2017
Bank Trust Wealth Management
PHIL REID, Managing Director
Reid’s Birch Island Resort
MIKE MCAULAY, AVP & Branch Manager
Winnipeg Downtown Branch
cwb.com
Welcome to CWB Financial Group's Annual Report. The online pdf
version of the report has been enhanced with navigation and task
buttons to help you explore the document and find the information you
want more quickly. The table of contents, highlighted page references
and URLs link to pages and sections within the document as well as to
outside websites. The task buttons provide quick access to search, print,
save to disk and view options, but may not work on all browsers or
tablets.
NAVIGATION AND TASK BUTTONS
Close document
Search
Print
Save to disk
Two page view
Single page view
Table of contents
Next page
Previous page
Last page visited
Five Year Financial Summary
($ thousands, except per share amounts)
Results from Continuing Operations(1)
Net interest income (teb)(2)
Less teb adjustment
Net interest income per financial statements
Non-interest income
Pre-tax, pre-provision income (teb)(3)
Total revenues (teb)
Total revenues
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(4)
Return on common shareholders' equity(5)
Adjusted return on common shareholders' equity(6)
Return on average total assets(7)
Efficiency ratio (teb)(8)
Efficiency ratio(8)
Net interest margin (teb)(9)
Net interest margin(9)
Number of full-time equivalent staff
Results from Combined Operations(1)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(4)
Return on common shareholders' equity(5)
Adjusted return on common shareholders' equity(6)
Return on average total assets(7)
Results from Discontinued Operations(1)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(4)
Per Common Share
Average common shares outstanding (thousands)
Cash Dividends
Book value
Market price
High
Low
Close
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(10)
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 bank branches
2017
2016
2015
2014
2013
$
644,652
2,262
642,390
84,245
390,991
728,897
726,635
214,277
$
588,464
3,240
585,224
72,672
353,843
661,136
657,896
177,761
$
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
2.43
2.42
2.63
10.1 %
11.0
0.85
46.4
46.5
2.57
2.56
2,058
2.13
2.13
2.26
9.3 %
9.9
0.73
46.5
46.7
2.43
2.41
1,966
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
$
214,277
$
177,761
$
319,701
$
218,549
$
187,163
2.43
2.42
2.63
10.1 %
11.0
0.85
-
-
-
-
$
$
88,297
0.93
24.82
37.36
23.68
36.34
$26,447,453
2,708,783
23,229,239
21,902,982
1,476,336
2,461,045
10,408,012
2,114,861
2.13
2.13
2.26
9.3 %
9.9
0.73
-
-
-
-
$
$
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
0.12
0.12
0.12
$
80,034
0.78
19.52
$
79,147
0.70
17.45
43.30
32.61
37.75
33.75
27.04
33.44
$
83,411
0.92
23.58
29.30
19.26
25.45
$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
9.5 %
10.8
12.5
0.23 %
0.14
42
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.
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
equivalent basis does not have a standardized meaning prescribed by IFRS and, therefore, may not be
comparable to similar measures presented by other banks.
(3) Pre-tax, pre-provision income is calculated as total revenue (teb) less non-interest expenses, excluding the pre-
tax amortization of acquisition-related intangible assets and contingent consideration fair value changes, net of
tax. Excluded items are not considered to be indicative of ongoing business performance.
(4) Adjusted cash earnings per common share is calculated as diluted earnings per common share excluding the
amortization of acquisition-related intangible assets and contingent consideration fair value changes, net of
tax. Excluded items are not considered to be indicative of ongoing business performance.
(5) Return on common shareholders’ equity is calculated as common shareholders’ net income divided by average
common shareholders’ equity.
(6) Adjusted return on common shareholders’ equity is calculated as common shareholders’ net income excluding
the amortization of acquisition-related intangible assets and contingent consideration fair value changes, net of
tax, divided by average common shareholders’ equity.
(7) Return on assets is calculated as common shareholders’ net income divided by average total assets.
(8) 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.
(9) Net interest margin is calculated as net interest income divided by average total assets.
(10) Capital adequacy is calculated in accordance with Basel III guidelines issued by the Office of the Superintendent
of Financial Institutions (OSFI).
CWB Financial Group 2017 Annual Report
i
Performance Dashboard(1)
CWB Financial Group (CWB) operates with a clear focus to meet the unique financial
needs of business owners. Clients recognize CWB for our in-depth knowledge of
targeted segments within Canada’s commercial banking industry, our uncommon
brand of personal service and our full suite of relevant financial solutions. Shareholders
value CWB’s strong track record of high-quality balance sheet and dividend growth,
conservative approach to risk management and consistent profitability.
EMPLOYEES
~2,100
2007 – ~1,200
CWB BRANCHES
ASSETS UNDER ADMINISTRATION
ASSETS UNDER MANAGEMENT
42
2007 – 35
$10.4B
2007 – $4.3B
9% 10yr CAGR(5)
$2.1B
2007 – nil
DIVERSIFYING LOANS BY PROVINCE (%)
DIVERSIFYING LOANS BY LENDING SECTOR (%)
STRONG CREDIT QUALITY
0.51%
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
Q4-08
Q4-09
Q4-10
Q4-11
Q4-12
Q4-13
Q4-14
Q4-15
Q4-16
Q4-17
$ Gross impaired loans as a % of average loans
$ Write-offs as a % of average loans
Growing a more
balanced industry
mix through
targeted growth
of full-service
relationships with
business owners
Growing a
more balanced
geographic
footprint through
targeted growth
in Ontario
Alberta
British Columbia
Ontario and other
Saskatchewan
Manitoba
2007
2017
2007
2017
54
35
4
4
3
33
35
23
6
3
General commercial loans
Personal loans and mortgages
Commercial mortgages
Real estate project loans
Equipment financing and leasing
Oil and gas production loans
23
13
20
21
18
5
27
20
18
17
17
1
0.22%
CWB
CDN Bank Avg.
BMO
CIBC
National
RBC
Scotia
TD
LOW PROVISION FOR CREDIT LOSSES
(5 yr average as a % of average loans)
STRONG EFFICIENCY RATIO(2)
46.4% 55.1%
0.22
0.21
0.24
0.26
0.31
0.34
80
40
00
0.42
0.37
2013
2014
2015
2016
2017
CWB
CDN Bank Average(3)
GROWTH AND DIVERSIFICATION OF FUNDING SOURCES - COMPOSITION OF DEPOSITS (%)
54% Total branch-raised deposits
35%
19%
36%
10%
Branch demand and notice
Branch term
Broker term
Capital markets term
LOW LEVERAGE (total assets-to-equity)
10.7x
30.0
Canadian Western Bank
17.1x
Canadian Bank Average(3)
15.0
0.0
2008
2009
2010
2011(4)
2012
2013
2014
2015
2016
2017
STRONG REGULATORY CAPITAL RATIOS BASED ON THE STANDARDIZED APPROACH (CWB | regulatory minimum)
INVESTMENT GRADE CREDIT RATINGS (DBRS) - STABLE TREND (confirmed November 29, 2017)
9.5% | 7.0%
Common equity
Tier 1 capital (CET1)
10.8% | 8.5%
Tier 1 capital
12.5% | 10.5%
Total capital
8.3% | 3.0%
Basel III leverage ratio
A (low)
Long-term deposits /
Long-term senior debt
R-1 (low)
Short-term instruments
BBB (high)
Subordinated debt
Pfd-3
Preferred shares
ii
CWB Financial Group 2017 Annual Report
CWB Financial Group 2017 Annual Report
iii
TOTAL ASSETS
$26.4B
2007 – $9.5B
11% 10yr CAGR(5)
TOTAL LOANS
(excluding the allowance for credit losses)
$23.2B
2007 – $7.4B
12% 10yr CAGR(5)
TOTAL DEPOSITS
$21.9B
2007 – $8.3B
10% 10yr CAGR(5)
COMMON SHAREHOLDERS’
NET INCOME ($ millions)
$214
CONSISTENT GROWTH OF BOOK
VALUE / SHARE
CONSISTENT GROWTH OF
DIVIDENDS PAID / COMMON SHARE
$24.82 | 10%
(4)
10yr
CAGR(5)
$0.93 | 11%
10yr
CAGR(5)
205
208
214
177
178
24.82
22.18
17.45
0.93
0.86
0.70
0.54
0.44
0.34
14.36
12.16
9.48
2013
2014
2015
2016
2017
2007
2009
2011
2013
2015
2017
2007
2009
2011
2013
2015
2017
MEDIUM-TERM PERFORMANCE TARGET RANGES
Adjusted cash earnings per
common share growth
Adjusted return on common
shareholders’ equity
Medium-term
Performance
Target Ranges(6)
Fiscal 2017 Performance
7-12%
Exceeded target at 16%.
12-15%
Delivered 11.0%, with significant improvement from 9.9% in 2016.
Operating leverage
Positive
Met target at positive 0.3%.
Common equity Tier 1 capital ratio under
the Standardized approach
Strong
Exceeded target with a very strong ratio of 9.5%.
Common share dividend payout ratio
~30%
Delivered 38%, with an annual common share dividend increase for the 25th consecutive year.
(1) Financial results presented include certain metrics which do not 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.
(3) “CDN Bank Average” is calculated based on information contained in the publicly available company reports of 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) CAGR - compound annual growth rate.
(6) See page 20 for definitions and discussion of non-IFRS measures.
CWB Financial Group 2017 Annual Report
1
About CWB Financial Group
CWB Financial Group (CWB) operates with a clear focus to meet the unique financial needs of business
owners. We understand that a business owner’s dreams, vision and ambition extend beyond a set
of financial statements, and that business owners require a specialized approach to fully serve their
combined business, personal banking and wealth management needs.
Our clients recognize CWB for our in-depth knowledge of targeted segments within Canada’s
commercial banking industry, our uncommon brand of personal service and our full suite of relevant
financial solutions. Shareholders value CWB’s strong track record of high-quality balance sheet and
dividend growth, conservative approach to risk management and consistent profitability.
At the heart of CWB Financial Group, Canadian Western Bank (TSX:CWB) has grown to become the
seventh largest publicly traded Schedule 1 bank in Canada in terms of market capitalization by taking
a relationship-based approach within targeted segments of the financial services industry. In addition
to full-service business and personal banking under the CWB Bank brand, 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.
2
CWB Financial Group 2017 Annual Report BC18
Vancouver (4)
Abbotsford
Coquitlam
Courtenay
Cranbrook
Kamloops
Kelowna (2)
Langley
Nanaimo
Prince George
Richmond
Surrey (2)
Victoria
AB18
Edmonton (5)
Calgary (6)
Grande Prairie
Leduc
Lethbridge
Medicine Hat
Red Deer
Sherwood Park
St. Albert
SK5
Regina
Saskatoon (2)
Yorkton
Lloydminster
PEI1
Charlottetown
NL1
St. John’s
MB2
Winnipeg (2)
ON10
Barrie
Toronto (2)
London
Orillia
Oshawa
Ottawa
Mississauga
Richmond Hill
Woodbridge
QC3
Montreal
Quebec City (2)
NB3
Fredericton
Moncton
Saint John
NS3
Halifax (3)
CWB Financial Group 2017 Annual Report
3
CWB isn’t just a financial
institution where you’re putting
money in and taking money out.
You don’t feel like a number.
They’re hands-on, working one-
on-one with you every step of
the way and looking out for your
business interests as if they were
their own. You really feel that you
have a partner.”
PHIL REID, Managing Director, Reid’s Birch Island Resort
4
CWB Financial Group 2017 Annual Report Contents
i
ii
02
07
08
09
Five Year Financial Summary
Performance Dashboard
About CWB Financial Group
CWB’S Balanced Growth Strategy
Strategic Objectives and Highlights
Lines of Business
10 Message from Chris Fowler, President and CEO
12 Message from Robert Phillips, Chair of the Board
14
16
18
77
115
Board of Directors and Corporate Governance
Executive Committee
Management’s Discussion and Analysis
Consolidated Financial Statements
Shareholder Information
116
Locations
CWB Financial Group 2017 Annual Report
5
The team at CWB is genuinely interested in
our business and in supporting us – very much
demonstrating relationship style banking. And
at the same time, CWB’s products are very
competitive with the bigger banks. I recommend
them all the time to colleagues and friends.”
Left to right: LISA PORTEOUS WONG, Senior Cash Management Officer, Nanaimo Branch; LEN THOMSON, Business Owner, Paradise Island Foods;
KEVIN WILSON, AVP & District Manager, Vancouver Island.
6
CWB Financial Group 2017 Annual Report CWB’s Balanced
Growth Strategy
Operating from our corporate headquarters in Edmonton, Alberta, CWB
is the trusted financial partner to a growing community of business
owners. Our focus is to deliver a unique combination of business banking,
personal banking and wealth management offerings tailored for business
owners, their employees and their families. We deliver responsive service
and relevant financial solutions, and we remain committed to our
fundamental identity as a conservative, growth-oriented organization.
For our people, we drive a collaborative, performance-based culture
within a well-defined performance management framework. 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.
Our teams focus on key activities that contribute the greatest impact
toward the achievement of our goal to create the best full-service bank
for business owners in Canada. We track both financial and non-financial
measures to monitor progress toward achievement of our strategic
objectives to become the best choice for our clients, for our people and
for our investors.
Best for
People
CWB
relationships
Best for
Clients
i
n
v
e
s
t
m
e
n
t
Best for
Investors
p
r
o
fi
t
a
b
e
l
g
r
o
w
t
h
CWB Financial Group 2017 Annual Report
7
Strategic Objectives and Highlights
Balanced Growth Objectives
Strategic Execution
Full-service client growth with a focus on
business owners, including further geographic
and industry diversification
Growth and diversification of
funding sources
• 6% loan growth, including 11% growth outside of Alberta, with
higher net interest margin and a normalized credit experience.
•
•
•
Increased proportion of loan portfolio outside of Western Canada
to 23% from 19%, including Ontario up to 19% from 15%.
Increased business diversification with 12% overall growth of
general commercial loans, including 18% growth outside of
Alberta.
Further growth with increased geographic and industry
diversification forthcoming through acquisition of approximately
$900 million of assets concentrated outside of Western Canada, to
close January 31, 2018.
• Maintained stable balances of relationship-based, branch-raised
demand and notice deposits.
• Continued to expand securitization capabilities with the addition of
a second securitization funding partner and inaugural participation
in the Canada Mortgage Bond (CMB) program.
• Delivered a record year for funding through capital markets with
total issuance of $950 million of Senior Deposit Notes through
three successful transactions.
Optimized capital management through
transition to the Advanced Internal Ratings
Based (AIRB) approach
• On track for full transition to the AIRB approach in 2020, subject to
regulatory approval.
Financial Highlights
Non-financial Highlights
Strong Financial Performance
Client Experience and Business Transformation
• Very strong operating performance with common shareholders’ net
income of $214 million, up 21%, and record core pre-tax, pre-
provision income (teb) of $391 million, up 10%.
•
•
• Diluted and adjusted cash earnings per common share of $2.42 and
$2.63, up 14% and 16%, respectively.
• Record total revenue (teb) from core operations of $729 million, up
10%, including 10% growth of net interest income (teb) and 16%
higher non-interest income.
• Positive operating leverage of 0.3%.
• Net interest margin (teb) of 2.57%, up 14 basis points, with
sequential increases in every quarter.
• Normalized credit experience with a provision for credit losses as a
percentage of average loans of 23 basis points, down from 38 basis
points.
•
Increased CWB’s annual common share dividend for the 25th
consecutive year.
• Announced an agreement to acquire for cash, on January 31, 2018,
approximately $900 million of equipment loans and leases, and
general commercial lending assets.
8
Improved clients’ digital banking experience through strategic
improvements to CWBdirect® Online Banking.
Improved clients’ online wire transfer experience, expanded desktop
foreign exchange capabilities and introduced a fully integrated, omni-
channel payment technology for business owners through strategic
external partnerships.
• Created a new ‘centre of excellence’ for commercial real estate and
specialized lending to better serve targeted business owners with
complex financial needs.
•
•
Initiated realignment of CWB’s credit support operations to make key
lending processes faster and easier.
Launched Motive Financial, a new brand for CWB’s online bank, with
a focus to create valuable savings opportunities for clients across a
broad geographic footprint.
Awards and Community Investment
• Recognized for leadership in turning raw data into business insights as
a recipient of the SAS Innovation Award – Presented by SAS Canada,
a global leader in data analytics.
• Gave back $2 million to charitable and community organizations
through CWB’s Community Investment Program.
• Surpassed United Way campaign targets, raising more than $320,000
through special events, employee pledges and corporate matching.
• Contributed $250,000 to assist in emergency relief efforts related to
BC wildfires.
CWB Financial Group 2017 Annual Report Lines of Business
Banking
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
We understand that a business owner’s wealth is integrated with his or
her business. CWB Wealth Management uses a ‘whole person’ approach
to deliver sound service, helpful solutions and ongoing support to help
clients achieve their vision for the future.
High-net-worth individuals and institutions looking for discretionary
wealth management will find value in working with the boutique
portfolio management companies of CWB Wealth Management,
including McLean & Partners Wealth Management. With distinct
investment strategies, clients have access to various approaches that are
well-suited to their risk appetite.
Financial planning and investment products are offered at CWB branches
through our licensed mutual fund representatives. Under the CWB
Financial Group banner, clients have access to a range of investment
products from Canada’s leading mutual fund companies, including CWB’s
proprietary Core and Onyx Portfolio Series mutual funds.
We set ourselves apart through our commitment to provide a best-
in-class client experience for business owners, coupled with our deep
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 online banking
services provided by Motive Financial (formerly Canadian Direct Financial).
Business Banking
We take an uncommon approach to business banking. Our full suite
of accounts, lending, and cash management solutions allow business
owners to streamline financial management so they can focus on
what matters most: growing their business. We specialize in general
commercial banking, financing for commercial real estate and real estate
construction.
CWB Maxium Financial provides financing solutions to a growing
and diversified base of clients in specialized areas of health care, golf,
transportation, real estate, general corporate and program financing.
CWB Maxium’s head office is located in Richmond Hill, Ontario, and the
majority of its business is in Eastern 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
Branch-based equipment lenders specialize in financing standard
industrial equipment for borrowers operating within our branch footprint
in Western Canada.
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 Broker Buying Centre selectively acquires loan portfolios from select
brokers and the finance divisions of original equipment manufacturers.
Personal banking for business owners, their families
and employees
We understand that a business owner’s life extends beyond their
business. Our specialized approach is supported by a full complement of
personal banking services delivered today through our branch network
across Western Canada. Services include chequing and savings accounts,
mortgages, home equity lines of credit, personal loans and investment
products.
CWB Optimum Mortgage, our broker-sourced alternative mortgage
provider, offers personalized borrowing solutions for clients who fall
outside of traditional lending guidelines.
Motive Financial is for savers. Motive offers services to clients across
Canada seeking enhanced flexibility for their personal saving 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.
CWB Financial Group 2017 Annual Report
9
Message from
Chris Fowler,
President and CEO
Strong execution of our Balanced
Growth strategy
At CWB Financial Group, our Balanced Growth strategy has provided an incredible opportunity
to deepen relationships with business owners and expand our footprint from coast-to-coast.
I’m excited about the road ahead and confident that continued execution of our well-defined
plan will sustain and build on CWB’s history of consistent, profitable growth.
CWB has always been focused on business owners. This year, we sharpened that focus even
further. We know that successful business owners have unique financial needs, and our
targeted approach to meeting those needs has been at the heart of CWB’s growth story for
more than thirty years.
I want to share a story that bears this out. Phil Reid operates Reid’s Birch Island
Resort, a successful fishing lodge just outside of Minaki in Northwestern
Ontario. Service is everything in Phil’s business. To be successful, he
knows that his clients need to feel welcome and looked after.
Phil recognizes these same values in CWB. Working with CWB’s
Mike McAulay, Branch Manager at one of CWB’s two Winnipeg
locations, he’s found a fresh perspective and attention to detail
he’d never encountered with another bank.
The care we demonstrate for clients like Phil is what CWB is
built on. Through our focus on relationship-based banking
we have made notable progress toward achieving our
strategic goals. These include profitable, balanced growth of
both loans and relationship-based funding sources, progress
toward a more balanced geographic footprint with broader
industry diversification, and enhanced capital management.
We know that successful business owners have
unique financial needs. Our targeted approach
to meeting those needs has been at the heart of
CWB’s growth story for more than thirty years.”
10
CWB Financial Group 2017 Annual Report The best choice for business owners
Success for CWB means delivering best-in-class client experiences for
business owners. To deliver on this commitment for Phil Reid, and for
many others like him, we use every tool at our disposal – from the
way our people dig deeper to truly understand our clients’ growth
opportunities, to the way our technology makes business banking easier,
and more convenient.
This year we celebrated the first anniversary of our successful core
banking system transformation. This new technology has allowed us
to focus our efforts to develop broader and deeper client relationships
that go beyond highly-valued lending solutions. We expect continued
investment in technology to enhance the power and convenience of
our suite of business and personal banking tools, and to enable clients
in remote locations like Minaki, Ontario, to do more of their business
banking without having to visit a physical branch.
To be sure, increased use of technology will be a permanent feature
of our business model going forward. But for us, personal service will
remain at the heart of our differentiated client experiences. Our work
with Len Thomson, of Paradise Island Foods on Vancouver Island,
perfectly illustrates this commitment. Len’s father started the company in
1978. Since that time, the family has steadily grown their production of
high quality dairy products using environmentally conscious production
and distribution methods. Len has found CWB to be a much better fit for
him than other financial institutions. Len appreciates that Lisa Porteous
Wong, Senior Cash Management Officer, and Kevin Wilson, District
Manager, Vancouver Island, have teamed up to find flexible and creative
ways to support his business. Together, Lisa and Kevin have delivered
customized banking solutions from our Nanaimo branch that work for
Len. In fact, Len has been so impressed with our personalized service that
he consolidated all of his business and personal banking with CWB.
The best choice for top talent
Len’s recognition of our unique team approach speaks to CWB’s greatest
competitive advantage. The strength of our people is an essential part
of CWB’s success. It’s thanks to their commitment and dedication that
we continue to deliver on our strategic goals. And as our transformation
efforts continue to create a significant amount of change, we are
committed to ensure that our culture evolves to match the future we
envision.
We know that our future success will depend on strong collaboration
between engaged, well-trained and empowered CWB teams. In the same
way technology transformation is required for CWB to be the best choice
for clients, it is also required for us to compete for the top talent in our
industry. To support this capability, we made significant progress this year
toward implementation of a contemporary Human Resources Information
System (HRIS). With full implementation planned for 2018, our HRIS
will streamline decision making capabilities for strategic people-related
processes and information.
We are investing in people-related infrastructure because we are
committed to being an employer of choice. We want top talent like Mike,
Lisa and Kevin to continue to choose CWB because they know they can
thrive in a collaborative, performance-based environment that is fair, fun,
progressive, diverse and opportunity-rich.
The best choice for investors
We believe that if we are truly the best choice for business owners like
Phil Reid and Len Thomson, and the best choice for top talent in the
industry, best-in-class financial results will follow. Our strong financial
performance in 2017 demonstrates the benefits of this focus. This year
we delivered record total revenues from core operations, record core
pre-tax, pre-provision income, very strong growth of earnings per share,
increased return on common shareholders’ equity and positive operating
leverage. We maintained a very strong common equity Tier 1 regulatory
capital ratio, and increased our annual common share dividend for the
25th consecutive year.
This year we were also ranked by The Banker magazine as the soundest
bank in Canada, as measured by the capital to assets ratio. The balance
sheet strength reflected by this ranking has provided us with the flexibility
to create value for shareholders through a range of strategic initiatives.
In fiscal 2017, these included continued organic loan growth and an
agreement to acquire nearly $1 billion of equipment finance loans and
leases, and general commercial lending assets by the end of January
2018. This portfolio acquisition will be our largest asset purchase to
date and represents a highly accretive and strategic investment of
shareholders’ capital. The addition of this portfolio is entirely consistent
with our Balanced Growth strategy, and we’re excited to get to work for
these new clients.
Along with the 2016 acquisitions of CWB Maxium and the CWB
Franchise Finance portfolio, the newly acquired assets represent our third
acquisition in the past two years with a direct focus on business owners.
In each case, more than 70% of the respective client relationships are
located outside of Western Canada. In combination, these acquisitions
will help us make significant progress toward our strategic goal to grow
CWB’s Ontario exposures to a third of our total. They also improve the
balance of our overall business mix, with increased exposure to general
commercial loans and equipment financing and leasing.
As we look forward, I’m pleased to report that our transition to an
internal models-enabled methodology for managing regulatory capital
is on track. We made significant progress in 2017 and we expect to
complete our application for full transition to the Advanced Internal
Ratings Based (AIRB) approach by the end of fiscal 2019. We expect the
impact of this transition to be significant, and to benefit shareholders by
putting CWB on more equal footing with our competition.
Creating the best full-service bank
for business owners in Canada
So what does it mean to be the best choice for our clients, for our people
and for investors? What does it all add up to for CWB Financial Group?
We believe that continued execution of our Balanced Growth strategy
will create the best full-service bank for business owners in Canada. This
is an ambitious goal, and it will take time. But I believe we can get there
through continued disciplined execution of our plan.
I want to thank our clients and our shareholders for their continued trust
in us, and I want to thank our people for their passion and commitment
to help CWB achieve our strategic goals. Today, we have an incredible
opportunity to create exceptional client experiences from Vancouver
Island to Northwestern Ontario and beyond. There is no doubt in my
mind that CWB’s future looks more exciting than ever before. And thanks
to our tremendous people, I am very confident in our ability to achieve
our full potential together.
CWB Financial Group 2017 Annual Report
11
Message from Robert Phillips,
Chair of the Board
Your Board of Directors is responsible to oversee development and implementation of the strategic direction for CWB Financial Group and to maintain an
effective governance framework. Our focus is to ensure CWB continues to deliver strong, profitable growth for investors, exceptional client experiences
and a positive, rewarding and collaborative environment for CWB’s people. I’m pleased to report that CWB’s financial performance in 2017 was excellent
as we continue to deliver on our Balanced Growth strategy.
Strategic Transformation
Our Focus on Diversity
Every year the Board of Directors works with CWB’s management team
to revisit the strategic direction and adapt the plan to set the stage for
the next phase of CWB’s growth. As part of this year’s strategic planning
process, your Board increased collaboration with management, including
a focused, multi-day strategy session with a goal to further define
CWB’s place in Canada’s financial landscape. The outcome was a clear
endorsement of CWB’s focus on meeting the full scope of banking,
trust services and wealth management needs for business owners across
Canada.
CWB has historically demonstrated unique capabilities in serving mid-
market commercial enterprises primarily in Western Canada. Clarifying
the purpose of CWB as a bank for business owners provides the focus
necessary to guide targeted investments in support of CWB’s ongoing
transformation to a leading, full-service business banking brand with the
most relevant technology and a national presence. We expect CWB’s
ambitious transformation to deliver significant value to investors. As a
board, we are committed to providing effective oversight every step of
the way.
Risk Management Culture
Part of this oversight ensures that CWB continues to develop its
enterprise risk management framework and maintains a strong
organizational risk management culture. We are pleased with the
progress of our transition to the Advanced Internal Ratings Based (AIRB)
methodology for managing regulatory capital. We are on track with our
targeted three year delivery timeframe and anticipate advancing our final
application by the end of fiscal 2019.
The AIRB approach will provide CWB with critical insight to achieve
balanced and sustainable growth, and risk measurement under the
AIRB approach will support effective capital deployment to maximize
shareholder return. Your Board is committed to providing diligent
oversight of this important transformation as we seek to balance within
our risk culture the benefits of quantitative sophistication with the value
of common sense.
CWB remains 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. With women now representing 27% of
CWB’s independent directors, we have surpassed our interim goal of
25% by 2018 one year early. I’m also pleased to report that women
represent 29% of our Executive Committee.
Over the course of my career as a director, I have experienced first-hand
the way an organization can benefit from the addition of new skills and
new perspectives to the board. This year, your Board was pleased to
welcome Margaret J. Mulligan, FCA as our newest director. Ms. Mulligan
brings to CWB’s Board an impressive track record in management and
as a corporate director, including experience overseeing technology and
operations at the executive level for one of Canada’s large banks. I’m
pleased to say Ms. Mulligan has already made us a better board in her
short time with us.
Our Bright Future
In 2017 we took meaningful steps to broaden CWB’s reach as a bank for
business owners. I am very proud of the many things our people have
accomplished throughout the year. That said, there is more work to do as
our transformation is not complete. In fact, with the pace of technology-
driven change apparent all around us, it’s fair to say that transformation is
set to be a permanent feature of our business.
I believe that a strong board has to get two things right: strategy and
people. I’m pleased to report that your Board fully supports CWB’s
Balanced Growth strategy. We believe our strategic focus on business
owners will continue to set us apart, and we are very confident in our
excellent management team. Together we are working to ensure CWB is
well-suited for the change to come. I can speak for CWB’s entire Board of
Directors in saying we are all very excited for what lies ahead.
12
CWB Financial Group 2017 Annual Report A tribute to
Robert L. Phillips Q.C., F.ICD
On behalf of the entire management team and all of
CWB’s tremendous people, I would like to recognize Bob
Phillips’ induction as a 2017 Fellow of the Institute of
Corporate Directors. This honour recognizes Bob’s three
decade contribution as a director to an impressive array
of leading Canadian corporations, including Canadian
National Railway Co., Maxar Technologies Ltd. (formerly
MacDonald Dettwiler & Associates Ltd.), Precision Drilling
Corp., West Fraser Timber Co. Ltd., and of course, CWB
Financial Group.
I am grateful for the opportunity to collaborate with Bob
as we guide CWB Financial Group forward. We are very
fortunate to enjoy Bob’s leadership and the depth of his
insight as the Chair of our Board of Directors. I can attest
from my personal experience that this prestigious award
is well-deserved.
- Chris Fowler
CWB Financial Group 2017 Annual Report
13
Board of Directors
Albrecht W. A. Bellstedt
President,
A.W.A. Bellstedt Professional Corporation
Andrew J. Bibby
CEO and Director,
Grosvenor Americas Partners
Chris H. Fowler
President and CEO,
Canadian Western Bank
Linda M.O. Hohol
Corporate Director
Robert A. Manning
President,
Cathton Investments Ltd.
Sarah A. Morgan-Silvester
Corporate Director
Corporate Governance
At CWB Financial Group, we strive to earn and maintain the trust of our stakeholders through high standards of corporate governance. Active
oversight of our leadership team and operations and a robust governance framework are core to our business processes and key to our success. We
work continuously to enhance our governance practices to ensure the sound functioning of CWB Financial Group and provide value to our fellow
shareholders.
Oversight of our Business
Board Independence
Our Board of Directors (Board) provides overall stewardship of CWB
Financial Group. This includes overseeing the development and
implementation of our strategic direction, reviewing and approving
our risk management framework, and fostering an ethical culture.
Members of the Board have been carefully selected for their judgment,
integrity, leadership ability, and extensive experience, and bring a range
of perspectives to our business. CWB’s management proxy circular for
the 2018 Annual Meeting sets out the director nominees proposed for
election as well as detailed information regarding the Board’s committees
and activities over the past year.
The Chair of the Board and all of our directors, other than CWB’s
President and CEO, are independent of management. In addition, a
portion of every Board meeting includes time for the independent
directors to meet without management and non-independent directors
present.
14
CWB Financial Group 2017 Annual Report
Margaret J. Mulligan
Corporate Director
Robert L. Phillips
(Chair), President and CEO,
R.L. Phillips Investments Inc.
Raymond J. Protti
Corporate Director
Ian M. Reid
Corporate Director
H. Sanford Riley
President and CEO,
Richardson Financial Group Limited
Alan M. Rowe
Partner,
Crown Realty Partners
Our Focus on Ethical Conduct
At CWB Financial Group, ethical conduct is not only a legal and regulatory
requirement, but a core value that facilitates the development of strong
relationships with our clients and other stakeholders. The CWB Financial
Group Code of Conduct, called Living our Values, guides our decision-
making and sets out the standards of integrity, accountability, respect,
common sense, and caring that apply to every CWB Financial Group team
member. 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.
Our Approach to Director and
Executive Compensation
CWB Financial Group’s director and executive compensation policies
follow best practices. Our executive 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 our shareholders.
Our Commitment to Diversity
A diversity of experience and perspectives is essential to the Board’s
successful oversight of our business, and helps us make better decisions.
Our Corporate Governance Policies promote effective governance by
requiring the Board to consider gender, ethnic, and geographic diversity
when assessing potential director nominees. Our policies also include
the goal that women comprise at least one-quarter of our independent
directors by 2018. We achieved this target one year early, in March 2017.
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
Financial Group’s corporate governance practices is available in the
Corporate Governance section at cwb.com.
Shareholders are encouraged to review CWB’s management proxy circular
for information on how they can attend and participate in the annual
shareholder meeting on April 5, 2018.
CWB Financial Group 2017 Annual Report
15
Executive Committee from left to right: DARRELL JONES, Executive Vice President and Chief Information Officer; H. BOGIE OZDEMIR, Executive
Vice President and Chief Risk Officer; KELLY BLACKETT, Executive Vice President, Human Resources and Corporate Communications; CAROLYN
GRAHAM, Executive Vice President and Chief Financial Officer; CHRIS FOWLER, President and Chief Executive Officer; STEPHEN MURPHY, Executive
Vice President, Banking; GLEN EASTWOOD, Executive Vice President, Business Transformation.
16
CWB Financial Group 2017 Annual Report Executive Committee
Chris Fowler
President and Chief Executive Officer
Chris Fowler became President and Chief Executive Officer of CWB in
March 2013. He is responsible for the overall leadership and direction
of CWB, as well as for defining, communicating, and implementing its
strategic direction.
Carolyn Graham
Executive Vice President and Chief Financial Officer
Carolyn Graham is responsible for financial and capital management
for CWB in addition to overseeing strategy and investor relations, legal
services and treasury.
Kelly Blackett
Executive Vice President, Human Resources and Corporate Communications
Kelly Blackett is responsible for human resources, internal
communications, public relations and community investment, with
a focus on building CWB’s reputation as an employer and financial
services firm of choice.
Glen Eastwood
Executive Vice President, Business Transformation
Glen Eastwood is responsible for business transformation activities
that leverage our people, technology and practices in the pursuit of
exceptional client experiences. He is also responsible for oversight of
CWB Wealth Management and Canadian Western Trust.
Darrell Jones
Executive Vice President and Chief Information Officer
Darrell Jones is responsible for delivery of technology and information
services across CWB. He is also responsible for leading the infrastructure
management function across the enterprise.
Stephen Murphy
Executive Vice President, Banking
Stephen Murphy is responsible for all branch banking operations (which
includes retail and commercial, equipment finance, real estate and
specialized lending), as well as CWB Maxium, CWB Franchise Finance,
National Leasing, and CWB Optimum Mortgage.
H. Bogie Ozdemir
Executive Vice President and Chief Risk Officer
Bogie Ozdemir is responsible for providing independent review and
oversight of enterprise-wide risk management which includes credit
risk, market risk, operational risk, and regulatory compliance risk,
including privacy and anti-money laundering.
CWB Financial Group 2017 Annual Report
17
Management’s Discussion and Analysis (MD&A)
TABLE OF CONTENTS
18
BUSINESS PROFILE
BALANCED GROWTH STRATEGY
19
FISCAL 2017 STRATEGIC HIGHLIGHTS 19
20
FORWARD-LOOKING STATEMENTS
20
TAXABLE EQUIVALENT BASIS (TEB)
NON-IFRS MEASURES
20
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
COMPREHENSIVE INCOME
CASH AND SECURITIES
22
22
28
29
31
33
33
34
34
35
LOANS
39
CREDIT QUALITY
42
DEPOSITS AND FUNDING
OTHER ASSETS AND OTHER LIABILITIES 43
44
LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT
46
FINANCIAL INSTRUMENTS AND
OTHER INSTRUMENTS
STRATEGIC TRANSACTIONS
OFF-BALANCE SHEET
SUMMARY OF QUARTERLY
49
50
51
RESULTS AND FOURTH QUARTER 51
51
52
QUARTERLY RESULTS
FOURTH QUARTER OF 2017
ACCOUNTING POLICIES
AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
53
53
CHANGES IN ACCOUNTING POLICIES
AND FINANCIAL STATEMENT
PRESENTATION
FUTURE CHANGES IN
ACCOUNTING POLICIES
RISK MANAGEMENT
RISK MANAGEMENT OVERVIEW
RISK UNIVERSE
OTHER RISK FACTORS
UPDATED SHARE INFORMATION
CONTROLS AND PROCEDURES
55
55
57
58
63
75
76
76
BUSINESS PROFILE
Canadian Western Bank is the only Schedule 1 chartered bank in Canada
with a clear focus to meet the unique financial needs of business
owners. Together, Canadian Western Bank and its operating subsidiaries
are known as CWB Financial Group (CWB). Operating from corporate
headquarters in Edmonton, Alberta, with operations distributed across
Canada, CWB delivers full-service business banking, personal banking,
trust services and wealth management offerings specifically tailored for
business owners, their employees and their families.
Business Line
Client Offering
Geographic Footprint
CWB Bank
Full-service banking for business owners,
their employees and their families
CWB Real Estate and Specialized
Lending
Commercial real estate activities and
loans and leases to franchised hotels and
restaurants
42 branches from Vancouver Island to Winnipeg,
with growing digital capabilities to offer full-
service banking beyond CWB’s branch footprint;
full-service online personal banking provided
through Motive Financial in all provinces except
Quebec
Real estate activity primarily in Western Canada
with targeted participation in Ontario; CWB
Franchise Finance activity in all provinces, with a
head office in Montreal, Quebec
National Leasing Group Inc.
(National Leasing)
Small- and mid-sized commercial
equipment leases
All provinces with a head office in Winnipeg,
Manitoba
CWB Equipment Finance
CWB Maxium Financial Inc.
(CWB Maxium)
CWB Optimum Mortgage
(CWB Optimum)
Larger-ticket standard industrial equipment
loans and leases
Primarily in Western Canada with a growing
presence in Ontario
Commercial loans, leases and structured
financing
Primarily concentrated in Ontario, with a head
office in Richmond Hill
Residential mortgages sourced through an
extensive network of mortgage brokers
Ontario, Western Canada and Atlantic Canada,
with a head office in Edmonton, Alberta
Canadian Western Trust Company
(CWT)
Personalized pension, trustee and custodial
solutions for businesses and individuals
All provinces except Quebec, with a head office in
Vancouver, BC
CWB Wealth Management Ltd.
including McLean & Partners
Wealth Management Ltd.
(McLean & Partners) and Canadian
Western Financial Ltd. (CWF)
Comprehensive wealth advisory
services, including discretionary wealth
management primarily for high net-worth
individuals, as well as third-party and
proprietary funds offered with financial
and investment planning advice
Primarily in Western Canada
p
u
o
r
G
l
a
i
c
n
a
n
i
F
B
W
C
18
CWB Financial Group 2017 Annual Report
BALANCED GROWTH STRATEGY
Key strategic objectives defined within CWB’s Balanced Growth strategy
include profitable full-service client growth with a focus on business
owners, including further geographic and industry diversification;
ongoing growth and diversification of funding sources; and, optimized
capital management through transition to the Advanced Internal Ratings
Based (AIRB) approach for capital and risk management. Over time, we
believe continued execution of our Balanced Growth strategy will create
the best full-service bank for business owners in Canada.
In support of this long-term objective, our strategic execution is focused
to ensure CWB is the best choice for our clients, for our people and for
our investors.
Our clients recognize CWB for our in-depth knowledge of targeted
segments within Canada’s commercial banking industry, our unique
brand of personal service, and our relationship-based approach.
FISCAL 2017 STRATEGIC HIGHLIGHTS
Table 1 – Execution of CWB’s Balanced Growth Strategy
We maintain a supportive environment for our people within a results-
oriented culture. We empower our people to deliver exceptional client
experiences and accelerate growth of full-service client relationships.
Shareholders value CWB’s strong track record of high-quality balance
sheet and dividend growth, conservative approach to risk management
and consistent profitability.
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 www.sedar.com and on CWB’s website at
www.cwb.com.
Balanced Growth objective
Strategic execution during fiscal 2017
Full-service client growth with a focus on business owners, including
further geographic and industry diversification
Growth and diversification of
funding sources
• 6% loan growth, including 11% growth outside of Alberta, with
higher net interest margin and a normalized credit experience.
•
•
Increased proportion of loan portfolio outside of Western Canada to
23% from 19%, including Ontario up to 19% from 15%.
Increased business diversification with 12% overall growth of
general commercial loans, including 18% growth outside of Alberta.
• Further growth with increased geographic and industry
diversification forthcoming through acquisition of approximately
$900 million of assets concentrated outside of Western Canada, to
close January 31, 2018.
• Maintained stable balances of relationship-based, branch-raised
demand and notice deposits.
• Continued to expand securitization capabilities with the addition of
a second securitization funding partner and inaugural participation
in the Canada Mortgage Bond (CMB) program.
• Delivered a record year for funding through capital markets with
total issuance of $950 million of Senior Deposit Notes through three
successful transactions.
Optimized capital and risk management through transition to the
Advanced Internal Ratings Based (AIRB) approach
• On track for transition to the AIRB approach in 2020, subject to
regulatory approval.
Strategic Transactions
On October 30, 2017, CWB announced a definitive asset purchase
agreement to acquire for cash approximately $900 million of equipment
loans and leases, and general commercial lending assets. The loans and
leases to be acquired are fully aligned with CWB’s Balanced Growth
strategy, including strategic objectives for industry and geographic
diversification. The portfolio is primarily comprised of assets concentrated
within the transportation, construction and healthcare industries, with
approximately three quarters of the exposures distributed outside
of Western Canada. The transaction is expected to close on January
31, 2018. CWB expects the transaction to be immediately accretive
to earnings per common share and return on common shareholders’
equity, with positive contributions in fiscal 2018 to net interest margin
and operating leverage. Management expects the acquired portfolio to
contribute at least $0.10 of adjusted cash earnings per common share in
both fiscal 2018 and 2019, while contributing to a slight increase in the
provision for credit losses as a percentage of average loans.
CWB’s common equity Tier 1 capital (CET1) ratio will remain in a very
strong position upon closing, with approximately 30 basis points of
existing CET1 capital to be deployed. Management expects to fund the
portfolio primarily through its securitization facilities.
On August 16, 2017, CWB announced that CWT will focus its activities
within business lines that are most aligned with the strategic objectives
of CWB Financial Group, and will no longer offer self-directed account
services to holders of exempt market securities. CWT appointed a
successor trustee effective September 30, 2017. As a result of the
agreement, CWB realized an after-tax gain on sale of $0.06 per share
in 2017 and annual revenues from trust services are expected to be
approximately $4 million lower next year. Approximately $71 million of
branch-raised deposits and $1.3 billion of assets under administration
transferred to the successor trustee on the closing date.
CWB Financial Group 2017 Annual Report
19
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 Management’s Discussion and Analysis
(MD&A). These and other factors should be considered carefully, and
readers are cautioned not to place undue reliance on these forward-
looking statements as a number of important factors could cause CWB’s
actual results to differ materially from the expectations expressed in such
forward-looking statements. Unless required by securities law, CWB does
not undertake to update any forward-looking statement, whether written
or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy over the
forecast horizon and how it will affect CWB’s businesses are material
factors considered when setting organizational objectives and targets. In
determining expectations for economic growth, 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.
20
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 2017 adjustment to taxable equivalent basis of $2.3 million (2016
– $3.2 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 earnings, 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 Table 3).
• Adjusted cash earnings per common share – diluted earnings per
common share excluding the amortization of acquisition-related
intangible assets and contingent consideration fair value changes, net
of tax. 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 amortization of acquisition-
related intangible assets and contingent consideration fair value
changes, net of tax (see Table 2), 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 Table 2),
divided by total revenues.
• 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 Office of the Superintendent of
Financial Institutions Canada (OSFI).
• Operating leverage – total revenue (teb) growth over the past twelve
months, less non-interest expense growth over the past twelve
months, excluding the pre-tax amortization of acquisition-related
intangible assets.
• Common share dividend payout ratio – common share dividends
declared during year divided by common shareholders’ net income.
• Average balances – average daily balances.
• References to core common shareholders’ net income, core pre-
tax, pre-provision income (teb), and total revenues (teb) from core
operations exclude divestiture gains recorded in fiscal 2015.
CWB Financial Group 2017 Annual Report Table 2 – Adjusted Financial Measures
($ thousands)
Non-interest expenses
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets
Adjusted non-interest expenses
Common shareholders' net income
Adjustments (after-tax):
Acquisition-related fair value changes
Amortization of acquisition-related intangible assets
Adjusted common shareholders' net income
Table 3 – Pre-tax, Pre-provision (PTPP) Income
($ thousands)
Total revenue (teb)
Less:
Adjusted non-interest expenses (see Table 2)
Pre-tax, pre-provision income
2017
2016
$ 345,466
$ 313,647
(7,560)
(6,354)
$ 337,906
$ 307,293
$ 214,277
$ 177,761
13,402
5,775
5,572
4,682
$ 233,251
$ 188,218
2017
2016
$
728,897 $
661,136
337,906
307,293
$
390,991 $
353,843
CWB Financial Group 2017 Annual Report
21
CWB FINANCIAL GROUP PERFORMANCE
OVERVIEW
Highlights of 2017 (compared to 2016)
• Very strong operating performance with common shareholders’
• Gross impaired loans represented 0.72% of total loans, compared
to 0.58% last year.
• Very strong Basel III regulatory capital ratios under the
Standardized approach for calculating risk-weighted assets of
9.5% common equity Tier 1 (CET1), 10.8% Tier 1 and 12.5%
Total capital.
• Significant progress toward transition to the Advanced Internal
Ratings Based (AIRB) approach for capital and risk management,
with application for regulatory approval anticipated by the end of
fiscal 2019.
•
Increased CWB’s annual common share dividend for the 25th
consecutive year.
• Announced an agreement to acquire for cash, on January 31,
2018, approximately $900 million of equipment loans and leases,
and general commercial lending assets.
net income of $214 million, up 21%, and record core pre-tax, pre-
provision income (teb) of $391 million, up 10%.
• Diluted and adjusted cash earnings per common share of $2.42
and $2.63, up 14% and 16%, respectively.
• Record total revenue (teb) from core operations of $729 million,
up 10%, including 10% growth of net interest income (teb) and
16% higher non-interest income.
• The gain on sale related to the appointment of a successor trustee
for CWT’s exempt market securities business contributed $0.06 to
2017 adjusted cash earnings per common share.
• Net interest margin of 2.57%, up 14 basis points, with sequential
increases in every quarter.
• Provision for credit losses as a percentage of average loans of 23
basis points, down from 38 basis points.
• Positive operating leverage of 0.3%.
• Loan growth of 6%, with 11% growth outside of Alberta and
18% growth of non-Alberta general commercial loans.
• Strong execution of CWB’s funding diversification strategy,
including record issuance of senior deposit notes in capital
markets, growth of securitization capabilities, and stable branch-
raised deposits.
22
CWB Financial Group 2017 Annual Report Table 4 – Select Annual Financial Information(1)
($ 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
2017
2016
2015
$
%
Change from 2016
$ 728,897
$ 661,136
$ 617,000
$ 67,761 10 %
726,635
657,896
611,420
68,739 10
390,991
353,843
328,059
37,148 10
214,277
177,761
208,064
36,516 21
2.43
2.13
2.59
0.30 14
2.42
2.13
2.59
0.29 14
2.63
2.26
2.63
0.37 16
Return on common shareholders' equity
10.1 % 9.3 % 12.4 %
80 bp(3)
Adjusted return on common shareholders' equity
11.0
9.9
12.6
0.85
0.73
0.97
46.4
46.5
46.8
46.5
46.7
47.3
2.57
2.43
2.56
2.56
2.41
2.53
0.3
0.8
(5.0)
110
12
(10)
(20)
14
15
(50)
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
0.23
0.38
0.17
(15)
Key Performance Indicators (Combined Operations)(2)
Common shareholders' net income
$ 214,277
$ 177,761
$
319,701
$
36,516 21 %
Earnings per share
Basic
Diluted
Adjusted cash
2.43
2.13
3.97
0.30 14
2.42
2.13
3.97
0.29 14
2.63
2.26
4.01
0.37 16
Return on common shareholders' equity
10.1 % 9.3 % 19.1%
Adjusted return on common shareholders' equity
11.0
9.9
19.3
Return on assets
0.85
0.73
1.48
80 bp(3)
110
12
Key Performance Indicators (Discontinued Operations)(2)
Common shareholders' net income
$ -
$ -
$ 111,637
$ - - %
Earnings per share
Basic
Diluted
Adjusted cash
Other Financial Information
Total assets
Dividends per common share
-
-
1.38
- -
-
-
1.38
- -
-
-
1.38
- -
$ 26,447,453
$ 25,222,549
$ 22,838,527
$ 1,224,904 5 %
0.93
0.92
0.86
0.01 1
(1) See page 20 for a discussion of teb and non-IFRS measures.
(2) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and stock transfer business. Revenues, expenses and gains on sale associated with the businesses sold are defined and classified on the consolidated
statements of income in 2015 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.
(3) bp – basis points.
(4) A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
CWB Financial Group 2017 Annual Report
23
Summary of Operations
Fiscal 2017 was a very strong year for CWB, both in terms of strategic
execution and financial performance. In respect to execution of CWB’s
Balanced Growth strategy, CWB expanded its geographic footprint,
delivered increased industry diversification with a continued focus on
business owners, and made significant progress toward the upcoming
transition to the Advanced Internal Ratings Based (AIRB) approach for risk
and capital management. Highlights of financial performance included
record total revenues (teb) from core operations and record core pre-tax,
pre-provision income (teb), higher net interest margin in every quarter,
positive operating leverage, strong credit quality, and the 25th consecutive
annual increase to CWB’s common share dividend. CWB closed the year
with the announcement of a highly strategic and accretive acquisition
of equipment loans and leases, and general commercial lending assets,
while maintaining a very strong common equity Tier 1 (CET1) capital
ratio.
CWB recorded double-digit percentage growth in several key financial
metrics: record total revenue (teb) from core operations of $729 million
increased 10%; record core pre-tax, pre-provision income (teb) of $391
million was up 10%; and, common shareholders’ net income of $214
million was 21% higher. Very strong earnings growth resulted from both
the increase in total revenue (teb) and a normalized provision for credit
losses.
Net interest income (teb) of $645 million was up 10% from 2016,
reflecting the combined positive impact of 6% loan growth and a 14
basis point increase in net interest margin (teb) to 2.57%. The significant
improvement in net interest margin (teb) resulted from a number of
factors including higher asset yields, favourable changes in funding mix,
and favourable changes in asset mix, partially offset by incrementally
higher funding costs.
Non-interest income of $84 million increased 16% ($12 million), primarily
due to net gains on securities of $1 million compared to net losses of $3
million last year, higher credit related fees, the CWT-related gain on sale
within ‘other’ non-interest income, and higher wealth management fees.
The annual provision for credit losses as a percentage of average loans
was 23 basis points. This is consistent with CWB’s traditional range of
18 – 23 basis points, and slightly better than management's previously
stated expectation for the full-year provision to fall in a range between 25
and 35 basis points. The annual provision last year was abnormally high
at 38 basis points due to the impact of energy-related losses.
These factors were partially offset within common shareholders’ net
income by 10% ($32 million) higher non-interest expenses, a $10 million
increase in acquisition-related fair value changes reflecting a full year
of strong performance from CWB Maxium, compared to only a portion
of last year, and a $4 million increase in preferred share dividends. The
increase in non-interest expenses reflects an 8% ($16 million) increase
in salaries and benefits, 15% ($9 million) higher ‘other’ expenses, and
a 15% ($8 million) increase in costs related to premises and equipment.
Of note, the addition of CWB Maxium and CWB Franchise Finance,
both acquired in 2016, contributed approximately 35% of the increase
in salaries and benefits, with the remainder attributed to annual salary
increases and additional staff to support business growth. Also of note,
premises and equipment expenses include costs associated with the new
core banking system beginning in the third quarter last year.
Diluted earnings per common share of $2.42 and adjusted cash earnings
per common share of $2.63 were up 14% and 16%, respectively. The
CWT-related gain on sale contributed $0.06 to adjusted cash earnings per
common share.
24
Adjusted return on common shareholders’ equity (ROE) of 11% increased
110 basis points from last year. This was primarily driven by very strong
growth of common shareholders’ net income, reflecting both strong
business growth and the impact of energy-related provisions last year.
These factors were partially offset by the impact of common shares
issued in the third quarter of 2016. Total cash dividends paid to common
shareholders of $0.93 per share increased 1% ($0.01), resulting in CWB's
25th consecutive annual dividend increase. The dividend payout ratio was
38% of total common shareholders’ net income in fiscal 2017, down
from 43% last year.
Total assets increased 5% to reach $26,447 million. Total loans, including
the allowance for credit losses, of $23,229 million increased 6%.
Excluding CWB’s Alberta portfolio, where growth has been constrained
by the lagging impacts of the 2015 – 2016 regional recession, overall
loan growth was 11%. Loan growth was consistent with CWB’s
Balanced Growth strategy, including strategic objectives to achieve a
more balanced geographic footprint and further industry diversification
with a continued focus on business owners. Ontario continued to lead
loan growth by province and now accounts for 19% of CWB’s total loan
portfolio, up from 15% last year. This result was underpinned by strong
performance from CWB’s businesses that have a national footprint,
including CWB Maxium, CWB Optimum, CWB Franchise Finance and
National Leasing. Annual growth within the strategically targeted general
commercial category was 12% overall, and 18% outside of Alberta. This
portfolio now represents 27% of CWB’s overall portfolio, compared to
26% in 2016.
Total deposits of $21,903 million were up 3%. Relationship-based
branch-raised funding increased 2% from last year, including a relatively
stable balance of lower-cost demand and notice deposits. Of note, the
average balance of branch-raised deposits on a full-year basis was up 7%
compared to 2016, including the impact of $71 million of branch-raised
deposits transferred to the successor trustee for CWT’s accounts holding
exempt market securities. Branch-raised deposits represented 54% of
total deposits at October 31, 2017, compared to 55% last year. Demand
and notice deposits comprised 35% of total deposits, compared to 36%
in 2016. The proportion of funding represented by term deposits raised
through the broker market was unchanged at 36%.
CWB delivered strong execution against its funding diversification
strategy. For example, CWB established a new record for funding through
capital markets in fiscal 2017, with total senior deposit note issuance
of $950 million across three successful transactions. The proportion
of deposits raised through the capital markets increased to 10% of
total funding at year end, compared to 9% in the prior year. CWB also
increased the use of securitization funding through the addition of a
second securitization partner, continued participation in the National
Housing Act Mortgage Backed Securities (NHA MBS) program, and
inaugural participation in the Canada Mortgage Bond (CMB) program.
The maintenance of solid capital levels is fundamental to CWB’s
objectives to effectively manage risks and support strong growth. CWB’s
Basel III common equity Tier 1 (CET1) at October 31, 2017 of 9.5% was
very strong. Including CWB’s Tier 1 and total capital ratios of 10.8%
and 12.5%, respectively, all capital ratios 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 9.2% last year was primarily driven by
strong earnings growth. At 8.3%, the Basel III leverage ratio remains very
conservative.
CWB Financial Group 2017 Annual Report Ongoing business transformation initiatives to enhance CWB’s client experience and support development of full-
service client relationships
Implementation of CWB’s new banking system in 2016 has enabled
progress toward enhanced client experiences through further
development of targeted products and services. For example, this
year CWB improved clients’ online wire transfer experience, expanded
desktop foreign exchange capabilities and introduced CWB PayHQ, a
fully integrated, omni-channel payment technology platform, all through
strategic external partnerships. Planned delivery of remote deposit
capture technology early in calendar 2018 is also on track, which will
enable clients to make deposits anywhere, any time. These enhancements
will complement the forthcoming introduction of next generation online
banking tools for businesses, which will allow clients to house their
business and personal banking on a common platform.
Management also executed a strategic realignment of reporting
structures to better address the needs of targeted business owner clients.
The realignment created a new ‘centre of excellence’ for commercial
real estate and specialized lending, and integrated CWB’s vendor-
focused equipment lending operations within National Leasing. CWB’s
new ‘centre of excellence’ will specialize in working with commercial
real estate, corporate lending and franchise finance clients with similar
needs, often related to large, complex, syndicated lending opportunities.
The new structure is also expected to permit regional branch leadership
to focus on growth of targeted mid-market, full-service commercial
relationships and deliver on CWB’s unique client value proposition. Two
new senior leadership roles for brand development, and marketing and
sales effectiveness were also created as part of the realignment. The focus
of these roles is to contribute to more effective, central support for CWB’s
frontline teams.
Ongoing growth and development of CWB’s wealth management
offering is also a key area of focus. A key goal is for CWB Wealth
Management to be seen as a trusted source of specialized wealth
management expertise for business owners and their families. Looking
forward, management will continue with efforts to enhance CWB’s
offering of proprietary wealth management solutions, and increase the
effectiveness of related business development activities across business
lines.
Management’s business transformation and process improvement
efforts are also focused to improve key credit processes to enchance
CWB’s overall client experience and established sources of competitive
advantage. Related initiatives undertaken in 2017 and continuing
into the new fiscal year will realign CWB’s credit support structure to
improve focus and efficiency through standardized processes, clear
accountabilities, and effective leverage of CWB’s investment in industry-
leading technology.
Management expects these product improvements, structural
realignments and process improvements to position branch-based teams
to more effectively demonstrate CWB’s unique brand of personal service
and relationship-based approach. Taken together, these are key steps
to enhance CWB’s full-service banking experience for business owners.
Management expects these initiatives to support development of broader,
multi-product client relationships, including ongoing loan growth and
accelerated growth of branch-raised deposits.
Ongoing enhancements to CWB’s employee experience to be seen as the best choice for top talent
CWB’s future success will depend on strong collaboration between
engaged, well-trained and empowered teams. To support this capability,
CWB made significant progress this year toward implementation of
a contemporary Human Resources Information System (HRIS). With
full implementation planned for 2018, CWB’s HRIS will streamline
decision-making capabilities for strategic people-related processes and
information.
This year CWB also completed a broad-based compensation review
with the assistance of external compensation consultants to assess the
market competitiveness of CWB’s compensation. Where appropriate,
adjustments were made for employees whose compensation was not
market aligned. In addition, CWB held its inaugural group-wide Ethics
Week campaign, and inaugurated a Week of Caring initiative to support
community investment. Approximately 600 employees participated in the
latter event, contributing more than 1,500 volunteer hours and raising
$320,000 for United Way locations across Western Canada.
CWB’s Award of Excellence program was expanded in 2017 to include
more frequent recognition on a quarterly basis. Pillars of Excellence
Awards are a nomination-based program to recognize the importance
of employee contributions, award high-quality employee performance,
and to motivate employees to achieve excellence. The Pillars of Excellence
Awards recognize team-focused individuals who have gone "above and
beyond" in contributing to key strategic objectives, and who actively
display the qualities for which CWB is known.
Management will continue to invest in improved people-related
infrastructure and processes to support CWB’s objective to be seen as the
best choice for top talent, and to support a collaborative, performance-
based environment that is fair, fun, progressive, diverse and opportunity-
rich.
CWB Financial Group 2017 Annual Report
25
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 Balanced Growth strategy 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:
Table 5 – Medium-term Performance Target Ranges
Adjusted cash earnings per
common share growth
Adjusted return on common
shareholders’ equity
Operating leverage
Common equity Tier 1 capital ratio under the
Standardized approach
Common share dividend payout ratio
(1) See page 20 for definitions and discussions of non-IFRS measures.
Medium-term
Performance
Target Ranges(1)
Fiscal 2017 Performance
7 - 12% Exceeded target at 16%.
12 - 15% Delivered 11.0%, with significant improvement from 9.9% in 2016.
Positive
Met target at positive 0.3%.
Strong
Exceeded target with a very strong ratio of 9.5%.
~30%
Delivered 38%, with an annual common share dividend increase for the
25th consecutive year.
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 profitable client relationship growth with further geographic
and industry diversification, further optimization of CWB’s funding
mix, strong credit quality, effective expense management in
consideration of revenue growth opportunities, and prudent capital
management.
Outlook
Over a three- to five-year timeframe, management expects financial
performance to reflect ongoing strong execution of CWB’s Balanced
Growth strategy and to be relatively consistent with its medium-
term targets. Results are expected to benefit from an expanding
geographic footprint with increased business diversification; success
in key strategic initiatives to enhance client experiences, build core
funding sources, and leverage current and future investment in
technology; and CWB’s planned transition to the AIRB methodology
for capital and risk management.
Profitable loan growth with continued strategic
diversification and ongoing growth and
diversification of funding sources
CWB remains committed to delivering double-digit annual loan
growth whenever prudent, with a continued focus on secured loans
that offer an appropriate return and acceptable risk profile. Loan
growth accelerated in the second half of fiscal 2017 to a double-digit
pace outside of the provinces most affected by the 2015 – 2016
regional recession, and management expects this trend to continue
into 2018. Business opportunities within Alberta and Saskatchewan
are expected to gain momentum as these provincial economies
continue to recover.
CWB’s pipeline of new organic growth opportunities across
all provinces continues to expand. In addition, the portfolio of
equipment loans and leases, and general commercial lending assets
to be acquired on January 31, 2018, is expected to support continued
progress toward strategic objectives for geographic and industry
diversification, and provide CWB with valuable prospects to pursue
future growth. The balance of loans and leases to be acquired at
closing is expected to be approximately $900 million.
With approximately three quarters of the portfolio originated
outside of Western Canada, this acquisition will move CWB toward
its strategic goal for Ontario exposures to represent a third of the
overall portfolio. From an industry perspective, the portfolio is
primarily comprised of assets concentrated within the transportation,
construction and healthcare industries, with yields and security types
generally comparable to CWB’s existing exposures within these
industries. Related prospecting activity will primarily leverage CWB’s
well-established specialization in equipment financing and leasing.
Management expects strong financial contributions from these assets
to contribute to performance against our medium-term performance
targets. In view of the acquired portfolio’s relatively short duration,
CWB is working to quickly identify and execute on high-quality
retention and renewal opportunities consistent with management’s
risk appetite. However, some degree of portfolio run-off in respect to
these assets is expected in the near term.
In respect to housing-related growth opportunities, revisions to OSFI’s
Guideline B-20, Residential Mortgage Underwriting Practices and
Procedures (B-20) could serve to curtail market activity and reduce
the pace of home price increases across the country. In particular,
the 200 basis point qualifying stress test and limits on co-lending
arrangements could make it more difficult for certain prospective
buyers to qualify for uninsured mortgages, and have a negative
impact on originations within CWB Optimum; however, the changes
may also result in increased renewals with existing borrowers, as well
as incremental lending opportunities within the alternative mortgage
space as all federally-regulated mortgage lenders are affected
by revisions to the guideline. Notwithstanding these somewhat
offsetting factors, management expects the growth rate for CWB
Optimum to more closely resemble overall growth across the rest
of the loan portfolio going forward. This includes the expected
26
CWB Financial Group 2017 Annual Report moderating impact of changes to Guideline B-20, as well as CWB’s
overall risk appetite for Alt-A mortgages as a proportion of total
loans. CWB does not expect changes to Guideline B-20 to have a
material impact on growth opportunities within its real estate project
lending portfolio.
CWB’s strategic focus to grow and diversify funding sources will
continue, including a goal to increase relationship-based branch-
raised deposits with particular emphasis on demand and notice
deposits. This funding segment is typically lower cost and provides
associated transactional fee income. Continued growth in the
proportion of branch-raised funding is also a key strategic objective
because it reflects success in strengthening targeted full-service client
relationships. The capabilities of CWB’s new core banking system will
support various growth initiatives related to branch-raised funding
over the medium term. Continued development of new and more
effective products, along with an ongoing strategic focus on business
transformation and process improvement, are expected to enhance
CWB’s client experience and strengthen CWB’s competitive position.
CWB’s growing market presence to support strong performance
against these goals will include further development of digital
banking capabilities and may also include periodic expansion of full-
service branches.
Continued diversification of funding sources is also expected to
include increased utilization of both debt capital markets and
CWB’s growing securitization capabilities. CWB added a second
securitization funding partner in 2017, continued securitization of
residential mortgages through the National Housing Administration
Mortgage Backed Security (NHA MBS) program, and initiated
participation in the Canada Mortgage Bonds (CMB) program this
year. Participation through each of these channels is expected to
increase over the medium term.
Incrementally higher net interest margin
CWB’s Balanced Growth strategy targets growth of lower-cost
funding sources along with selective, geographically diversified loan
growth in higher yielding portfolios with an acceptable risk profile.
Acceleration of loan growth in 2018 may require increased utilization
of the relatively higher-cost broker deposit funding channel, and
management may periodically hold higher average balances of
cash and securities with a lower average yield in the event of
macroeconomic or financial market volatility, as well as in preparation
for expected maturities. Competitive pressure on loan yields is
expected to remain apparent, and deposit costs are expected to
move incrementally higher in 2018, due to both competitive factors
and expectations for a lagged impact from the Bank of Canada’s
rate increases in 2017. However, the combined positive impact of
successful strategic execution, including the expected contributions
of assets to be acquired at the end of the first quarter, and the higher
interest rate environment is expected to support incrementally higher
net interest margin in fiscal 2018 compared to the prior year.
Strong credit quality
Overall credit quality is expected to reflect CWB’s secured lending
business model, disciplined underwriting practices and proactive loan
management. Partially due to the lagging impacts of the regional
2015 – 2016 recession, management expects periodic further
increases in the balance of impaired loans across the portfolio;
however, the trend in balances of loans classified as past due but not
impaired improved late in fiscal 2017, supporting a more positive
outlook. Material credit impacts related to the small balance of
remaining oil and gas loans are not expected. Gross impaired loans
within CWB Optimum may increase in the event of a material
correction of residential home prices. Loss rates on current and future
impaired loans are expected to be low, reflecting the combined
positive impact of CWB’s disciplined underwriting, secured lending
practices, and proactive account management. This expectation
is consistent with CWB’s prior experience, where write-offs have
typically been low as a percentage of impairments. Management
remains confident in the strength, diversity and underwriting
structure of the overall loan portfolio and lending exposures continue
to be closely monitored. CWB continues to carefully monitor the
entire portfolio for signs of weakness. The fiscal 2018 provision
for credit losses as a percentage of average loans is expected to be
relatively consistent with 2017.
Based on the results of stress tests simulating severe economic
conditions across CWB’s geographic footprint over a multi-year time
frame, including consideration for the impact of a severe housing
market correction, management is confident CWB will continue to
deliver positive earnings for shareholders while maintaining financial
stability and a strong capital position. Stress test assumptions include
severe credit losses, a persistent low interest rate environment and
significantly slower loan growth to reflect lower assumed levels of
economic activity, as well as increased competition for deposits and
much higher levels of gross impaired loans that could combine to
result in significant compression of net interest margin.
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
investment while maintaining effective control of costs. Realignment
of CWB’s credit support structure is expected to improve efficiency
over the medium term through development of standardized
processes and effective leverage of CWB’s investment in industry-
leading technology. CWB’s ongoing targeted investment in people,
technology and infrastructure is expected to contribute to long-
term shareholder value through improved financial performance in
future periods. In view of the level of necessary future investment
to facilitate ongoing business transformation in support of CWB’s
Balanced Growth strategy, management expects CWB’s efficiency
ratio to fluctuate within a relatively narrow range around 46% over
the near term. Management is committed to disciplined control of
all discretionary expenses, and expects to deliver positive operating
leverage 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, CWB is
well positioned to create value for shareholders through a range of
capital deployment options consistent with management’s Balanced
Growth strategy. Ongoing support and development of each of
CWB’s core businesses will remain a key priority, and management
will continue to evaluate potential strategic acquisitions.
Management expects CWB to deploy approximately 30 basis points
of CET1 capital to close the acquisition of approximately $900 million
of equipment loans and leases, and general commercial lending
assets on January 31, 2018.
A normal course issuer bid (NCIB) authorizing CWB to purchase for
cancellation prior to September 30, 2018, up to 1,767,000 common
shares is in place. Management may choose to activate the NCIB in
fiscal 2018 should the appropriate circumstances become apparent.
CWB Financial Group 2017 Annual Report
27
Common share dividend increases are evaluated every quarter
against the dividend payout ratio target of approximately 30% of
common shareholders’ net income, as well as capital requirements
under the Standardized approach to support ongoing strong and
balanced asset growth.
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 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 2017
• Strong 10% growth of net interest income (teb) to a record
$644.7 million, reflecting 6% loan growth and significant
improvement in net interest margin (teb).
• Net interest margin (teb) of 2.57% increased 14 basis points from
2016, with sequential improvement in each quarter. Significant
improvement in this key metric resulted from a number of factors
including higher asset yields, favourable changes in funding
mix, and favourable changes in asset mix, partially offset by
incrementally higher funding costs.
• Higher asset yields reflect both the impact of Bank of Canada rate
increases in July and September, and increased prepayment fees.
• Favourable changes in funding mix reflect strong strategic
execution, including the combined positive impact of 7% higher
average balances of branch-raised deposits, stable average
balances of deposits sourced through the broker market, and
redemption of higher-cost capital markets funding instruments.
• Favourable changes in asset mix also reflect strong strategic
execution with increased contributions from the relatively higher-
yielding CWB Maxium and CWB Franchise Finance portfolios and
lower average balances of cash and securities.
•
Incorporating the impact on both asset yields and deposit costs,
the Bank of Canada rate increases contributed approximately two
basis points to the total increase of 14 basis points.
Table 6 - Net Interest Income (teb)(1)
($ thousands)
2017
2016
Average
Balance Mix
Interest
Interest
Rate
Average
Balance
Mix
Interest
Interest
Rate
$ 2,443,633
10 % $
35,458
1.44 % $ 2,719,327
11 % $
36,352
1.34 %
Assets
Cash, securities and deposits with
regulated financial institutions
Securities purchased under
resale agreements
25,300
-
138
0.54
131,891
1
620
0.47
Loans
Personal
Business
Total interest bearing assets
Other assets
Total Assets
Liabilities
Deposits
Personal
Business and government
4,373,295
17,803,589
22,176,884
24,645,817
479,376
$ 25,125,193
17
71
88
98
2
100 % $
164,816
829,134
993,950
1,029,546
-
1,029,546
3,659,510
3.77
17,264,663
4.66
20,942,173
4.48
23,775,391
4.18
0.00
424,060
4.10 % $ 24,199,451
15
71
86
98
2
100 % $
141,277
786,980
928,257
965,229
-
965,229
$ 13,006,738
7,949,443
20,956,181
52 % $
31
83
236,274
119,002
355,276
1.82 % $ 12,489,741
7,955,410
1.50
20,445,151
1.70
52 % $
33
85
231,429
114,895
346,324
Securities sold under
repurchase agreements
Other liabilities
Debt
Shareholders' equity
Non-controlling interests
Total Liabilities and Equity
Total Assets/Net Interest Income
42,775
456,340
1,279,283
2,389,701
913
$ 25,125,193
$ 25,125,193
-
2
5
10
-
100 % $
$
245
-
29,373
-
-
384,894
644,652
44,504
0.57
375,379
0.00
1,226,192
2.30
2,107,633
0.00
0.00
592
1.53 % $ 24,199,451
2.57 % $ 24,199,451
-
2
5
8
-
100 % $
$
174
-
30,267
-
-
376,765
588,464
3.86
4.56
4.44
4.06
0.00
3.99 %
1.85 %
1.46
1.70
0.39
0.00
2.47
0.00
0.00
1.56 %
2.43 %
(1) See page 20 for a discussion of teb and other non-IFRS measures.
28
CWB Financial Group 2017 Annual Report Net interest income (teb) increased 10% to a record $644.7 million.
Strong growth was primarily driven by the 4% increase in average
interest earning assets and 14 basis point increase in net interest margin
(teb) to 2.57%.
The yield on CWB’s average interest-earnings assets increased 12 basis
points to 4.18% in 2017 as a result of a number of factors, including:
increased contributions from the relatively higher-yielding CWB Maxium
and CWB Franchise Finance portfolios, a higher interest rate environment
following increases in the Bank of Canada’s overnight rate in July and
September, increased prepayment fees, and the impact of pricing
discipline across the portfolio. The yield on average personal loans was
down nine basis points from 2016, primarily reflecting the full-year
impact of CWB's NHA MBS- and CMB-related liquidity and funding
inititatives.
The yield on average cash, securities and deposits with regulated financial
institutions was up 10 basis points from last year, reflecting the higher
interest rate environment and steeper yield curve.
Average deposit costs were unchanged from last year and the overall cost
of average interest-bearing liabilities and equity fell three basis points to
1.53%. The cost of personal deposits was slightly lower with favourable
changes in product mix driven by execution of CWB’s Balanced Growth
strategy. While business deposit costs increased slightly, mainly due to
competitive factors, these deposits comprised a lower portion of overall
interest-bearing liabilities and equity. Debt-related costs were 17 basis
points lower with redemption of relatively higher-cost subordinated
debentures.
Outlook for Net Interest Income and Net Interest Margin
CWB’s Balanced Growth strategy targets growth of lower-cost
funding sources along with selective, geographically diversified loan
growth in higher yielding portfolios with an acceptable risk profile.
Acceleration of loan growth in 2018 may require increased utilization
of the relatively higher-cost broker deposit funding channel, and
management may periodically hold higher average balances of
cash and securities with a lower average yield in the event of
macroeconomic or financial market volatility, and in preparation
for upcoming maturities. Competitive pressure on loan yields is
expected to remain apparent, and deposit costs are expected to
move incrementally higher in 2018, due to both competitive factors
and expectations for a lagged impact from the Bank of Canada’s
rate increases in 2017. However, the combined positive impact of
successful strategic execution, including the expected contributions
of assets to be acquired at the end of the first quarter, and the higher
interest rate environment is expected to support incrementally higher
net interest margin in fiscal 2018 compared to the prior year.
NON-INTEREST INCOME
Highlights of 2017
• Non-interest income of $84.2 million, up 16%.
• Non-interest income represented 12% of total revenues (teb), up
• Net gains on securities of $0.7 million compared to net losses
of $2.8 million last year, higher credit related fees, and wealth
management income.
• Higher ‘other’ non-interest income, due to a $5.7 million pre-tax
gain on sale related to the appointment of a successor trustee for
CWT’s exempt market securities business, to focus CWT’s activities
within business lines that are most aligned with CWB’s strategic
objectives.
from 11% in 2016.
•
Improved online wire transfer experience for clients expanded
desktop foreign exchange capabilities and introduced a fully
integrated, omni-channel payment technology platform through
strategic external partnerships.
• CWB’s proprietary Onyx Portfolio Series mutual funds surpassed
$100 million in assets under management less than two years
after their inception in February 2016.
CWB Financial Group 2017 Annual Report
29
Table 7 – Non-interest Income
($ thousands)
Credit related
Wealth management services(1)
Retail services(1)
Trust services
Gains (losses) on securities, net
Other(2)
Total Non-interest Income
Change from 2016
2017
2016
$
%
$
34,012 $
30,598 $
3,414 11 %
19,073
10,758
11,305
664
8,433
16,394
2,679 16
11,244
(486)
(4)
11,522
(217)
(2)
(2,830)
3,494
nm (3)
5,744
2,689 47
$
84,245 $
72,672 $
11,573 16 %
(1) During 2017, certain fee income was reclassified from retail services to wealth management services within Non-interest Income. Comparative figures have been restated to conform with current year presentation, resulting in a
$2,373 increase in wealth management services and a corresponding decrease in retail services.
Includes gains on strategic transactions and loan portfolio sales, lease administration services, foreign exchange gains/losses, gains/losses on land, buildings and equipment disposals, and other miscellaneous non-interest revenues.
(2)
(3) nm – not meaningful.
Non-interest income of $84.2 million was up 16% or $11.6 million.
Net gains on securities of $0.7 million increased from a net loss of $2.8
million in 2016, while credit related fees were up 11% ($3.4 million) with
ongoing growth of lending activity. ‘Other’ non-interest income was $2.7
million higher, primarily due to a $5.7 million pre-tax gain on sale related
to the appointment of a successor trustee for CWT’s exempt market
securities business, partially offset by lower gains on the sale of residential
mortgages this year. Wealth management fees also increased $2.7 million
with strong performance across the business.
Non-interest income as a percentage of total revenues (teb) increased to
12% from 11% in 2016.
Outlook for Non-interest Income
Growth of non-interest income is expected to reflect CWB’s strategy
to extend and deepen relationships with both new and existing
business owner clients. Increases are expected across most categories
of non-interest income reflecting CWB’s continued strategic focus
on strong, high-quality loan growth with associated fee income,
as well as enhanced transactional capabilities in cash management
and other retail services, including CWB’s relationship-based,
branch-raised deposit franchise. Planned delivery of remote deposit
capture technology early in calendar 2018 is on track. This will
complement the introduction of next generation online banking tools
for businesses, which will allow clients to house their business and
personal banking on a common platform.
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 2018; however, the magnitude and timing of
gains or losses are dependent on market factors that are difficult to
predict.
Management expects further increases in wealth management
revenues to result over the medium term from solid performance
within CWB Wealth Management, including organic growth of
discretionary investment services, and further growth of proprietary
investment products. Management will also continue to consider
strategically aligned and accretive wealth management acquisition
opportunities.
CWB may realize gains on the sale of residential mortgage portfolios
as opportunities become available. Such gains are anticipated to be a
recurring, although sporadic, source of ‘other’ non-interest income.
CWT’s exempt market securities business line contributed
approximately $3.5 million of non-interest income on an annual basis
prior to this year's appointment of a successor trustee for accounts
holding these securities.
30
CWB Financial Group 2017 Annual Report
NON-INTEREST EXPENSES, EFFICIENCY AND OPERATING LEVERAGE
Highlights of 2017
• Operating leverage was positive 0.3%.
• The efficiency ratio (teb) of 46.4% improved from 46.5% in 2016.
Table 8 – Non-interest Expenses and Efficiency Ratio
($ thousands)
Salaries and employee benefits
Salaries
Employee benefits
Premises
Rent
Depreciation
Other
Equipment and software
Depreciation
Other
General
Professional fees and services
Regulatory costs
Marketing and business development
Amortization of acquisition-related intangible assets
Banking charges
Travel
Postage and stationery
Loan-related credit reports
Community investment
Communications
Staff relations
Employee training
Capital and business taxes
Employee recruitment
Mutual fund administration
General insurance
Parking
Acquisition-related
Other
2017
2016
$
%
Change from 2016
$ 184,670
$
171,332
$
13,338
8 %
35,746
220,416
33,571
204,903
2,175
6
15,513
8
20,738
5,036
3,532
29,306
18,096
12,946
31,042
9,439
8,826
7,691
7,560
5,062
3,263
2,668
2,565
2,000
1,836
1,616
1,407
1,399
1,065
1,037
1,006
864
-
5,398
64,702
19,688
5,277
3,314
28,279
12,950
11,310
24,260
8,234
6,281
6,939
6,354
5,429
2,832
2,898
2,431
2,281
1,717
1,279
1,303
1,284
641
808
1,036
908
695
2,855
56,205
1,050
5
(241)
(5)
218
7
1,027
4
5,146
40
1,636
14
6,782
28
1,205
15
2,545
41
752
11
1,206
19
(367)
(7)
431
15
(230)
(8)
134
6
(281)
(12)
119
7
337
26
104
8
115
9
424
66
229
28
(30)
(3)
(44)
(5)
(695)
(100)
2,543
89
8,497
15
Total Non-interest Expenses
$ 345,466
$
313,647
$
31,819
10 %
Efficiency Ratio (teb)(1)(2)
46.4%
46.5%
(10) bp(3)
(1) See page 20 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.
CWB Financial Group 2017 Annual Report
31
Premises expense was relatively stable, up by 4% or $1.0 million. General
non-interest expenses were up 15% or $8.5 million. ‘Other’ general
expenses increased $2.5 million. Higher regulatory costs, amortization
of acquisition-related intangible assets, and fees for professional services
also contributed to the increase in general expenses.
Operating leverage for the year was positive 0.3% and the efficiency
ratio (teb) of 46.4% improved by 10 basis points from last year. Strong
performance on both metrics reflects the combined positive impact
of higher revenues from ongoing loan growth and higher net interest
margin (teb), as well as effective management of discretionary expense
growth.
Total non-interest expenses of $345.5 million were up 10% ($31.8
million). Incorporation of a full year of expenses for CWB Maxium and
CWB Franchise Finance in 2017, compared to only a portion of last year,
accounted for nearly 25% of the overall increase in total non-interest
expenses and more than 35% of the annual increase in salaries and
benefits. Overall, salaries and employee benefits increased 8% ($15.5
million) reflecting the acquisition-related impact noted above, as well
as hiring activity to support overall business growth and annual salary
increments.
The net increase in overall full-time equivalent employees (FTEs) was
moderate at 5%. Equipment and software costs were up 28% ($6.8
million) including a full year of costs related to the core banking system,
compared to half the year in 2016, and other costs associated with
ongoing investment in technology infrastructure to position CWB for
future growth.
Figure 1 – Number of Full-time Equivalent Staff
2,037*
(+8%)
1,715
(+8%)
2,094*
(+3%)
1,788
(+4%)
1,928
(+8%)
1,966
(+2%)
2,058
(+5%)
2013
2014
2015
2016
2017
Continuing Operations
Discontinued Operations
*
Combined Operations - See Table 4, footnote 2 for descriptions of Continuing, Discontinued and Combined Operations.
32
CWB Financial Group 2017 Annual Report
Outlook for Non-interest Expenses, Efficiency and Operating Leverage
CWB’s medium-term targets for growth of adjusted cash earnings
per share and positive operating leverage incorporate expectations
for strong business growth supported through strategic investment
in people, technology and infrastructure, along with effective control
of expense growth. CWB’s annual efficiency ratio (teb) over the past
three years is approximately 46%. In view of both necessary future
investment to facilitate ongoing execution of CWB’s Balanced Growth
strategy, and the recently improved outlook for net interest margin,
management expects CWB’s efficiency ratio to fluctuate around
46% over the near term. Management is committed to maintaining
efficient operations through disciplined control of all discretionary
expenses, and positive operating leverage is expected over the
medium term.
ACQUISITION-RELATED FAIR VALUE CHANGES
The estimated change in fair value of contingent consideration related
to the acquisition of CWB Maxium amounted to $18.3 million,
compared to $7.9 million last year, with accruals commencing after the
acquisition closed on March 1, 2016. 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 CWB Maxium. CWB Maxium has delivered
INCOME TAXES
The 2017 effective income tax rate (teb) was 26.9% compared to 27.3%
in 2016, with the decrease primarily resulting from the tax treatment
of the CWT-related gain on sale. The effective tax rate before the teb
adjustment was 26.4%, unchanged from last year, as the benefit from
the tax treatment of the CWT-related gain on sale was offset by lower tax
exempt income on certain securities.
Deferred tax assets and liabilities represent the cumulative amount of
tax applicable to temporary differences between the carrying amount of
strong performance, consistent with management’s expectations. Annual
contingent consideration fair value changes, approximately similar in
magnitude through the remainder of the three-year earn out period,
would represent the maximum amount available through the purchase
agreement. Related detail is provided in Note 3 to the consolidated
financial statements.
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 2018 is approximately 27.5%.
CWB Financial Group 2017 Annual Report
33
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 small increase in comprehensive income
was primarily driven by very strong 21% ($40.3 million) growth of net
income, partially offset by a decrease in OCI of $36.8 million. Changes
in OCI mainly reflect the combined impact of a $16.8 million decrease in
the fair value of available-for-sale securities and a $13.9 million decrease
in the fair value of derivatives designated as cash flow hedges. CWB`s
portfolio of available-for-sale securities is comprised of debt securities
and investment grade preferred shares. Fluctuations in value are generally
attributed to changes in interest rates, movements in market credit
spreads and shifts in the interest rate curve.
Table 9 – Comprehensive Income
($ thousands)
Net Income
Other Comprehensive Income (Loss)
Available-for-sale securities
Gains from change in fair value, net of tax
Reclassification to net income, net of tax
Derivatives designated as cash flow hedges
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
2017
2016
Change from 2016
$
229,655
$
189,334
$
40,321
4,021
20,799
(485)
2,158
3,536
22,957
(22,089)
(8,157)
(3,321)
113
(25,410)
(8,044)
(21,874)
14,913
(16,778)
(2,643)
(19,421)
(13,932)
(3,434)
(17,366)
(36,787)
$
207,781
$
204,247
$
3,534
CASH AND SECURITIES
Cash, securities and securities purchased under resale agreements
amounted to $2,709 million at October 31, 2017, compared to $2,792
million last year. The cash and securities portfolio is mainly comprised of
high-quality debt instruments and investment grade preferred shares that
are not held for trading purposes and, where applicable, are typically held
to maturity. Fluctuations in the value of securities are generally attributed
to changes in interest rates, movements in market credit spreads, shifts
in the interest rate curve, as well as volatility in equity markets. Total net
unrealized losses before tax recorded on the balance sheet at October
31, 2017 were $39.9 million, compared to $44.7 million last year. Net
unrealized gains or losses are reflected in the following table.
Table 10 – Unrealized Gains (Losses) on Available-for-sale Cash and Securities
($ thousands)
As at October 31, 2017
As at October 31, 2016
Amortized
Cost
Net
Unrealized
Gains (Losses)
Fair
Value
Amortized
Cost
Net
Unrealized
Gains (Losses)
Fair
Value
Deposits with Regulated Financial Institutions
$ 503,913 $ (18)
$ 503,895 $ 890,597 $ (81)
$ 890,516
Securities Issued or Guaranteed by
Canada
A province or municipality
Other Debt Securities
Preferred Shares
Total
1,327,541
(20,243)
1,307,298
1,142,651
147
1,142,798
443,510
(4,652)
438,858
291,814
133
291,947
306,671
1,750
308,421
153,126
1,522
154,648
149,159
(16,749)
132,410
165,606
(46,405)
119,201
$ 2,730,794 $ (39,912)
$ 2,690,882 $ 2,643,794 $ (44,684)
$ 2,599,110
34
CWB Financial Group 2017 Annual Report The decrease in unrealized losses on securities compared to 2016
primarily relates to the impact of improvements in market conditions
within the Canadian preferred share market, partially offset by the
impact of changes in interest rates on pricing within the debt securities
market. 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.
Net gains on securities were $0.7 million in 2017, compared to net
losses of $2.8 million last year. Based on the current composition of the
securities portfolio, net gains/losses on securities going forward are not
expected to have a material impact on non-interest income, although
debt security and preferred share market conditions are inherently
unpredictable in the short-term.
See Table 28 – Valuation of Financial Instruments of this MD&A for
additional information on significant financial assets and liabilities
reported at fair value.
The balance and mix of cash and securities are managed as part of CWB’s
overall liquidity management process; additional information, including
management’s outlook for 2018, is included in the Liquidity Management
discussion of this MD&A.
LOANS
Highlights of 2017
• Profitable 6% loan growth, with strong execution of CWB’s
Balanced Growth strategy.
• Achieved further geographic diversification, with Ontario-based
loans representing 19% of total loans at year end, compared to
15% last year, and loans outside of Western Canada representing
23%, compared to 19% in 2016.
• Achieved further industry diversification, with very strong 12%
growth in general commercial loans, including 18% growth
outside of Alberta, primarily driven by the contributions of CWB
Maxium and CWB Franchise Finance.
• Very strong 16% growth in personal loans and mortgages,
including the contributions of CWB Optimum.
• Strong 11% growth outside of Alberta.
Table 11 – Outstanding Loans by Portfolio
($ millions)
General commercial loans
Personal loans and mortgages
Commercial mortgages
Real estate project loans
Equipment financing and leasing
Oil and gas production loans
Total Outstanding Loans
Total loans before the allowance for credit losses increased 6% to reach
$23,346 million at year end. Excluding CWB’s Alberta portfolio, where
growth has been constrained by the lagging impacts of the 2015 – 2016
regional recession, overall loan growth was 11% from last year.
Year-over-year growth by lending sector was consistent with CWB’s
Balanced Growth strategy. In dollar terms, growth was led by general
commercial loans ($663 million), which includes the contributions of CWB
Maxium and CWB Franchise Finance, followed closely by personal loans
and mortgages ($662 million), including sustained strong performance
within CWB Optimum.
Annual growth within the strategically targeted general commercial
category was very strong at 12% overall, and 18% outside of Alberta.
General commercial lending reflects activity across a broad range of
industries, such as manufacturing, construction, transportation, health
care, professional services, hospitality, and wholesale and retail trade.
Very strong performance within this category is consistent with CWB’s
Balanced Growth strategy, and reflects ongoing efforts to leverage
development of full-service relationships with business owners to support
CWB’s funding diversification objectives.
Change from 2016
2017
2016
$
%
$
6,307 $
5,644 $
663
12 %
4,726
4,064
662
4,267
4,189
78
4,030
4,236
(206)
3,892
3,711
181
124
221
(97)
16
2
(5)
5
(44)
$
23,346 $
22,065 $
1,281
6 %
Personal loans and mortgages include CWB’s broker-sourced residential
mortgage business, CWB Optimum, lending activity in banking branches,
and CWB’s participation in the National Housing Act Mortgage Backed
Security (NHA MBS) program. The gross amount of mortgages securitized
under the NHA MBS program was $381 million (2016 – $391 million).
Net of portfolio sales, total loans of $2,746 million within CWB Optimum
increased 20% ($463 million) from 2016. Mortgage application volumes
within CWB Optimum were elevated in the late spring and early summer
due to challenges faced by its largest direct competitor. As a result,
growth accelerated moderately early in the third quarter. However,
management tightened lending criteria and origination volumes were
maintained at levels consistent with CWB’s strategic growth objectives
and established risk appetite. Application volumes returned to more
normal levels through the later part of the fiscal year.
Management’s response to these events was supported by continuous
review of CWB’s three lines of defence framework and risk appetite
parameters. This ongoing work is undertaken to ensure vigilant risk
management and strong underwriting. During fiscal 2017, related efforts
in respect to residential mortgages were focused to ensure fulsome
oversight of all controls, including those that detect fraud, as well as
compliance with the changes to Guideline B-20.
CWB Financial Group 2017 Annual Report
35
Overall growth within CWB Optimum in fiscal 2017 was driven almost
exclusively by alternative mortgages secured via first mortgages carrying
a weighted average loan-to-value ratio at initiation of approximately
67%. The book value of alternative mortgages represented 94% of
CWB Optimum’s total portfolio at year end, compared to 93% in 2016.
At approximately 56% of the total, Ontario represents the largest
geographic exposure by province within CWB Optimum’s portfolio,
followed by Alberta at 18% and British Columbia at 16%. The average
size of CWB Optimum mortgages originated in 2017 was approximately
$341,000 and the average size of all mortgages outstanding at October
31, 2017 was approximately $286,000. Management remains committed
to the ongoing development of this business as it continues to produce
solid returns while maintaining an acceptable risk profile.
CWB maintained a proactive approach in managing its small portfolio of
oil and gas production loans over the past year, reducing the outstanding
balances by 44% ($97 million).
The mix of CWB’s portfolio (see Figure 2) shifted in a manner consistent
with CWB’s Balanced Growth strategy. Growth was strong in general
commercial loans and personal loans and mortgages, and resumed at
a moderate pace within equipment financing and leasing. The increase
in commercial mortgages was modest for a second consecutive year,
while both real estate project loans and oil and gas production lending
contracted as expected. In combination, these changes delivered
increased business diversification with lower concentrations in commercial
real estate and energy-related lending.
The balance of loans in equipment financing and leasing includes the
branch-based heavy equipment financing business and the $1,877 million
of small- and mid-ticket leases within National Leasing. Total loans in
this category were up 5% ($181 million) from last year. Growth was
primarily driven by the 8% increase within National Leasing, reflecting
its solid market position and coast-to-coast footprint. Overall growth of
equipment financing and leasing outside of Alberta was also 8%.
CWB maintained a stable presence in commercial mortgages, with a 2%
($78 million) increase from last year.
Real estate project loans contracted 5% ($206 million). This is consistent
with management's previously stated expectations, and reflects the
successful completion of development projects along with reduced new
activity within Alberta.
Figure 2 – Outstanding Loans by Portfolio
(October 31, 2016 in brackets)
27% (26%)
20% (18%)
General Commercial Loans
Personal Loans and Mortgages
The change in the mix of CWB’s portfolio based on the location of
security (see Figure 3) was also consistent with management’s Balanced
Growth strategy. British Columbia and Alberta represented 35% and
33%, respectively, of total loans at October 31, 2017, compared to
36% for each province in 2016. Ontario represented 19% of total loans
at the end of fiscal 2017, up from 15% last year. This material shift
primarily resulted from strong growth within CWB’s business lines that
have a national footprint, including CWB Maxium, CWB Optimum, CWB
Franchise Finance and National Leasing. Moderate growth in BC and
contraction within Alberta also contributed to the change in geographic
mix.
Oil & Gas Production
1% (1%)
Real Estate Project Loans
17% (19%)
18% (19%)
Commercial Mortgages
Equipment Financing
17% (17%)
36
CWB Financial Group 2017 Annual Report Outlook for Loans
CWB will continue to support high-quality borrowers operating
within targeted industry segments across Canada. Management
remains committed to delivering double-digit annual loan growth
whenever prudent, with a continued focus on secured loans that
offer an appropriate return and acceptable risk profile. Loan growth
accelerated in the second half of fiscal 2017 to a double-digit pace
outside of the provinces most affected by the 2015 – 2016 regional
recession, and management expects this trend to continue into
2018. Business opportunities within Alberta and Saskatchewan are
expected to gain momentum as these provincial economies continue
to recover.
impact on originations within CWB Optimum; however, the changes
may also result in increased renewals with existing borrowers, as well
as incremental lending opportunities within the alternative mortgage
space as all federally-regulated mortgage lenders are affected
by revisions to the guideline. Notwithstanding these somewhat
offsetting factors, management expects the growth rate for CWB
Optimum to more closely resemble overall growth across the rest
of the loan portfolio going forward. This includes the expected
moderating impact of changes to Guideline B-20, as well as CWB’s
overall risk appetite for Alt-A mortgages as a proportion of total
loans.
Overall growth in Canada’s domestic economy is expected to
continue at a moderate pace in 2018, and CWB’s pipeline of new
growth opportunities across all provinces continues to expand. In
addition to quality organic growth opportunities, the portfolio of
equipment finance, equipment leasing and healthcare assets to be
acquired on January 31, 2018, is expected to support continued
progress toward strategic objectives for geographic and industry
diversification, and provide CWB with valuable prospects to pursue
future growth. The balance of loans and leases to be acquired at
closing is expected to be approximately $900 million. In view of
the acquired portfolio’s relatively short duration, CWB is working to
quickly identify and execute on high-quality retention and renewal
opportunities consistent with management’s risk appetite. However,
some degree of portfolio run-off in respect to these assets is expected
over the medium term.
In respect to housing-related growth opportunities, revisions to OSFI’s
Guideline B-20 could serve to curtail market activity and reduce
the pace of home price increases across the country. In particular,
the 200 basis point qualifying stress test and limits on co-lending
arrangements could make it more difficult for certain prospective
buyers to qualify for uninsured mortgages, and have a negative
CWB does not expect changes to Guideline B-20 to have a material
impact on growth opportunities within its real estate project lending
portfolio. CWB expects to continue to identify opportunities to
finance well-capitalized developers on the basis of sound loan
structures and acceptable pre-sale/lease levels, especially within
British Columbia where real estate activity remains robust. Within
Greater Vancouver, demand and supply conditions remain tight
and home prices have held firm despite counter-cyclical measures
undertaken by both the federal and provincial governments. That
said, the recent change in British Columbia’s provincial government
has resulted in greater uncertainty related to the future of energy
infrastructure development opportunities within the province, and
related economic activity.
Potential risks that could have a material adverse impact on loan
growth expectations include a significant and sustained deterioration
in Canadian residential real estate prices, material changes to
standing free trade agreements which could affect the outlook
for Canadian exports, material weakening of energy and other
commodity prices compared to recent levels, a material contraction
of economic growth in the U.S., or a significant disruption in major
global economies.
Diversification of Portfolio
Figure 3 – Geographical Distribution of Loans based on Location of Security
(October 31, 2016 in brackets)
35% (36%)
British Columbia
33% (36%)
Alberta
Manitoba
Other
Saskatchewan
3% (3%)
4% (4%)
6% (6%)
Ontario
19% (15%)
CWB Financial Group 2017 Annual Report
37
Table 12 – Total Advances Based on Industry Sector(1)
(% at October 31)
Construction
Consumer loans and residential mortgages
Real estate operations
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
2017
2016
22 %
21 %
20
19
7
6
5
4
3
2
2
2
2
2
2
1
1
18
21
7
6
5
4
3
3
2
2
2
2
2
1
1
100 %
100 %
(1) Table is based on the North American Industry Classification System (NAICS) codes.
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, including a mix of business and personal loans, with further
geographic and industry diversification targeted through CWB’s Balanced
Growth strategy. Certain reporting structures were realigned in 2017
to better address the needs of targeted business owner clients. The
realignment created a new ‘centre of excellence’ for commercial real
estate and specialized lending, and integrated within National Leasing
the activities of CWB’s specialized equipment financing underwriting
centre. CWB’s new ‘centre of excellence’ will specialize in working with
commercial real estate, corporate lending and CWB Franchise Finance
clients with similar needs, often related to large, complex, syndicated
lending opportunities. The new structure is also expected to permit
regional leaders to focus on growth of targeted general commercial
relationships and deliver on CWB’s unique client value proposition.
Financing of standard industrial equipment will continue to be primarily
sourced by specialized lenders within branches or through stand-alone
equipment financing centres, while small- and mid-sized leases will
continue to be offered across Canada through National Leasing. CWB
Maxium operates across the country, with a primary focus in Ontario.
CWB Optimum maintains centralized administration based in Edmonton,
with a regional underwriting centre located in Ontario, and sources
residential mortgages through an established network of mortgage
brokers throughout the country. Oil and gas production lending is
conducted by specialists located in Calgary.
Outlook for Diversification of Portfolio
Loan growth accelerated in the second half of fiscal 2017 to a
double-digit pace outside of the provinces most affected by the
2015 – 2016 regional recession, and management expects this trend
to continue into 2018. Business opportunities within Alberta and
Saskatchewan are expected to gain momentum as these provincial
economies continue to recover.
CWB’s Balanced Growth strategy will continue to target further
geographic and industry diversification through higher relative
growth outside of Western Canada, concentrated in areas such as
equipment financing and leasing, general commercial loans and
personal loans and mortgages, compared to real estate project
loans and commercial mortgages. The 2016 acquisitions of CWB
Maxium and CWB Franchise Finance contributed meaningfully to
progress against these objectives in 2017, and the assets to be
acquired on January 31, 2018 will continue this positive trend.
With approximately three quarters of the newly acquired portfolio
originated outside of Western Canada, this acquisition will move
CWB toward its strategic goal for Ontario exposures to represent a
third of the overall portfolio. From an industry perspective, the
portfolio is primarily comprised of assets concentrated within
the transportation, construction and healthcare industries, with
yields and security types generally comparable to CWB’s existing
exposures within these industries. Related prospecting activity will
primarily leverage CWB’s well-established specialization in equipment
financing and leasing, along with the healthcare specialization within
CWB Maxium. Contributions to renewal and retention efforts related
to the acquired portfolio will be made on a collaborative basis within
National Leasing, including a specialized underwriting centre which
partners with select equipment brokers and the finance companies
of original equipment manufacturers, and CWB’s branch-based
standard industrial equipment lending operations.
Growth of personal loans and mortgages is expected to be moderate
with expected growth in CWB Optimum more closely resembling
the rest of the loan portfolio. Expectations for moderate growth,
with the potential for further incremental contraction, of real estate
project loans reflects the combined impact of this portfolio’s relatively
short duration and management’s strategic focus to grow other
portfolios more quickly. Within the parameters of its established risk
38
CWB Financial Group 2017 Annual Report 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. Management
will continue with initiatives to develop and/or acquire sources of
high-quality growth that are complementary to the geographic and
industry diversification objectives defined within CWB’s Balanced
Growth strategy.
CREDIT QUALITY
Highlights of 2017
• Total provision for credit losses of $51.0 million represented
23 basis points of average loans, consistent with CWB’s
traditional range of 18 – 23 basis points, and slightly better than
management’s previously stated expectation for the full-year
provision to fall in a range between 25 and 35 basis points.
• Gross impaired loans represented 0.72% of total loans, compared
to 0.58% last year.
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, the dollar level of gross impaired loans at
October 31, 2017 totaled $168.3 million, up from $127.2 million last
year. This amount represented 0.72% of total loans, compared to 0.58%
at the end of 2016. Gross impaired loans within Alberta of $105.8 million
accounted for 63% of total impairments at year end, compared to 51%
last year. Gross impaired loans within the general commercial category
amounted to $58.2 million, compared to $18.4 million at the end of
2016. Of the total impairments in this category, approximately 72%
is comprised of Alberta exposures, compared to 81% last year. Gross
Table 13 – Change in Gross Impaired Loans
($ thousands)
• Growth in the collective allowance of 8% moderately exceeded
the level of overall loan growth.
• Total allowance for credit losses as a percentage of gross impaired
loans (coverage ratio) was 81%, compared to 100% in 2016.
impaired loans from CWB’s equipment financing and leasing exposures
were $50.8 million compared to $40.2 million last year. Approximately
50% of the gross impaired balance in this category is comprised of
Alberta exposures, relatively unchanged from last year. The ten largest
accounts classified as impaired, measured by dollars outstanding,
represented 42% of total gross impaired loans at year end, down from
48%. New formations of impaired loans totaled $180.2 million, up 10%
from last year.
The overall higher balance of impaired loans as a percentage of total
loans, with an increasing proportion of impairments located in Alberta,
is consistent with management’s expectations and reflects the lagging
impacts of the 2015 – 2016 regional recession. Gross impairments
outside of Alberta represented 0.40% of non-Alberta loans at October
31, 2017, down from 0.44% last year.
Gross impaired loans, beginning of period
$ 127,212
$
94,905
$
32,307
34 %
New formations
180,170
164,386
15,784
10
2017
2016
$
%
Change from 2016
Reductions, impaired accounts paid down or returned to performing status
(92,027)
(47,094)
(61,619)
(70,460)
(30,408)
49
23,366
(33)
$ 168,261
$
127,212
$
41,049
32 %
Write-offs
Total, end of period(1)
Balance of the ten largest impaired accounts
Total number of accounts classified as impaired(2)
$ 70,935
$
61,397
$
9,538
16 %
237
232
5
2
Total number of accounts classified as impaired under $1 million(2)
Gross impaired loans as a percentage of total loans(3)
206
0.72 %
217
0.58 %
(11)
(5)
14 bp(4)
(1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $1,983 (2016 – $3,876). 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.
(3) Total loans do not include an allocation for credit losses or deferred revenue and premiums.
(4) bp – basis points.
CWB Financial Group 2017 Annual Report
39
The level of gross impaired loans fluctuates as loans become impaired
and are subsequently resolved, and does not directly reflect the dollar
value of expected write-offs given tangible security held in support of
lending exposures. The higher balance of gross impaired loans reflects
the increase in new formations, partially offset by the success of ongoing
realization efforts and work-out programs.
The overall loan portfolio is reviewed regularly with credit decisions
undertaken on a case-by-case basis to provide early identification of
possible adverse trends. Ongoing loan management processes include
assignment of experienced credit adjudicators to assist branches and
credit teams to proactively identify and address higher risk loans. Loans
that have become impaired are monitored closely by a specialized
team with regular reviews of each loan and its realization plan. Specific
allowances for expected write-offs are established through detailed
analyses of both the overall quality and marketability of security held
against each impaired account. Please see the Risk Management section
of this MD&A for further information.
Outlook for Impaired Loans
Overall credit quality is expected to reflect CWB’s secured lending
business model, disciplined underwriting practices and proactive
loan management. Gross impaired loans within CWB Optimum
may increase in the event of a material correction of residential
home prices. Partially due to the lagging impacts of the regional
2015 – 2016 recession, periodic increases in the balance of impaired
loans may occur across the portfolio; however, the trend in balances
of loans classified as past due but not impaired improved late in
fiscal 2017, supporting a more positive outlook. Material credit
impacts related to the small balance of remaining oil and gas loans
are not expected. Loss rates on current and future impaired loans
are expected to be low, reflecting the combined positive impact
of CWB’s disciplined underwriting, secured lending practices, and
proactive account management. This expectation is consistent with
CWB’s prior experience, where write-offs have typically been low as a
percentage of impairments.
Management remains confident in the strength, diversity and
underwriting structure of the overall loan portfolio. CWB continues
to carefully monitor all lending exposures for signs of weakness.
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 $16.6 million at year end, compared to $16.3 million a year
earlier. Estimates are established through detailed analysis of both the
overall quality and ultimate marketability of the security held against
Table 14 – Allowance for Credit Losses
($ thousands)
each 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 the
following table.
Specific Allowance
Equipment financing and leasing
General commercial loans
Real estate project loans
Oil and gas production loans
Commercial mortgages
Personal loans and mortgages
Collective Allowance
Total
Represented by:
2017
Opening
Balance
Provision
for Credit
Losses
Write-Offs,
net of
Recoveries(1)
2017
Ending
Balance
$ 9,563 $ 22,830 $
(22,261)
$ 10,132
1,370
16,589
(14,888)
3,071
2,719
-
(699)
2,020
2,143
1,868
(3,211)
800
270
385
(270)
385
204
959
(954)
209
16,269
110,943
42,631
8,355
(42,283)
-
16,617
119,298
$ 127,212 $ 50,986 $
(42,283)
$ 135,915
Loans
Committed but undrawn credit exposures and letters of credit(2)
Total
$ 116,329
19,586
$ 135,915
(1) Recoveries in 2017 totalled $4,811.
(2) The collective allowance for credit losses related to committed but undrawn credit exposures and letters of credit is included in Other Liabilities on the consolidated balance sheets.
Allowances for credit losses are maintained to absorb both identified
and unidentified losses in the loan portfolio and, at October 31, 2017,
consisted of the above-mentioned $16.6 million (2016 – $16.3 million)
of specific allowances and $119.3 million (2016 – $110.9 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 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.
40
CWB Financial Group 2017 Annual Report Growth in the collective allowance of 8% moderately exceeded the
level of overall loan growth. The total allowance for credit losses as a
percentage of gross impaired loans (coverage ratio) was 81%, compared
to 100% in 2016.
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 in relation to loans within Alberta may remain
elevated. 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 2017 provision for credit losses of $51.0 million was down 36% from
$79.1 million last year. The 2017 provision represented 23 basis points
of average loans, consistent with CWB’s traditional range of 18 – 23
basis points, and slightly better than management's previously stated
expectation for the full-year provision to fall in a range between 25 and
35 basis points. This year’s provision was 15 basis points lower than
last year when the provision was abnormally high due to the impact of
energy-related losses. Net new specific provisions represented 19 basis
points of average loans, compared to 32 basis points in 2016. CWB
has a long history of strong credit quality and low loan losses, both
of which compare very favourably to the Canadian banking industry.
Macroeconomic and other external factors that may impact core
geographic regions and/or industry sectors in which CWB customers
operate are continually analyzed.
Table 15 – Provision for Credit Losses
($ thousands)
Provision for credit losses(1)
0.23 %
0.38 %
0.17%
0.15 %
0.19 %
2017
2016
2015
2014
2013
Net new specific provisions (net of recoveries)(2)
0.19
0.32
0.21
0.34
0.12
0.06
0.07
0.13
0.09
0.16
$
119,298
$
110,943
$
99,613
$
90,075
$
76,217
81 %
100 %
122 %
154 %
134 %
Write-offs(1)
Collective allowance
Coverage ratio(3)
(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, expectations for the credit performance of assets to be
acquired on January 31, 2018, and the adequacy of the collective
allowance for credit losses, the fiscal 2018 provision for credit
losses as a percentage of average loans is expected to be relatively
consistent with 2017. CWB will adopt IFRS 9 – Financial Instruments,
the new accounting standard for loan losses and impairment, and
begin to calculate the provision for credit losses using the expected
credit loss method on November 1, 2018. Related detail is provided
under Future Changes in Accounting Policies within this MD&A.
Potential risks that could have a material adverse impact on
expectations for the provision for credit losses include a significant
and sustained deterioration in Canadian residential real estate
prices, material changes to standing free trade agreements which
could affect the outlook for Canadian exports, material weakening
of energy and other commodity prices compared to recent levels, a
material contraction of economic growth in the U.S., or a significant
disruption in major global economies.
CWB Financial Group 2017 Annual Report
41
DEPOSITS AND FUNDING
Highlights of 2017
• Strong execution against CWB’s funding diversification strategy.
• Average balances of branch-raised deposits increased 7%.
• Established a new record for annual senior deposit note issuance
in capital markets, with $950 million raised across three successful
transactions, increasing capital markets deposits to 10% of the
total (2016 – 9%).
• The appointment of a successor trustee for CWT’s exempt market
securities business resulted in the transfer of approximately $71.3
million of branch-raised deposits during the fourth quarter of
2017.
•
Increased the use of cost effective securitization funding through
the addition of a second securitization funding partner, continued
participation in the National Housing Act Mortgage Backed
Securities (NHA MBS) program, and inaugural participation in the
Canada Mortgage Bond (CMB) program.
• Branch-raised deposits of $11,816 million increased 2%, with the
balance of lower-cost demand and notice deposits relatively stable
compared to last year.
• Branch-raised deposits comprised 54% of total deposits,
compared to 55% in 2016.
• Broker deposits were unchanged at 36% of total deposits, with
the average balance for the full year down slightly from 2016.
Table 16 – Deposits
($ thousands)
Demand
Notice
Term
2017
Total
Personal
$ 37,984
$ 3,699,356
$ 9,657,222
$ 13,394,562
Business and government
791,358
3,112,419
2,440,643
6,344,420
Capital markets
Total Deposits
% of Total
-
-
2,164,000
2,164,000
$ 829,342
$ 6,811,775
$ 14,261,865
$ 21,902,982
4 % 31 % 65 % 100 %
Demand
Notice
Term
2016
Total
Personal
$ 34,681
$ 3,866,441
$ 9,322,580
$ 13,223,702
Business and government
761,523
3,031,090
2,317,038
6,109,651
Capital markets
Total Deposits
% of Total
-
-
1,861,200
1,861,200
$ 796,204
$ 6,897,531
$ 13,500,818
$ 21,194,553
4 % 32 % 64 % 100 %
% of
Total
61 %
29
10
100 %
% of
Total
62 %
29
9
100 %
Total deposits of $21,903 million increased 3% ($708 million) from last
year, reflecting 7% ($538 million) growth in business and government
deposits, 1% ($171 million) increase in personal deposits, which include
those issued through the deposit broker network, and 16% ($303
million) growth in capital markets deposits outstanding.
Table 17 – Deposits by Source
(as a percentage of total deposits at October 31, 2017)
Branches
Deposit brokers
Capital markets
Total
2017
2016
54 %
36
10
55 %
36
9
100 %
100 %
References to branch-raised deposits within this MD&A include all
deposits generated through the branch network, as well as certain
deposits raised via CWT, Motive Financial and Valiant Trust’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. 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.
The appointment of a successor trustee for CWT’s exempt market
securities business resulted in the transfer of approximately $71.3 million
of branch-raised deposits during the fourth quarter of 2017.
CWB rebranded its online bank, Motive Financial (Motive), during fiscal
2017 to position this offering as an effective funding channel through a
renewed focus to create valuable savings opportunities for clients across
a broad geographic footprint. Motive offers various deposit products to
customers in all provinces and territories except Quebec. Client deposits
in Motive at October 31, 2017 totaled $311 million, down from $324
million last year.
42
CWB Financial Group 2017 Annual Report The fixed-term deposit franchises of CWT and Valiant Trust provide
additional channels for CWB to raise insured deposits.
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).
Total branch-raised deposits were up 2% in 2017, with the balance of
lower-cost demand and notice deposits stable from last year. Of note,
the average balance of branch-raised deposits was up 7% compared
to 2016, including the impact of $71 million of branch-raised deposits
transferred to the successor trustee for CWT’s accounts holding exempt
market securities. CWB delivered strong execution against its funding
diversification strategy. This included a new record for annual issuance
of senior deposit notes in capital markets in 2017, with $950 million
raised across three successful transactions. As a result, the proportion
of deposits raised through the capital markets increased to 10% of
total funding at year end, compared to 9% in the prior year. CWB also
increased the use of securitization funding through the addition of a
second securitization funding partner, continued participation in the
NHA MBS program, and initial participation in the CMB program during
the fourth quarter. Fiscal 2017 funding from the securitization of leases,
loans and mortgages was $739 million (2016 – $734 million), including
$40 million from the participation in the CMB program. Demand and
notice deposits comprised 35% of total deposits at year end, down from
36% in 2016. Total branch-raised deposits accounted for 54% of total
deposits, compared to 55% last year.
Other deposits are primarily sourced through a deposit broker network.
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. Reliance on broker deposits in 2017 was
unchanged from the prior year at 36% of the total. Of note, CWB raises
only fixed-term deposits through this funding channel, with terms to
maturity between one and five years, and does not offer a High Interest
Savings Account (HISA) product. Pricing within the broker channel was
disrupted late in the second quarter of 2017 as the most active issuer
came under pressure. This disruption had no impact on CWB’s ability to
raise broker deposits, and the pricing impact proved to be temporary
from CWB’s perspective.
Outlook for Deposits and Funding
CWB’s strategic focus to grow and diversify funding sources will
continue. This includes a goal to increase relationship-based branch-
raised deposits, with particular emphasis on demand and notice
deposits. This funding segment is typically lower cost and provides
associated transactional fee income. Continued growth in the
proportion of branch-raised funding is also a key strategic objective
because it reflects success in strengthening targeted full-service client
relationships. The capabilities of CWB’s new core banking system
supports various growth initiatives related to branch-raised funding
over the medium term. Continued development of new and more
effective products, along with an ongoing strategic focus on business
transformation and process improvement, are expected to enhance
CWB’s client experience and strengthen CWB’s competitive position.
CWB’s growing market presence to support strong performance
against these goals will include further development of digital
banking capabilities and may also include periodic expansion of full-
service branches.
Continued diversification of funding sources is also expected to
include increased utilization of both debt capital markets and CWB’s
growing securitization capabilities. CWB commenced securitization
of residential mortgages in 2016 through the National Housing
Administration Mortgage Backed Security (NHA MBS) program, and
initiated participation in the Canada Mortgage Bonds (CMB) program
this year. Participation through both of these channels is expected to
increase over the medium–term.
OTHER ASSETS AND OTHER LIABILITIES
Other assets at October 31, 2017 totaled $509 million (2016 – $469
million). The amount of goodwill and intangible assets recorded on the
balance sheet at October 31, 2017 was $86 million (2016 – $85 million)
and $150 million (2016 – $149 million), respectively.
Other liabilities totalled $604 million at October 31, 2017 (2016 – $417
million). The higher balance of other liabilities relates to increased
accounts payable and accrued liabilities.
CWB Financial Group 2017 Annual Report
43
LIQUIDITY MANAGEMENT
Highlights of 2017
• Maintained a prudent liquidity position and conservative investment profile.
• Maintained compliance with OSFI’s Liquidity Adequacy Requirement (LAR) guideline.
A schedule outlining the consolidated securities portfolio at October 31,
2017 is provided in Note 5 to the consolidated financial statements. A
conservative liquid asset profile is maintained by ensuring:
• All investments are high quality and include government debt securities
(both canadian and U.S. Government debt securities), short-term
money market instruments, and other marketable securities;
CWB’s liquidity management is a comprehensive process that includes,
but is not limited to:
• Maintaining a pool of high-quality liquid assets;
• Comprehensive liquidity scenario stress testing;
• Monitoring the quality of the cash and securities portfolio;
• Specific investment criteria and procedures are in place;
• Monitoring liability diversification and maturity profile;
• Regular review, monitoring and approval of the structural market risk
policy is completed by cwb’s asset and liability committee (alco); and,
• Quarterly reports on the composition of the portfolio are provided to
the board risk committee. The Board, or the Board Risk Committee,
annually reviews and approves structural interest rate and liquidity risk
policies and risk appetite statements.
Table 18 – Liquid Assets
($ thousands)
Cash and non-interest bearing deposits with financial institutions
Deposits with regulated financial institutions
Cheques and other items in transit
Total Cash Resources
• Monitoring deposit behaviour;
• Maintaining access to deposit and capital market funding sources; and,
• Monitoring microeconomic and macroeconomic factors and early
warning indicators.
2017
2016
Change from
2016
$ 17,491
$ 11,490
$ 6,001
503,895
890,516
(386,621)
410
18,050
(17,640)
521,796
920,056
(398,260)
Government of Canada, provincial and municipal debt, term to maturity 1 year or less
17,763
420,108
(402,345)
Government of Canada, provincial and municipal debt, term to maturity more than 1 year
1,728,393
1,014,637
713,756
Other debt securities
Securities (sold) purchased under (repurchase) resale agreements
NHA mortgage-backed securities(1)
293,561
141,094
152,467
(58,358)
163,318
(221,676)
262,213
391,165
(128,952)
Total Securities (Sold) Purchased Under (Repurchase) Resale Agreements and Marketable Securities
2,243,572
2,130,322
113,250
Total High-quality Liquid Assets
Total Assets
High-quality Liquid Assets as a Percentage of Total Assets
Total-quality Deposit Liabilities
High-quality Liquid Assets as a Percentage of Total Deposit Liabilities
$ 2,765,368
$ 2,659,213
$ (285,010)
$ 26,447,453
$ 25,222,549
10 %
12 %
$ 21,902,982
$ 21,194,553
13 %
14 %
$ 1,224,904
(200) bp(2)
$ 708,429
(100) bp(2)
Includes securitized mortgages that were not transferred to third parties. These are reported in loans on the consolidated balance sheets at ammortized cost.
(1)
(2) bp - basis points.
Liquid assets, as defined by OSFI, comprised of cash, deposits, securities
purchased (sold) under repurchase agreements and marketable debt
securities totalled $2,765 million at October 31, 2017 (2016 – $3,050).
High-quality liquid assets represented 10% (2016 – 12%) of total assets
and 13% (2016 – 14%) of total deposit liabilities at year end.
CWB’s liquidity management is based on an internal stressed cash flow
model, with the level of cash and securities driven primarily by the term
structure of both assets and liabilities, and the liquidity structure of the
liabilities. The composition of total high-quality liquid assets supports
ongoing compliance with the OSFI Liquidity Adequacy Requirements
guideline. Key changes in the composition of liquid assets at
October 31, 2017 compared to the prior year generally reflect increased
duration of CWB’s holdings, including:
• Maturities within one year comprising 33% (2016 – 53%);
• Government of Canada, provincial and municipal debt securities and
unencumbered NHA MBS comprising 73% (2016 – 60%);
• Deposits with regulated financial institutions comprising 19% (2016 –
29%); and,
• Other marketable securities comprising 11% (2016 – 5%).
44
CWB Financial Group 2017 Annual Report Additional sources of liquidity and funding in 2017 included $739
million (2016 – $734 million) from the securitization of leases, loans and
mortgages, including $381 million (2016 – $391 million) of residential
mortgages which represent utilization of CWB’s NHA MBS allocation
and $40 million from participation in the CMB program (2016 – nil).
The primary source of incremental new funding was branch-raised
deposits supported by the issuance of non-redeemable personal fixed
term deposits with maturities from one to five years through the broker
deposit market. A summary of all outstanding deposits by contractual
maturity date is presented in the two following tables.
Table 19 – Deposit Maturities Within One Year
($ millions)
October 31, 2017
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Cumulative
Within 1 Year
$
829 $
- $
- $ 829
6,812
-
-
6,812
532
921
5,070
6,523
$
8,173 $
921 $
5,070 $ 14,164
October 31, 2016 Total
$
8,337 $
1,408 $
4,116 $ 13,861
Table 20 – Total Deposit Maturities
($ millions)
October 31, 2017
Demand deposits
Notice deposits
Within
1 Year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5
Years
More than
5 Years
Total
$ 829 $
- $
- $
- $
- $
- $ 829
6,812
-
-
-
-
-
6,812
Deposits payable on a fixed date
6,523
3,098
1,870
1,833
938
-
14,262
Total
$ 14,164 $ 3,098 $
1,870 $ 1,833 $ 938 $
- $ 21,903
October 31, 2016 Total
$ 13,861 $ 3,515 $
1,554 $ 1,008 $ 1,257 $
- $ 21,195
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
notional debt securities related to the securitization of loans, leases and
mortgages to third parties (refer to Note 9 and 17 of the consolidated
financial statements for additional information). A summary of the
subordinated debentures outstanding is presented in the following table.
Interest Rate
3.463%(1)
5.571%(2)
Total
Maturity Date
December 17, 2024
March 21, 2022
Earliest Date
Redeemable
by CWB at Par
As at
October 31
2017
As at
October 31
2016
December 17, 2019 $ 250,000 $ 250,000
75,000
March 22, 2017
-
$ 250,000 $ 325,000
(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 had a 15-year term with a fixed interest rate for the first 10 years. Thereafter, the interest rate would have reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 180 basis
points.
Outlook for Liquidity Management
Internal methodologies for managing liquidity risk are continuously
refined. 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 utilizes
comprehensive stress testing to manage, measure and monitor
liquidity risk to ensure a prudent approach. CWB will maintain
prudent liquidity levels in 2018 while maintaining compliance with
the OSFI Liquidity Adequacy Requirements guideline.
CWB Financial Group 2017 Annual Report
45
CAPITAL MANAGEMENT
Highlights of 2017
• Very strong Basel III regulatory capital ratios under the
• Cash dividends of $0.93 per share paid to common shareholders,
Standardized approach for calculating risk-weighted assets of
9.5% common equity Tier 1 (CET1), 10.8% Tier 1, and 12.5%
total capital.
• Redemption of all $105 million CWB Capital Trust Capital
Securities Series 1 (WesTS) in December 2016, which did not
qualify as non-viability contingent capital (NVCC) under the Basel
III regulatory capital requirements.
• Redemption of all $75 million of outstanding 5.571%
subordinated debentures in March 2017, which did not qualify as
NVCC under the Basel III regulatory capital requirements.
up 1%, resulting in CWB’s 25th consecutive annual dividend
increase.
• Very conservative Basel III leverage ratio of 8.3%, compared to the
regulatory minimum of 3.0%, where a higher ratio indicates lower
leverage.
• A normal course issuer bid (NCIB) authorizing CWB to purchase
for cancellation prior to September 30, 2018, up to 1,767,000
common shares, representing approximately 2% of the issued
and outstanding common shares, was approved by OSFI and the
Toronto Stock Exchange.
Subsequent Highlights
• On December 6, 2017, the Board of Directors declared a cash
dividend of $0.24 per common share, unchanged from the prior
quarter and up 4% from the dividend declared in the same period
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.
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 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 19 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 www.cwb.com/investor_relations.
46
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 Advanced Internal Ratings Based
(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
2017. A normal course issuer bid (NCIB) authorizing CWB to purchase
for cancellation, prior to September 30, 2018, up to 1,767,000 common
shares, representing approximately 2% of the issued and outstanding
common shares, has been approved by OSFI and the Toronto Stock
Exchange. No shares have been purchased through the NCIB.
CWB Financial Group 2017 Annual Report Table 22 – Capital Structure and Basel III Regulatory Ratios at Year End
($ thousands)
Regulatory Capital, Net of Deductions
Common equity Tier 1
Tier 1
Total
Capital Ratios
Common equity Tier 1
Tier 1
Total
Leverage ratio
2017
2016
Change from
2016
$
2,009,530
$
1,863,264
$
146,266
2,274,727
2,644,071
2,233,364
2,669,334
41,363
(25,263)
9.5 %
9.2 %
30 bp
10.8
12.5
8.3
11.0
13.1
8.6
(20)
(60)
(30)
The increase of 30 basis points in CWB’s CET1 capital ratio from last
year was primarily driven by strong growth of retained earnings. On
December 31, 2016, CWB redeemed both the $105 million senior
deposit note held by CWB Capital Trust and all outstanding CWB Capital
Trust Capital Securities Series 1 (WesTS), which did not qualify as non-
viability contingent capital (NVCC) under the Basel III regulatory capital
requirements. The redemption resulted in a $105 million reduction in
CWB’s Tier 1 regulatory capital and reduced both the Tier 1 and Total
capital ratios by approximately 50 basis points. CWB redeemed all $75
million outstanding 5.571% non-NVCC subordinated debentures on
March 22, 2017. This redemption reduced the Total capital ratio by
approximately 40 basis points. At 8.3%, the Basel III leverage ratio
remains very conservative.
Table 23 – Regulatory Capital
($ thousands)
Common equity Tier 1 capital instruments and reserves
Directly issued qualifying common share capital plus related share-based payment reserve
$
756,864
$
749,653
As at
October 31
2017
As at
October 31
2016
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)
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
1,488,634
1,354,966
(29,174)
(32,710)
2,216,324
(206,794)
2,071,909
(208,645)
2,009,530
1,863,264
265,000
265,000
-
105,000
197
100
265,197
370,100
2,274,727
2,233,364
250,000
325,000
46
27
119,298
110,943
369,344
435,970
$
2,644,071
$
2,669,334
(1) CET1 deductions include goodwill and intangible assets, net of related tax.
(2) The 2017 inclusion of non-qualifying capital instruments in regulatory capital under Basel III is capped at 50% (2016 – 60%) of the balance of non-common equity instruments outstanding at January 31, 2013. At October 31, 2017
and 2016, no outstanding subordinated debentures were excluded from total regulatory capital. At October 31, 2016 there was no exclusion from Tier 1 regulatory capital related to the WesTS (disclosed in deposits).
CWB Financial Group 2017 Annual Report
47
Table 24 – Risk-weighted Assets
($ thousands)
Corporate
Sovereign
Bank
Retail residential mortgages
Other retail
Small business entities
Excluding small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
As at October 31, 2017
As at October 31, 2016
Table 25 – Risk-weighting Category
($ thousands)
As at October 31, 2017
Cash,
Securities
and Resale
Agreements
Loans
Other
Items
Total
Risk-
Weighted
Assets
$
140,274 $ 14,893,908 $
- $ 15,034,182 $ 14,974,569
1,907,523
25,099
-
1,932,622
5,020
510,004
11,099
-
521,103
113,100
4,477
4,674,539
-
4,679,016
1,378,941
-
2,393,151
-
2,393,151
1,832,986
-
173,684
-
173,684
117,609
132,990
-
-
132,990
132,990
-
253,036
-
253,036
246,923
-
-
95,200
95,200
1,189,998
-
123,293
-
123,293
646,049
-
197,437
466,635
664,072
443,979
$
$
2,695,268 $ 22,745,246 $
561,835 $ 26,002,349 $ 21,082,164
2,757,791 $ 21,677,476 $
544,937 $ 24,980,204 $ 20,361,583
0%
20%
35%
50%
75%
100%
As at October 31, 2017
150% and
greater
Balance
Weighted
Corporate
Sovereign
Bank
$
21,690 $ 96,057 $
- $ 15,124 $
- $ 14,808,343 $
92,968 $ 15,034,182 $ 14,974,569
1,907,523
25,099
-
-
-
-
-
1,932,622
5,020
-
510,004
-
-
-
11,099
-
521,103
113,100
Retail residential mortgages
796,162
-
3,846,024
-
15,990
20,840
-
4,679,016
1,378,941
Other retail
Small business entities
9,103
1,084
-
-
2,234,395
131,760
16,809
2,393,151
1,832,986
Excluding small
business entities
15,968
1,283
-
-
156,396
1
36
173,684
117,609
Equity
-
-
-
-
-
132,990
-
132,990
132,990
Undrawn commitments
-
-
-
-
25,637
226,806
593
253,036
246,923
Operational risk
Securitization risk
Other
-
-
-
-
-
-
95,200
95,200
1,189,998
-
-
-
-
-
77,836
45,457
123,293
646,049
254,971
16,416
-
-
45,055
310,347
37,283
664,072
443,979
As at October 31, 2017
3,005,417 $ 649,943 $ 3,846,024 $ 15,124 $ 2,477,473 $ 15,720,022 $ 288,346 $ 26,002,349 $ 21,082,164
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
48
CWB Financial Group 2017 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 continued execution of
CWB’s Balanced Growth strategy and the anticipated achievement
of CWB’s medium-term performance target for a strong common
equity Tier 1 ratio. Management expects to deploy approximately 30
basis points of CET1 capital to close the acquisition of approximately
$900 million of equipment loans and leases, and general commercial
lending assets on January 31, 2018. With a very conservative Basel III
leverage ratio of 8.3% at October 31, 2017, CWB is not constrained
by OSFI’s requirement for banks to maintain a minimum leverage
ratio of 3%.
Based on the results of stress tests simulating severe economic
conditions across CWB’s geographic footprint over a multi-year time
frame, including consideration for the impact of a severe housing
market correction, management is confident CWB will continue to
deliver positive earnings for shareholders while maintaining financial
stability and a strong capital position. Stress test assumptions include
severe credit losses, a persistent low interest rate environment and
significantly slower loan growth to reflect lower assumed levels of
economic activity, as well as increased competition for deposits and
much higher levels of gross impaired loans that could combine to
result in significant compression of net interest margin.
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 run-off 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 support
for ongoing organic growth, potential strategic acquisitions and
common share dividend increases. Management may also choose to
activate CWB’s NCIB in fiscal 2018 should appropriate circumstances
become apparent.
AIRB transition plan
CWB’s project continues in support of an application to OSFI for
transition to the AIRB methodology for capital and risk management,
including an anticipated three-year time frame ending in fiscal 2019.
The AIRB approach will put CWB on more equal footing with its
competition. It will add risk sensitivity to CWB’s framework for capital
management, increase risk quantification processes, improve risk-
based pricing capabilities and economic capital estimations, improve
CWB’s stress testing capabilities and enhance CWB’s ability to comply
with new accounting standards and ICAAP reporting requirements.
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 and
testing, deployment, operationalization and use test; model
validation; implementation of risk-weighted asset engine and capital
reporting tool; and, submission of final application to OSFI.
AIRB models have now been developed for CWB Optimum, National
Leasing, branch-based residential mortgages, small and medium-
sized enterprises, small business entities and commercial real estate
(commercial mortgages and real estate project loans). Models
for CWB Optimum, National Leasing, branch-based residential
mortgages were operationalized in 2017, with the remaining models
targeted for operationalization in the first quarter of 2018.
Work continues toward development of an enhanced enterprise
data warehouse to serve as the repository for required data. Model
validation and continuous improvement has commenced. Further
development of CWB’s risk function, including: three lines of defence
enhancement; stress testing capabilities; and, economic capital
estimation are also underway.
Progress on development of revised capital standards by the Basel
Committee for Banking Supervision has slowed, and a “made in
Canada” regulatory capital framework, including changes to the
Standardized approach and output floors for AIRB models, is under
consideration by OSFI. CWB’s quantitative impact estimates based
on reasonable assumptions related to a potential “made in Canada”
version of the “new Standardized” approach are manageable.
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, securities sold under
repurchase agreements, 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 Accounting Policies 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.
CWB Financial Group 2017 Annual Report
49
Derivative Financial Instruments
More detailed information on the nature of derivative financial
instruments is shown in Note 12 to the consolidated financial statements.
The notional amounts of derivative financial instruments are not reflected
on the consolidated balance sheets.
Table 26 – Derivative Financial Instruments
($ thousands)
Notional Amounts
Interest rate contracts designated as accounting hedges(1)
Foreign exchange contracts(2)
Equity swaps designated as accounting hedges(3)
Equity swaps not designated as accounting hedges(4)
Total
2017
2016
$ 3,553,000
$ 3,698,000
170,194
124,056
18,222
20,117
4,237
3,628
$ 3,745,653
$ 3,845,801
Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between November 2017 and August 2022.
(1)
(2) 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 2017 and May 2018.
(3) Equity swaps designated as hedges mature between June 2018 and June 2020. Equity swaps are used to reduce the earnings volatility from restricted share units linked to CWB’s common share price.
(4) Equity swaps not designated as hedges mature between December 2017 and June 2018. Equity swaps are used to reduce the earnings volatility from deferred share units linked to CWB’s common share price.
The active use of interest rate contracts remains an integral component
to manage the interest rate gap position. 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.
On July 1, 2016, CWB acquired the portfolio now referred to as CWB
Franchise Finance, along with key employees to support business growth.
The business provides financing across Canada to a diverse group of
established companies in the franchised hospitality and restaurant
industries.
On March 1, 2016, CWB acquired the non-securitized lending assets and
other net business assets, including employees, of CWB Maxium. Under
the terms of the purchase agreement, 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 period.
CWB paid the first contingent consideration instalment in cash in the first
quarter of fiscal 2017.
Both CWB Maxium and CWB Franchise Finance acquisitions
have delivered strong performance since closing, consistent with
management’s expectations.
STRATEGIC TRANSACTIONS
On October 30, 2017, CWB entered into an asset purchase agreement
to acquire for cash approximately $900 million of equipment loans
and leases, and general commercial lending assets. The loans and
leases to be acquired are fully aligned with CWB’s Balanced Growth
strategy, and the acquired assets will support continued progress
toward strategic objectives for industry and geographic diversification.
The portfolio is primarily comprised of assets concentrated within the
transportation, construction and healthcare industries, with exposures
primarily distributed outside of Western Canada. The transaction is
expected to close on January 31, 2018. CWB expects the transaction
to be immediately accretive to earnings per common share and return
on common shareholders’ equity, with positive contributions in fiscal
2018 to net interest margin and operating leverage. Management
expects the acquired portfolio to contribute at least $0.10 of adjusted
cash earnings per common share in both fiscal 2018 and 2019, while
contributing to a slight increase in the provision for credit losses as a
percentage of average loans. CWB’s common equity Tier 1 capital (CET1)
ratio will remain in a strong position upon closing, with approximately
30 basis points of existing CET1 capital to be deployed as part of the
acquisition. Management expects to fund the portfolio primarily through
its securitization facilities.
On August 16, 2017, CWB announced that CWT will focus its activities
within business lines that are most aligned with the strategic objectives
of CWB Financial Group, and will no longer offer self-directed account
services to holders of exempt market securities. CWT appointed a
successor trustee, effective September 30, 2017. As a result of the
agreement, CWB realized a pre-tax gain on sale of approximately $5.7
million this year and annual revenues from trust services are expected
to be approximately $3.5 million lower next year. Approximately $71.3
million of deposits and $1.3 billion of assets under administration
transferred to the successor trustee on the closing date.
50
CWB Financial Group 2017 Annual Report OFF-BALANCE SHEET
Off-balance sheet items include assets under administration and assets
under management. Total assets under administration, which are
comprised of trust assets under administration, third-party leases under
administration, and mortgages under service agreements, totalled $10.4
billion at October 31, 2017, compared to $10.7 billion one year ago. As
a result of CWT’s appointment of a successor trustee for self-directed
accounts holding exempt market securities, approximately $1.3 billion of
assets under administration transferred to the successor trustee during
the fourth quarter of 2017.
Assets under management held within CWB Wealth Management,
including McLean & Partners Wealth Management, were $2.1 billion at
year end, compared to $1.9 billion last year.
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 21 of
the audited consolidated financial statements.
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, and two fewer days during leap years such as 2016. Results from
the second and third quarters of 2016 reflect the credit performance of
oil and gas production loans. Non-interest income in the fourth quarter of
2017 includes $5.7 million from the CWT-related gain on sale.
Among other things, quarterly results can also fluctuate from the
recognition of periodic income tax items.
Table 27 – Quarterly Financial Highlights(1)
($ thousands, except per share amounts)
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
www.sedar.com and on CWB’s website at www.cwb.com. Copies of
the quarterly reports to shareholders can also be obtained, free of charge,
by contacting InvestorRelations@cwbank.com.
2017
2016
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Results from Operations
Net interest income (teb)
$ 170,993
$ 164,555
$ 152,739
$ 156,365
$ 149,704
$ 149,547
$ 145,106
$ 144,107
Less teb adjustment
Net interest income
Non-interest income
Total revenues (teb)
Total revenues
499
564
583
616
579
676
754
1,231
170,494
163,991
152,156
24,628
19,852
20,287
195,621
195,122
184,407
183,843
173,026
172,443
155,749
19,478
175,843
175,227
149,125
148,871
144,352
142,876
19,127
19,541
19,378
14,626
168,831
169,088
164,484
158,733
168,252
168,412
163,730
157,502
Pre-tax, pre-provision income (teb)
104,401
100,924
90,786
94,880
89,497
92,360
87,628
84,358
Common shareholders' net income
60,833
56,308
47,594
49,542
47,834
45,582
32,213
52,132
Earnings per common share
Basic
Diluted
Adjusted cash
Return on common
0.69
0.64
0.54
0.56
0.54
0.55
0.40
0.65
0.68
0.64
0.54
0.56
0.54
0.55
0.40
0.65
0.74
0.69
0.59
0.61
0.59
0.60
0.41
0.66
shareholders' equity
11.2 % 10.4 % 9.2 % 9.5 % 9.3 %
9.4 %
7.1 % 11.5 %
Adjusted return on common
shareholders' equity
12.0
11.3
10.1
10.4
10.1
10.3
7.4
11.7
Return on average total assets
0.94
0.89
0.79
0.78
0.76
0.73
0.55
0.90
Efficiency ratio (teb)
Efficiency ratio
46.6
45.3
47.5
46.0
47.0
45.4
46.7
46.9
46.8
45.4
47.7
46.2
47.2
45.6
46.9
47.2
Net interest margin (teb)
2.64
2.60
2.55
2.47
2.36
2.40
2.47
2.48
Net interest margin
2.63
2.59
2.54
2.46
2.35
2.39
2.45
2.46
Provision for credit losses as
a percentage of average loans
0.20
0.20
0.25
0.27
0.24
0.32
0.78
0.18
(1) See page 20 for a discussion of teb and non-IFRS measures.
CWB Financial Group 2017 Annual Report
51
Net Interest Margin
Fourth quarter net interest margin (teb) of 2.64% was up 28 basis
points from the same period last year. This reflected a number of factors,
including:
•
Increased asset yields due to the higher interest rate environment,
steepening of the yield curve, and the positive impact of pricing
discipline across the portfolio;
• Favourable changes in assets mix with increased contributions from
the relatively higher-yielding cwb maxium and cwb franchise finance
portfolios, and lower average balances of cash and securities; and,
• Favourable changes in funding mix through a combination of branch-
raised deposit growth, stable utilization of deposits sourced through
the broker market, and redemption of higher-cost capital markets
funding instruments.
Net interest margin (teb) increased four basis points from the prior
quarter. Incorporating the impact on both asset yields and deposit costs,
Bank of Canada rate increases in July and September contributed six basis
points to the sequential change in net interest margin, partially offset by
higher average balances of cash and securities.
Efficient Operations and Positive Operating Leverage
The fourth quarter efficiency ratio (teb) of 46.6% was down from 47.0%
in the same period last year and up from 45.3% in the previous quarter.
Year-over-year improvement reflects the combined positive impact of
higher revenues from ongoing loan growth and consistent sequential
increases in net interest margin (teb), as well as effective management
of discretionary expense growth. The increase in CWB’s efficiency ratio
from the prior quarter primarily reflects the customary seasonal increase
of non-interest expenses across all categories in the final quarter of the
fiscal year.
Operating leverage, which is calculated as the growth rate of total
revenue (teb) less the growth rate of non-interest expenses, excluding the
pre-tax amortization of acquisition-related intangible assets, over the past
12 months, was positive 0.3% compared to 1.0% last year.
FOURTH QUARTER OF 2017
Overview of Operations
Q4 2017 vs. Q4 2016
Common shareholders’ net income of $61 million and pre-tax, pre-
provision income (teb) of $104 million were up 27% and 17%,
respectively. Very strong earnings growth was primarily driven by record
quarterly revenues (teb) from core operations of $196 million, up 16%
from the same period last year. Net interest income (teb) of $171 million
was up 14%, reflecting the combined positive impact of the 28 basis
point increase in net interest margin (teb) to 2.64% and 6% loan growth.
Non-interest income of $25 million increased 29%, primarily driven by
the gain on the sale related to the appointment of a successor trustee for
CWT’s exempt market securities business. The provision for credit losses
as a percentage of average loans of 20 basis points was down from 24
basis points. These factors were partially offset by 15% higher non-
interest expenses to support business growth and increased acquisition-
related fair value changes.
Diluted earnings per common share of $0.68 and adjusted cash earnings
per common share of $0.74 increased 26% and 25%, respectively,
reflecting the factors noted above. The CWT-related gain on sale
contributed $0.06 to adjusted cash earnings per common share.
Q4 2017 vs. Q3 2017
Sequential growth of common shareholders’ net income and pre-tax,
pre-provision income was very strong, at 8% and 3%, respectively. Total
revenue (teb) growth of 6% was significant, reflecting 4% higher net
interest income (teb) and a 24% increase in non-interest income. Higher
net interest income reflects the combined positive impact of 2% loan
growth and a four basis point increase in net interest margin (teb). The
increase in non-interest income was primarily due to the CWT-related gain
on the sale within ‘other’ non-interest income. The provision for credit
losses was unchanged. Partially offsetting these factors were 9% higher
non-interest expenses to support business growth and a slight increase
in acquisition-related fair value changes. Sequential expense growth
primarily reflects customary seasonal increases across all categories in
the final quarter of the fiscal year. Diluted earnings per common share
and adjusted cash earnings per common share were up 6% and 7%,
respectively.
Adjusted ROE and ROA
Fourth quarter adjusted return on common shareholders’ equity (ROE)
of 12.0% was up 190 basis points from the same period last year. This
was primarily driven by very strong growth in common shareholders’ net
income, reflecting effective execution of CWB’s Balanced Growth strategy
and strong financial performance across CWB Financial Group.
Adjusted ROE was up 70 basis points compared to the prior quarter,
reflecting the same factors.
Return on assets (ROA) was 0.94% in the fourth quarter, compared to
0.76% in the same period last year and 0.89% last quarter.
52
CWB Financial Group 2017 Annual Report Financial Instruments Measured at Fair Value
Cash resources, securities, securities purchased under resale agreements,
securities sold under repurchase agreements, acquisition 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, 2017, CWB’s total allowance for credit losses was $135.9
million (2016 – $127.2 million) which included specific allowances of
$16.6 million (2016 – $16.3 million) and a collective allowance of $119.3
million (2016 – $110.9 million). Additional information on the process
and methodology for determining the allowance for credit losses can be
found in the discussion of Credit Quality in this MD&A and in Note 8 to
the consolidated financial statements.
CWB Financial Group 2017 Annual Report
53
The following table summarizes the significant financial assets and liabilities recorded on the consolidated balance sheets at fair value.
Table 28 – Valuation of Financial Instruments
($ thousands)
As at October 31, 2017
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities(1)
Deposits
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$ 521,796 $
27,440 $
494,356 $
-
2,186,987
285,998
1,900,989
-
23,649,806
-
-
23,649,806
12,393
-
12,393
-
$ 26,370,982 $
313,438 $
2,407,738 $
23,649,806
$ 21,874,990 $
- $
21,874,990 $
-
Securities sold under repurchase agreements
58,358
-
58,358
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
As at October 31, 2016
Financial Assets
Cash resources
Securities
1,437,516
-
1,437,516
-
32,920
-
-
32,920
35,381
-
35,381
-
$ 23,439,165 $
- $
23,406,245 $
32,920
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$ 920,056 $
45,426 $
874,630 $
-
1,708,594
322,509
1,386,085
-
Securities purchased under resale agreements
163,318
-
163,318
-
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
22,376,753
-
-
22,376,753
10,370
-
10,370
-
$ 25,179,091 $
367,935 $
2,434,403 $
22,376,753
$ 21,281,835 $
- $
21,281,835 $
-
1,271,036
-
1,271,036
-
24,257
-
-
24,257
7,172
-
7,172
-
$ 22,584,300 $
- $
22,560,043 $
24,257
(1) The Level 3 financial liabilities at October 31, 2017 are related to the acquisition of CWB Maxium and the trust services strategic transaction.
Notes 2, 4, 5, 6, 7, 12, 14, 17 and 27 to the consolidated financial statements provide additional information regarding these financial instruments.
54
CWB Financial Group 2017 Annual Report
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 2017.
Impairment
IFRS 9 introduces a new expected credit loss (ECL) model for calculating
impairment on all financial assets classified at amortized cost or fair value
through other 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:
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 (IAS
39). IFRS 9 addresses classification and measurement of financial assets
and liabilities, impairment and hedge accounting.
Additional guidance from regulatory bodies have been issued since the
final release of IFRS 9. The Basel Committee on Banking Supervision
(BCBS) issued Guidance on credit risk and accounting for expected credit
losses and 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.
Transition
IFRS 9 will be mandatorily effective for CWB’s fiscal year beginning on
November 1, 2018. OSFI has 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. Amendments
made to IFRS 7 Financial Instruments: Disclosures related to IFRS 9 will
also be adopted on November 1, 2018.
IFRS 9 is required to be applied on a retrospective basis, with certain
exceptions. CWB does not plan to re-state prior period comparative
figures within the consolidated financial statements upon transition to
IFRS 9 and will recognize an adjustment to opening retained earnings and
accumulated other comprehensive income to reflect the application of
the new requirements at the adoption date.
The adoption of IFRS 9 is a significant initiative for CWB with a robust
implementation plan focused on key responsibilities of the project. These
include defining the related risk methodology and accounting policy,
identifying data and system requirements, and developing appropriate
processes and a related governance framework. During 2017, CWB
continued its IFRS 9 transition project and established a formal project
governance structure, including a Steering Committee with senior
stakeholders from Finance, Risk Management and Information Services
to monitor the progress and critical decisions during the transition to
IFRS 9. The transition project focuses on the three main areas of IFRS
9: classification and measurement, impairment, and hedge accounting.
Working groups for each area are comprised of subject matter experts in
the relevant policies, processes or technologies that are expected to be
impacted by the transition.
Throughout the transition, CWB continues to monitor industry
interpretations of IFRS 9 requirements and adjust implementation plans
accordingly. The transition impact of IFRS 9 on CWB’s consolidated
financial statements has not been determined. CWB is on schedule to
meet transition timelines.
Stage one: From initial recognition until the date on which the
financial asset has experienced a significant increase in credit risk,
the loss allowance is measured based on credit losses expected from
defaults occurring in the next 12 months.
Stage two: A financial asset will move to stage two if it has
experienced a significant increase in credit risk since inception and
the loss allowance is measured based on credit losses expected from
defaults occurring over the remaining life of the asset.
Stage three: When a financial asset is identified as credit impaired,
it will move to stage three and a loss allowance equal to full
lifetime expected credit losses will be recognized. 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. The determination of credit impairment under
IFRS 9 is expected to be similar to the individual assessment of financial
assets for objective evidence of impairment under IAS 39. CWB’s specific
allowances under current accounting standards will generally be replaced
by stage three allowances under IFRS 9, while the collective allowance
will generally be replaced by stage one and stage two allowances.
ECL calculations are a function of the probability of default (PD), loss-
given default (LGD) and exposure at default (EAD) discounted to the
reporting date. The PD, which represents the estimate of the likelihood
of default, considers past events, current market conditions and
forward-looking information over the 12 month or lifetime horizon. The
LGD represents an estimate of loss arising from default based on the
difference between the contractual cash flows due and those that CWB
would expect to receive, including consideration of the amount and
quality of collateral held. The EAD represents an estimate of the exposure
at a future default date, taking into account estimated future repayments
of principal and draws on committed facilities.
ECL calculations must consider information about past events and current
conditions as well as supportable forecasts of future events and economic
conditions, which requires significant judgement. Forward-looking
information impacts 12 month and lifetime ECL calculations as well as
the assessment of significant increases in credit risk. CWB’s estimation
of ECL will incorporate multiple future macroeconomic scenarios based
on internal and external information and will be governed by a cross-
functional committee.
CWB plans to leverage the models being developed for AIRB to satisfy
IFRS 9 requirements with consideration for specific differences between
regulatory and accounting requirements. CWB is in the process of
building a comprehensive ECL calculation engine, which includes
identifying significant increases in credit risk, calculating both 12 month
and lifetime credit losses and incorporating forward-looking information.
For immaterial portfolios that lack detailed historical information or
loss experience, CWB may apply simplified ECL calculation approaches,
based on available supportable information, that may differ from the
calculations described above.
CWB Financial Group 2017 Annual Report
55
Impact on Regulatory Capital
IFRS 16 – Leases
The IASB has 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. The new standard will
not impact lessor accounting beyond additional disclosures. The new
standard is effective for CWB’s fiscal year beginning November 1, 2019
with early adoption permitted if IFRS 15 Revenue from Contracts with
Customers is applied. CWB is in the process of assessing the impact,
including the potential impact on risk-weighted assets and regulatory
capital ratios.
IFRS 2 – Share-based Payment Transactions
The IASB has 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. CWB does not currently expect a
material impact from adopting these amendments.
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.
The BCBS issued Standards: Regulatory treatment of accounting
provisions – interim and transitional arrangements, addressing the
regulatory impact of transitioning to IFRS 9. The standard confirms
the retention of current regulatory treatment of accounting
provisions under both the Standardized and AIRB approaches for
calculating regulatory capital and outlines potential transitional
arrangements. The BCBS recommended each national regulator
further define the regulatory treatment of collective and specific
allowances in the context of IFRS 9-based expected credit loss
calculations and determine an appropriate transition approach.
OSFI's revised capital adequacy guideline was finalized in November
2017 and does not contain transitional arrangements related to the
phase-in of the impact of adopting IFRS 9 on regulatory capital.
Classification and Measurement
IFRS 9 introduces a principles-based approach for the classification of
financial assets and specifies that they must 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.
CWB is in the process of assessing the cash flow characteristics for all
financial assets within the scope of IFRS 9.
Hedge Accounting
IFRS 9 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
includes a policy choice to retain IAS 39 for hedging purposes pending
the completion of the IASB’s project on macro hedge accounting. CWB
expects to elect to continue applying IAS 39 hedging requirements.
IFRS 15 – Revenue from Contracts with Customers
The IASB 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,
and enhanced disclosure requirements. 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. IFRS 15 is effective for CWB’s fiscal year beginning
November 1, 2018. On transition, entities may either restate prior periods
retrospectively or recognize the cumulative effect of the transition in
opening retained earnings with no comparison for prior years. CWB
continues to assess the impact of the new standard on the timing and
measurement of revenue recognition, enhanced financial statement
disclosures as well as transitional requirements. As the majority of its
revenues are outside the scope of IFRS 15, CWB does not currently expect
a significant impact from adopting the new standard.
56
CWB Financial Group 2017 Annual Report RISK MANAGEMENT
CWB’s Approach to Risk Management
Maintenance of an integrated and disciplined approach to risk
management is a key success factor for CWB. Effective risk
management supports creation of long-term shareholder value
by providing a framework to optimize risk-adjusted returns on
shareholders’ invested capital. CWB’s risk management framework
guides us in prudent, balanced and measured risk-taking aligned
with CWB’s Balanced Growth strategy.
The Enterprise Risk Management (ERM) group develops and
maintains CWB’s risk management framework. This framework
encompasses risk culture, risk governance, risk appetite, risk policies,
and risk management processes. The framework also provides
independent review and oversight across the enterprise on risk-
related issues.
CWB's Balanced Growth strategy and its long-term objective
to be the best full-service bank for business owners in Canada
requires continuous consideration, understanding and responsible
management of all key risks at both the strategic and operational
level. CWB’s core strategic objectives include an effective balance
of risk and reward. This requires that each team member make
common-sense business decisions by assessing risk and reward
trade-offs considering CWB’s Balanced Growth strategy and risk
appetite, along with regulatory and legal requirements. Management
consciously accepts risks to create long-term value for stakeholders
and support the responsible and efficient delivery of products and
services to valued clients, provided those risks:
• Are aligned with our strategic objectives;
• Are thoroughly understood, measured and managed within the
confines of well-communicated risk tolerances, including the
highest ethical standards; and,
• Serve the interests of stakeholders, including our clients,
shareholders, creditors, employees, regulators and communities.
• Codified data and model risk management with formalized CWB
Board-approved policies.
• Established model vetting and validation, and risk analytics
and economic capital groups, with continued development of
economic forecasting capabilities, to enhance ERM capabilities and
support CWB’s IFRS 9 transition.
• Continued to develop and implement, on a targeted basis, a
second line of defence for risk-based pricing to support profitable
growth.
• Continued to implement an operational risk management
framework, including implementation of a Regulatory Compliance
Risk Management Policy with associated tools and processes.
Highlights of 2017
Further enhancements to CWB’s risk management framework
were undertaken in 2017 as part of the ongoing development and
implementation of CWB’s risk management processes. Key initiatives
included:
• Significant progress of CWB’s multi-year project in support of
an application for transition to the AIRB approach for managing
credit risk and calculating risk-weighted assets. This transition
will enhance CWB’s competitive position and facilitate risk-based
pricing, enable further optimization of capital allocation, facilitate
business mix optimization, and enhance CWB’s risk quantification,
stress-testing, and overall Enterprise Risk Management (ERM)
capabilities.
• Developed and operationalized AIRB models and AIRB-based stress
testing capabilities for the CWB Optimum Mortgage, branch-
based residential mortgages, and National Leasing portfolios.
• Further developed CWB’s ERM function and the three lines of
defence framework, including subsidiaries, to provide consistent,
transparent and clearly documented allocation of accountabilities
and segregation of functional responsibilities.
• Formalized an enterprise-wide risk management framework and
an enterprise-wide risk appetite framework, including further
development of key metrics to measure risk exposures and
portfolio concentrations against risk appetite.
CWB Financial Group 2017 Annual Report
57
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 57 to 75 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2017. Outlook for Risk Management
CWB will continue to support enhanced risk management capabilities
through further development of enterprise risk management and risk
appetite frameworks, and related risk policies. Key risk management
priorities for 2018 include: further progression toward transition to
the AIRB approach, including the development of a comprehensive
stress testing program based on developed AIRB models; and, further
development and implementation of the three lines of defence
model across the enterprise, including enhancement of CWB’s
second line of defence for liquidity and funding risk, and business
and strategic risk.
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 take loans and/or
make deposits, and 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 internal and 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
• Secured lending business model;
• Disciplined underwriting with demonstrated strength through multiple
credit cycles;
• Strong risk culture with robust risk management framework which
addresses risks throughout CWB;
• Low operational risk profile;
•
•
In-depth knowledge of our clients;
Increasing geographic diversification;
• Low balance sheet leverage;
• Low average duration of lending portfolios; and,
• Relatively low exposure to economically sensitive retail lending
portfolios.
RISK MANAGEMENT CHALLENGES
• Macroeconomic volatility, including the impact of an extended period
of relatively low oil prices and related economic challenges within parts
of Western Canada;
• Uncertainty related to renegotiation of standing free trade agreements
which could affect the outlook for Canadian exports and future
economic growth;
• Market volatility related to factors outside of CWB’s control which
affect investors’ decisions to buy, sell or hold CWB shares or other
securities;
58
•
Increasing volume and complexity of regulatory requirements and
expectations; and,
• Capital requirements under the Standardized approach which are
insensitive to the underlying economic risk, and do not adequately
reflect CWB’s demonstrated risk management strengths through
multiple credit cycles.
RISK MANAGEMENT PRINCIPLES
CWB’s risk management principles are based on the premise that CWB
is in the business of accepting risks for appropriate return. Management
does not seek to eliminate risk, but seeks to manage risk appropriately
and optimize risk-adjusted returns on shareholders’ invested capital. In
conducting its business activities, CWB will take risks that are aligned
with management’s Balanced Growth strategy in a manner which is
expected to create long-term value for shareholders. Risk management
principles are therefore aligned with CWB’s strategic objectives, and
embedded within CWB’s management practices.
The following principles guide the management of risks across all of
CWB’s operations and companies:
• 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 and
manage the risks inherent in their respective day-to-day activities
including identification of risk exposures, with communication and
escalation of risk-based concerns;
• Use of common sense, sound judgment and fulsome risk-based
discussions;
• 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, and an independent and effective Internal Audit
function comprising the third line.
The mandate of CWB’s ERM function is to provide independent oversight
of risk-taking decisions, independent assessment of risk and effective
challenge to the business. ERM establishes the enterprise-wide risk
management framework to identify, measure, aggregate and report
all material risks managed by the first line within CWB’s three lines of
defence framework. This includes oversight of risk governance policies,
establishment of risk appetites and key risk metrics, and development of
risk infrastructure including all risk management processes and practices.
CWB Financial Group 2017 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 Balanced Growth strategy,
related business activities and overall risk appetite. The enterprise 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 depicts the main elements of CWB’s enterprise risk
management framework.
Figure 4 – CWB's Enterprise Risk Management Framework
K
C W B’S R I S
E RIS K V
MIZ
I
T
P
O
M A N A GEMENT FRA
IDENTIFY
T U R N -
E
S . R
M
E
W
O
R
K
M
E
A
S
U
R
E
&
e
c
n
Risk
overn a
G
U
R
is
k
niv
e
r
s
e
CWB’s
Risk
Culture
A
R
F
r
p
a
p
i
s
k
m
e
w
e
tite
ork
F
&
r
T
a
R
m
O
e
P
E
n a g ment
Risk
P olicies
M a
D M
work
ITOR & CONTROL R
O
N
CWB’s
Balanced Growth
strategy
E
T
A
C
I
N
A
U
p
M
p
e
M
t
i
t
O
C
e
Independent
assurance of risk and
control environment
by Internal Audit
A
S
S
E
S
S
R
E
S
P
O
N
CWB’s risk culture is the core of the enterprise risk management
framework, including our risk management principles, values and
accountabilities as defined within the three lines of defence framework.
Key elements of CWB’s risk management framework include Risk
Governance, the Risk Universe, Risk Management Policies, and Risk
Appetite Framework.
RISK CULTURE
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 interrelationships 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 demonstrated throughout CWB and is
emphasized by the actions of senior management and the Board.
CWB’s risk culture includes:
• “Tone at the top” as established through the CWB Code of Conduct
and governance processes;
• CWB’s core values of integrity, accountability, respect, common sense
and caring;
Principal risks within CWB’s Risk Universe include: credit risk; capital risk;
market risk, including interest rate risk, foreign exchange risk, liquidity
and funding risk; and, operational risk. Reputational risk arises as a
consequence of not managing other risks effectively.
• Effective integration of CWB’s compensation strategy with desired risk
behaviours; and,
• Risk management principles, policies and processes, including
implementation of a three lines of defence framework.
CWB’s three lines of defence framework provides a consistent,
transparent, and clearly documented allocation of accountability
and segregation of functional responsibilities. This segregation
of responsibilities helps to establish a robust control framework
that demonstrates CWB’s risk culture, contributes to effective risk
management and encourages continuous improvement of risk
management practices. CWB’s three lines of defence framework is
described in the following table.
CWB Financial Group 2017 Annual Report
59
Table 29 – Three Lines of Defence
First Line
Second Line
Business and Support Areas
ERM and Support Functions
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
Establish an enterprise risk management
framework to provide a consistent and
integrated view of risk exposures 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
Set key risk metrics on which risk appetite and
limits are based
Establish policies, processes and practices that
address all significant risks across the enterprise
Independently assess, quantify, monitor, control
and report all significant risk exposures against
the risk appetite and limits
Independently audit first and second lines
and report on their effectiveness in regard to
respective functional responsibilities
Independently review adherence to controls,
policies, rules and regulations
Identify operational weaknesses; recommend
and track remediation actions
Provide independent oversight, effective
challenge and independent assessment of risk
RISK APPETITE FRAMEWORK
CWB’s risk appetite framework includes policies and processes to
establish and monitor adherence to CWB’s risk appetite, and outlines
accountabilities for those overseeing its implementation. The purpose of
the risk appetite framework is to define the type and amount of risk CWB
is willing to assume through its business activities, while considering the
priorities of all stakeholders. CWB’s risk appetite framework is forward-
looking and integrates with management’s Balanced Growth strategy,
including consideration for CWB’s capital plan and budget processes.
Key components of CWB’s risk appetite framework include:
• A philosophy to emphasize business lines where management has
extensive knowledge and experience; for example, CWB has 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;
• 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;
• Risk Capacity – the maximum level of risk CWB can assume before
breaching regulatory or other stakeholders’ constraints;
• Risk Appetite – the aggregate level and type of risk CWB is willing to
• Targeted financial performance which supports maintenance of
investment grade credit ratings to allow for competitive access to
funding;
assume; and,
• Risk Limits – the allocation of risk to specific risk categories, to business
units, and/or to lines of business at the portfolio or product level. ERM
measures, monitors, and manages CWB’s risk profile to ensure the
overall level of risk remains within specified risk limits. Early warning
indicators are reported to the Executive Risk Committee and the Board
Risk Committee, along with proposed actions to reduce the level of
risk to within the approved risk appetite.
Key attributes of CWB’s overall risk appetite include the following:
• A conservative risk culture that is prevalent throughout CWB, from the
Board to senior management to front-line staff;
• A philosophy to only take risks that are aligned with CWB’s Balanced
Growth strategy and are expected to create long-term value for
shareholders;
• A philosophy to only take risks that are transparent and understood,
and that can be measured, monitored and managed;
• 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.
CWB conducts stress testing of relevant metrics on a regular basis to
enable the identification and monitoring of potential vulnerabilities.
The results from stress testing also help inform the Risk Appetite, and
quarterly sensitivity testing of earnings and capital ratios ensures that
CWB operates within Risk Limits.
60
CWB Financial Group 2017 Annual Report CWB Financial Group 2017 Annual Report
61
Risk Management Governance StructureThe foundation of CWB’s enterprise risk management framework is a governance approach which includes a robust committee structure and a comprehensive set of corporate policies and limits approved by the Board of Directors, as well as supporting corporate standards and operating guidelines. The Risk Management Framework is governed through a hierarchy of committees and individual responsibilities as outlined in Figure 5.Figure 5 – Enterprise-Wide Risk Management FrameworkBoard of Directors – responsible for overseeing 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. The Board Risk Committee also includes a Loan Adjudication Panel.Board Governance Committee – assists the Board in fulfilling its oversight responsibilities with respect to developing CWB’s corporate governance policies and practices.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 (CEO) – directly accountable to the Board for all of CWB’s risk-taking activities. The CEO is supported by the Executive Risk Committee and its sub committees, as well as the Enterprise Risk Management (ERM) function.Chief Risk Officer (CRO) – as head of ERM, responsible to provide 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 CRO reports functionally to the Board Risk Committee. The following CWB oversight functions provide key support within the
enterprise-wide risk management framework:
that regulatory requirements are satisfied.
Oversight departments within ERM include:
• Credit Risk Management – responsible to assess, recommend, process
and adjudicate credit applications and credit reviews within delegated
loan approval authorities; and to provide second line oversight of credit
risk.
• Regulatory Compliance – responsible to provide second line oversight
of regulatory compliance risk by establishing and maintaining the
regulatory compliance risk-related policies, standards and protocols
used by the first and second lines to identify, measure, communicate,
respond to and control regulatory compliance risk, including risks
related anti-money laundering, anti-terrorist financing, and privacy.
Regulatory Compliance assesses, monitors, and reports on regulatory
compliance risk against the risk appetite framework.
• Risk Data Aggregation, Analytics, and Reporting (RDAAR) – responsible
to develop, implement, and monitor risk measurement processes and
validation methodologies to provide a comprehensive view of overall
credit risk exposures. Ensures that credit risk exposures are measurable,
and that adequate reporting is produced to facilitate the management
of the portfolio within established limits, appetite, and standards; and
RISK MANAGEMENT POLICIES
•
Integrated Risk Management – responsible for CWB’s interest rate and
liquidity risk management framework, providing second line oversight
for Treasury; implements the operational risk management framework;
operationalizes second line oversight of risk-based pricing; responsible
for profitability reporting and analysis; and responsible for CWB’s
ICAAP.
• Model Vetting Team – responsible for development and maintenance
of an enterprise-wide model risk management framework; and to
monitor, effectively challenge and report on enterprise-wide model risk
in accordance with related policy and guidelines.
• Risk Capital and IFRS 9 – is responsible to lead ERM activities relating to
CWB’s AIRB and IFRS 9 transition requirements, including governance,
modelling, analysis and reporting.
Separate from ERM, CWB’s Finance department provides independent
oversight of processes to manage financial reporting and capital risk.
Finance provides oversight on financial reporting, capital adequacy,
external credit ratings, regulatory reporting on accounting-related
functions, finance-related issues and tax. This activity is overseen by
CWB’s CFO. The CFO reports functionally to the Audit Committee.
In order to support effective communication, implementation, and
governance of CWB’s risk management framework, ERM codifies
processes and operational requirements in comprehensive management
policies and operating guidelines. These policies and guidelines promote
the application of a consistent approach to managing risk exposures
across the enterprise. All risk policies are developed by the second line
and approved by the Board Risk Committee or the full Board of Directors,
on an annual basis.
62
CWB Financial Group 2017 Annual ReportExecutive 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 CRO and membership includes the CEO and the Chief Financial Officer (CFO).Subsidiary Company Second Line Function – provide oversight in each line of business to ensure management has implemented effective risk management processes for identification, assessment, risk response development, monitoring and control, and reporting of risks. Second line subsidiary risk officers monitor and report on the risks of their respective businesses and ensure the development of mitigation strategies to manage these risks.Sub Committees of the Executive Risk Committee – the various 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) – reviews and endorses operational policies and programs for liquidity management and control, funding sources, investments, foreign exchange risk, structural interest rate risk and derivatives risk.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.Group Disclosure Committee – supports CEO/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. RISK UNIVERSE – REPORT ON PRINCIPAL RISKS
CWB pursues risks that are aligned with management’s Balanced Growth
strategy and are expected to create value for shareholders. 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. These risks materially comprise
CWB’s risk universe as defined as part of its enterprise risk framework.
CREDIT RISK
Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to fulfil its contractual commitment or obligation to
CWB. Credit risk is comprised of default risk and credit migration, or downgrade risk. Credit default risk is defined as the potential that a bank
borrower or counterparty will fail to meet its obligations in accordance with the agreed terms. Credit migration or downgrade risk refers to the
risk of deterioration of credit quality of a borrower or counterparty.
Risk Overview
CWB’s credit risk results from granting loans and leases to businesses and
individuals. 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 2017 Annual Report
63
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 RDAAR 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; • 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; and,• Independent oversight, effective challenge and independent assessment by the second line. 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 CWB 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.
64
CWB Financial Group 2017 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 on 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 discretionary securities portfolio, and foreign
exchange.
Risk Overview
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. 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. CWB maintains exposure
to preferred shares through its discretionary investment portfolio.
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 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 interest rate commitments on un-
advanced 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 CWB’s assets, liabilities, and off-
balance sheet (OBS) positions. Thus, the sensitivity of a CWB’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
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 balances short-term income
volatility with 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 value of CWB’s equity;
• Risk and return (e.g. Increasing duration increases the exposure to
rising interest rates, but also benefits net interest income when there is
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)
the resulting risk exposure is maintained within CWB’s risk appetite.
CWB Financial Group 2017 Annual Report
65
Risk GovernanceMarket risk is managed in accordance with the approved second line market risk policy and the accompanying first line policies. As the first line of defence, Treasury owns and manages CWB’s market risk on a daily basis. ALCO provides tactical and strategic direction and is responsible for ongoing oversight, and reviews and endorses the operational policies. Integrated Risk Management monitors market risk exposure and reports to the Board Risk Committee against CWB’s risk appetite. Risk Metrics
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).
CWB’s Interest Rate Risk Exposures
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,
2017 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 2.5% of total assets
at October 31, 2017, compared to 3.5% one year ago, while the one-
month and under gap was 1.2% compared to 0.8% one 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.
66
CWB Financial Group 2017 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
2017
$ 1,637
8,324
2016
$ 7,608
12,582
1.39 %
2.15 %
2017
$ (1,068)
(13,226)
2016
$ (3,570)
(5,150)
(2.21)%
(0.88)%
It is estimated that a one-percentage point increase in all interest rates at
October 31, 2017 would decrease unrealized gains related to available-
for-sale securities and the fair value of interest rate swaps designated
as hedges, and result in a reduction in other comprehensive income
of approximately $77.3 million, net of tax (October 31, 2016 – $57.1
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 securities and increase the fair value
of interest rate swaps designated as hedges, which would increase
other comprehensive income by approximately $76.2 million, net of tax
(October 31, 2016 – $58.6 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 current interest rate environment and balance sheet
composition.
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 2017 Annual Report
67
In providing financial services to its customers, CWB has assets and liabilities denominated in U.S. dollars. At October 31, 2017, assets denominated in U.S. dollars were 1.2% (2016 – 1.4%) of total assets and U.S. dollar liabilities were 1.4% (2016 – 1.5%) 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 or 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 CWB-
specific or systemic 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 sections of this MD&A for additional
information.
CWB remains in compliance with OSFI’s Liquidity Adequacy Requirements guideline.
68
CWB Financial Group 2017 Annual ReportRisk Governance Liquidity 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 direction. ERM, as the second line of defence, is responsible for independent oversight.Risk Management CWB has a comprehensive liquidity risk management policy. The key elements of managing liquidity risk for CWB include the following:• Policies – Liquidity 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 modeling – 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 CWB-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 behaviour 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.• 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.
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 14, 17, 21 and
26 of the consolidated financial statements, the following contractual
obligations are outstanding at October 31, 2017.
Lease commitments
Purchase obligations for operating and capital expenditures
$
13,720 $
25,611 $
19,720 $
3,568
5,624
108
31,236 $
-
90,287
9,300
Within 1
Year
1 to 3
Years
4 to 5
Years
More than
5 Years
Total
October 31, 2017
October 31, 2016
Credit Ratings
$
$
17,288 $
31,235 $
19,828 $
31,236 $
99,587
16,114 $
29,546 $
20,851 $
34,690 $
101,201
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.
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.
The following table summarizes the credit ratings issued by DRBS for CWB, as well as the corresponding rating agency outlook, last confirmed with no
changes on November 29, 2017.
Table 32 – Credit Ratings
Long-term senior debt
and long-term deposits
Short-term instruments
Subordinated debt
Preferred shares
Outlook
A (low)
R1 (low)
BBB (high)
Pfd-3
Stable
CWB Financial Group 2017 Annual Report
69
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:
• Capital management involves a dynamic and ongoing process to
determine, allocate and maintain appropriate amounts of capital;
• The optimal amount and composition of capital must consider
regulatory requirements, as well as the expectation of CWB
shareholders and other stakeholders; and,
• The objective of capital management is to ensure:
- Capital is, and will continue to be, adequate to maintain confidence
in the safety and stability of CWB while also complying with
required regulatory standards;
- 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.
70
CWB Financial Group 2017 Annual ReportRisk Governance The Board approves the annual regulatory capital plan, and the Board Risk Committee approves the annual ICAAP and 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, Integrated Risk Management and Finance comprise the ICAAP core team and are closely involved in capital management. The core team is closely supported by other key departments, including Treasury, Credit Risk Management, Strategy and RDAAR.Risk Management The 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;• 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 defined as the risk of loss due to unanticipated outcomes that result from inadequate or failed systems, processes, or human
errors, as well as from external events. Exposure to operational risks arises from the people, processes, and systems that are established to serve
CWB’s clients and maintain the required functions of the enterprise. CWB’s primary operational risks include regulatory compliance risk, people
risk, technology risk, information and cyber security risk and fudiciary/reputation risk.
Risk Overview
Operational risk is inherent in all of CWB’s business activities including
banking, trust, and wealth management, and is embedded in processes
that support the management of principal risks such as credit, liquidity,
market, and capital 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 2017 or
2016.
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 Policy to ensure that all employees understand
their responsibilities with respect to operational risk management. The
Operational Risk Management Policy encompasses a common language
of risk coupled with programs and methodologies for identification,
measurement, control, and management of operational risk.
CWB Financial Group 2017 Annual Report
71
Risk Governance Business and support areas as the first line of defence are fully accountable for the management and mitigation of operational risks to which they are exposed. The CWB Group Operational Risk Committee oversees the implementation and adoption of the Operational Risk Management Policy across the enterprise and facilitates the involvement of necessary stakeholders in the first and second line of defence across the Group. Integrated Risk Management, as the second line, is responsible for the continual enhancement of the Group Operational Risk Management Framework and supporting policies. The Board Risk Committee has ultimate oversight and approves the Group’s Operational Risk Management Policy.Risk Management Following 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;• Communication of, and 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. 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
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);
• Risk Control Assessments (RCA) – are utilized throughout CWB to
• Continual enhancements to fraud prevention processes, policies and
develop a forward-looking view of operational risk exposure based on
proactive identification of key sources of operational risk exposures.
The results of RCAs are aggregated across the enterprise to evaluate
the key sources of operational risks and compare relative exposures
from different business activities;
• 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. This includes benchmarking CWB’s operational loss
experience against external operational loss events from across the
financial industry;
• Root cause analysis – For significant operational risk events, CWB
employs a standardized methodology for identifying the underlying
cause of the operational failure and documenting the corrective
actions taken by the affected areas to avoid similar breakdowns in the
future; and,
• New initiative risk assessments – Are integrated with CWB’s change
management process and that requires project owners to proactively
identify all relevant stakeholders across significant functional areas and
conduct detailed RCAs for new initiatives.
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;
• 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).
As part of the ongoing development of CWB’s Operational Risk
Management Framework, management has adopted an updated
Operational Risk Taxonomy. This taxonomy now forms the basis for all
operational risk management reporting, with loss events and identified
risks categorized consistently.
72
CWB Financial Group 2017 Annual Report Table 33 – Operational Risk Taxonomy
Regulatory compliance risk
The risk of potential non-conformance with laws, rules, regulations and prescribed practices
(“regulatory requirements”) in any jurisdiction in which it operates. It does not include risk arising
from non-conformance with ethical standards.
People risk
The risk that CWB cannot retain and attract sufficient qualified resources to implement its strategies
and/or achieve its objectives.
Technology risk
Information and cyber
security risk
Fiduciary/reputation risk
Business disruption risk
Financial crime risk
Accounting risk
Model risk
Risk reporting risk
The risk related to the operational performance, confidentiality, integrity and availability of our
information, systems and infrastructure.
The risk of loss and reputational damage due to information systems and services (including
application systems and supporting technology infrastructure) failing to satisfy business
requirements, caused by inadequately designed, maintained, and/or supported systems,
applications and technology.
The risk of loss and reputational damage due to the compromising of CWB’s information assets
(i.e., the unauthorized use, loss, damage, disclosure or modification of company information and
information systems) caused by a failure to protect CWB’s information assets. Cyber security risk is
specifically related to the ongoing threat that systems and their data may be attacked, damaged or
subject to unauthorized access.
Risk of loss and reputational damage due to CWB failing to meet professional obligations to its
customers, clients, and/or shareholders, caused by an inadequate understanding and/or execution
of the obligation/suitability requirements.
The risk of loss and reputational damage due to the failure of ensuring the ongoing continuation of
critical business operations, caused by disruptions impacting the availability of staff, systems, and/or
CWB premises.
The risk of loss and reputational damage due to crimes committed against CWB, against its
customers, or by its customers. Loss in this context refers to economic loss including time, recovery
costs, and overhead.
The risk of loss and reputational damage due to misstatements of assets, liabilities, and/or income,
caused by internal financial control failures or deficiencies.
The risk of loss and reputational damage due to inaccurate model outputs or incorrect
interpretations of model outputs, caused by inadequate model design, use and/or assumptions.
The risk of loss and reputational damage due to inadequate risk-related information being provided
to senior management, the Board, and/or regulatory bodies, caused by incomplete, inaccurate or
untimely risk reporting processes, systems and/or un-actioned risk reporting.
Outsourcing and third-party
supplier risk
The risk of loss and reputational damage due to a third-party service provider failing to deliver
functionality and performance required to effectively support underlying business objectives,
caused by inadequate selection, retention, oversight and/or monitoring of the relationship, or by
inadequate contractual terms and conditions.
Change management risk
(excludes technology change)
The risk of loss and reputational damage due to a failure to effectively manage change to achieve
the desired business requirements and objectives, caused by inadequate management (i.e.,
planning, execution, monitoring, oversight, and reporting) of significant business change.
Process and execution risk
The risk of loss and reputational damage due to a failure to achieve the desired outcome caused by
inadequately designed or executed processes.
Product and customer/client
selection risk
The risk of loss and/or reputational damage due to the inability to effectively design, develop,
distribute, and sell and/or attract/select profitable customers/clients caused by a breakdown of the
product development and sales distribution process, and/or the failure to properly vet customers/
clients.
CWB Financial Group 2017 Annual Report
73
A discussion of several of CWB's key operational risks follows:
Regulatory Compliance Risk
Information and Cyber Security Risk
CWB manages information 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 information and cyber security program and through
ongoing vigilance has not experienced an information or cyber security
event of any materiality.
Fiduciary/Reputation Risk
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.
The businesses operated by CWB are highly regulated through laws,
rules, regulations and prescribed practices that have been put in place by
various federal and provincial governments and regulators. Changes to
these regulatory requirements, including changes in their interpretation
or implementation, could adversely affect CWB. CWB’s failure to comply
with applicable laws, rules, regulations, and practices could result in
sanctions, financial penalties and costs associated with litigation that
could adversely impact earnings and damage reputation. Although
most sources of regulatory compliance 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. Certain regulations may also impact CWB’s ability to
compete against both federally regulated and non-federally 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
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 Balanced Growth strategy.
Key related tactics include maintenance of a positive, rewarding and
collaborative environment, complemented by efforts to empower staff to
deliver exceptional client experiences.
Inability to maintain an appropriate staff complement would adversely
affect CWB’s ability to achieve its strategic objectives.
Technology Risk
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 in 2016 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.
74
CWB Financial Group 2017 Annual Report Further, the initiation of any new growth initiatives or infrastructure
projects, and 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 strategic execution or 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.
CHANGES IN ACCOUNTING STANDARDS AND
ACCOUNTING POLICIES AND ESTIMATES
The International Accounting Standards Board 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.
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 AND
STRATEGIC INFRASTRUCTURE PROJECTS
As part of its Balanced Growth strategy, CWB intends to continue
growing its business through a combination of organic growth and
strategic acquisitions. The ability to successfully grow its business
organically will be dependent on successful execution of key business
transformation efforts and infrastructure projects. The ability to
successfully grow through acquisition 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.
CWB Financial Group 2017 Annual Report
75
UPDATED SHARE INFORMATION
As at November 30, 2017, there were 88,498,915 common shares and
3,369,430 stock options outstanding. On December 6, 2017, CWB’s
Board of Directors declared a cash dividend of $0.24 per common share,
payable on January 4, 2018 to shareholders of record on December 15,
2017. This quarterly dividend is consistent with the prior quarter and 4%
higher than the dividend declared one year ago. The Board of Directors
CONTROLS AND PROCEDURES
As of October 31, 2017, 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, 2017, 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 have certified that the design and
operating effectiveness of internal controls over financial reporting were
effective.
These evaluations were conducted using the framework and criteria
established in accordance with Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). A Disclosure Committee, comprised
of members of senior management, assists the CEO and CFO in their
responsibilities. Management’s evaluation of controls can only provide
reasonable, not absolute, assurance that all control issues that may result
in material misstatement, if any, have been detected.
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, 2018 to shareholders of record on January 19, 2018.
This Management’s Discussion and Analysis is dated December 6, 2017.
In the second quarter of 2016, CWB’s certifying officers 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, a newly acquired subsidiary. This limitation was
removed in the first quarter of 2017.
There were no other changes in CWB’s ongoing internal controls over
financial reporting that occurred during the year ended October 31,
2017 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.
76
CWB Financial Group 2017 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
function, 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 related party 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, 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 6, 2017
Carolyn J. Graham, FCPA, FCA
Executive Vice President and Chief Financial Officer
CWB Financial Group 2017 Annual Report
77
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, 2017 and October 31, 2016, 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.
AUDITORS’ RESPONSIBILITY
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.
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.
OPINION
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, 2017 and October 31, 2016, and its
consolidated financial performance and its consolidated cash flows for
the years then ended in accordance with International Financial Reporting
Standards.
KPMG LLP
Chartered Professional Accountants
December 6, 2017
Edmonton, Canada
78
CWB Financial Group 2017 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
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
Securities sold under repurchase agreements
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
As at
October 31
2017
As at
October 31
2016
$
17,491
$ 11,490
503,895
890,516
410
18,050
521,796
920,056
1,307,298
438,858
308,421
132,410
2,186,987
-
4,725,715
18,619,853
23,345,568
(116,329)
23,229,239
56,115
85,669
149,730
12,393
205,524
509,431
1,142,798
291,947
154,648
119,201
1,708,594
163,318
4,063,552
18,001,584
22,065,136
(103,788)
21,961,348
57,330
84,762
149,312
10,370
167,459
469,233
$ 26,447,453
$
25,222,549
(Note 4)
(Note 5)
(Note 6)
(Note 7)
(Note 8)
(Note 10)
(Note 11)
(Note 11)
(Note 12)
(Note 13)
(Note 14)
$ 13,394,562
8,508,420
$
13,223,702
7,970,851
21,902,982
21,194,553
(Note 6 and 9)
(Note 12)
(Note 16)
55,545
58,358
35,381
455,009
604,293
27,683
-
7,172
382,130
416,985
(Note 9 and 17)
(Note 17)
1,226,336
250,000
1,476,336
943,198
325,000
1,268,198
(Note 18)
(Note 18)
265,000
731,885
1,488,634
24,979
265,000
718,377
1,354,966
31,276
(49,453)
(27,579)
2,461,045
2,342,040
(Note 20)
2,797
773
2,463,842
2,342,813
$ 26,447,453
$
25,222,549
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 2017 Annual Report
79
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 services
Trust services
Retail services
Gains (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
Income Taxes
Net Income
Net income attributable to non-controlling interests
Shareholders' Net Income
Preferred share dividends
Common Shareholders' Net Income
Average number of common shares (in thousands)
Average number of diluted common shares (in thousands)
Earnings Per Common Share
Basic
Diluted
2017
2016(1)
$ 993,950
$
928,257
25,136
28,703
8,198
5,029
1,027,284
961,989
355,521
346,498
29,373
30,267
384,894
376,765
642,390
585,224
34,012
30,598
19,073
16,394
11,305
11,522
10,758
11,244
664
(2,830)
8,433
5,744
84,245
72,672
726,635
657,896
(Note 8)
(Note 3)
50,986
79,115
18,295
7,857
220,416
204,903
60,348
52,539
64,702
56,205
345,466
313,647
311,888
82,233
229,655
1,128
228,527
14,250
257,277
67,943
189,334
961
188,373
10,612
$ 214,277
$
177,761
88,297
88,592
83,411
83,419
$ 2.43
2.42
$
2.13
2.13
(Note 23)
(Note 24)
(1) During 2017, certain fee income was reclassified from retail services to wealth management services within Non-interest Income. Comparative figures have been restated to conform with current year presentation, resulting in a
$2,373 increase in wealth management services and a corresponding decrease in retail services.
The accompanying notes are an integral part of the consolidated financial statements.
80
CWB Financial Group 2017 Annual Report
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Year Ended October 31
($ thousands)
Net Income
Available-for-sale securities
Gains from change in fair value(1)
Reclassification to net income(2)
Derivatives designated as cash flow hedges
Losses from change in fair value(3)
Reclassification to net income(4)
Other Comprehensive Income (Loss), Net of Tax
Comprehensive Income
Comprehensive income for the year attributable to:
Shareholders of CWB
Non-controlling interests
Comprehensive Income
(1) Net of income tax of $1,463 (2016 - $7,699).
(2) Net of income tax of $179 (2016 - $796).
(3) Net of income tax of $8,128 (2016 - $3,002).
(4) Net of income tax of $1,222 (2016 - $42).
2017
2016
$
229,655
$
189,334
4,021
20,799
(485)
2,158
3,536
22,957
(22,089)
(3,321)
(25,410)
(8,157)
113
(8,044)
(21,874)
14,913
$
207,781
$
204,247
$
206,653
$
203,286
1,128
961
$
207,781
$
204,247
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 2017 Annual Report
81
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Year Ended October 31
($ thousands)
Retained Earnings
Balance at beginning of year
Shareholders' net income
Dividends - Preferred shares
- Common shares
Share premium on equity issued to non-controlling interests
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
Transferred from share-based payment reserve on the exercise or exchange of options
Issued under dividend reinvestment plan
Issued to public
Issued on acquisition of subsidiary
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
Increase in equity attributable to non-controlling interests
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.
2017
2016
$
1,354,966
$
1,261,678
228,527
188,373
(Note 18)
(Note 18)
(14,250)
(10,612)
(82,107)
(76,424)
(Note 18)
(Note 18)
(Note 19)
1,498
-
-
(8,049)
1,488,634
1,354,966
(27,579)
(42,492)
3,536
22,957
(25,410)
(8,044)
(49,453)
(27,579)
265,000
125,000
-
140,000
265,000
265,000
718,377
537,511
8,228
706
5,280
4,491
-
150,063
-
25,606
731,885
718,377
31,276
29,210
1,931
2,772
(8,228)
(706)
24,979
31,276
2,461,045
2,342,040
773
992
1,683
-
1,128
961
(670)
(1,033)
(117)
(147)
2,797
773
$
2,463,842
$
2,342,813
82
CWB Financial Group 2017 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended October 31
($ thousands)
Cash Flows from Operating Activities
Net income
Adjustments to determine net cash flows:
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
Deferred income taxes, net
(Gains) losses on sale of securities, net
Acquisition-related fair value changes
Net gain on Trust Services strategic transaction
Change in operating assets and liabilities
Deposits, net
Loans, net
Securities sold under resale agreements, net
Securities purchased under resale agreements, net
Other items, net
Cash Flows from Financing Activities
Debt securities issued
Debt securities repaid
Debentures redeemed
Dividends
Distributions to non-controlling interests
Sale of non-controlling interests
Common shares issued, net of issuance costs
Preferred shares issued, net of issuance costs
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net
Securities, purchased
Securities, sales proceeds
Securities, matured
Property, equipment and software costs
Partial ownership increase
Contingent consideration payment
Proceeds from Trust Services strategic transaction
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.
2017
2016
$
229,655
$ 189,334
(Note 8)
50,986
30,692
12,134
(Note 19)
1,931
(19,061)
(10,638)
(664)
(Note 3)
(Note 3)
18,295
(5,726)
79,115
24,581
(17,424)
2,772
7,705
(3,045)
2,830
7,857
-
708,429
1,829,146
(1,322,714)
(2,218,973)
58,358
163,318
46,543
(38,462)
739,177
(456,039)
-
(163,318)
29,242
(230,178)
734,376
(353,801)
(Note 17)
(75,000)
(300,000)
(91,077)
(670)
(82,545)
(1,033)
3,401
-
(Note 18)
(Note 18)
-
-
119,792
145,176
136,838
279,011
(Note 3)
(Note 3)
(Note 3)
386,621
(477,748)
(5,843,898)
(10,760,756)
4,338,132
8,638,234
1,031,966
2,990,500
(28,846)
(1,838)
(10,132)
7,164
-
(120,831)
(39,501)
1,857
$
(37,644)
$
(38,507)
(4,572)
-
-
(364,523)
(17,372)
31,461
(29,604)
1,857
$
17,491
$
11,490
410
(55,545)
$
(37,644)
$
18,050
(27,683)
1,857
$
1,031,937
$ 975,727
392,413
66,009
366,737
88,674
CWB Financial Group 2017 Annual Report
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2017 and 2016
($ thousands, except per share amounts)
1. NATURE OF OPERATIONS AND BASIS OF
PRESENTATION
a) Reporting Entity
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)
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) 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.
h) 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.
Canadian Western Bank (CWB) is a publicly traded, federally regulated
Canadian bank headquartered in Edmonton, Alberta. CWB is a diversified
financial services organization serving businesses and individuals across
Canada.
The consolidated financial statements were authorized for issue by the
Board of Directors on December 6, 2017.
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.
84
CWB Financial Group 2017 Annual Report i) 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
Note Topic
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Financial instruments
Strategic transactions
Cash resources
Securities
Securities sold under
repurchase agreements
and purchased
under resale agreements
Loans
Allowance for credit
losses
Financial assets
transferred but not
derecognized
Property and equipment
Goodwill and intangible
assets
Derivative financial
instruments
Other assets
Deposits
Interest in
unconsolidated
structured entity
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Other liabilities
Debt
Capital stock
Share-based payments
Non-controlling interests
Contingent liabilities and
commitments
Employee future benefits
Income taxes
Earnings per common
share
Related party
transactions
Interest rate sensitivity
Fair value of financial
instruments
Financial instruments -
offsetting
Risk management
Capital management
Subsidiaries
j) 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 IFRS 9, which will replace IAS 39 Financial
Instruments: Recognition and Measurement (IAS 39). IFRS 9 addresses
classification and measurement of financial assets and liabilities,
impairment and hedge accounting.
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. IFRS 9 is required to be applied on a retrospective
basis, with certain exceptions. CWB does not plan to retrospectively re-
state prior period comparative figures within the consolidated financial
statements upon transition to IFRS 9 and will recognize an adjustment to
opening retained earnings and accumulated other comprehensive income
to reflect the application of the new requirements at the adoption date.
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 includes a policy choice to retain IAS 39 for hedging
purposes pending the completion of the IASB’s project on macro hedge
accounting. CWB expects to elect to continue applying IAS 39 hedging
requirements.
The adoption of IFRS 9 is a significant initiative for CWB supported by
a formal governance framework and a robust implementation plan. For
more details related to CWB’s transition to IFRS 9, see the Future Changes
in Accounting Policies section of Management’s Discussion and Analysis.
IFRS 15 – Revenue from Contracts with Customers
The IASB 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,
and enhanced disclosure requirements. 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. IFRS 15 is effective for CWB’s fiscal year beginning
November 1, 2018. On transition, entities can either restate prior periods
retrospectively or recognize the cumulative effect of the transition in
opening retained earnings with no comparison for prior years. CWB
continues to assess the impact of the new standard on the timing and
measurement of revenue recognition, enhanced financial statement
disclosures as well as transitional requirements. As the majority of its
revenues are outside the scope of IFRS 15, CWB does not currently expect
a significant impact from adopting the new standard.
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. CWB does not currently expect a
significant impact from adopting the amendments.
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.
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 is applied.
CWB is in the process of assessing the impact.
CWB Financial Group 2017 Annual Report
85
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.
Financial assets include cash resources, securities, securities purchased
under resale agreements, loans, derivative financial instruments and
certain other assets. Financial liabilities include deposits, securities sold
under repurchase agreements, derivative financial instruments, debt and
certain other liabilities.
The use of financial instruments exposes CWB to credit, liquidity and
market risk. A discussion of how these are managed can be found in the
Risk Management section of the Management Discussion aand Analysis
(MD&A).
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
Equipment Loans and Leases and General Commercial Lending Assets
On October 30, 2017, CWB entered into an asset purchase agreement to
acquire a portfolio of equipment loans and leases and general commercial
lending assets, expected to approximate $900 million at closing on
January 31, 2018, primarily within the transportation, construction and
healthcare industries, with exposures concentrated outside of Western
Canada.
Trust Services
On September 28, 2017, Canadian Western Trust Company (CWT),
a wholly-owned subsidiary of CWB, appointed a successor trustee or
custodian for clients who held exempt market securities within a CWT
self-directed account. The carrying value of deposits transferred totalled
$71,259 and the market value of the related assets under administration
totalled $1,316,788.
The operations and cash flows of CWT’s self-directed account services
provided to holders of exempt market securities cannot be clearly
distinguished operationally or financially from the rest of CWB, nor do
they represent a separate major line of business or geographic area of
operations. As such, the transaction does not require the presentation of
discontinued operations within the consolidated statements of income.
The gain related to the transaction, which reflects sales proceeds less the carrying value of assets sold and related transactions costs, is recorded in other
non-interest income in the consolidated statements of income and calculated as follows:
Sale proceeds(1)
Transaction costs and accruals
Net Proceeds
Assets sold
Net Gain on Sale
$
8,311
1,147
7,164
1,438
$
5,726
(1) The sale proceeds include contingent consideration with a fair value of $500 and may be subject to post-closing adjustments in fiscal 2018.
CWB Franchise Finance
On July 1, 2016, CWB acquired a portfolio of franchise finance loan
assets along with key employees, 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.
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 2017, the fair value of contingent
consideration was increased by $18,295 (2016 – $7,857), which was
86
recognized as an acquisition-related fair value change in the consolidated
statements of income. CWB paid the first contingent consideration
instalment of $10,132 in cash during fiscal 2017 (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.
CWB Financial Group 2017 Annual Report 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
fair value reported in other comprehensive income, net of income taxes.
At October 31, 2017, the fair value of deposits with regulated financial
institutions was $503,895 (October 31, 2016 – $890,516), which is
$18 (October 31, 2016 – $81) lower than amortized cost. At October
31, 2017, $17,895 of interest-bearing deposits with regulated financial
institutions was restricted from use in relation to the securitization of
equipment financing leases and loans (October 31, 2016 – $16,262).
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.
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.
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
Total
Maturities
Within 1
Year
1 to 3
Years
3 to 5
Years
Over 5
Years
As at
October 31
2017
As at
October 31
2016
$
-
$
390,501
$
892,038
$
24,759
$
1,307,298 $
1,142,798
17,763
110,041
15,022
216,198
164,529
80,190
204,897
33,851
37,198
-
-
-
438,858
308,421
132,410
291,947
154,648
119,201
$
142,826
$
851,418
$
1,167,984
$
24,759
$
2,186,987 $
1,708,594
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
As at October 31, 2017
As at October 31, 2016
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Securities Issued or Guaranteed by
Canada
$ 1,327,541 $
1,014 $
21,257 $ 1,307,298 $ 1,142,651 $
676 $
529 $ 1,142,798
A province or municipality
Other Debt Securities
Preferred Shares
443,510
306,671
149,159
137
2,930
11
4,789
1,180
16,760
438,858
308,421
132,410
291,814
153,126
165,606
274
1,589
-
141
67
46,405
291,947
154,648
119,201
Total
$ 2,226,881 $
4,092 $
43,986 $ 2,186,987 $ 1,753,197 $
2,539 $
47,142 $ 1,708,594
The securities portfolio is primarily comprised of high-quality debt and
equity instruments that are not held for trading purposes and, where
applicable, are typically held until maturity. Fluctuations in value are
generally attributed to changes in interest rates, market credit spreads
and shifts in the interest rate curve as well as volatility in equity markets.
As at October 31, 2017, 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 (2016 – nil).
CWB Financial Group 2017 Annual Report
87
6. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND PURCHASED UNDER
RESALE AGREEMENTS
Securities sold under repurchase agreements represent a sale of
Government of Canada securities by CWB effected with a simultaneous
agreement to purchase them back at a specified price on a future date,
which is generally short term. The difference between the proceeds of
the sale and the predetermined cost to be paid on a resale agreement is
recorded as deposit interest expense.
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.
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.
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.
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.
Outstanding gross loans and impaired loans, net of the allowances for credit losses, by loan type, are as follows:
As at October 31, 2017
As at October 31, 2016
Gross
Amount
Gross
Impaired
Amount(2)
Specific
Allowance
Net
Impaired
Loans
Gross
Amount
Gross
Impaired
Amount(2)
Specific
Allowance
Net
Impaired
Loans
$ 4,725,715 $
19,816
$
209 $
19,607
$ 4,063,552 $
21,968
$
204 $
21,764
Personal
Business
General commercial loans
Commercial mortgages(1)
Real estate project loans
6,307,560
4,266,702
4,029,810
Equipment financing and leasing
3,892,150
Oil and gas production loans
123,631
58,183
16,571
21,391
50,760
1,540
3,071
385
2,020
10,132
800
55,112
16,186
19,371
40,628
5,644,231
4,188,988
4,235,789
3,711,504
740
221,072
18,363
13,552
16,232
40,201
16,896
1,370
270
2,719
9,563
2,143
Total
Collective Allowance(3)
Net Impaired Loans After
Collective Allowance
$ 23,345,568 $
168,261
$
16,617
$ 22,065,136 $ 127,212
$
16,269
151,644
(119,298)
$
32,346
16,993
13,282
13,513
30,638
14,753
110,943
(110,943)
$
-
(1) Multi-family residential mortgages are included in commercial mortgages.
(2) Gross impaired loans include foreclosed assets with a carrying value of $1,983 (October 31, 2016 – $3,876). 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 letters of credit and is not allocated by loan type (see Note 8).
During the year, interest recognized as income on impaired loans totalled $3,552 (2016 – $1,801).
88
CWB Financial Group 2017 Annual Report 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
Collective Allowance(1)
As at October 31, 2017
As at October 31, 2016
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
Gross
Impaired
Amount
Specific
Allowance
$
105,831
$
6,270
$
99,561
$
64,751
$
6,137
$
17,460
19,169
8,273
6,635
10,893
2,179
3,134
1,485
1,099
2,450
$
168,261
$
16,617
15,281
16,035
6,788
5,536
8,443
151,644
(119,298)
29,074
16,596
8,688
3,903
4,200
2,868
4,680
712
543
1,329
$
127,212
$
16,269
Net
Impaired
Loans
58,614
26,206
11,916
7,976
3,360
2,871
110,943
(110,943)
Net Impaired Loans After Collective Allowance
$
32,346
$
-
(1) The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and letters of credit and is not allocated by province.
Loans are considered past due when a customer has not made a payment
by the contractual due date. These loans are not classified as impaired as
they are either less than 90 days past due or well secured and collection
efforts are reasonably expected to result in repayment or restoring it to
current status in accordance with CWB’s policy.
Details of such past due loans follow:
As at October 31, 2017
Personal
Business
Total
1 - 30 days
31 - 60 days
61 - 90 days
More than
90 days
$
52,794
57,542
$
14,400
23,118
$
$
958
5,158
$
677
6
Total
68,829
85,824
$
110,336
$
37,518
$
6,116
$
683
$
154,653
As at October 31, 2016
$
168,153
$
47,136
$
9,309
$
4,491
$
229,089
The composition of CWB’s loan portfolio by geographic region and industry sector is as follows:
($ millions)
Personal(1)
Business
BC
AB
ON
SK
MB
Other
Total
Composition Percentage
Oct. 31
2017
Oct. 31
2016
$ 1,253
$ 1,195
$ 1,876
$
198
$
107
$
97
$ 4,726
20 %
18 %
General commercial loans
Commercial mortgages
Real estate project loans
Equipment financing and leasing(2)
Oil and gas production loans
1,921
1,802
2,546
623
-
6,892
2,219
1,987
1,098
1,119
110
6,533
1,378
94
150
899
-
291
277
165
398
14
2,521
1,145
264
106
71
189
-
630
234
1
-
664
-
899
6,307
4,267
4,030
3,892
124
18,620
27
18
17
17
1
80
26
19
19
17
1
82
Total(3)
$ 8,145
$ 7,728
$ 4,397
$ 1,343
$
737
$
996
$ 23,346
100 %
100 %
Composition Percentage
October 31, 2017
October 31, 2016
35 %
36 %
33 %
36 %
19 %
15 %
6 %
6 %
3 %
3 %
4 %
4 %
100 %
100 %
(1) Includes mortgages securitized through the National Housing Act Mortgage Backed Securities program reported on-balance sheet of $381 (October 31, 2016 - $391).
(2) Includes securitized leases and loans reported on-balance sheet of $1,212 (October 31, 2016 – $1,030) (see Note 9).
(3) This table does not include an allocation of the allowance for credit losses.
CWB Financial Group 2017 Annual Report
89
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, committed but undrawn
credit exposures and letters of credit 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 and letters of
credit is included with other liabilities. Losses expected from future events
are not recognized.
Specific Allowance
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.
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.
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:
• Historical trends in the loss experience during economic cycles;
• The current portfolio profile;
• Historical loss experience in portfolios of similar credit risk
characteristics;
• 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.
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
2017
Specific
Allowance
Collective
Allowance
Total
Specific
Allowance
2016
Collective
Allowance
Total
$
16,269
$
110,943 $
127,212
$ 15,806
$ 99,613 $
115,419
42,631
8,355
50,986
67,785
11,330
79,115
(47,094)
-
(47,094)
(70,460)
-
(70,460)
4,811
-
4,811
3,138
-
3,138
Balance at End of Year
$
16,617
$
119,298 $
135,915
$ 16,269
$ 110,943 $
127,212
Represented by:
Loans
Committed but undrawn credit
$
16,617
$
99,712 $
116,329
$ 16,269
$ 87,519 $
103,788
exposures and letters of credit
(Note 16)
-
19,586
19,586
-
23,424
23,424
Total Allowance
$
16,617
$
119,298 $
135,915
$ 16,269
$ 110,943 $
127,212
90
CWB Financial Group 2017 Annual Report 9. FINANCIAL ASSETS TRANSFERRED BUT NOT DERECOGNIZED
Securitization of equipment financing leases and loans
CWB securitizes equipment financing leases and loans to third parties.
These securitizations do not qualify for derecognition as CWB continues
to be exposed to certain risks associated with the leases and loans;
therefore, CWB has not transferred substantially all of the risks and
rewards of ownership. As the leases and loans do not qualify for
derecognition, the assets are not removed from the consolidated balance
sheets and a securitization liability is recognized within debt securities for
the cash proceeds received (see Note 17).
During 2017, CWB sold securitized equipment financing leases and loans
of $679,352 to third parties (2016 – $816,425) for cash proceeds of
$610,201 (2016 – $734,376).
Securitization of residential mortgages
CWB securitizes fully insured residential mortgage loans through the
creation of mortgage-backed securities under the National Housing Act
Mortgage Backed Securities (NHA MBS) program sponsored by Canada
Mortgage Housing Corporation (CMHC). The mortgage-backed securities
are sold directly to third-party investors, sold to the Canada Housing Trust
(CHT) as part of the Canada Mortgage Bond (CMB) program or are held
by CWB. The CHT issues CMBs, which are government guaranteed, to
third party investors and uses resulting proceeds to purchase NHA MBS
from CWB and other mortgage issuers in the Canadian market.
During 2017, CWB sold securitized residential mortgages of $88,354
to a third-party investor and $39,957 to the CHT for cash proceeds of
$90,003 (2016 – nil) and $38,973 (2016 – nil), respectively.
The third-party sale of the mortgage pools that comprise the NHA MBS
does not qualify for derecognition as CWB retains the credit and interest
rate risks associated with the mortgages, which represent substantially
all of the risks and rewards associated with the transferred assets. As
a result, the mortgages remain on the consolidated balance sheets as
personal loans and are carried at amortized cost. Cash proceeds from the
third-party sale of the mortgage pools, including those sold as part of the
CMB program, are recognized within debt securities (see Note 17).
Securities sold under repurchase agreements
CWB enters into repurchase agreements under which it sells previously
recognized securities, with a simultaneous agreement to purchase
them back at a specific price on a future date, but retains substantially
all of the credit, price, interest rate, and foreign exchange risks and
rewards associated with the assets (see Note 6). These securities are not
derecognized and the cash proceeds from the sale are recognized within
other liabilities on the balance sheet.
Details about the nature of transferred financial assets that do not qualify for derecognition and the associated liabilities follow:
2017
2016
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Transferred Assets that do not Qualify for Derecognition
Securitized equipment financing leases and loans
$
1,211,816
$
1,248,146
$
1,030,499
$
1,099,240
Securitized residential mortgages
Securities issued or guaranteed by Canada
Associated Liabilities(1)
Net Position
119,180
58,358
116,374
58,358
-
-
-
-
1,389,354
1,422,878
1,030,499
1,099,240
1,284,694
1,280,758
943,198
942,171
$
104,660
$
142,120
$
87,301
$
157,069
(1) Associated liabilities consist of $1,105,180 related to securitized equipment financing leases and loans (2016 – $943,198), $121,156 related to residential mortgages securitized through the NHA MBS program (2016 – nil) and $58,358
related to securities sold under repurchase agreements (2016 – nil).
In addition, CWB has securitized residential mortgages through the NHA
MBS program totalling $262,213 with a fair value of $256,038
(2016 – $391,165 with a fair value of $363,103) that were not
transferred to third parties.
CWB Financial Group 2017 Annual Report
91
10. 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; and,
• 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.
Cost
Balance at November 1, 2016
$
70,146
$
18,701 $
28,319
$
39,101
$
156,267
Leasehold
Improvements
Land and
Buildings
Computer
Equipment
Office
Equipment
Total
Additions
Disposals
Balance at October 31, 2017
Accumulated Depreciation and Impairment
Balance at November 1, 2016
Depreciation for the year
Disposals
Balance at October 31, 2017
2,486
(234)
72,398
43,399
4,098
(234)
47,263
53
-
18,754
5,016
564
-
5,580
3,918
(793)
31,444
21,921
2,333
(793)
23,461
2,777
(1,036)
40,842
28,601
2,768
(350)
31,019
Net Carrying Amount at October 31, 2017
$
25,135
$
13,174 $
7,983
$
9,823
$
9,234
(2,063)
163,438
98,937
9,763
(1,377)
107,323
56,115
Cost
Balance at November 1, 2015
$
68,794
$
18,663 $
26,045
$
37,114
$
150,616
Additions
Business acquisition
Disposals
(Note 3)
1,345
7
-
38
-
-
2,269
50
(45)
1,901
86
-
5,553
143
(45)
Balance at October 31, 2016
70,146
18,701
28,319
39,101
156,267
Accumulated Depreciation and Impairment
Balance at November 1, 2015
Depreciation for the year
Disposals
Balance at October 31, 2016
39,092
4,307
-
43,399
4,418
598
-
5,016
19,853
2,113
(45)
21,921
25,897
2,704
-
28,601
89,260
9,722
(45)
98,937
Net Carrying Amount at October 31, 2016
$
26,747
$
13,685 $
6,398
$
10,500
$
57,330
92
CWB Financial Group 2017 Annual Report 11. 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); and,
• CWB Wealth Management Ltd. (WM).
Balance at November 1, 2016
Partial ownership change
Balance at October 31, 2017
Balance at November 1, 2015
Business acquisition
Partial ownership change
Balance at October 31, 2016
MX
38,869
-
$
NL
35,776
-
$
M&P
6,306
793
$
38,869
$
35,776
$
7,099
$
WM(1)
3,811
114
3,925
-
$
35,776
$
4,194
$
3,811
$
$
$
$
$
$
(Note 3)
38,869
-
-
-
-
2,112
-
-
$
38,869
$
35,776
$
6,306
$
3,811
$
Total
84,762
907
85,669
43,781
38,869
2,112
84,762
(1) During fiscal 2017, Adroit Investment Management Ltd. amalgamated with CWB Wealth Management Ltd. and goodwill was combined.
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; and,
• Other: 3 to 5 years.
CWB Financial Group 2017 Annual Report
93
Cost
Balance at November 1, 2016
$
141,927
$
58,906 $
6,514 $
10,922 $
5,150 $
223,419
Software
and Related
Assets
Customer
Relationships
Trademarks
and
Trade Names
Non-
competition
Agreements
Other
Total
Additions
Partial ownership change
Disposals
Balance at October 31, 2017
Accumulated Amortization
Balance at November 1, 2016
Amortization
Disposals
Balance at October 31, 2017
20,298
-
(7,464)
154,761
42,557
13,369
(7,464)
48,462
-
700
-
-
118
-
-
231
-
-
-
-
20,298
1,049
(7,464)
59,606
6,632
11,153
5,150
237,302
19,607
5,102
-
24,709
-
-
-
-
8,768
1,520
-
10,288
3,175
938
-
4,113
74,107
20,929
(7,464)
87,572
Net Carrying Amount at October 31, 2017
$
106,299
$
34,897 $
6,632 $
865 $
1,037 $
149,730
Cost
Balance at November 1, 2015
$
109,414
$
39,576 $
2,552 $
9,770 $
4,480 $
165,792
Additions
Business acquisition
Partial ownership change
Disposals
Balance at October 31, 2016
Accumulated Amortization
Balance at November 1, 2015
Amortization
Disposals
Balance at October 31, 2016
(Note 3)
32,954
-
-
(441)
141,927
34,493
8,505
(441)
42,557
-
17,250
2,080
-
58,906
15,256
4,351
-
19,607
-
3,680
282
-
6,514
-
-
-
-
-
100
1,052
-
-
670
-
-
32,954
21,700
3,414
(441)
10,922
5,150
223,419
7,525
1,243
-
8,768
2,415
760
-
3,175
59,689
14,859
(441)
74,107
Net Carrying Amount at October 31, 2016
$
99,370
$
39,299 $
6,514 $
2,154 $
1,975 $
149,312
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
3.0% (2016 – 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 9.8% (2016 – 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 2017 or 2016.
94
CWB Financial Group 2017 Annual Report 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.
12. 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 creditworthiness).
Approved counterparties are limited to rated financial institutions or their
associated parent/affiliate with a minimum rating of A high or equivalent.
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.
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.
CWB Financial Group 2017 Annual Report
95
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, 2017
As at October 31, 2016
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
$ 3,553,000 $
298 $
8,365 $
8,663 $
1,733
$ 3,698,000 $
12,800 $
10,490 $
23,290 $
3,244
Foreign exchange
contracts
Equity swaps
Total
170,194
22,459
2,627
9,526
1,702
1,527
4,329
11,053
582
877
124,056
23,745
35
-
1,247
1,642
1,282
1,642
281
328
$ 3,745,653 $
12,451 $
11,594 $
24,045 $
3,192
$ 3,845,801 $
12,835 $
13,379 $
26,214 $
3,853
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, 2017
As at October 31, 2016
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
$
195,000 $
239 $
3,358,000 $
(31,483)
$
2,035,000 $
10,335 $
1,663,000 $
(3,014)
Foreign exchange contracts
61,609
2,627
108,585
(3,898)
1,330
35
122,726
(2,575)
Equity swaps designated
as accounting hedges
18,222
7,769
Equity swaps not designated
as accounting hedges
4,237
1,758
-
-
-
-
-
-
-
-
20,117
(1,449)
3,628
(134)
Total
$
279,068 $
12,393 $
3,466,585 $
(35,381)
$
2,036,330 $
10,370 $
1,809,471 $
(7,172)
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)
2017
7,847
19,191
$
$
2016
18,811
9,324
$
$
96
CWB Financial Group 2017 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, 2017
Maturity
As at October 31, 2016
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)
Foreign exchange contracts(2)
Equity swaps designated
as accounting hedges(3)
Equity swaps not designated
as accounting hedges(4)
$ 1,880,000
1.24% $ 1,673,000
1.05% $ 1,600,000
1.35% $ 2,098,000
0.95%
170,194
-
124,056
-
9,214
2.12%
9,008
2.18%
10,053
1.65%
10,064
1.67%
4,237
2.02%
-
-
2,839
1.50%
789
1.50%
Total
$ 2,063,645
$ 1,682,008
$ 1,736,948
$ 2,108,853
(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, 2017 mature
between November 2017 and August 2022.
(2) Foreign exchange contracts outstanding at October 31, 2017 mature between November 2017 and May 2018. The contractual interest rate is not meaningful for foreign exchange contracts.
(3) Equity swaps designated as accounting hedges outstanding at October 31, 2017 mature between June 2018 and June 2020.
(4) Equity swaps not designated as accounting hedges outstanding at October 31, 2017 mature between December 2017 and June 2018.
During the year, $22,089 net unrealized after-tax losses (2016 – $8,157)
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, $3,321 of net gains after-tax (2016 – $113 of net losses
after-tax) were reclassified to net income.
At October 31, 2017, hedged cash flows are expected to occur and affect
profit or loss within the next five years (2016 – five years).
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
13. OTHER ASSETS
Accrued interest receivable
Deferred tax asset
Accounts receivable
Derivative collateral receivable
Prepaid expenses
Financing costs(1)
Income tax receivable
Other
Total
(1) Amortization for the year amounted to $2,262 (2016 - $1,962).
2017
2016
$
-
$
1,135
-
-
(501)
634
-
-
$
(Note 23)
As at
October 31
2017
67,805
39,701
36,013
34,660
$
As at
October 31
2016
56,264
31,704
44,931
2,540
7,498
11,034
5,682
4,605
3,710
14,191
10,455
2,190
$
205,524
$
167,459
CWB Financial Group 2017 Annual Report
97
14. 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(1)
Payable on a fixed date
Total
Payable on demand
Payable after notice
Payable on a fixed date
Total
As at October 31, 2017
Individuals
Business and
Government
Total
$
37,984
$
791,358
$
829,342
3,699,356
9,657,222
3,112,419
4,604,643
6,811,775
14,261,865
$ 13,394,562
$
8,508,420
$ 21,902,982
As at October 31, 2016
Individuals
Business and
Government
Total
$
34,681
$
761,523
$
796,204
3,866,441
9,322,580
3,031,090
4,178,238
6,897,531
13,500,818
$ 13,223,702
$
7,970,851
$ 21,194,553
(1) Deposits payable after notice totalling $71,259 were transferred to a third party as part of the Trust Services strategic transaction (see Note 3).
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
As at
October 31
2017
As at
October 31
2016
$
6,523,479
$
6,167,088
3,098,182
1,870,404
1,832,669
937,131
3,515,358
1,554,168
1,007,829
1,256,375
$ 14,261,865
$ 13,500,818
15. INTEREST IN UNCONSOLIDATED STRUCTURED ENTITY
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 was included
in Deposits in the consolidated balance sheets as at October 31, 2016.
Based on the guidance provided in IFRS 10 Consolidated Financial
Statements, CWB determined that it did not control, and consequently
did not consolidate, CWB Capital Trust.
On December 31, 2016, CWB redeemed the $105,000 senior deposit
note for a redemption price of $108,245, representing the principal
amount plus accrued and unpaid interest. Upon redemption of the senior
deposit note, CWB Capital Trust redeemed the corresponding WesTS.
Subsequent to the redemptions and the satisfaction of all outstanding
liabilities of CWB Capital Trust, the structured entity was terminated,
effective December 31, 2016, in accordance with the Amended and
Restated Declaration of Trust.
98
CWB Financial Group 2017 Annual Report 16. OTHER LIABILITIES
Accounts payable and accrued liabilities
Accrued interest payable
Contingent consideration
Provisions for committed but undrawn credit exposures and letters of credit
Income taxes payable
Deferred tax liability
Derivative collateral payable
Deferred revenue
Leasehold inducements
Other
Total
17. DEBT
a) Debt Securities
As at
October 31
2017
As at
October 31
2016
$
230,187 $
166,544
126,557
134,077
(Note 27)
32,920
24,257
(Note 8)
19,586
23,424
9,413
7,726
(Note 23)
7,252
9,658
6,670
7,070
3,970
3,110
3,698
2,939
14,756
3,325
$
455,009 $
382,130
A summary of outstanding debt related to the securitization of equipment financing leases and loans and residential mortgages by contractual maturity
date is as follows (see Note 9):
Securitized leases
Securitized residential mortgages
Total
b) Subordinated Debentures
$
$
Within
1 Year
1 to 3
Years
3 to
5 Years
394,316 $
532,390 $
178,474 $
As at
October 31
2017
As at
October 31
2016
1,105,180 $
943,198
-
6,287
24,804
90,065
121,156
400,603 $
557,194 $
268,539 $
1,226,336 $ 943,198
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.
redemptions are subject to the approval of OSFI. On March 22, 2017,
CWB redeemed all outstanding 5.571% subordinated debentures at par
plus accrued interest.
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
Interest Rate
3.463%(1)
5.571%(2)
Total
Maturity Date
Earliest Date Redeemable
by CWB at Par
As at
October 31
2017
As at
October 31
2016
December 17, 2024
March 21, 2022
December 17, 2019
March 22, 2017
$ 250,000 $ 250,000
75,000
-
$ 250,000 $ 325,000
(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 had a 15-year term with a fixed interest rate for the first 10 years. Thereafter, the interest rate would have reset quarterly at the CDOR 90-day Bankers’ Acceptance rate plus 180 basis points.
CWB Financial Group 2017 Annual Report
99
18. 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,
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 under dividend reinvestment plan
Issued on exercise or exchange of options(1)
Issued to public
Issued on acquisition of subsidiary
Outstanding at end of year
Share Capital
• 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.
2017
2016
Number of
Shares
Amount
Number of
Shares
Amount
5,000,000
$
125,000
5,000,000
$
125,000
5,600,000
140,000
-
-
5,600,000
10,600,000
-
140,000
265,000
5,600,000
5,600,000
10,600,000
-
140,000
140,000
265,000
88,103,120
718,377
80,526,069
537,511
177,731
213,502
-
-
5,280
8,228
-
-
185,111
16,628
6,125,000
1,250,312
88,494,353
731,885
88,103,120
4,491
706
150,063
25,606
718,377
$
996,885
$
983,377
(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. This
limitation does not restrict the current level of dividends.
a) Common Shares
On October 2, 2017, CWB announced the approval of OFSI and the
Toronto Stock Exchange to repurchase for cancellation up to 1,767,000
common shares, representing approximately 2% of the issued and
outstanding common shares, under a normal course issuer bid (NCIB)
during the 12 month period commencing September 30, 2017. No
common shares have been repurchased under the NCIB.
b) Preferred Shares
Non-Viability Contingent Capital Preferred Share Rights and Privileges
Preferred Shares - Series 5
Preferred Shares - Series 7
$
$
25.00
25.00
$
$
Redemption
Amount
Quarterly
Non-cumulative
Dividend(1)
0.275(2)
0.390625(3)
Annual
Yield(4)
4.40%
6.25%
Date
Redeemable/
Convertible(5)(6)
Convertible to(7)
April 30, 2019
Preferred Shares - Series 6
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,
(7)
floating rate preferred shares.
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, which reset quarterly at a rate equal to the
90-day Government of Canada Treasury Bill rate plus 276 and 547 basis points, respectively.
Upon the occurrence of a non-viability 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).
100
CWB Financial Group 2017 Annual Report
c) Dividends
The following dividends were declared by CWB’s Board of Directors and paid by CWB during the year:
$0.93 per common share (2016 - $0.92)
$1.10 per preferred share - Series 5 (2016 - $1.10)
$1.56 per preferred share - Series 7 (2016 - $0.91)(1)
Total
(1) The 2016 Series 7 Preferred Share dividend payment covered the period from issuance on March 31, 2016 to October 31, 2016.
2017
2016
$
82,107
$
76,424
5,500
8,750
5,500
5,112
$
96,357
$
87,036
Subsequent to October 31, 2017, the Board of Directors of CWB declared
a dividend of $0.24 per common share payable on January 4, 2018 to
shareholders of record on December 15, 2017, a dividend of $0.275 per
Series 5 preferred share payable on January 31, 2018 to shareholders of
record on January 19, 2018, and a dividend of $0.390625 per Series 7
preferred share payable on January 31, 2018 to shareholders of record on
January 19, 2018. With respect to these dividend declarations, no liability
was recorded on the consolidated balance sheets at October 31, 2017.
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 toward 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, 177,731 (2016 – 185,111) common shares were
issued under the plan from CWB’s treasury with no discount (2016 – no
discount).
CWB Financial Group 2017 Annual Report
101
19. 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.
CWB has authorized 6,577,007 common shares (2016 – 6,790,509)
for issuance under the share incentive plan. Of the amount authorized,
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:
Range of Exercise Prices
$23.70 to $26.13
$28.09 to $30.85
$37.50 to $39.42
Total
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 2017, option holders exchanged
the rights to 1,850,575 (2016 – 149,340) options and received 213,502
(2016 – 16,628) shares in return by way of the cashless settlement.
Salary expense of $1,931 (2016 – $2,772) 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 1.3%
(2016 – 0.8%), (ii) expected option life of 5.0 (2016 – 5.0) years, (iii)
expected annual volatility of 26% (2016 – 26%), and (iv) expected annual
options exercisable into 3,390,759 shares (2016 – 5,205,794) 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 2017 to March 2024.
2017
2016
Number
of Options
5,205,794
$
339,630
(1,850,575)
(33,035)
(271,055)
3,390,759
1,787,718
$
$
Weighted
Average
Exercise
Price
29.63
30.84
27.17
35.91
29.67
31.02
35.34
Number
of Options
5,232,366
$
610,731
(149,340)
(78,865)
(409,098)
5,205,794
2,599,039
$
$
Weighted
Average
Exercise
Price
30.26
23.70
25.52
33.21
29.71
29.63
27.44
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
3.8
2.7
1.4
2.6
Weighted
Average
Exercise
Price
24.97
29.32
38.58
$
Weighted
Average
Exercise
Price
-
28.42
38.58
$
Number of
Options
-
571,111
1,216,607
$
31.02
1,787,718
$
35.34
Number of
Options
1,263,411
910,741
1,216,607
3,390,759
dividends of 3.1% (2016 – 3.8%). 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
$4.77 (2016 – $3.47) per share.
During the year, $8,228 (2016 – $706) was transferred from the share-
based payment reserve to share capital, representing the estimated fair
value recognized for 1,850,575 (2016 – 149,340) options exercised
during the year.
102
CWB Financial Group 2017 Annual Report 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 $9,677 (2016 – $9,514) was
recognized related to RSUs. As at October 31, 2017, the liability for the
RSUs held under this plan was $14,510 (October 31, 2016 – $9,436). 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
2017
741,244
360,929
(336,159)
(34,084)
731,930
2016
638,807
442,559
(308,988)
(31,134)
741,244
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 $1,878 (2016 – $990) was recognized
related to PSUs. As at October 31, 2017, the liability for the PSUs held
under this plan was $3,603 (October 31, 2016 – $1,876). 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
Vested and paid out
Balance at End of Year
d) Deferred Share Units
2017
177,579
58,807
(27,123)
209,263
2016
91,404
86,175
-
177,579
Under the Deferred Share Unit (DSU) plan, non-employee directors receive
at least 50% of their 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 $804 (2016 –
$624) related to the DSUs. As at October 31, 2017, the liability for DSUs
held under this plan was $6,281 (October 31, 2016 – $3,639). At the end
of each period, the liability and expense are adjusted to reflect changes in
the market value of the DSUs.
Number of DSUs
Balance at beginning of year
Granted
Balance at End of Year
2017
142,969
29,864
172,833
2016
115,123
27,846
142,969
CWB Financial Group 2017 Annual Report
103
20. NON-CONTROLLING INTERESTS
Non-controlling interests relate to the following:
CWB Wealth Management Ltd.(1)
McLean & Partners Wealth Management Ltd.
Total
(1) During fiscal 2017, Adroit Investment Management Ltd. amalgamated with CWB Wealth Management Ltd.
21. CONTINGENT LIABILITIES AND COMMITMENTS
a) Credit Instruments
As at
October 31
2017
As at
October 31
2016
$
$
$
1,987
810
2,797
$
144
629
773
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
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 $2,010,830 (October 31,
2016 – $2,265,566) and authorized but unfunded loan commitments
of $2,052,879 (October 31, 2016 – $2,473,525). 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 and letters of credit is included in other
liabilities on the consolidated balance sheets (see Note 16). From a
liquidity perspective, undrawn credit authorizations will be funded over
b) Lease Commitments
As at
October 31
2017
As at
October 31
2016
$
4,063,709
$
4,739,091
451,486
492,327
$
4,515,195
$
5,231,418
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 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:
2018
2019
2020
2021
2022
2023 and thereafter
Total
104
$
$
13,720
13,110
12,501
11,077
8,643
31,236
90,287
CWB Financial Group 2017 Annual Report 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
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
22. 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
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.
a material effect on the consolidated financial position or results of
operations.
group retirement savings plan and employee share purchase plan totalled
$13,727 (2016 – $13,267).
CWB Financial Group 2017 Annual Report
105
23. 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
2017
2016
$
85,941
$
(3,708)
82,233
1,642
(9,350)
(7,708)
65,714
2,229
67,943
8,495
(2,960)
5,535
73,478
Total
$
74,525
$
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
Stock-based compensation
Other
2017
2016
$
83,623
26.8% $
68,975
26.8%
(2,645)
519
736
(0.8)
0.2
0.2
(2,362)
745
585
(0.9)
0.3
0.2
Provision for Income Taxes and Effective Tax Rate
$
82,233
26.4% $
67,943
26.4%
Deferred tax balances are comprised of the following:
Deferred Tax Assets
Allowance for credit losses
Leasing income
Deferred loan fees
Deferred deposit broker commission
Other temporary differences
Deferred Tax Liabilities
Intangible assets
Other temporary differences
2017
2016
$
26,988
$
14,915
10,875
(6,625)
(6,452)
39,701
$
5,547
$
1,705
7,252
$
$
$
$
26,260
7,764
12,814
(6,844)
(8,290)
31,704
6,578
3,080
9,658
106
CWB Financial Group 2017 Annual Report 24. 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
Denominator
Weighted average of common shares outstanding - basic
Dilutive instruments:
Stock options(1)
Weighted Average Number of Common Shares Outstanding - Diluted
Earnings Per Common Share
Basic
Diluted
2017
2016
$
214,277 $
177,761
88,296,592
83,411,226
295,586
7,941
88,592,178
83,419,167
$
2.43 $
2.42
2.13
2.13
(1) At October 31, 2017, the denominator excludes 1,556,237 (2016 – 5,205,794) of employee stock options with an average exercise price of $37.49 (2016 - $30.02), adjusted for unrecognized stock-based compensation, that is greater
than the average market price.
25. RELATED PARTY TRANSACTIONS
Transactions with and between subsidiary entities are made at normal
market prices and eliminated on consolidation.
Preferred Rates and Terms
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 $116,199 (October 31, 2016 –
$105,634). 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 $311,194 (October 31,
2016 – $318,569).
Compensation of key management personnel is as follows:
Salaries, benefits and directors' compensation
Share-based payments (stock options, RSUs, PSUs and DSUs)(1)
Total
(1) Share-based payments are based on the estimated fair value on grant date.
Loans outstanding with key management personnel totalled $326 as at
October 31, 2017 (October 31, 2016 – $386). CWB’s policies preclude
lending to CWB’s independent directors.
Key Management Personnel
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.
2017
5,106
$
2,936
8,042
$
2016
4,815
3,117
7,932
$
$
CWB Financial Group 2017 Annual Report
107
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
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.
Asset Liability Gap Positions
($ millions)
October 31, 2017
Assets
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
Cash resources and securities
$
821
$
47
$
19
$
887
$
1,797
$
25
373
-
-
398
$
-
$
2,709
(136)
23,229
509
170
543
509
3,746
30,193
-
-
-
-
-
-
-
$
$
398
2,358
$
$
(14)
21,903
-
546
-
2,199
170
2,901
(2,358)
-
-
-
-
58
546
1,476
2,464
3,746
30,193
-
-
-
-
-
$
$
$
Loans(1)
Other assets(2)
Derivative financial instruments(3)
Total
Liabilities and Equity
Deposits
Securities sold under
repurchase agreements
Other liabilities(2)
Debt(1)
Equity
Derivative financial instruments(3)
Total
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
10,663
-
80
11,564
1,201
-
150
1,398
3,701
15,565
-
1,673
5,393
-
1,903
18,355
7,427
-
1,673
10,897
7,541
961
5,066
13,568
8,349
58
-
38
-
3,576
11,213
-
-
71
-
-
-
-
292
-
-
1,032
5,358
58
-
401
-
3,576
17,603
$
$
351
351
$
$
366
717
$
$
35
752
$
$
752
752
$
$
-
-
1,075
265
-
9,689
1,208
1,960
Percentage of Total Assets
1.2%
2.4%
2.5%
2.5%
6.5%
7.8%
October 31, 2016
Cumulative Gap
Cumulative Gap as a
$
219
$ 1,235
$
1,003
$
1,003
$
1,815
$
2,075
$
Percentage of Total Assets
0.8%
4.2%
3.5%
3.5%
6.2%
7.1%
(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.
The effective, weighted average interest rates for each class of financial asset and liability are shown below:
Weighted Average Effective Interest Rates
(%)
October 31, 2017
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
October 31, 2016
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
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
3.6 %
0.7
2.9 %
3.1 %
0.9
2.2 %
3.5 %
1.7
1.8 %
2.5 %
2.4
0.1 %
3.4 %
1.8
1.6 %
3.7 %
1.7
2.0 %
3.5 %
1.1
2.4 %
3.2 %
1.3
1.9 %
3.5 %
2.2
1.3 %
3.4 %
2.2
1.2 %
4.8 %
-
4.8 %
4.1 %
-
4.1 %
Total
3.5 %
2.0
1.5 %
3.3 %
2.0
1.3 %
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 $8,324 (October 31, 2016 – $12,582)
and decrease other comprehensive income $77,293 (October 31, 2016 –
$57,109) 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 $13,226 (October 31, 2016 – $5,150)
and increase other comprehensive income $76,173 (October 31, 2016 –
$58,646), net of tax.
108
CWB Financial Group 2017 Annual Report
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.
October 31, 2017(1)
Financial Assets
Cash resources
Securities
Loans(2)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(2)
Securities sold under
repurchase agreements
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
October 31, 2016
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
Total Financial Liabilities
Loans and
Receivables,
and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
Fair Value
Over (Under)
Carrying
Amount
(Note 4)
$
(Note 5)
- $
-
-
- $
521,796 $
521,796 $
521,796 $
-
2,186,987
2,186,987
2,186,987
-
-
23,365,410
12,393
-
-
-
23,365,410
23,649,806
284,396
12,393
12,393
-
$
$
12,393 $
23,365,410 $
2,708,783 $
26,086,586 $
26,370,982 $
284,396
- $
21,916,584 $
- $
21,916,584 $
21,874,990 $
(41,594)
-
-
-
35,381
-
58,358
58,358
58,358
-
1,476,336
32,920
-
-
-
-
1,476,336
1,437,516
(38,820)
32,920
35,381
32,920
35,381
-
-
$
35,381 $
23,425,840 $
58,358 $
23,519,579 $
23,439,165 $
(80,414)
Loans and
Receivables,
and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
- $
- $
920,056 $
920,056 $
920,056 $
(Note 4)
$
(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 $
-
-
7,172
1,268,198
24,257
-
-
-
-
1,268,198
1,271,036
24,257
7,172
24,257
7,172
65,993
2,838
-
-
$
7,172 $
22,508,297 $
- $
22,515,469 $
22,584,300 $
68,831
Fair Value
Over
Carrying
Amount
-
-
-
(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.
CWB Financial Group 2017 Annual Report
109
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.
• 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.
• 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.
110
CWB Financial Group 2017 Annual Report 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, 2017
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Securities sold under repurchase agreements
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
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
Derivative related
Total Financial Liabilities
-
-
-
-
-
-
-
-
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
521,796
$
27,440 $
494,356 $
2,186,987
23,649,806
12,393
285,998
1,900,989
-
-
-
23,649,806
12,393
-
$ 26,370,982
$
313,438 $
2,407,738 $ 23,649,806
$ 21,874,990
$
- $
21,874,990 $
58,358
1,437,516
32,920
35,381
-
-
-
-
58,358
1,437,516
-
32,920
35,381
-
$ 23,439,165
$
- $
23,406,245 $
32,920
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
920,056
$
45,426 $
874,630 $
1,708,594
163,318
22,376,753
10,370
322,509
1,386,085
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
-
7,172
-
-
24,257
-
$ 22,584,300
$
- $
22,560,043 $
24,257
CWB Financial Group 2017 Annual Report
111
b) Level 3 Financial Instruments Carried at Fair Value
The Level 3 financial liabilities measured at fair value on the consolidated
balance sheet as at October 31, 2017 are related to the acquisition
of CWB Maxium and the Trust Services strategic transaction (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:
Acquisitions
Balance at beginning of year
Business acquisition
Acquisition-related fair value changes
Contingent consideration instalment payment
Dispositions
Balance at beginning of year
Trust Services strategic transaction
Extinguishment of contingent consideration
Balance at End of Year
2017
2016
(Note 3)
$
24,257
$ -
-
16,400
18,295
7,857
(10,132)
-
32,420
24,257
-
650
(Note 3)
500
-
-
(650)
500
-
$
32,920
$
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, 2017
Financial Assets
Derivative instruments
Financial Liabilities
Derivative instruments
As at October 31, 2016
Financial Assets
Derivative instruments
Financial Liabilities
Derivative instruments
Amounts not offset on the consolidated balance sheets
Gross amounts
reported on the
consolidated
balance sheets
Impact of
master netting
agreements
Cash
collateral(1)
Securities
received as
collateral(1)(2)
Net amount
$
$
12,393 $
3,106 $
6,670
$
35,381 $
3,106 $
30,914
$
-
-
$
$
2,617
1,361
Amounts not offset on the consolidated balance sheets
Gross amounts
reported on the
consolidated
balance sheets
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
(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.
112
CWB Financial Group 2017 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
19 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) using the Standardized approach. 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.
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
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 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 2017 inclusion of non-qualifying capital
instruments in regulatory capital under Basel III is capped at 50% (2016 –
60%) of the balance of non-common equity instruments outstanding at
January 1, 2013. At October 31, 2017 and 2016 there were no exclusions
from regulatory capital relating to outstanding subordinated debentures.
In December 2016, CWB redeemed both the $105,000 senior deposit
note held by CWB Capital Trust and all outstanding CWB Capital Trust
Securities 1 (WesTS), which did not qualify as non-viability contingent
capital (NVCC) under the Basel III regulatory capital requirements. Prior
to the redemption, there was no exclusion from Tier 1 regulatory capital
related to the WesTS. The redemption resulted in a $105,000 reduction
in CWB’s Total regulatory capital and reduced both the Tier 1 and Total
capital ratios by approximately 50 basis points (see Note 15).
In March 2017, CWB redeemed all $75,000 outstanding 5.571%
subordinated debentures, which did not qualify as NVCC under the Basel
III regulatory requirements. The redemption reduced the Total ratio by
approximately 40 basis points.
During the year, CWB complied with all internal and external capital
requirements.
2017
2016
$
2,009,530
$
1,863,264
2,274,727
2,644,071
2,233,364
2,669,334
9.5%
10.8
12.5
8.3
9.2%
11.0
13.1
8.6
CWB Financial Group 2017 Annual Report
113
31. SUBSIDIARIES
As at October 31, 2017, CWB, either directly or indirectly through its subsidiaries, controls the following significant subsidiaries.
Canadian Western Bank Subsidiaries(1)
(annexed in accordance with subsection 308 (3) of the Bank Act)
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
Carrying Value of
Voting Shares Owned
by the CWB(4)
$ 134,458
30,812
CWB Wealth Management Ltd.(2)(3)
Suite 3000, 10303 Jasper Avenue
29,518
Edmonton, Alberta
McLean & Partners Wealth Management Ltd.
801 10th Ave SW
Calgary, Alberta
Canadian Western Financial Ltd.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
CWB Insurance Solutions Ltd.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Trust Company
Suite 3000, 10303 Jasper Avenue
19,136
Edmonton, Alberta
Valiant Trust Company
Suite 3000, 10303 Jasper Avenue
8,080
Edmonton, Alberta
Canadian Western Bank Leasing Inc.
Suite 3000, 10303 Jasper Avenue
1
Edmonton, Alberta
(1) Unless otherwise noted, CWB, either directly or through its subsidiaries, owns 100% of the voting shares of each entity.
(2) CWB owns 90.17% of the voting shares of CWB Wealth Management Ltd.
(3) During fiscal 2017, Adroit Investment Management Ltd. amalgamated with CWB Wealth Management Ltd. and CWB transferred its controlling interest in McLean & Partners Wealth Management Ltd. (75.88% ownership) and
Canadian Western Financial Ltd. (100% ownership) to CWB Wealth Management Ltd. CWB Insurance Solutions Ltd. is 100% owned by CWB Wealth Management Ltd.
(4) The carrying value of voting shares is stated at the cost of CWB’s equity in the subsidiaries in thousands of dollars.
114
CWB Financial Group 2017 Annual Report
Shareholder Information
CWB Financial Group
Corporate Headquarters
Suite 3000, 10303 Jasper Avenue NW
CWB 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
CWB Financial Group
Suite 3000, 10303 Jasper Avenue NW
CWB Place
Edmonton, AB T5J 3X6
Telephone: (800) 836-1886
Fax: (780) 969-8326
Email: 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 2017 Annual Report, along with
our Annual Information Form, Notice
of Annual Meeting of Shareholders
and Proxy Circular, is available on our
website, or will be available in due
course. For additional printed copies
of these reports, please contact the
Investor Relations Department.
Filings are available on the Canadian
Securities Administrators' website at
sedar.com.
2018 Annual Meeting
The annual meeting of the common
shareholders of Canadian Western
Bank will be held in Edmonton, AB, on
April 5, 2018 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
CWB Financial Group
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
Blaine Forer
Senior Vice President and
Regional General Manager,
British Columbia
Lester Shore
Senior Vice President and Regional
General Manager, Northern Alberta
Mario Furlan
Senior Vice President,
Real Estate and Specialized Lending
Keith Hughes
Senior Vice President,
Business and Personal Banking
National Leasing
Tom Pundyk
President and Chief Executive Officer
CWB Optimum Mortgage
Rejean Roberge
Vice President
Canadian Western Trust
Matt Colpitts
Vice President and General Manager
CWB Wealth Management
David Schaffner
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
Ombudsman
Michael Novak
Carolyn J. Graham
Executive Vice President and Chief
Financial Officer
CWB Financial Group
Telephone: (780) 423-8854
Fax: (780) 423-8899
Email: 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
Email: rmanning@shawbiz.ca
SENIOR OFFICERS
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, 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 2017 Annual Report
115
Locations
Canadian Western Bank
Regional Offices
British Columbia
2200, 666 Burrard Street
Vancouver
(604) 669-0081
Blaine Forer
Northern Alberta
3000, 10303 Jasper Avenue NW
Edmonton
(780) 423-8888
Lester Shore
Calgary Northeast
2810 - 32 Avenue NE
(403) 250-8838
June Lavigueur
West Broadway
110, 1333 West Broadway
(604) 730-8818
Lawrence Robinson
Calgary South Trail Crossing
300, 5222 - 130 Avenue SE
(403) 257-8235
Nancy Matheos
Abbotsford
100, 2548 Clearbrook Road
(604) 855-4941
Hugh Ellis
Broker Buying Centre
285, 2880 Glenmore Trail SE
(403) 720-8960
David Miller
Coquitlam
310, 101 Schoolhouse Street
(604) 540-8829
Dave McGregor
Prairies
606 - 4 Street SW
Calgary
(403) 262-8700
Jeff Bowling
Real Estate and
Specialized Lending
2200, 666 Burrard Street
Vancouver
(604) 443-5118
Mario Furlan
Equipment Financing
3000, 10303 Jasper Avenue NW
Edmonton
(780) 441-3770
Kirby Hill
BRANCHES
Alberta
Edmonton
Edmonton Main
100, 12230 Jasper Avenue NW
(780) 424-4846
Andy McPherson
103 Street
10303 Jasper Avenue NW
(780) 423-8801
Bruce Young
Old Strathcona
7933 - 104 Street NW
(780) 433-4286
Donna Austin
South Edmonton Common
2142 - 99 Street NW
(780) 988-8607
Robert Ovics
West Point
17603 - 100 Avenue NW
(780) 484-7407
David Hardy
Calgary
Calgary Main
606 - 4 Street SW
(403) 262-8700
Dean Proctor
Calgary Chinook
6606 Macleod Trail SW
(403) 252-2299
Rick Vandergraaf
Calgary Foothills
6127 Barlow Trail SE
(403) 269-9882
Dustin Jones
116
Calgary Westjet
Banking Centre
22 Aerial Place NW
Westjet Campus
(403) 452-5869
Grande Prairie
11226 - 100 Avenue
(780) 831-1888
Todd Kramer
Leduc
5407 Discovery Way
(780) 986-9858
Surinder Gakhal
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 SE
(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
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
Dylan Watson
Victoria
1201 Douglas Street
(250) 383-1206
Mary Ellen Echle
CWB Optimum Mortgage
Edmonton
#1010, 10303 Jasper Avenue NW
(780) 423-9748
Toll-free: 1-866-441-3775
optimummortgage.ca
(Representation across Western
Canada, Ontario, and Atlantic
Canada)
CWB Maxium Financial
Richmond Hill
30 Vogell Road #1
(905) 780-6150
cwbmaxium.com
CWB Franchise Finance
Missassauga
Suite E200 6860 Century Avenue
(289) 998-0284
cwbfranchise.com
CWB Wealth
Management
Edmonton
3000, 10303 Jasper Avenue NW
(855) 292-9655
cwbwealth.com
McLean & Partners
Wealth Management
Calgary
801 - 10 Avenue SW
(403) 234-0005
Toll-free: 1-888-665-0005
mcleanpartners.com
Canadian Western
Financial
Edmonton
3000, 10303 Jasper Avenue NW
(780) 423-8888
canadianwesternfinancial.com
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 Downtown
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)
Motive Financial
Edmonton
3000, 10303 Jasper Avenue NW
(780) 441-2249
Toll-free: 1-877-441-2249
motivefinancial.com
Canadian Western Trust
Toll-free: 1-800-663-1124
cwt.ca
Vancouver
600, 750 Cambie Street
(604) 685-2081
CWB Financial Group 2017 Annual Report cwb.com