludes 5,205,794 (2015 – 2,642,435) of employee stock options with an average exercise price of $30.02, adjusted for unrecognized stock-based compensation, that is greater than the average
market price.
102
CWB Financial Group 2016 Annual Report
24. ASSETS UNDER ADMINISTRATION AND MANAGEMENT
Assets under administration of $10,689,398 (October 31, 2015 –
$9,293,683) and assets under management of $1,924,181 (October 31,
2015 – $1,882,736) represent the fair value of assets held for personal,
corporate and institutional clients as well as third-party leases and
residential mortgages subject to service agreements. These assets are
kept separate from CWB’s own assets. Assets under administration and
management are not reflected in the consolidated balance sheets.
25. RELATED PARTY TRANSACTIONS
Transactions with and between subsidiary entities are made at normal
market prices and eliminated on consolidation.
Preferred Rates and Terms
Key Management Personnel
CWB makes loans, primarily residential mortgages, to its officers and
employees at various preferred rates and terms. The total amount
outstanding for these types of loans is $105,634 (October 31, 2015 –
$113,178). CWB offers deposits, primarily fixed term deposits, to its
officers and employees and their immediate family at preferred rates. The
total amount outstanding for these deposits is $318,569 (October 31,
2015 – $284,727).
Compensation of key management personnel is as follows:
Salaries, benefits and directors' compensation
Share-based payments (stock options, RSUs, PSUs and DSUs)(1)
Termination benefits (included in discontinued operations)
Total
(1) Share-based payments are based on the estimated fair value on grant date.
Loans outstanding with key management personnel totaled $386 as at
October 31, 2016 (October 31, 2015 – $405). CWB’s policies preclude
lending to CWB’s independent directors.
Key management personnel of CWB are those that have authority and
responsibility for planning, directing and controlling the activities of CWB
and include independent directors of CWB.
2016
$
4,815
$
3,117
-
$
7,932
$
2015
5,156
3,203
1,244
9,603
CWB Financial Group 2016 Annual Report
103
26. INTEREST RATE SENSITIVITY
CWB is exposed to interest rate risk as a result of a difference, or gap,
between the maturity or repricing behaviour of interest sensitive assets
and liabilities. The interest rate gap is managed by adjusting the repricing
behaviour of interest sensitive assets or liabilities to ensure the gap falls
within the risk appetite of CWB. The repricing profile of these assets and
Asset Liability Gap Positions
($ millions)
liabilities has been incorporated in the table following, which contains the
gap position at October 31 for select time intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap position.
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
October 31, 2016
Assets
Cash resources and securities
$
1,394
$
590
$
11
$
1,995
$
743
$
52
$
2
$
2,792
Loans(1)
Other assets(2)
Derivative financial instruments(3)
Total
11,865
2,469
4,140
18,474
-
150
-
500
-
950
-
1,600
-
2,098
9,812
10,321
1,379
3,179
14,879
6,971
208
Liabilities and Equity
Deposits
Other liabilities(2)
Debt(1)
Equity
Derivative financial instruments(3)
3,722
Total
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
11,646
$
$
219
219
$
$
7,893
1,288
4,149
13,330
7,886
-
31
-
-
165
-
-
1,453
1,016
1,235
-
223
-
-
-
419
-
3,722
4,372
17,471
$
$
(232)
1,003
$
$
1,003
1,003
$
$
-
849
265
-
9,000
812
1,815
$
$
-
-
260
-
-
-
-
-
-
(96)
469
148
523
(21)
417
-
2,078
124
2,598
-
-
260
$
(2,075)
2,075
$
$
$
Percentage of Total Assets
0.8%
4.2%
3.5%
3.5%
6.2%
7.1%
October 31, 2015
Cumulative Gap
Cumulative Gap as a
$
(380)
$
(373)
$
(906)
$
(906)
$
1,650
$
1,930
$
-
$
Percentage of Total Assets
(1.5)%
(1.4)%
(3.5)%
(3.5)%
6.4%
7.5%
-
(1) 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.
(2) Accrued interest is excluded in calculating interest sensitive assets and liabilities.
(3) Derivative financial instruments are included in this table at the notional amount.
104
21,962
469
3,846
29,069
21,195
417
1,268
2,343
3,846
29,069
-
-
-
-
-
CWB Financial Group 2016 Annual Report
The effective, weighted average interest rates for each class of financial asset and liability are shown below:
Weighted Average Effective Interest Rates
(%)
October 31, 2016
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
October 31, 2015
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
Floating
Rate
and Within
1 Month
1 to 3
Months
3 Months
to 1 Year
3.1 %
0.9
2.2 %
3.4 %
1.1
2.3 %
2.5 %
2.4
0.1 %
2.7 %
1.7
1.0 %
3.7 %
1.7
2.0 %
3.7 %
1.8
1.9 %
Total
Within
1 Year
3.2 %
1.3
1.9 %
3.4 %
1.3
2.1 %
1 Year to
5 Years
More than
5 Years
3.4 %
2.2
1.2 %
3.4 %
2.3
1.1 %
4.1 %
-
4.1 %
1.8 %
-
1.8 %
Total
3.3 %
2.0
1.3 %
3.4 %
1.6
1.8 %
Based on the current interest rate gap position, it is estimated that a
one percentage point increase in all interest rates would increase net
interest income by approximately 2.15% or $12,582 (October 31,
2015 – decrease 0.61% or $2,989) and decrease other comprehensive
income $57,109 (October 31, 2015 – $90,099) net of tax, respectively,
over the following twelve months. A one-percentage point decrease in
all interest rates would decrease net interest income by approximately
0.88% or $5,150 (October 31, 2015 – 0.04% or $201) and increase
other comprehensive income $58,646 (October 31, 2015 – $87,091), net
of tax.
27. FAIR VALUE OF FINANCIAL INSTRUMENTS
a) Financial Assets and Liabilities by Measurement Basis
The fair value of a financial instrument on initial recognition is normally
the transaction price (i.e. the value of the consideration given or
received). Subsequent to initial recognition, financial instruments
measured at fair value that are quoted in active markets are based on
bid prices for financial assets and offer prices for financial liabilities.
For certain securities and derivative financial instruments where an
active market does not exist, fair values are determined using valuation
techniques that refer to observable market data, including discounted
cash flow analysis, option pricing models and other valuation techniques
commonly used by market participants, and non-market observable
inputs.
Several of CWB’s significant financial instruments, such as loans and
deposits, lack an available trading market as they are not typically
exchanged. Therefore, these instruments have been valued assuming they
will not be sold, using present value or other suitable techniques and are
not necessarily representative of the amounts realizable in an immediate
settlement of the instrument.
Changes in interest rates are the main cause of changes in the fair value
of CWB’s financial instruments. The carrying value of loans, deposits,
subordinated debentures and debt securities are not adjusted to reflect
increases or decreases in fair value due to interest rate changes as CWB’s
intention is to realize their value over time by holding them to maturity.
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 sets out the fair
values of financial instruments (including derivatives) using the valuation
methods and assumptions referred to below the table. 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.
CWB Financial Group 2016 Annual Report
105
October 31, 2016(1)
Financial Assets
Cash resources
Securities
Securities purchased under resale
agreements
Loans(2)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(2)
Debt
Contingent consideration
Derivative related
Loans and
Receivables,
and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
(Note 4)
$
-
$
-
$
920,056
$
920,056
$
920,056
$
(Note 5)
-
-
-
-
-
22,049,997
10,370
-
1,708,594
1,708,594
1,708,594
163,318
163,318
163,318
-
-
22,049,997
22,376,753
326,756
10,370
10,370
-
$
10,370
$ 22,049,997
$ 2,791,968
$ 24,852,335
$ 25,179,091
$
326,756
$
-
$ 21,215,842
$
-
$ 21,215,842
$ 21,281,835
$
65,993
-
-
1,268,198
24,257
7,172
-
-
-
-
1,268,198
1,271,036
2,838
24,257
7,172
24,257
7,172
-
-
Fair Value
Over
Carrying
Amount
-
-
-
Total Financial Liabilities
$
7,172
$ 22,508,297
$
-
$ 22,515,469
$ 22,584,300
$
68,831
October 31, 2015
Financial Assets
Cash resources
Securities
Loans(2)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(2)
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
Loans and
Receivables,
and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
(Note 4)
$
-
$
-
$
443,422
$
443,422
$
443,422
$
-
2,551,112
2,551,112
2,551,112
Fair Value
Over
Carrying
Amount
-
-
(Note 5)
-
-
19,541,676
23,245
-
-
-
19,541,676
19,889,076
347,400
23,245
23,245
-
$
23,245
$ 19,541,676
$ 2,994,534
$ 22,559,455
$ 22,906,855
$
347,400
$
-
$ 19,384,468
$
-
$ 19,384,468
$ 19,457,102
$
72,634
-
-
4,503
1,187,623
650
-
$
4,503
$ 20,572,741
$
-
-
-
-
1,187,623
1,206,101
18,478
650
4,503
650
4,503
-
-
$ 20,577,244
$ 20,668,356
$
91,112
(1) For further information on interest rates associated with financial assets and liabilities, including derivative instruments, refer to Note 26.
(2) Loans and deposits exclude deferred premiums, deferred revenue and allowances for credit losses, which are not financial instruments.
The methods and assumptions used to estimate the fair values of
financial instruments are as follows:
• Cash resources and securities are reported on the consolidated balance
sheets at the fair value disclosed in Notes 4 and 5. Securities purchased
under resale agreements are reported at the fair value as disclosed on
the consolidated balance sheets. These values are based on quoted
market prices, if available. Where a quoted market price is not readily
available, other valuation techniques are based on observable market
rates used to estimate fair value;
• Fair value of loans reflects changes in the general level of interest
rates that have occurred since the loans were originated and exclude
the allowance for credit losses. For floating rate loans, fair value is
assumed to be equal to book value as the interest rates on these
loans automatically reprice to market. For all other loans, fair value is
estimated by discounting the expected future cash flows of these loans
at current market rates for loans with similar terms and risks;
• With the exception of derivative financial instruments and acquisition
contingent consideration, other assets and other liabilities reported
on the consolidated balance sheets are either not considered financial
instruments, or are assumed to approximate their carrying value due
to their short-term nature. Other assets and other liabilities which are
not considered financial instruments include property and equipment,
goodwill and other intangible assets, deferred tax asset, prepaid and
deferred expenses, financing costs, deferred tax liability, deferred
revenue, and other items that are not financial instruments;
• For derivative financial instruments where an active market does not
exist, fair values are determined using valuation techniques that refer
to observable market data, including discounted cash flow analysis,
option pricing models and other valuation techniques commonly used
by market participants;
106
CWB Financial Group 2016 Annual Report • For contingent consideration, included in other liabilities, where an
active market does not exist, fair value is determined by estimating
the expected value of the contingent consideration, taking into
consideration the potential financial outcomes and their associated
probabilities;
• Deposits with no stated maturity are assumed to be equal to their
carrying values. The estimated fair values of fixed rate deposits are
determined by discounting the contractual cash flows at current
market rates for deposits of similar terms; and,
• The fair values of debt are determined by reference to current market
prices for debt with similar terms and risks.
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.
Fair Value Hierarchy
CWB categorizes its fair value measurements of financial instruments
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.
As at October 31, 2016
Financial Assets
Cash resources
Securities
Securities purchased under resale agreements
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Debt
Contingent consideration(1)
Derivative related
Total Financial Liabilities
As at October 31, 2015
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Debt
Contingent consideration(1)
Derivative related
Total Financial Liabilities
Valuation Technique
Fair Value
Level 1
Level 2
Level 3
-
-
-
-
-
$
920,056
$
45,426
$
874,630
$
1,708,594
322,509
1,386,085
163,318
22,376,753
10,370
-
-
-
163,318
-
22,376,753
10,370
-
$ 25,179,091
$
367,935
$ 2,434,403
$ 22,376,753
$ 21,281,835
$
-
$ 21,281,835
$
1,271,036
24,257
7,172
-
-
-
1,271,036
-
24,257
7,172
-
$ 22,584,300
$
-
$ 22,560,043
$
24,257
Valuation Technique
Fair Value
Level 1
Level 2
Level 3
$
443,422
$
27,939
$
415,483
$
2,551,112
219,041
2,332,071
-
-
19,889,076
23,245
-
-
-
19,889,076
23,245
-
$ 22,906,855
$
246,980
$ 2,770,799
$ 19,889,076
$ 19,457,102
$
-
$ 19,457,102
1,206,101
650
4,503
-
-
-
1,206,101
-
4,503
$ 20,668,356
$
-
$ 20,667,706
$
-
-
650
-
650
(1) The Level 3 financial liability at October 31, 2016 is related to the acquisition of CWB Maxium as described in Note 3. At October 31, 2015, Level 3 financial liabilities were comprised of contingent consideration related to a business
sold in 2015 as described in Note 3.
CWB Financial Group 2016 Annual Report
107
b) Level 3 Financial Instruments Carried at Fair Value
The Level 3 financial liability measured at fair value on the consolidated
balance sheet as at October 31, 2016 is related to the acquisition of CWB
Maxium (see Note 3). Contingent consideration related to a business sold
in 2015 was extinguished during 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:
Business Acquisitions
Balance at beginning of year
Business acquisition
Contingent consideration fair value changes
Settlement of contingent consideration
Business Dispositions
Balance at beginning of year
Contingent consideration fair value changes
Extinguishment of contingent consideration
(Note 3)
(Note 3)
2016
2015
$
-
$
2,679
16,400
7,857
-
638
-
(3,317)
24,257
650
-
(650)
-
-
-
650
-
650
650
Balance at end of year
$
24,257
$
28. FINANCIAL INSTRUMENTS - OFFSETTING
The following table provides a summary of financial assets and liabilities
which are subject to enforceable master netting agreements and similar
arrangements, as well as financial collateral received to mitigate credit
exposures related to these financial instruments. The agreements do
not meet the netting criteria required by IAS 32 Financial Instruments:
Presentation as the right to set-off is only enforceable in the event of
default or occurrence of other predetermined events.
As at October 31, 2016
Financial Assets
Derivative instruments
Financial Liabilities
Derivative instruments
As at October 31, 2015
Financial Assets
Derivative instruments
Financial Liabilities
Derivative instruments
Amounts not offset on the consolidated balance sheet
Gross amounts
reported on the
consolidated
balance sheet
Impact of
master netting
agreements
Cash
collateral(1)
Securities
received as
collateral(1)(2)
Net amount
$
$
10,370
$
4,345
$
5,730
$
49
$
246
7,172
$
4,345
$
2,121
$
-
$
706
Amounts not offset on the consolidated balance sheet
Gross amounts
reported on the
consolidated
balance sheet
Impact of
master netting
agreements
Cash
collateral(1)
Securities
received as
collateral(1)(2)
Net amount
$
$
23,245
$
4,503
$
9,535
$
4,503
$
4,503
$
-
$
-
-
$
$
9,207
-
(1) Financial collateral is reflected at fair value. The amount of financial instruments and cash collateral disclosed is limited to the net balance sheet exposure, and any over-collateralization is excluded from the table.
(2) Collateral received in the form of securities is not recognized on the consolidated balance sheets.
108
CWB Financial Group 2016 Annual Report
29. RISK MANAGEMENT
As part of CWB’s risk management practices, the risks that are significant
to the business are identified, monitored and controlled. The most
significant risks include credit risk, market risk, capital risk and operational
risk. The nature of these risks and how they are managed is provided in
the Risk Management section of the MD&A.
As permitted by the IASB, certain of the risk management disclosure
related to risks inherent with financial instruments is included in
30. CAPITAL MANAGEMENT
Capital funds are managed in accordance with policies and plans that are
regularly reviewed and approved by the Board of Directors or Board Risk
Committee 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.
CWB has a share incentive plan that is provided to officers and employees
who are in a position to impact the longer term financial success of
CWB as measured by share price appreciation and dividend yield. Note
18 to the consolidated financial statements details the number of shares
under options outstanding, the weighted average exercise price and the
amounts exercisable at year end.
Regulatory capital and capital ratios are calculated in accordance with
the requirements of OSFI. Capital is managed and reported in accordance
with the requirements of the Basel III Capital Adequacy Accord (Basel
III). OSFI requires banks to measure capital adequacy in accordance with
instructions for determining risk-adjusted capital and risk-weighted
assets, including off-balance sheet commitments. Based on the deemed
credit risk of each type of asset, a standardized weighting of 0% to
150% is assigned. As an example, a loan that is fully insured by the
Canada Mortgage and Housing Corporation (CMHC) is applied a risk
weighting of 0% as CWB’s risk of loss is nil, while uninsured commercial
loans are assigned a risk weighting of 100% to reflect the higher level
of risk associated with this type of asset. The ratio of regulatory capital
to risk-weighted assets is calculated and compared to OSFI’s standards
for Canadian financial institutions. Off-balance sheet assets, such as
the notional amount of derivatives and some credit commitments, are
included in the calculation of risk-weighted assets and both the credit risk
equivalent and the risk-weighted calculations are prescribed by OSFI.
the MD&A. The relevant MD&A sections are identified by shading
within boxes and the content forms an integral part of these audited
consolidated financial statements.
Information on specific measures of risk, including the allowance for
credit losses, derivative financial instruments, interest rate sensitivity, fair
value of financial instruments and liability for unpaid claims are included
elsewhere in these notes to the consolidated financial statements.
The required minimum regulatory capital ratios for a bank using the
Standardized approach for credit risk, 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. In addition, OSFI requires banks and trust
companies to maintain a minimum leverage ratio of 3%. The leverage
ratio provides the ratio of Tier 1 capital to on-balance sheet and off-
balance sheet exposures.
Basel III rules provide for transitional adjustments with certain aspects
of the new rules phased in between 2013 and 2019. The only available
transition allowance in the Basel III capital standards permitted by
OSFI for Canadian banks relates to the multi-year phase out of non-
qualifying capital instruments. The 2016 inclusion of non-qualifying
capital instruments in non-common Tier 1 (WesTS) and total capital
(subordinated debentures) under Basel III are capped at 60% (October
31, 2015 – 70%) of the balance of non-common equity instruments
outstanding at January 1, 2013. At October 31, 2016, there were no
exclusions from regulatory capital related to the WesTS Tier 1 capital
(disclosed in deposits) or outstanding subordinated debentures (October
31, 2015 – $152,500).
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 17), which
increased the CET1 capital ratio by approximately 70 basis points. The
issuance of 5,600,000 Series 7 Preferred Shares for gross proceeds
of $140,000 on March 31, 2016 positively impacted the Tier 1 and
total capital ratios by approximately 70 basis points. The $300 million
redemption of all 4.389% subordinated debentures on November 30,
2015, which did not qualify as non-viability contingent capital under the
Basel III regulatory capital requirements, decreased the total capital ratio
by approximately 80 basis points.
In fiscal 2017, the redemption of all outstanding WesTS will reduce both
the Tier 1 and total capital ratios by approximately 50 basis points.
During the year, CWB complied with all internal and external capital
requirements.
Capital Structure And Regulatory Ratios
Regulatory Capital, net of deductions
Common equity Tier 1
Tier 1
Total
Capital ratios
Common equity Tier 1
Tier 1
Total
Leverage ratio
2016
2015
$
1,863,264
$
1,636,718
2,233,364
2,669,334
1,866,873
2,439,022
9.2 %
11.0
13.1
8.6
8.5 %
9.7
12.7
7.9
CWB Financial Group 2016 Annual Report
109
31. SUBSIDIARIES
CWB Subsidiaries(1)
(annexed in accordance with subsection 308 (3) of the Bank Act)
October 31, 2016
National Leasing Group Inc.
CWB Maxium Financial Inc.
Address of
Head Office
1525 Buffalo Place
Winnipeg, Manitoba
30 Vogell Road, Suite 1
Richmond Hill, Ontario
Canadian Western Trust Company
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
McLean & Partners Wealth Management Ltd.
801 10th Avenue SW
Calgary, Alberta
Adroit Investment Management Ltd.
Suite 1250, 10303 Jasper Avenue
Valiant Trust Company
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
CWB Wealth Management Ltd.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Bank Capital Trust
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Bank Leasing Inc.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Financial Ltd.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Carrying Value of
Voting Shares Owned
by CWB(2)
$ 134,458
30,812
19,136
17,481
8,449
8,080
1,750
1,000
1
1
(1) CWB owns 100% of the voting shares of each entity, with the exception of Adroit Investment Management Ltd. (84.0% ownership) and McLean & Partners Wealth Management Ltd. (October 31, 2016 – 73.6% ownership).
(2) The carrying value of voting shares is stated at the cost of CWB’s equity in the subsidiaries in thousands of dollars.
110
CWB Financial Group 2016 Annual Report
Shareholder Information
CWB Group Corporate
Headquarters
Suite 3000, 10303 Jasper Avenue NW
Canadian Western Bank Place
Edmonton, AB T5J 3X6
Telephone: (780) 423-8888
Fax: (780) 423-8897
Website: cwb.com
Transfer Agent and Registrar
Computershare
100 University Avenue, 8th Floor
Toronto, ON M5J 2Y1
Telephone: (416) 263-9200
Toll-free: 1-800-564-6253
Fax: (888) 453-0330
Website: computershare.com
Stock Exchange Listings
The Toronto Stock Exchange (TSX)
Common Shares: CWB
Series 5 Preferred Shares: CWB.PR.B
Series 7 Preferred Shares: CWB.PR.C
Shareholder Administration
Computershare serves as Transfer
Agent and Registrar for the common
shares and preferred shares of CWB.
For dividend information, change in
share registration or address, lost share
certificates, tax forms or estate transfers,
please write or call the Transfer Agent
and Registrar, or inquire online at
computershare.com.
Duplicated Communications
If you receive, but do not require,
more than one mailing for the same
ownership, please contact the Transfer
Agent and Registrar to combine the
accounts.
Direct Deposit Services
Shareholders may choose to have cash
dividends paid on CWB common and
preferred shares deposited directly
into accounts held at their financial
institution. To arrange direct deposit
service, please contact the Transfer
Agent and Registrar.
Eligible Dividend Designation
CWB designates all common and
preferred share dividends 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.
Investor Relations
Shareholders, institutional investors
or research analysts who would like
additional financial information are
asked to contact:
Investor Relations Department
Canadian Western Bank
Suite 3000, 10303 Jasper Avenue N.W.
Canadian Western Bank Place
Edmonton, AB T5J 3X6
Telephone: (800) 836-1886
Fax: (780) 969-8326
E-mail: investorrelations@cwbank.com
More comprehensive investor
information - including supplemental
financial reports, quarterly financial
releases, corporate presentations,
corporate fact sheets and frequently
asked questions - is available in the
Investor Relations section at cwb.com.
This 2016 Annual Report, along with
our Annual Information Form, Notice
of Annual Meeting of Shareholders
and Proxy Circular, is available on our
website. For additional printed copies
of these reports, please contact the
Investor Relations Department.
Filings are available on the Canadian
Securities Administrator’s website at
sedar.com.
2017 Annual Meeting
The annual meeting of the common
shareholders of Canadian Western
Bank will be held in Edmonton, AB, on
March 2, 2017 at The Fairmont Hotel
Macdonald (Empire Ballroom) at 3:00
p.m. MT (5:00 p.m. ET).
Corporate Secretary
Gail L. Harding, Q.C.
Senior Vice President,
Chief Legal Officer and
Corporate Secretary
Canadian Western Bank
Suite 3000, 10303 Jasper Avenue N.W.
Edmonton, AB T5J 3X6
Telephone: (780) 969-1525
Fax: (780) 969-1503
Complaints or Concerns
regarding Accounting, Internal
Accounting Controls or
Auditing Matters
Please contact either:
Commercial and
Retail Banking
Jeff Bowling
Senior Vice President and
Regional General Manager, Prairies
Mario Furlan
Senior Vice President and
Regional General Manager,
British Columbia
Michael Halliwell
Senior Vice President and Regional
General Manager, Northern Alberta
Keith Hughes
Senior Vice President,
Business and Personal Banking
National Leasing
Tom Pundyk
President and Chief Executive Officer
Canadian Western Trust
Matt Colpitts
Vice President and General Manager
CWB Wealth Management
David Schaffner
President and
Chief Executive Officer
Adroit Investment
Management
Maria Holowinsky
President and
Chief Executive Officer
McLean & Partners
Wealth Management
Kevin Dehod
President and
Chief Executive Officer
CWB Maxium Financial
Paul McLean
Chief Executive Officer
Daryl MacLellan
President
Ombudsmen
R. Graham Gilbert
Carolyn J. Graham
Executive Vice President and Chief
Financial Officer
Canadian Western Bank
Telephone: (780) 423-8854
Fax: (780) 423-8899
E-mail: carolyn.graham@cwbank.com
or
Robert A. Manning
Chairman of the Audit Committee
c/o 210 – 5324 Calgary Trail
Edmonton, AB T6H 4J8
Telephone: (780) 438-2626
Fax: (780) 438-2632
E-mail: rmanning@shawbiz.ca
SENIOR OFFICERS
Group Executive Officers
Chris H. Fowler
President and Chief Executive Officer
Carolyn J. Graham, FCPA, FCA
Executive Vice President and
Chief Financial Officer
Kelly S. Blackett
Executive Vice President, Human
Resources and Corporate
Communications
Glen Eastwood
Executive Vice President, Business
Transformation
Darrell Jones
Executive Vice President, Chief
Technology Officer and Chief
Information Officer
Stephen Murphy
Executive Vice President, Banking
H. Bogac (Bogie) Ozdemir
Executive Vice President and
Chief Risk Officer
Senior Corporate Officers
Niall Boles
Senior Vice President and Treasurer
David L. Thompson
Senior Vice President,
Credit Risk Management
Gail L. Harding, Q.C.
Senior Vice President,
Chief Legal Officer and
Corporate Secretary
Allen D. Stephen, CPA, CA
Vice President and
Chief Accountant
CWB Financial Group 2016 Annual Report
111
Locations
Canadian Western Bank
Regional Offices
British Columbia
2200, 666 Burrard Street
Vancouver
(604) 669-0081
Mario Furlan
Northern Alberta
3000, 10303 Jasper Avenue N.W.
Edmonton
(780) 423-8888
Michael Halliwell
Prairies
606 - 4 Street S.W.
Calgary
(403) 262-8700
Jeff Bowling
Equipment Financing
3000, 10303 Jasper Avenue N.W.
Edmonton
(780) 441-3770
Kirby Hill
BRANCHES
Alberta
Edmonton
Edmonton Main
100, 12230 Jasper Avenue N.W.
(780) 424-4846
George Bawden
103 Street
10303 Jasper Avenue N.W.
(780) 423-8801
Bruce Young
Old Strathcona
7933 - 104 Street N.W.
(780) 433-4286
Donna Austin
South Edmonton Common
2142 - 99 Street N.W.
(780) 988-8607
Robert Ovics
West Point
17603 - 100 Avenue N.W.
(780) 484-7407
David Hardy
Calgary
Calgary Main
606 - 4 Street S.W.
(403) 262-8700
Dean Proctor
Calgary Chinook
6606 Macleod Trail S.W.
(403) 252-2299
Rick Vandergraaf
Calgary Foothills
6127 Barlow Trail S.E.
(403) 269-9882
Dustin Jones
Calgary Northeast
2810 - 32 Avenue N.E.
(403) 250-8838
June Lavigueur
112
CWB Optimum Mortgage
Edmonton
#1010, 10303 Jasper Avenue N.W.
(780) 423-9748
Toll-free: 1-866-441-3775
optimummortgage.ca
(Representation across Western
Canada and in Ontario)
CWB Maxium Financial
Richmond Hill
30 Vogell Road #1
(905) 780-6150
cwbmaxium.com
CWB Wealth
Management
Edmonton
3000, 10303 Jasper Avenue N.W.
(855) 292-9655
Adroit Investment
Management
Edmonton
1250, 10303 Jasper Avenue N.W.
(780) 429-3500
adroitinvestments.ca
McLean & Partners
Wealth Management
Calgary
801 - 10 Avenue S.W.
(403) 234-0005
Toll-free: 1-888-665-0005
mcleanpartners.com
Canadian Western
Financial
Edmonton
3000, 10303 Jasper Avenue N.W.
(780) 423-8888
canadianwesternfinancial.com
Calgary South Trail Crossing
300, 5222 - 130 Avenue S.E.
(403) 257-8235
Nancy Matheos
Abbotsford
100, 2548 Clearbrook Road
(604) 855-4941
Hugh Ellis
Broker Buying Centre
285, 2880 Glenmore Trail S.E.
(403) 720-8960
David Miller
Coquitlam
310, 101 Schoolhouse Street
(604) 540-8829
Dave McGregor
Calgary Westjet
Banking Centre
22 Aerial Place N.W.
Westjet Campus
(403) 452-5869
Grande Prairie
11226 - 100 Avenue
(780) 831-1888
Todd Kramer
Leduc
5407 Discovery Way
(780) 986-9858
Michael White
Lethbridge
744 - 4 Avenue S
(403) 328-9199
Daryn Wenaas
Courtenay
200, 470 Puntledge Road
(250) 334-8888
Jean-Marc Jaquier
Cranbrook
202, 828 Baker Street
(250) 426-1140
Mike Eckersley
Kamloops
101, 1211 Summit Drive
(250) 828-1070
Romi Arora
Kelowna
Kelowna
1674 Bertram Street
(250) 862-8008
Bob Brown
Medicine Hat
101, 2810 - 13 Avenue S.E.
(403) 527-7321
Daniel Kitching
Kelowna Industrial
101, 1505 Harvey Avenue
(250) 860-0088
Jim Kruiper
Red Deer
4822 - 51 Avenue
(403) 341-4000
Don Odell
Sherwood Park
251 Palisades Way
(780) 449-6699
Arden Vos
St. Albert
300 - 700 St. Albert Trail
(780) 458-4001
Blair Zahara
British Columbia
Vancouver
Kitsilano
3190 West Broadway
(604) 732-4262
Demetra Papaspyros
Park Place
100, 666 Burrard Street
(604) 688-8711
Brian Korpan
Vancouver Real Estate
2200, 666 Burrard Street
(604) 669-0081
Jennifer Drury
West Broadway
110, 1333 West Broadway
(604) 730-8818
Lawrence Robinson
Langley
100, 19915 - 64 Avenue
(604) 539-5088
Craig Martin
Nanaimo
101, 6475 Metral Drive
(250) 390-0088
Kevin Wilson
Prince George
300 Victoria Street
(250) 612-0123
Derek Dougherty
Richmond
4991 No. 3 Road
(604) 238-2800
Dean Chan
Surrey
Panorama Ridge
103, 15230 Highway 10
(604) 575-3783
Scott Bearss
Strawberry Hill
1, 7548 - 120 Street
(604) 591-1898
Bob Duffield
Victoria
1201 Douglas Street
(250) 383-1206
Bob Granger
Saskatchewan
Lloydminster
2909 - 50 Avenue
(306) 825-8410
Alan Wells
Regina
1866 Hamilton Street
Hill Tower III
(306) 757-8888
Kelly Dennis
Saskatoon
Saskatoon City Centre
244 - 2 Avenue South
(306) 477-8888
Kelly Walker
Saskatoon North Landing
101, 2803 Faithfull Avenue
(306) 244-8008
Byron Eberle
Yorkton
5, 259 Hamilton Road
(306) 782-1002
Kelly Price
Manitoba
Winnipeg
Winnipeg
230 Portage Avenue
(204) 956-4669
Mike McAulay
Winnipeg Kenaston
125 Nature Park Way
(204) 452-0939
Chris Voogt
National Leasing Group
Winnipeg
1525 Buffalo Place
(204) 954-9000
Toll-free: 1-800-882-0560
nationalleasing.com
(Representation across all
provinces and territories in
Canada)
Canadian Direct Financial
Edmonton
3000, 10303 Jasper Avenue N.W.
(780) 441-2249
Toll-free: 1-877-441-2249
canadiandirectfinancial.com
Canadian Western Trust
Toll-free: 1-800-663-1124
cwt.ca
Calgary
310, 606 - 4 Street S.W.
(403) 717-3145
Vancouver
600, 750 Cambie Street
(604) 685-2081
CWB Financial Group 2016 Annual Report cwb.com