Canadian Western Bank
Annual Report 2019

Plain-text annual report

2019 Annual Report GRAEDON RUST, Relationship Manager, Commercial Banking, CWB SOHAIL “ZEE” ZAIDI, Owner and CEO, Remedy Café Five Year Financial Summary (1) ($ thousands, except per share amounts) Results from Continuing Operations(3) Net interest income Non-interest income Pre-tax, pre-provision income Total revenue Common shareholders’ net income Earning per share Basic Diluted Adjusted cash Return on common shareholders' equity Adjusted return on common shareholders' equity Return on assets Efficiency ratio Net interest margin Number of full-time equivalent staff Results from Combined Operations(3) Common shareholders' net income Earnings per share Basic Diluted Adjusted cash Return on common shareholders' equity Adjusted return on common shareholders' equity Return on assets Results from Discontinued Operations(3) Common shareholders' net income Earnings per share Basic Diluted Adjusted cash Per Common Share Average common shares outstanding (thousands) Cash dividends Book value Market price High Low Close 2019(2) 2018 2017 2016 2015 $ 785,584 $ 724,990 $ 642,390 $ 585,224 $ 543,472 76,020 461,130 861,604 266,940 78,368 436,188 803,358 249,256 84,245 388,729 726,635 214,277 72,672 350,603 657,896 177,761 67,948 322,479 611,420 208,064 3.05 3.04 3.15 10.9% 11.3 0.88 46.5 2.60 2,278 2.81 2.79 3.01 11.0% 11.9 0.89 45.7 2.60 2,178 2.43 2.42 2.63 10.1% 11.0 0.85 46.5 2.56 2,058 2.13 2.13 2.26 9.3% 9.9 0.73 46.7 2.41 1,966 2.59 2.59 2.63 12.4% 12.6 0.97 47.3 2.53 1,928 $ 266,940 $ 249,256 $ 214,277 $ 177,761 $ 319,701 3.05 3.04 3.15 10.9% 11.3 0.88 - - - - 87,513 1.08 29.29 33.89 24.33 33.35 2.81 2.79 3.01 11.0% 11.9 0.89 - - - - $ $ 88,952 $ 1.00 $ 26.09 40.83 29.81 30.62 2.43 2.42 2.63 10.1% 11.0 0.85 - - - - 88,297 0.93 24.82 37.36 23.68 36.34 $ $ 3.97 3.97 4.01 19.1% 19.3 1.48 $ 111,637 2.13 2.13 2.26 9.3% 9.9 0.73 - - - - $ 1.38 1.38 1.38 80,442 0.86 22.18 38.16 21.04 25.13 83,411 $ 0.92 $ 23.58 29.30 19.26 25.45 Balance Sheet and Off-Balance Sheet Summary Assets $ 31,424,235 $ 29,021,463 $ 26,447,453 $ 25,222,549 $ 22,838,527 Cash resources, securities and repurchase agreements Loans Deposits Debt Shareholders' equity Assets under administration Assets under management Capital Adequacy Common equity Tier 1 ratio Tier 1 ratio Total ratio Other Information 2,475,415 28,365,893 25,351,361 2,412,293 2,945,810 9,298,745 2,099,569 2,237,973 26,204,599 23,699,957 2,007,854 2,585,752 8,368,716 2,100,802 2,708,783 23,229,239 21,902,982 1,476,336 2,461,045 2,791,968 21,961,348 21,194,553 1,268,198 2,342,040 10,408,012 10,689,398 2,114,861 1,924,181 2,994,534 19,475,383 19,365,407 1,187,623 1,910,907 9,293,683 1,882,736 9.1% 10.7 12.8 9.2% 10.3 11.9 9.5% 10.8 12.5 9.2% 11.0 13.1 8.5% 9.7 12.7 Provision for credit losses on total loans as a percentage of average loans(4) (5) Provision for credit losses on impaired loans as a percentage of average loans(4) (5) Net impaired loans as a percentage of total loans 0.21% 0.20% 0.23% 0.38% 0.17% 0.21 0.43 0.19 0.42 0.19 0.65 0.32 0.51 0.12 0.41 (1) See page 20 for a discussion of non-IFRS measures. (2) Amounts for 2019 have been prepared in accordance with IFRS 9 Financial Instruments (IFRS 9) (refer to Notes 1 and 2 of the annual consolidated financial statements). Prior year comparatives (3) have been prepared in accordance with IAS 39 Financial Instruments: Classification and Measurement (IAS 39) and have not been restated. 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. (4) Under IFRS 9, provisions for credit losses related primarily to loans, committed but undrawn credit exposures and letters of credit, and also apply to debt securities measured at fair value through other comprehensive income and other financial assets. Prior to the adoption of IFRS 9, provisions for credit losses only related to loans, committed but undrawn credit exposures and letters of credit. Includes provisions for credit losses on loans, committed but undrawn credit exposures and letters of credit. (5) CWB Financial Group 2019 Annual Report i Performance Dashboard (1)(2) 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. 2019 10YR CAGR(3) TOTAL LOANS* $28.4B 12% TOTAL ASSETS $31.4B 10% TOTAL DEPOSITS $25.4B 10% ASSETS UNDER MANAGEMENT $2.1B ASSETS UNDER ADMINISTRATION $9.3B * INCLUDING THE ALLOWANCE FOR CREDIT LOSSES DIVERSIFYING LOANS BY PROVINCE (%) DIVERSIFYING LOANS BY LENDING SECTOR (%) Growing a more balanced geographic footprint through targeted growth in Ontario 2019 2009 33 32 27 5 3 35 50 7 5 3 British Columbia Alberta Ontario and other Saskatchewan Manitoba Growing a more balanced industry mix with reduced concentration in commercial real estate through targeted growth of full-service relationships with business owners 2019 2009 General commercial loans Personal loans and mortgages Commercial mortgages Equipment financing and leasing Real estate project loans Oil and gas production loans 30 20 18 18 13 1 27 16 23 13 19 2 GROWTH AND DIVERSIFICATION OF FUNDING SOURCES - COMPOSITION OF TOTAL FUNDING (%) Deep and liquid funding sources Lower proportion of broker deposits, significant increases in funding from capital markets and securitization Branch demand and notice deposits Broker term deposits Branch term deposits Capital markets term deposits Securitization 2019 2009 32 30 19 12 7 35 35 29 1 - ii CWB Financial Group 2019 Annual Report STRONG CREDIT QUALITY STRONG EFFICIENCY RATIO 5 YEAR AVERAGE AS A % OF GROSS LOANS EXPENSE GROWTH DIVIDED BY REVENUE GROWTH 0.52% $ GROSS IMPAIRED LOANS 0.21% $ WRITE-OFFS GROSS IMPAIRED LOANS AND WRITE-OFFS AS A % OF GROSS LOANS 46.5% 1.5 1.0 0.5 0.0 60 40 20 00 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 PROVISION FOR CREDIT LOSSES AS A % OF AVERAGE LOANS LOW LEVERAGE TOTAL ASSETS-TO-EQUITY 5YR AVERAGE AS A % OF AVERAGE LOANS 0.21% 10.7% 0.5 0.4 0.3 0.2 0.1 0.0 21.0 14.0 7.0 0.0 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 STRONG REGULATORY CAPITAL RATIOS BASED ON THE STANDARDIZED APPROACH CWB | CWB’S REGULATORY MINIMUM 9.1% | 7.0% COMMON EQUITY TIER 1 CAPITAL (CET1) 10.7% | 8.5% TIER 1 CAPITAL 12.8% | 10.5% TOTAL CAPITAL 8.3% | 3.0% BASEL III LEVERAGE RATIO CWB Financial Group 2019 Annual Report iii COMMON SHAREHOLDERS’ NET INCOME ($ MILLIONS) $267 CONSISTENT GROWTH OF BOOK VALUE / SHARE CONSISTENT GROWTH OF DIVIDENDS PAID / COMMON SHARE $29.29 9% 10YR CAGR $1.08 9% 10YR CAGR 260 195 130 65 00 32.00 24.00 16.00 8.00 0.00 1.20 0.90 0.60 0.30 0.00 15 16 17 18 19 15 16 17 18 19 15 16 17 18 19 2019 MEDIUM-TERM PERFORMANCE TARGET RANGES KEY METRICS 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 MEDIUM-TERM PERFORMANCE TARGET RANGES FISCAL 2019 PERFORMANCE 7 - 12% 12 - 15% Positive Strong ~30% Delivered 5% Delivered 11.3% Delivered negative 1.8% Delivered a very strong ratio of 9.1% Delivered 35% INVESTMENT GRADE CREDIT RATINGS (DBRS) - STABLE TREND (CONFIRMED NOVEMBER 27, 2019) A (low) LONG-TERM DEPOSITS / LONG-TERM SENIOR DEBT R-1 (low) SHORT-TERM INSTRUMENTS BBB (low) SUBORDINATED DEBENTURES (NVCC) Pfd-3 PREFERRED SHARES (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; see page 20 for definitions and discussions of non-IFRS measures. (2) As of 2011, financial results are reported under International Financial Reporting Standards (IFRS), as opposed to Generally Accepted Accounting Principles (GAAP). CWB adopted IFRS 9 Financial Instruments in 2019 (refer to Notes 1 and 2 of the 2019 audited annual financial statements). Prior period results have not been restated and are not directly comparable. (3) CAGR - compound annual growth rate. CWB Financial Group 2019 Annual Report 1 Table of Contents i FIVE YEAR FINANCIAL SUMMARY ii PERFORMANCE DASHBOARD 3 WHO WE ARE 3 WHY INVEST IN CWB? 4 A DIFFERENTIATED FULL-SERVICE CLIENT EXPERIENCE 5 GROWING CAPABILITIES TO DELIVER COAST TO COAST 7 STRATEGIC OBJECTIVES & 2019 HIGHLIGHTS 8 MESSAGE FROM THE PRESIDENT & CEO 11 OUR VALUES 11 OUR STRATEGY 11 OUR VISION 12 EXECUTIVE COMMITTEE 14 MESSAGE FROM THE CHAIR OF THE BOARD 16 BOARD OF DIRECTORS & CORPORATE GOVERNANCE 17 SOCIAL RESPONSIBILITY 18 LASTING IMPACTS IN OUR COMMUNITIES 19 MANAGEMENT’S DISCUSSION AND ANALYSIS 70 CONSOLIDATED FINANCIAL STATEMENTS 117 SHAREHOLDER INFORMATION 118 LOCATIONS MIKE SPIESS, AVP and Manager of Commercial Relationships, CWB CAREY MOBIUS, President and CEO, Garibaldi Glass 2 CWB Financial Group 2019 Annual ReportWho we are Why invest in CWB? CWB Financial Group (TSX: CWB) is an agile, future focused, CWB Financial Group creates long-term value for shareholders growth-oriented, full-service financial institution serving through strong, profitable growth of full-service client business owners and individuals across Canada. Our teams relationships across a growing geographic footprint. We deliver a uniquely proactive client experience through highly maintain strong capital ratios, generate consistent dividend personalized service, specialized expertise within targeted growth, and maintain the strongest consolidated efficiency industries, customized solutions and faster response times. Headquartered in Edmonton, Alberta, we are the only full- service bank with a strategic focus to meet the unique financial ratio among the Canadian banks. In fiscal 2020, we expect to successfully transition to the Advanced approach for capital and risk management, which will position us to deliver a higher needs of business owners. We provide full-service business and growth, higher profitability bank with an improved view of risk. personal banking, nation-wide specialized financing in targeted industries, comprehensive wealth management offerings, and trust services. Our highly engaged teams operate within a client-centric, collaborative and change-ready culture, with a core focus to achieve CWB’s long-term goal to be the best full-service bank for business owners in Canada. We continue to invest in capabilities to provide innovative financial solutions to business owners, their employees and their families, through a full range of in-person and digital channels. CWB’s differentiated market position, performance-based culture and transformation- focused strategy has set the stage to create a disruptive force in Canadian financial services, and deliver breakout growth in the years to come. 3 CWB Financial Group 2019 Annual ReportA Differentiated Full-Service Client Experience At CWB Financial group, our relationship-based approach is FULL-SERVICE PERSONAL BANKING AND LENDING focused to meet the unique financial needs of small and medium- sized businesses and their owners. We set ourselves apart through proactive client experiences: our people know our clients and their industries, we ask the right questions, and work to find the right financial solutions. Our core strength in full-service business and personal banking is complemented with targeted capabilities in highly-responsive business lines offering specialized financing, wealth management and trust services. CWB FULL-SERVICE BANKING FULL-SERVICE BUSINESS BANKING AND LENDING We take an uncommon approach to business banking. Through our branch network we offer our full suite of financing and cash management solutions to allow business owners to streamline financial management so they can focus on what matters most: growing their business. We also offer specialized financing solutions within targeted, growth-oriented markets: • Led through our flagship Real Estate and Specialized lending offices in Vancouver, Surrey, Edmonton and Calgary, we deliver local market expertise and flexible lending options to top real estate developers and commercial property owners. We understand that a business owner’s financial life extends beyond their business. We provide a proactive approach for business owners, their employees and families with a full complement of personal banking services delivered today through our branch network. Services include chequing and savings accounts, mortgages, home equity lines of credit, personal loans and investment products. We also offer targeted savings solutions for individuals: • Our branch-based teams deliver a highly personal, caring client experience and offer attractive rates. • Motive Financial provides internet banking services to clients across Canada seeking enhanced flexibility for their personal saving needs. Online account access and a dedicated customer service team allow Motive Financial clients to manage their savings with ease. CWB WEALTH MANAGEMENT We understand that a business owner’s personal wealth is often integrated with their business, and we deliver a complete wealth management approach to encompass both aspects. We create thoughtful, sophisticated financial plans that complement their investment portfolio and are woven into the fabric of our clients’ • Our equipment financing specialists provide transactions across lives. a broad range of industries, with comprehensive geographic coverage. CWB National Leasing is the largest Canadian lessor in small- and mid-size commercial equipment transactions, with operations across Canada. CWB Equipment Finance delivers mid- and large-size equipment transactions from British Columbia to Ontario. Our specialized Broker Buying Centre acquires loans and leases from the finance divisions of original equipment manufacturers and select third-party brokers. • CWB Maxium provides financing solutions to a growing and diversified base of entrepreneurial business owners across the country with a particularly strong presence in Ontario. High net-worth individuals and institutions who value discretionary wealth management choose the boutique portfolio management companies of CWB Wealth Management, including CWB McLean & Partners. We provide our clients with distinct and personalized investment strategies matched to their risk appetite. Financial planning and investment products are also offered within CWB branches through our mutual fund dealer, Canadian Western Financial. Investment solutions include CWB Wealth Management’s proprietary Core and Onyx Portfolio Series mutual funds, as well as offerings from other leading mutual fund companies. Our industry specializations include general corporate, health CWB TRUST SERVICES care, program financing, real estate, golf, and transportation. • CWB Franchise Finance is a leading provider of financing solutions for growth-oriented hotel and hospitality franchise owners across Canada. We offer a wide variety of comprehensive trustee and custodial solutions for individuals and businesses through CWB Trust Services. CWB Trust Services has a proven reputation for comprehensive delivery of fiduciary expertise, asset safe keeping and dedicated • CWB Optimum Mortgage is our broker-sourced provider of “A” client service. Our philosophy is centered on providing clients a and alternative mortgages. We offer personalized borrowing rapid response, strong attention to detail and a flexible, solution- solutions for clients who fall within and outside of traditional oriented approach to doing business. lending guidelines, with geographic coverage across Canada outside of Quebec. 4 CWB Financial Group 2019 Annual ReportKELLY-ANNE BODVARSON, Manager of Operations, Oakville Investments Ltd. MENNO GIESBRECHT, President, Oakville Investments Ltd. Growing Capabilities to Deliver Coast to Coast FIRST ONTARIO BRANCH IN MISSISAUGA WILL OPEN IN 2020. REGIONAL MARKET COVERAGE BC AB SK and MB ON CWB Full-service Branches CWB Full-service Branches CWB Full-service Branches CWB Equipment Financing CWB Equipment Financing CWB Equipment Financing CWB Franchise Finance CWB Franchise Finance CWB Franchise Finance CWB National Leasing CWB National Leasing CWB National Leasing CWB Maxium CWB Maxium CWB Maxium CWB Optimum Mortgage CWB Optimum Mortgage CWB Optimum Mortgage CWB Trust Services CWB Trust Services CWB Wealth Management CWB Wealth Management CWB Full-service Branch (2020) CWB Equipment Financing CWB Franchise Finance CWB National Leasing CWB Maxium CWB Optimum Mortgage CWB Trust Services QC CWB National Leasing CWB Equipment Financing NB, NS, PEI and NL CWB National Leasing CWB Optimum Mortgage 5 CWB Financial Group 2019 Annual Report “ CWB is very hands-on and customer service oriented. It feels similar to what we do and it just works.” - SOFIA SAYANI SOFIA SAYANI, Director of Sales and Marketing, Executive Hotels & Resorts FARIDA SAYANI, Owner and Managing Director, Executive Group Development 6 CWB Financial Group 2019 Annual ReportStrategic Objectives & 2019 Highlights BALANCED GROWTH OBJECTIVE STRATEGIC EXECUTION DURING FISCAL 2019 Full-service client growth with a focus on business owners, including further geographic and industry diversification • Solid annual loan growth of 8%, including 13% growth in Central and Eastern Canada, 8% growth in Alberta, and 5% growth in BC • Increased the proportion of the loan portfolio in Central and Eastern Canada to 27% • Increased business diversification with very strong 15% growth in general commercial loans and 9% growth in equipment financing and leasing • Recognized as a Great Place to Work Canada™, and one of the Best Workplaces™ in Alberta • Very strong branch-raised deposit growth of 12%, including 14% growth in the demand and notice category, and 10% growth in term deposits Growth and diversification of funding sources • Growth in debt capital markets funding with three successful senior deposit note issuances totaling $900 million • Growth in debt related to securitization to support originations of both equipment loans and leases, and residential mortgages • Expect to submit final application and receive regulatory approval in fiscal 2020 for transition to the AIRB approach. Optimized capital and risk management processes through transition to the Advanced Internal Ratings Based (AIRB) approach 2019 PERFORMANCE HIGHLIGHTS FINANCIAL HIGHLIGHTS • Delivered an 8% increase to CWB’s annual common share • Solid performance with common shareholders’ net income of $267 million, up 7%, pre-tax, pre-provision income of $461 million, up 6%, and total revenue of $862 million, up 7%. • Diluted and adjusted cash earnings per common share of $3.04 and $3.15, up 9% and 5%. Gains on sale related to the CWT strategic transactions contributed $0.04 to adjusted cash earnings per common share in fiscal 2018 and nil in 2019. • Full-year operating leverage of negative 1.8% as revenue growth was outpaced by growth of expenses reflecting continued investment in strategic execution. • Solid loan growth of 8% with strong execution against our balanced growth strategic objectives for geographic and industry diversification, including very strong 15% growth in general commercial loans and 13% growth in Central and Eastern Canada. • Very strong branch-raised deposit growth of 12%, including 14% growth of demand and notice deposits, contributing to a reduction in the outstanding balance of broker deposits. • Continued stable credit quality with the provision for credit losses representing 21 basis points of average loans, compared to 20 basis points last year. dividend. • Very strong Basel III regulatory capital ratios under the Standardized approach for calculating risk-weighted assets of 9.1% common equity Tier 1 (CET1), 10.7% Tier 1 and 12.8% Total capital. NON-FINANCIAL HIGHLIGHTS • Recognized as a Great Place to Work CanadaTM, and one of the Best WorkplacesTM in Alberta. • Significant progress to align our culture with our ambitious strategic agenda with the introduction of new core values. • Unveiled an exciting new brand promise to business owners across Canada – Obsessed with your successTM. • Expanded Environmental, Social (ESG) disclosure to reflect our ongoing commitments to environmental sustainability, inclusion and diversity in the workforce, and positive impacts in our communities. and Governance • Completed enterprise-wide integration of the market-leading Workday human capital management system. • Gross impaired unchanged from last year. loans represented 0.52% of gross loans, 7 CWB Financial Group 2019 Annual ReportMESSAGE FROM PRESIDENT AND CEO Chris Fowler 8 CWB Financial Group 2019 Annual ReportBECOMING A DISRUPTIVE FORCE IN CANADIAN FINANCIAL SERVICES evolving expectations of the business owners we serve. Going forward, further progress to align increasingly frictionless processes with increasingly powerful human and digital capabilities will CWB Financial Group was created 35 years ago to fill a gap in drive delivery of our proactive full-service client experience at a Canadian financial services. CWB’s entrepreneurial founders significantly accelerated scale. recognized that small and medium-size businesses were under- served, overlooked, and ignored. They got “off-the-shelf” products built for someone else, instead of solutions customized just for them. Today, we still believe business owners are under-served by our competitors. They deserve a better alternative than “all things to all people.” They deserve a partner focused on their unique needs and their success. This year we also expect to successfully transition to the Advanced approach for regulatory capital and risk management. This accomplishment will represent the culmination of an enterprise- wide transformation effort with contributions from nearly every CWB team. It has the power to make us more competitive on loan pricing, enhance our overall view of portfolio risk, unlock new opportunities to deploy our capital, and ultimately, to win more Those needs are diverse and complex. They evolve through the clients. The Advanced approach will be a foundational capability for different stages of a business owner’s journey, from start up, to us, and will unleash our full potential to grow across Canada. scaling, to sustained growth and business succession. No two journeys are the same and each milestone brings new opportunities and new challenges, both personal and professional. We are confident that the growing community of business owners we serve will benefit from a fully integrated, full-service approach. Our strategy for long-term value creation is focused to solve for this unmet need. We will continue to empower our business banking, personal banking, and wealth management teams to create an increasingly Our strategy is focused to translate these new capabilities – from client experience to capital deployment – into strong and scalable growth to create value for the people who choose CWB every day: our clients, our people, and our investors. Our continued focus on transformation will drive progress towards our near-term mission to create a clear alternative to the big banks, and our aspiration to become the best full-service bank for business owners in Canada. Obsessed with your successTM is much more than a clever tagline. It’s a rallying cry for our team and a promise to business owners. Our people live our brand promise with purpose every day. CUTTING THROUGH THE NOISE For 35 years, much of our growth has come from word of mouth and the confidence and trust of our loyal clients. It’s astonishing to think how successful we have been with limited investment in marketing, and exciting to imagine how much room we have to grow with a powerful national brand driving increased visibility and familiarity with our target clients. This year we unveiled an exciting new brand promise to business owners across Canada – Obsessed with your successTM. We sharpened our visual identity with a more contemporary logo and bolder treatments of our signature teal and gold. We re-vamped our website, cwb.com, and brought in new expertise to engage business owners through digital and social media. Finally, we launched a new brand campaign – we come to integrated experience. We’ve launched a client-centric operating you – to show business owners the lengths we’ll go (literally!) to help model to create focus, increase collaboration across lines of business, them succeed. While stronger marketing will help us reach more and enable our teams to deliver for our clients more seamlessly and clients, obsessed with your successTM is much more than a clever consistently. In the new model, our people have more time to focus tagline. It’s a rallying cry for our team and a promise to business on the client experience, and can tap into expert internal partners for owners: to be proactive, to never take them for granted, and to go support to meet our clients’ specialized needs. the extra mile. Our people live our brand promise with purpose every While proactive, personal service, and specialized expertise remain at the core of our competitive advantage, digital capabilities will be an increasingly prominent feature of our differentiated client experience. To accelerate this transformation, we continue to reshape our digital infrastructure, which we have built on top of a modern, flexible core technology platform. In 2020, a key priority will be to add new, innovative solutions that meet the rapidly day. GROWING WITH BUSINESS OWNERS Graedon Rust, Relationship Manager, Commercial Banking in Edmonton is one of those outstanding CWB team members. Graedon has worked with Sohail “Zee” Zaidi, Owner and CEO of Remedy Café, to support Zee’s rapid growth from a single location 9 CWB Financial Group 2019 Annual ReportThis year, we were recognized as a Great Place to Work Canada™, and one of the Best Workplaces™ in Alberta. We are honoured by these achievements, but I will be the first to admit that better is always possible. We have a great culture to build on, and as our transformation continues to drive significant change across CWB Financial Group, our culture must evolve to support this ambitious agenda. This year we made significant progress to evolve our culture with the introduction of new core values. Like our brand promise, our values stand for who we are and who we want to be. They ground us in the qualities our clients and people love about CWB and encourage us to stretch and thrive through change as we transform to meet our exciting future. They also remind us to be inclusive of others, and to welcome new ideas and perspectives that push us to be better for our clients and each other. Our culture will continue to be a competitive advantage for us and will ensure we can attract and retain the diverse talent we need to drive our future growth. CREATING MORE VALUE FOR INVESTORS In fiscal 2019, we continued to execute on our strategy and deliver against our balanced growth objectives. We generated solid loan growth with further geographic and industry diversification, including strong 11% growth in Ontario and very strong 15% overall growth in the strategically targeted general commercial category. We delivered very strong 12% growth of branch-raised deposits – including 14% growth in the demand and notice category – as we continued to strengthen our full-service client experience, and invest in competitive deposit- gathering capabilities. With ongoing profitable growth and strong capital ratios, we were also pleased to provide shareholders with an 8% increase to the common share dividend. Strong, profitable growth against a highly competitive market backdrop reflects the tremendous contributions of our entire team, and I would like to close with an expression of gratitude. A sincere thank you to our people for their passion and continued dedication to our clients. I would also like to personally thank our clients across Canada. We are honoured that you’ve chosen CWB, and we are determined to enable your future success. And finally to our shareholders, thank you for your ongoing confidence in us. There is no doubt in my mind that our future looks more exciting than ever before. As an increasingly disruptive force in Canadian financial services, we are well-positioned to deliver high-quality earnings and profitable long-term growth in the years to come. to 10 bustling cafés in the Edmonton area. “CWB has helped me a lot,” Zee says. “If CWB didn’t stand with me, I wouldn’t have been able to do it. They’ve put everything together for me. I think Graedon has taken this really personally.” Thanks to the proactive effort of Graedon and his team, Zee is willing to offer the highest compliment we could hope for: “I trust this bank,” he says. “It feels like a family. It’s been a really good experience with them for the last 10 years. We’ve got the best. There’s no need to ever look anywhere else.” We don’t sit back and wait for our clients to come to us. We proactively step up with valuable insight, relevant solutions, and tailored advice. I’m thrilled with this story, and proud of our commitment to help our clients tackle their growth opportunities with confidence. Nearly two decades into his relationship with CWB, Frank Rizzardo, President and General Manager of Emcon Services Inc., agrees with Zee. It’s partly our willingness to step up and support big moves that sets us apart. “Getting banks to understand our business has always been a challenge from day one,” Frank says. “(But) CWB is there for us. Our ideal account manager is someone who understands our business; they know equipment, attend auctions, and understand valuations on various brands. We have found this at CWB.” We are proud of the support we provided to the Emcon team to complete a recent acquisition which tripled the company’s size, adding 1,800 people and more than two thousand pieces of equipment. This was a bold move, realizing Emcom’s plan to become the largest road maintenance contractor in Canada. We were with them every step of the way, because that’s what it takes to deliver on our brand promise. We don’t sit back and wait for our clients to come to us. We proactively step up with valuable insight, relevant solutions, and tailored advice. We know that people like Zee and Frank never sit still, and we succeed when our effort reflects their energy. INVESTING IN PEOPLE AND CULTURE These stories demonstrate our commitment to reach out and listen to our clients, and I’m extremely proud of what we hear. Business owners see us as caring, responsive, helpful, and different from the other banks. This feedback confirms something we’ve known from the beginning: our people and our culture set us apart. 10 CWB Financial Group 2019 Annual ReportOur values PEOPLE FIRST Caring people are the key to our success. We work as a team and EMBRACE THE NEW Change is everywhere. We seek out new ideas and are committed to support one another. We always treat each other with respect and continuous learning. We know that better is always possible. have the courage to be candid. RELATIONSHIPS GET RESULTS Clients choose CWB for the best experience. We build relationships THE HOW MATTERS How we do things is as important as what we do. We take ownership, and move with urgency and efficiency. We always act with integrity, proactively, with intention and consistency. Our results depend on it. and balance risk and reward. INCLUSION HAS POWER Diverse teams unleash new ideas and perspectives. We are aware of our own biases. We are proud of who we are, and we are allies for those around us. Our strategy CREATING VALUE FOR THE PEOPLE WHO CHOOSE CWB EVERY DAY OUR CLIENTS, OUR PEOPLE, OUR INVESTORS BUILDING ON OUR STRENGTHS Personalized service, specialized industry expertise, customized solutions, faster response times TRANSFORMING OUR BUSINESS TRANSFORMATION PRIORITIES • Targeted digital capabilities • Client-focused operating model • Fast, smooth, scalable processes • Transition to AIRB methodology for capital and risk management GROWTH ACCELERATORS Brand: bolder and more • visible to cut through the noise • Culture: proactive, client- focused, and change-ready to align with our strategy TO CREATE UNIQUE VALUE A proactive client experience through in-person and digital channels AND DELIVER BREAKOUT GROWTH A disruptive force full-service alternative for Canadian business owners in Canadian financial services, and a clear Our vision TO BE THE BEST FULL-SERVICE BANK FOR BUSINESS OWNERS IN CANADA 11 CWB Financial Group 2019 Annual Report Executive Committee Front row (left to right) Back row (left to right) KELLY BLACKETT, Executive Vice President, Human Resources and Corporate Communications STEPHEN MURPHY, Executive Vice President, Banking CHRIS FOWLER, President and Chief Executive Officer DARRELL JONES, Executive Vice President and Chief Information Officer GLEN EASTWOOD, Executive Vice President, Business Transformation CAROLYN GRAHAM, Executive Vice President and Chief Financial Officer BOGIE OZDEMIR, Executive Vice President and Chief Risk Officer 12 CWB Financial Group 2019 Annual Report “ At CWB we’ve had good people who take the time to understand what it is we need to keep our company moving forward. They’re there as partners.” - FRANK RIZZARDO KIRBY HILL, Vice President, Equipment Finance Group Branch Operations, CWB Equipment Finance FRANK RIZZARDO, President & General Manager, Emcon Services Inc. 13 CWB Financial Group 2019 Annual ReportMESSAGE FROM CHAIR OF THE BOARD Robert Phillips 14 CWB Financial Group 2019 Annual ReportYour Board of Directors oversees development and implementation of the strategic direction for CWB Financial Group and maintains an effective governance framework. Our focus is to ensure CWB continues to deliver exceptional client experiences, a great place to build a career for CWB’s people, and strong, profitable long-term growth for investors. SUPPORTING LONG-TERM VALUE CREATION FOR ALL OF CWB’S STAKEHOLDERS Fiscal 2019 was a strong year of strategic execution for CWB Financial Group and marked our 35th year in business. This milestone provides an opportunity to reflect on our growth and success, and to focus on our promising future. CWB was founded during a time of economic uncertainty in the 1980s with less than $50 million dollars in total assets. We have grown to over $30 billion in assets with strong client relationships across the country. Our success is rooted in our commitment to an exceptional client experience, a culture that attracts and retains top talent, profitable growth for our investors, and support for the communities where we operate. Keeping these commitments will generate long-term value for all of our stakeholders. The Board oversees CWB’s strategy to set ourselves apart as a disruptive force in Canadian financial services. Our transformation plan is bold and ambitious, and as we innovate and grow, the Board will continue to ensure that a strong risk culture and sound enterprise risk management framework remain embedded in the strategic agenda. We are dedicated to strong corporate governance and continually monitor emerging trends. One important development is the increasing attention given to ESG factors by our stakeholders. We are working to expand our disclosure in these areas so they better reflect our values and our commitments to environmental sustainability, inclusion and diversity in the workforce, positive impact in our communities, and your Board’s prudent oversight of CWB’s activities. As the landscape for ESG reporting continues to evolve, we remain committed to transparency and proactive communication with all of our stakeholders. SUPPORTING NEW CAPABILITIES TO STRENGTHEN CWB’S UNIQUE CLIENT EXPERIENCE This year, the Board continued to provide oversight of management’s work to develop new capabilities that strengthen our client experience. A critical part of this is the evolution of our culture to support our continued transformation. We are very pleased with our progress to build a collaborative, inclusive, and change-ready culture within CWB, rooted in new core values and brought to life by our passionate employees. The Board will continue to support a culture that embraces transformation and exceeds the expectations of our clients today and in the future. We are also very pleased with the progress in our transition to the Advanced approach for regulatory capital and risk management. This is a foundational part of our transformation strategy. It will make us more competitive and further expand our addressable market. It has already improved our risk management capabilities, and will better equip us to allocate resources to generate the most attractive risk- adjusted returns and maximize shareholder return. It will position us to deliver higher growth and higher profitability with an enhanced view of risk. CREATING VALUE THROUGH RENEWAL With the exception of your President and Chief Executive Officer, the CWB Board is fully comprised of independent directors with strong and diverse backgrounds, experiences, perspectives, and skills. We are committed to ongoing renewal to ensure the Board remains effective in a rapidly changing environment. This year Ms. E. Gay Mitchell was elected as your newest director. Ms. Mitchell has a wealth of industry knowledge gained through decades of experience in financial services. With Ms. Mitchell’s election, women now comprise 33% of the Board. WELL-POSITIONED FOR FUTURE GROWTH We are confident that CWB’s focus to meet the financial needs of business owners represents a clear path to open-ended growth. We know that our current clients value the services we offer and their relationships with our teams. We believe more business owners deserve a clear, full-service alternative to Canada’s large banks. They deserve a proactive partner who will go to any length to help them succeed. Over the next year, we will continue to improve our capabilities and make it easier and more valuable for business owners to deal with us. In fiscal 2020, the Board will provide oversight for CWB’s transition to the Advanced approach, further enhancements to our digital capabilities, and ongoing improvements to key business processes that will elevate our client experience. Successful execution against these priorities will position CWB to deliver a differentiated experience to more business owners across Canada through a full range of channels, and we are thrilled with our continued progress. On behalf of the Board, I would like to thank every CWB team member for their focus and dedication to create value for all of our stakeholders. I would also like to thank my fellow directors for their ongoing commitment to CWB’s continued success. Finally, to my fellow shareholders, I thank you for your commitment and confidence in our unique vision for continued strong and profitable growth. THANK YOU FROM CWB Mr. Albrecht Bellstedt retired from the Board of Directors at our annual shareholders’ meeting this year. Al had served on your board since 1995, and his roots with CWB go back to the formation of our predecessor organization, the Bank of Alberta. Al was an exceptional director and significantly influenced our path to become the national, full-service financial institution we are today. Al’s contributions will be missed. 15 CWB Financial Group 2019 Annual ReportBoard of Directors Front row (left to right) Back row (left to right) IAN M. REID, Corporate Director LINDA M.O. HOHOL, Corporate Director ANDREW J. BIBBY, Corporate Director H. SANFORD RILEY, President and CEO, MARGARET J. MULLIGAN, Corporate Director Richardson Financial Group Limited ROBERT L. PHILLIPS (Chair), President and CEO, CHRIS H. FOWLER, President and CEO, Canadian Western Bank R.L. Phillips Investments Inc. ALAN M. ROWE, Partner, Crown Realty Partners SARAH A. MORGAN-SILVESTER, Corporate Director ROBERT A. MANNING, President, Cathton Investments Ltd. RAYMOND J. PROTTI, Corporate Director E. GAY MITCHELL, Corporate Director Corporate Governance CWB Financial Group strives to earn and maintain the trust of our Circular and in the Corporate Governance section at cwb.com/ stakeholders through high standards of corporate governance. corporate-governance. Please review our circular to learn how Active oversight of our leadership team and operations and a robust shareholders can attend and participate in the annual shareholder governance and risk management framework are core to our business meeting on April 2, 2020 in Edmonton, Alberta. 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. Detailed information about CWB Financial Group’s corporate governance practices are available in CWB’s Management Proxy We are committed to open communication with stakeholders – please contact us at: ChairoftheBoard@cwbank.com CorporateSecretary@cwbank.com 16 CWB Financial Group 2019 Annual ReportSocial Responsibility At CWB Financial Group we believe our success depends on the responsible creation of value for all of our stakeholders. We believe our future success is rooted in our complementary commitments to deliver an exceptional client experience, cultivate a culture our people want to be part of, contribute to a healthy society for future generations and deliver long term value creation. We are focused to build and maintain relationships with all of our stakeholders – our clients, employees, shareholders and community members – and continue to work diligently to create economic, social and environmental value through our corporate social responsibility activities. We truly believe the “how” matters in the way we operate our business. We are proud of the activities we have undertaken and awards we received in 2019, and have highlighted many below. We will continue to enhance the environmental, social and governance information available on our website and invite you to follow our progress at www.cwb.com. CLIENTS • Focused business transformation and investment in digital capabilities continue to drive delivery of our differentiated full-service client experience through a full range of channels • Initiatives to optimize client-facing operations within banking branches continue to build on the benefits from centralization of our credit support processes • We have implemented a multi-year accessibility plan • Together, we expect these initiatives to support growth in the number of clients we serve, the proportion of clients we serve on a full-service basis and our Net Promoter Score reflecting satisfaction with our offerings EMPLOYEES • We are certified as a Great Place to Work Canada™ and one of the Best Workplaces™ in Alberta • We invested more than 23,000 hours in employee training and development in 2019, more than 3,300 of which of was focused to address diversity, inclusion, and unconscious bias • We are a signatory to the UN Women’s Empowerment Principles • We support a number of Employee Represented Groups, including CWB Women and CWB Pride • CWB National Leasing is a 2019 winner of Canada’s Top 100 Employers and Manitoba’s Top Employers • CWB Optimum Mortgage is a 2019 winner of Mortgage Industry Employer of Choice from the Canadian Mortgage Awards COMMUNITIES • CWB’s Community Investment Program generated over $2 million in charitable donations in fiscal 2019, benefitting approximately 200 organizations, including: - Partnered with and donated $100,000 to the YWCA to support girl empowerment programs - Partnered with Enactus Canada to support financial literacy - Partnered with Rise to help individuals living with mental health or addiction challenges launch or growth their business - Partnered with and sponsored “6 degrees”, to support new Canadians and foster environments that lead to strengthened diversity and inclusion in our society • We support community involvement through our Funds for Fundraisers program, Employee Volunteer Grant, and the United Way Workplace Campaign and CWB’s Week of Caring • CWB donated more than $165,000 through employee matching initiatives ENVIRONMENT • We are a founding member of the City of Edmonton Corporate Climate Leaders Program, and have engaged with Climate Smart to measure CWB’s greenhouse gas emissions in the Alberta capital region and identify ways to reduce - We have established greenhouse gas reduction targets of 15% (over 880 TCO2e (tonnes of carbon dioxide equivalent)) by 2025 and 25% (over 1,450 TCO2e) by 2035 - We will reduce energy utility consumption by provisioning bicycle parking, increased telecommuting options, new LED lighting, occupancy sensors, and programmed paper reduction in print-capable devices • We support employee participation in waste management for initiatives like Shoreline Clean-up and CWB electronics recycling days 17 CWB Financial Group 2019 Annual ReportDAVE REID, Business Advisor, Rise REBEKAH THIBEAULT, Business Owner, Bee & Key Lasting Impacts in Our Communities We take pride in actively participating in the growth, development Over the past 12 months, we looked for opportunities to support and sustainability of the communities where we operate. This year organizations working to remove barriers for people in our we helped our charitable and not-for-profit partners through more communities. We’re particularly proud of our new partnership than a thousand hours of employee volunteerism and donated with Rise. Rise launched an Edmonton-based satellite office more than $2 million in financial support through our community this year to provide one-on-one advisory services and training investment program. Our program is aligned with our business programs so people living with mental health challenges can start goals and strategies, and is focused on helping our partners in the their own businesses. Rise successfully helped Rebekah Thibeault areas of health research and promotion, community development, and Melissa Wylie – their first clients – launch a retail consignment and education. and vintage store in Leduc. “It’s incredibly rewarding to build partnerships with community and charitable organizations that are helping to improve outcomes for people across Canada. Through support for organizations like Rise, CWB is committed to creating more opportunities to drive economic prosperity and ensure a positive future for our communities.” - LACEY JANSEN, Program Manager, Community Engagement, CWB 18 CWB Financial Group 2019 Annual ReportManagement’s Discussion and Analysis (MD&A) TABLE OF CONTENTS Forward Looking Statements IFRS 9 Non-IFRS Measures Who We Are Growth Strategy and Vision Fiscal 2019 Strategic Highlights Fiscal 2020 Strategic Priorities CWB Financial Group Performance Overview Select Financial Highlights Net Interest Income Non-Interest Income Non-Interest Expenses, Efficiency and Operating Leverage Acquisition-Related Fair Value Changes 19 20 20 21 22 22 22 23 23 24 28 29 30 31 Income Taxes Comprehensive Income Cash and Securities Loans Credit Quality Deposits and Funding Other Assets and Other Liabilities Liquidity Management Capital Management Financial Instruments and Other Instruments Off-Balance Sheet Summary of Quarterly Results and Fourth Quarter Quarterly Results Fourth Quarter of 2019 Accounting Policies and Estimates Critical Accounting Estimates Changes In Accounting Policies and Financial Statement Presentation Future Changes In Accounting Policies Risk Management Risk Management Overview Risk Universe - Report on Principal Risks Other Risk Factors Updated Share Information Controls and Procedures 31 31 32 33 36 38 39 39 42 45 46 47 47 48 49 49 51 51 52 53 58 68 69 69 This Management’s Discussion and Analysis (MD&A), dated December 4, Information Form, is available on SEDAR at www.sedar.com and on CWB’s 2019, should be read in conjunction with the audited consolidated financial website at www.cwb.com. statements of CWB for the year ended October 31, 2019 and the audited consolidated financial statements and MD&A for the year ended October 31, 2018. Additional information relating to CWB, including the Annual The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in Canadian dollars. FORWARD-LOOKING STATEMENTS From time to time, we make written and verbal forward-looking statements. economic and political conditions, material changes to trade agreements, Statements of this type are included in our Annual Report and reports legislative and regulatory developments, legal developments, the level to shareholders and may be included in filings with Canadian securities of competition, the occurrence of natural catastrophes, changes in regulators or in other communications such as press releases and corporate accounting standards and policies, information technology and cyber risk, presentations. Forward-looking statements include, but are not limited to, the accuracy and completeness of information we receive about customers statements about our objectives and strategies, targeted and expected and counterparties, the ability to attract and retain key personnel, the financial results and the outlook for CWB’s businesses or for the Canadian ability to complete and integrate acquisitions, reliance on third parties economy. Forward-looking statements are typically identified by the to provide components of business infrastructure, changes in tax laws, words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, technological developments, unexpected changes in consumer spending “may impact”, “goal”, “focus”, “potential”, “proposed” and other similar and saving habits, timely development and introduction of new products, expressions, or future or conditional verbs such as “will”, “should”, “would” and our ability to anticipate and manage the risks associated with these and “could”. factors. It is important to note that the preceding list is not exhaustive of By their very nature, forward-looking statements involve numerous possible factors. assumptions and are subject to inherent risks and uncertainties, which Additional information about these factors can be found in the Risk give rise to the possibility that our predictions, forecasts, projections, Management section of our MD&A. These and other factors should be expectations and conclusions will not prove to be accurate, that our considered carefully, and readers are cautioned not to place undue reliance assumptions may not be correct and that our strategic goals will not be on these forward-looking statements as a number of important factors could achieved. A variety of factors, many of which are beyond our 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, cause our actual results to differ materially from the expectations expressed in such forward-looking statements. Unless required by securities law, we do not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by us or on our behalf. general business and economic conditions in Canada, including housing Assumptions about the performance of the Canadian economy over the market conditions, the volatility and level of liquidity in financial markets, forecast horizon and how it will affect our businesses are material factors fluctuations in interest rates and currency values, the volatility and level considered when setting organizational objectives and targets. of various commodity prices, changes in monetary policy, changes in 19 CWB Financial Group 2019 Annual Report In determining expectations for economic growth, we consider our be general or specific. Where relevant, material economic assumptions own forecasts, economic data and forecasts provided by the Canadian underlying forward-looking statements are disclosed within the Outlook government and its agencies, as well as certain private sector forecasts. section of our MD&A for the year ended October 31, 2019. These forecasts are subject to inherent risks and uncertainties that may IFRS 9 We adopted International Financial Reporting Standard (IFRS) 9 Financial cost, debt securities measured at fair value through other comprehensive Instruments (IFRS 9), which replaces International Accounting Standard income (FVOCI), and certain off-balance sheet loan commitments and (IAS) 39 Financial Instruments: Classification and Measurement (IAS 39) financial guarantee contracts. The implementation of an ECL approach beginning November 1, 2018. As permitted by IFRS 9, we have not restated under IFRS 9, which results in allowances for credit losses being recognized prior period comparative figures and have recognized an adjustment to on financial assets regardless of whether there has been an actual loss opening retained earnings and accumulated other comprehensive income event, is a significant change from the incurred loss model under IAS 39. (AOCI) to reflect the application of the new requirements at the adoption date. For further details, refer to Notes 1 and 2 of the 2019 audited annual financial statements. Under IFRS 9, we refer to allowances and provisions for credit losses on impaired loans (Stage 3) and performing loans (Stages 1 and 2). Our specific allowances under IAS 39 are consistent with Stage 3 allowances for credit The most significant impact to CWB with the transition to IFRS 9 is the losses under IFRS 9, while the collective allowance under IAS 39 is replaced introduction of an expected credit loss (ECL) approach for measuring by Stage 1 and 2 allowances for credit losses under IFRS 9. impairment that is applicable to financial assets measured at amortized NON-IFRS MEASURES We use a number of financial measures to assess our performance against • Provision for credit losses on total loans as a percentage of average loans strategic initiatives and operational benchmarks. Non-IFRS measures – provision for credit losses on loans, committed but undrawn credit provide readers with an enhanced understanding of how we view our exposures and letters of credit divided by average total loans. Provisions ongoing performance. These measures may also provide the ability to for credit losses related to debt securities measured at FVOCI and other analyze trends related to profitability and the effectiveness of our operations financial assets are excluded. and strategies, and determine compliance against regulatory standards. To arrive at certain non-IFRS measures, we make adjustments to the results prepared in accordance with IFRS. Adjustments relate to items which we believe are not indicative of underlying operating performance. Adjusted results provide the reader with a better understanding of how we view our performance. Some of these financial measures 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 • Provision for credit losses on impaired loans as a percentage of average loans – provision for credit losses on impaired loans divided by average total loans. • Provision for credit losses on performing loans as a percentage of average loans – provision for credit losses on performing loans (stage 1 and 2) divided by average total loans. • Operating leverage – growth rate of total revenue less growth rate of measures used in this MD&A are calculated as follows: adjusted non-interest expenses. • Adjusted non-interest expenses – total non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets (see • Common share dividend payout ratio – common share dividends declared during the year divided by common shareholders’ net income. Table 1). • Adjusted common shareholders’ net income – total common shareholders’ net income, excluding the amortization of acquisition-related intangible assets and contingent consideration fair value changes, net of tax (see Table 1). • Basel III common equity Tier 1, Tier 1, Total capital, and leverage ratios – calculated in accordance with guidelines issued by Office of the Superintendent of Financial Institutions Canada (OSFI). • Risk-weighted assets – on and off-balance sheet assets assigned a risk weighting calculated in accordance with the Standardized approach • Pre-tax, pre-provision income – total revenue less adjusted non-interest guidelines issued by OSFI. expenses (see Table 1). • Average balances – average daily balances. • Adjusted cash earnings per common share – diluted earnings per common share calculated with adjusted common shareholders’ net income (see Table 1). • Return on common shareholders’ equity – common shareholders’ net income divided by average common shareholders’ equity. • Adjusted return on common shareholders’ equity – adjusted common shareholders’ net income divided by average common shareholders’ equity. • Return on assets – common shareholders’ net income divided by average total assets. • Efficiency ratio – adjusted non-interest expenses divided by total revenue. • Net interest margin – net interest income divided by average total assets. 20 CWB Financial Group 2019 Annual ReportTable 1 - Non-IFRS Measures ($ thousands) Non-interest expenses Adjustments (pre-tax): For the three months ended For the year ended October 31 2019 October 31 2018 October 31 2019 October 31 2018 $ 107,667 $ 98,751 $ 405,481 $ 373,483 Amortization of acquisition-related intangible assets Adjusted non-interest expenses (1,204) (1,367) (5,007) $ 106,463 $ 97,384 $ 400,474 $ (6,313) 367,170 Common shareholders' net income Adjustments (after-tax): Acquisition-related fair value changes Amortization of acquisition-related intangible assets Adjusted common shareholders' net income Total revenue Less: Adjusted non-interest expenses Pre-tax, pre-provision income STRATEGIC TRANSACTIONS $ 67,512 $ 64,501 $ 266,940 $ 249,256 - 904 3,705 1,005 5,773 3,397 14,769 4,695 $ 68,416 $ 69,211 $ 276,110 $ 268,720 $ 220,853 $ 208,566 $ 861,604 $ 803,358 106,463 97,384 400,474 $ 114,390 $ 111,182 $ 461,130 $ 367,170 436,188 On January 31, 2018, we closed an asset purchase agreement to acquire, for On August 16, 2017, we announced that the division of Canadian Western cash, equipment loans and leases, and general commercial lending assets Trust (CWT) now known as CWB Trust Services will focus its activities within totaling approximately $850 million (referred to as the acquired “business business lines that are most aligned with the strategic objectives of CWB lending assets”). The business lending assets acquired were fully aligned Financial Group, and will no longer offer self-directed account services to with our balanced growth strategic objectives, including goals related holders of certain securities. CWT initiated a process to appoint successor to industry and geographic diversification. The portfolio was primarily trustees for these accounts (referred to as the “CWT strategic transactions”). comprised of assets concentrated within the transportation, construction The CWT strategic transactions were completed in fiscal 2018. As a result of and healthcare industries, with approximately three quarters of the this process, we realized pre-tax gains on sale of approximately $4 million exposures distributed across Central and Eastern Canada. included in ‘other’ non-interest income in fiscal 2018, or $0.04 of adjusted cash earnings per common share (fiscal 2019 – nil). WHO WE ARE CWB Financial Group (CWB) is a growth-oriented, full-service financial CWB Equipment Finance delivers mid- and large-size equipment institution, and the only Schedule 1 chartered bank in Canada with a focus transactions from British Columbia to Ontario. Our specialized Broker to meet the unique financial needs of business owners. Operating from Buying Centre acquires loans and leases from the finance divisions of corporate headquarters in Edmonton, Alberta, we continue to extend original equipment manufacturers and select third-party brokers. our capabilities to deliver for clients across Canada. Our teams deliver a differentiated, proactive client experience through highly personalized service, specialized expertise within specific industries, customized solutions and faster response times. Through our branch network and dedicated wealth and trust offices, alongside growing digital capabilities, we deliver full-service business banking, personal banking, wealth management and trust services offerings specifically tailored for business owners, their employees and their families. • CWB Maxium provides financing solutions to a growing and diversified base of entrepreneurial business owners across the country with a particularly strong presence in Ontario. Our industry specializations include general corporate, health care, program financing, real estate, golf, and transportation. • CWB Franchise Finance is a leading provider of financing solutions for growth-oriented hotel and hospitality franchise owners across Canada. • CWB Optimum Mortgage (CWB Optimum) is our broker-sourced We also provide specialized financing solutions within targeted, growth- provider of “A” and alternative mortgages, where “A” mortgages consist oriented markets, through dedicated teams of experts: of residential mortgages eligible for bulk portfolio insurance. We offer personalized borrowing solutions for clients who fall within and outside • Led by our flagship Real Estate and Specialized Lending teams in of traditional lending guidelines, with geographic coverage across Vancouver, Surrey, Edmonton and Calgary, we deliver local market Canada other than Quebec. expertise and flexible lending options to top real estate developers and commercial property owners. • Our equipment financing specialists provide transactions across a broad range of industries, with comprehensive geographic coverage. CWB National Leasing is the largest Canadian lessor in small- and mid-size commercial equipment transactions, with operations across Canada. Motive Financial is our internet bank, with offerings tailored for dedicated savers. 21 CWB Financial Group 2019 Annual ReportGROWTH STRATEGY AND VISION Our highly engaged teams operate within a client-centric, collaborative and consistent dividend growth, and maintain the strongest consolidated change-ready culture, with a core focus to achieve our vision to become efficiency ratio among the Canadian banks. In fiscal 2020, we expect to the best full-service bank for business owners in Canada. We continue to successfully transition to the Advanced Internal Ratings Based (AIRB) transform our capabilities to offer a superior full-service client experience approach for regulatory capital and risk management, which will position through a complete range of in-person and digital channels, and to offer us to deliver a higher growth, higher profitability bank with an enhanced clients a clear alternative to the big banks. view of risk. We create long-term value for shareholders through strong, profitable Our differentiated market position and transformation-focused strategy growth of full-service client relationships across a growing geographic has set the stage for CWB to be a disruptive force in Canadian financial footprint. We maintain strong and conservative capital ratios, generate services, and to deliver break-out growth in the years to come. FISCAL 2019 STRATEGIC HIGHLIGHTS Table 2 - Execution against CWB’s Balanced Growth Strategic Objectives Balanced growth objective Strategic execution during fiscal 2019 Full-service client growth with a focus on business owners, including further geographic and industry diversification • Solid annual loan growth of 8%, including 13% growth in Central and Eastern Canada, 8% growth in Alberta, and 5% growth in BC • Increased the proportion of the loan portfolio in Central and Eastern Canada to 27% • Increased business diversification with very strong 15% growth in general commercial loans and 9% growth in equipment financing and leasing • Recognized as a Great Place to Work Canada™, and one of the Best Workplaces™ in Alberta Growth and diversification of funding sources Optimized capital and risk management processes through transition to the AIRB approach • Very strong branch-raised deposit growth of 12%, including 14% growth in the demand and notice category, and 10% growth in term deposits • Growth in debt capital markets funding with three successful senior deposit note issuances totaling $900 million • Growth in debt related to securitization to support originations of both equipment loans and leases, and residential mortgages • Expect to submit our final application and receive regulatory approval in fiscal 2020 for transition to the AIRB approach FISCAL 2020 STRATEGIC PRIORITIES Table 3 - Accelerated Transformation to Create Value for our Clients, our People and our Investors To create value for the people who choose CWB Fiscal 2020 transformation priorities Transform our capabilities to create enhanced value for clients and strengthen client relationships • Invest in digital capabilities to enhance our differentiated full-service client experience, including development of a digital offering for small business owners and upgraded online and mobile banking capabilities for mid-market clients • Optimize client-facing operations within banking branches, building upon centralization of our credit support processes • Significantly expand our presence in Central Canada with the opening of our first full-service Ontario banking location in Mississauga Continue to evolve our culture and our employee experience to create value for our people and become a career destination for top talent • Make continued progress toward CWB’s target culture, further leveraging and integrating our new core values across the organization • Continue to earn recognition as an employer of choice, a Great Place to Work CanadaTM and one of the Best WorkplacesTM in Alberta • Build momentum in change management and change readiness through ongoing training, communication and feedback tools • Continue to make strong progress to further enhance inclusion and diversity Transform and diversify our business to create value for investors through break-out growth and enhanced profitability • Submit final application and receive regulatory approval for transition to the AIRB approach for capital and risk management • Capture increased market share within targeted industries across our growing geographic footprint • Maintain double-digit percentage growth of branch-raised deposits and achieve double-digit loan growth, where prudent 22 CWB Financial Group 2019 Annual ReportCWB FINANCIAL GROUP PERFORMANCE OVERVIEW Financial Highlights of 2019 (compared to 2018) • Solid performance with common shareholders’ net income of $267 commercial loans and 13% growth in Central and Eastern Canada. million, up 7%, pre-tax, pre-provision income of $ 461 million, up 6%, and total revenue of $862 million, up 7%. • Very strong branch-raised deposit growth of 12%, including 14% growth of demand and notice deposits, contributing to a reduction • Diluted and adjusted cash earnings per common share of $3.04 and in the outstanding balance of broker deposits. $3.15, up 9% and 5%. Gains on sale related to the CWT strategic transactions contributed $0.04 to adjusted cash earnings per common share in fiscal 2018 and nil in 2019. • Full-year operating leverage of negative 1.8% as revenue growth was outpaced by growth of expenses reflecting continued investment in strategic execution. • Solid loan growth of 8% with strong execution against our balanced growth strategic objectives for geographic and industry diversification, including very strong 15% growth in general • Continued stable credit quality with the provision for credit losses representing 21 basis points of average loans, compared to 20 basis points last year. • Gross impaired loans represented 0.52% of gross loans unchanged from last year. • Delivered an 8% increase to CWB’s annual common share dividend. • Very strong Basel III regulatory capital ratios under the Standardized approach for calculating risk-weighted assets of 9.1% common equity Tier 1 (CET1), 10.7% Tier 1 and 12.8% Total capital. Non-Financial Highlights of 2019 • Recognized as a Great Place to Work Canada™, and one of the Best • Expanded Environmental, Social and Governance (ESG) disclosure Workplaces™ in Alberta • Significant progress to align our culture with our ambitious strategic agenda with the introduction of new core values. • Unveiled an exciting new brand promise to business owners across Canada – Obsessed with your success™. to reflect our ongoing commitments to environmental sustainability, inclusion and diversity in the workforce, and positive impacts in our communities. • Completed enterprise-wide integration of the market-leading Workday human capital management system. 23 CWB Financial Group 2019 Annual ReportSELECT FINANCIAL HIGHLIGHTS Table 4 - Select Annual Financial Information(1) ($ thousands, except per share amounts) Key Performance Indicators Total revenue Pre-tax, pre-provision income Common shareholders' net income Earnings per share Basic Diluted Adjusted cash Return on common shareholders' equity Adjusted return on common shareholders' equity Return on assets Net interest margin Efficiency ratio(3) Operating leverage Provision for credit losses on total loans as a percentage of average loans(4)(5) Provision for credit losses on impaired loans as a percentage of average loans(4)(5) Other Financial Information Total assets Dividends per common share Change from 2018 2019(2) 2018 2017 $ 58,246 24,942 17,684 0.24 0.25 0.14 $ 861,604 $ 803,358 $ 726,635 $ 461,130 266,940 436,188 249,256 388,729 214,277 3.05 3.04 3.15 10.9% 11.3 0.88 2.60 46.5 (1.8) 0.21 0.21 2.81 2.79 3.01 11.0% 11.9 0.89 2.60 45.7 1.9 0.20 0.19 2.43 2.42 2.63 10.1% 11.0 0.85 2.56 46.5 0.3 0.23 0.19 $ 31,424,235 $ 29,021,463 $ 26,447,453 $ 2,402,772 1.08 1.00 0.93 0.08 % 7 6 7 9 9 5 (10) bp(6) (60) (1) - 80 (370) 1 2 8% 8 (1) (2) (3) (4) (5) (6) See page 20 for a discussion of non-IFRS measures. Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 Financial Instruments (IFRS 9) (refer to Notes 1 and 2 of the 2019 audited annual financial statements). Prior year comparatives have been prepared in accordance with IAS 39 Financial Instruments: Classification and Measurement (IAS 39) and have not been restated. A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration. Under IFRS 9, provisions for credit losses related primarily to loans, committed but undrawn credit exposures and letters of credit, and also apply to debt securities measured at FVOCI and other financial assets. Prior to the adoption of IFRS 9, provisions for credit losses only related to loans, committed but undrawn credit exposures and letters of credit. Includes provisions for credit losses on loans, committed but undrawn credit exposures and letters of credit. bp – basis points. Summary of Operations Fiscal 2019 was a very good year for CWB, as we continued to execute on our transformational strategy and deliver against our balanced growth objectives. We generated solid loan growth with further geographic and industry diversification, including strong 13% growth in Central and Eastern Canada, and very strong 15% overall growth in the strategically targeted general commercial category. We delivered very strong 12% growth of branch-raised deposits – including 14% growth in the demand and notice category – as we continued to strengthen our full-service client experience and invest in competitive deposit-gathering capabilities. This strong performance resulted in a reduction in our outstanding balances of broker deposits. Net interest income was up 8% from 2018, reflecting the combined positive impacts of 8% loan growth and stable net interest margin. Expectations for further increases in net interest margin were tempered early in the year when it became apparent that an anticipated Bank of Canada rate increase would not materialize. In view of a relatively subdued macroeconomic backdrop, the possibility of a Bank of Canada rate cut persisted for most of the year. Non-interest income was down 3% from fiscal 2018. Growth of credit related fees, positive net gains on securities compared to losses last year, and higher retail services fees were more than offset by the impact of approximately $4 million of gains realized from the CWT strategic transactions recorded within ‘other’ non-interest income in 2018, along with the impact of slightly lower wealth management fees. 24 Focused business transformation and investment in digital capabilities continue to enhance our differentiated full-service client experience. Initiatives to optimize client-facing operations within our banking branches continued this year, building upon centralization of our credit support processes. Together, this integrated transformation will boost our capabilities to deliver on our reputation for proactive, personalized service through both in-person and digital channels in a highly scalable manner, and contribute to maximum value creation from our upcoming transition to the AIRB approach for capital and risk management. We re-launched the CWB Financial Group brand this year to generate greater awareness of our differentiated offering and increased visibility in targeted markets. We sharpened our visual identity with a more contemporary logo and bolder treatments of our signature teal and gold. We re-vamped and modernized our digital and online properties, including cwb.com, and we launched a new Obsessed with your success™ brand promise and We come to you marketing campaign. The campaign includes increased use of digital advertising on social media, as well as a television strategy to raise awareness of our story. Our continued success is built on strong collaboration between engaged, well-trained and empowered teams, and we continue to invest in improved people-related infrastructure to support efficiency and drive effective collaboration. Following implementation of the market-leading Workday human capital management system for our core banking operations in 2018, we further integrated operations across the enterprise with the CWB Financial Group 2019 Annual Report implementation of Workday for CWB National Leasing, CWB Maxium and CWB McLean & Partners. Workday integration is now complete across the entire organization. System and process transformation continues to drive change across CWB, and we have taken steps to ensure our culture evolves to support our ambitious strategic agenda. This year we made significant progress to evolve our culture with the introduction of new core values. Our values stand for who we are, and how we show up for our clients and each other. They ground us in the qualities our clients and people love about CWB, and encourage us to stretch as we transform to meet our exciting future. We are committed to create a culture that thrives through change, continues to foster deep relationships with clients, and helps us attract and retain the talent we need to drive our future growth. Continued progress to support a rewarding experience for CWB employees is reflected in our recognition as a Great Place to Work Canada™, and one of the Best Workplaces™ in Alberta. Our focus for 2019 was to build the culture, capabilities, technology, and brand to position CWB to deliver break-out growth and enhanced profitability as a model-enabled bank under the AIRB approach. Non- interest expenses were up 9%, reflecting investments to support continued growth and strategic execution, including increased advertising. Higher salaries and benefits comprised two-thirds of the increase and primarily reflect additional hiring. Costs related to premises, equipment and software were also higher, reflecting investment in new technology and depreciation of our previous investments. Growth of non-interest expenses, reflecting the strategic investments described above, outpaced total revenue growth of 7%, resulting in negative 1.8% operating leverage. Diluted earnings per common share of $3.04 and adjusted cash earnings per common share of $3.15 were up 9% and 5%, respectively. The higher growth rate of diluted earnings per common share primarily reflects decreased acquisition-related fair value changes this year. Adjusted return on common shareholders’ equity (ROE) of 11.3% decreased 60 basis points from last year, as 3% growth of adjusted common shareholders net income was more than offset by the increase in average common shareholders’ equity driven by higher accumulated other comprehensive income and retained earnings growth, partially offset by the impact of common shares purchased for cancellation under the normal course issuer bid. The maintenance of solid and conservative capital levels is fundamental to our objectives to effectively manage risks and support strong growth. Our Basel III CET1 capital ratio at October 31, 2019 remained very strong at 9.1%, compared to 9.2% last year. The change from last year reflects strong asset growth supported by solid growth in retained earnings and AOCI, the IFRS 9 transitional adjustment to opening retained earnings, partially offset by common share repurchases under the normal course issuer bid. Including Tier 1 and total capital ratios of 10.7%, and 12.8%, respectively, all of our capital ratios remain above both internal and regulatory minimums. With ongoing profitable growth and very strong capital ratios, we also rewarded shareholders with an 8% increase to the common share dividend compared to 2018. 2019 Medium-term Performance Target Ranges Target ranges effective through fiscal 2019, with related fiscal 2019 performance, are presented in the following table: Table 5 - 2019 Medium-term Performance Target Ranges Key Metrics(1) Medium-term Performance Target Ranges Fiscal 2019 Performance 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 discussion of non-IFRS measures. 7 - 12% 12 - 15% Positive Strong ~30% Delivered 5% Delivered 11.3% Delivered negative 1.8% Delivered a very strong ratio of 9.1% Delivered 35% In view of our planned transition to the AIRB approach for capital and However the magnitude of capital available for deployment upon transition risk management in fiscal 2020, we have discontinued our medium-term to the AIRB approach is uncertain at this time. We expect to establish targets. We introduced these targets in fiscal 2016, and designed them revised multi-year performance expectations incorporating benefits of the to be effective over a three- to five-year period under the Standardized AIRB transition following formal regulatory approval. Expectations related approach for calculating risk-weighted assets. We are confident to key performance metrics for fiscal 2020, on a standalone basis, are our transition to the AIRB approach will support higher growth and summarized within the Outlook section below. profitability from our differentiated business model over the medium-term. 25 CWB Financial Group 2019 Annual ReportFiscal 2020 Outlook We expect overall financial performance in fiscal 2020 to reflect and leasing as compared to real estate project loans. ongoing strong execution of our transformational strategy, including success in key strategic initiatives to enhance our client experience, continue to build core funding sources, and leverage investment in digital capabilities to position CWB for break-out growth as a model- enabled bank under AIRB. We expect growth in Ontario to continue to reflect ongoing contributions from our established businesses with a national footprint, as well as the planned opening of our first CWB branch premises in the province this year. We expect progress toward our strategic goal for Ontario to represent a third of the overall portfolio to moderate Financial results are expected to benefit from our expanding geographic somewhat compared to the significant rate of change achieved over footprint and increased business diversification; further optimization the past several years. This mainly reflects expectations for continued of our funding mix; strong credit risk management; effective expense normalization of very high growth within CWB Maxium and CWB management in consideration of revenue growth opportunities; and Franchise Finance, moderate growth from CWB National Leasing due prudent capital management. to the persistence of strong competition, and high-single digit growth In view of these expectations, considerations related to the Canadian within CWB Optimum. economy, and key performance drivers discussed below, we expect to We expect residential mortgage growth to continue to include an deliver: • a percentage growth rate of adjusted cash earnings per common share in the mid-single digits; • adjusted return on common shareholders’ equity at a similar level to 2019; • moderately positive operating leverage, with some volatility between quarters reflecting the timing of execution of our strategic priorities; • a strong CET 1 capital ratio; and, • a growth rate of common share dividends in the high-single digits. A relatively stable Canadian economy increased proportion of “A” mortgages, reflecting ongoing investment in our securitization capabilities. We remain committed to the ongoing development of CWB Optimum as it has produced solid returns while maintaining an acceptable risk profile. With new mortgage products launched late in fiscal 2019 that are specifically targeted to business owners, we expect to resume growth at a rate resembling the rest of our loan portfolio. We continue to assess construction-related lending opportunities within targeted markets. Our expectations for moderate growth of real estate project loans, with the potential for further incremental contraction, reflect the combined impact of this portfolio’s relatively The overall outlook for the Canadian economy is relatively stable. We short duration and our strategic focus to grow other portfolios more expect economic performance within our largest provincial markets to quickly. Within the parameters of our established risk appetite, we will vary based on factors unique to each region. continue to finance well-capitalized developers on the basis of sound Growth in BC is expected to accelerate slightly to a level exceeding the national average, mainly reflecting more constructive housing market loan structures and acceptable pre-sale/lease levels and have a strong pipeline of new lending opportunities. conditions and the impact of large-scale capital projects. Growth in Commercial mortgages are often subject to a higher level of pricing Alberta is also expected to improve from a level that was well below the competition compared to other types of lending. However, we remain national average in fiscal 2019. However, reduced provincial government focused to support existing client relationships and high-quality lending expenditures could dampen the recovery. Growth in Ontario is also opportunities offering adequate risk-adjusted returns within targeted expected to moderate to a level below the national average, with more markets, and we expect to deliver stronger growth in this portfolio constructive housing market conditions potentially offset by the impact compared to 2019. of trade-related uncertainty. Stable credit quality Strong, profitable loan growth with continued strategic diversification We expect impaired loans as a percentage of total loans to remain within our risk appetite. We expect actual loss rates and specific Continued strategic execution has positioned us to capture increased allowances on current and future impaired loans to remain stable market share within a larger addressable market, notwithstanding the from current levels, reflecting the combined positive impact of our potential for varying degrees of volatility in the operating environment. disciplined underwriting, secured lending practices, and proactive We will continue to support high-quality borrowers with a focus on account management. This expectation is consistent with our prior business owners operating within targeted industry segments across experience, where write-offs have typically been low as a percentage Canada, and we remain committed to deliver double-digit annual loan of impairments. We remain confident in the strength, diversity and growth whenever prudent. This includes a continued focus on secured underwriting structure of the overall loan portfolio, and we continue to loans that offer an appropriate return and acceptable risk profile. closely monitor lending exposures for signs of weakness. We continue to target further geographic and industry diversification While IFRS 9 affects the timing of the recognition of credit losses, the through growth of client relationships in targeted industries across accounting standard does not affect actual credit losses realized over our national geographic footprint. Slightly higher relative growth rates the life of a particular loan, represented by write-offs net of recoveries. should remain apparent in Central Canada, as compared to expectations Provisions for credit losses on performing loans have the potential to be for continued solid growth in Western Canada. We also expect higher somewhat volatile in view of the forward-looking ECL approach under relative growth in general commercial loans, and equipment financing IFRS 9. While levels for key economic variables incorporated in ECL 26 CWB Financial Group 2019 Annual Reportmodels such as unemployment rates, gross domestic product growth, loan growth. Enhanced transactional capabilities in cash management the Canadian dollar/U.S. dollar exchange rate, interest rates and oil and other retail services, including our relationship-based, branch- prices are expected to be relatively consistent with 2019, with the raised deposit franchise, is expected to drive increases in retail services potential for slight improvements in housing market conditions, these fees. We expect growth in revenue from CWB Wealth Management variables are inherently prone to volatility on a forward-looking basis. to reflect increases in assets under management, and we continue Potential risks that could have a material adverse impact on loan growth and/or credit quality include a deterioration in Canadian residential real estate prices, material changes to trade agreements, including the imposition of tariffs, 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. Continued growth and diversification of funding to consider strategically aligned wealth management acquisition opportunities. With renewed focus on targeted business lines aligned to our strategic direction, we expect revenue from CWB Trust Services to benefit from growth in new and expanding trustee and custody relationships. Based on the current composition of the debt securities portfolio, net gains and losses are not expected to contribute materially to non-interest income; however, the magnitude and timing of gains and losses are dependent on market factors that are difficult to predict. Growth in the above noted categories could be partially offset by lower ‘other’ non-interest income. In fiscal 2019 results in this category Our strategic focus to grow and diversify funding sources will continue. included gains from favourable foreign exchange activities, recoveries This includes a continued goal to increase branch-raised deposits, with on loan realization assets, and proceeds from asset sales that may not particular emphasis on demand and notice deposits. recur at comparable levels. We expect future growth in branch-raised funding to reflect success Efficient operations and operating leverage in acquiring more clients and developing broader, full-service client relationships across the country. We will continue to enhance our client experience by investing in digital capabilities, maintaining our strategic focus on business transformation and process improvement, and developing new and more effective products. In combination, we expect this effort to support core deposit growth by enhancing our capacity to deliver on our reputation for excellence in personalized service in a highly scalable manner through a full range of channels. Support for deposit gathering capabilities will also include targeted strategies within Motive Financial and CWB Trust Services, as well as continued development of the full-service branch network, including the opening of our first full-service branch in Ontario. We also expect continued diversification of funding sources to include growth of both debt capital markets and securitization funding channels. Strong revenue growth We expect to deliver high single-digit growth of net interest income in fiscal 2020 from the benefits of stronger loan growth, partially offset by downward pressure on net interest margin. Our strategic priorities to support net interest income include continued strong core deposit growth with further enhancement of our client experience through focused business transformation and ongoing investment in digital capabilities. However, the potential for Bank of Canada interest rate cuts in fiscal 2020 remains apparent, and we expect rising funding costs in our branch-raised deposits to continue as a result of competitive factors. We also anticipate slightly higher average levels of liquidity based on our expected deposit maturity profile, and the adoption of IFRS 16 Leases (IFRS 16) on November 1, 2019 will also contribute to net interest margin compression compared to 2019. That said, our net interest margin has operated within a fairly tight range of approximately 2.50 to 2.60% over the past several years, and we expect to remain around the mid point of that range in fiscal 2020 on a full-year basis, with the potential for quarterly volatility. We expect to restore positive growth of non-interest income with increases across most categories, reflecting our strategy to extend and deepen relationships with both new and existing clients across all business lines. We expect credit related fees to grow approximately in proportion to Our continued focus on business transformation and process improvement, alongside ongoing investment in digital capabilities, is intended to support improved efficiency and operating leverage through increasingly scalable client acquisition and business growth over the medium term. Our annual efficiency ratio over the past three years has been approximately 46%. We expect a relatively consistent outcome in 2020, with slightly positive operating leverage on a full-year basis. This incorporates expectations for strong business growth supported through strategic investment in people, technology and infrastructure, along with effective control of non-interest expenses. Notwithstanding our commitment to prudently manage expenses based on expected revenue growth, quarterly volatility of operating leverage may occur based on the timing of expenditures. Prudent capital management and dividends We expect to submit our final application and receive regulatory approval in fiscal 2020 for transition to the AIRB approach for capital and risk management. A reduction in risk-weighted assets measured under the AIRB approach is expected to increase our regulatory capital ratios; however, we do not expect any other material impacts to our financial results in fiscal 2020. With a very strong CET1 capital ratio under the more conservative Standardized approach for calculating risk-weighted assets, we are well positioned to create value for shareholders through a range of capital deployment options consistent with our balanced growth strategic objectives while remaining conservatively capitalized. Ongoing support and development of each of CWB’s businesses will remain a key priority, and we will continue to evaluate potential strategic acquisitions. Transition to the AIRB approach will put us on more equal footing with our competition and increase our addressable market. It will add risk sensitivity to our framework for capital management, increase risk quantification processes, improve risk-based pricing capabilities and economic capital estimations, improve stress testing capabilities and enhance our Internal Capital Adequacy Assessment Process (ICAAP). 27 CWB Financial Group 2019 Annual ReportThese improved risk management capabilities will better equip CWB to share dividend increases are evaluated every quarter against capital allocate resources to target business segments that generate the most requirements under the Standardized approach and opportunities attractive risk-adjusted returns. to create value for shareholders through various forms of capital deployment, including support for ongoing strong and balanced asset A normal course issuer bid (NCIB) authorizing the purchase for growth. cancellation prior to September 30, 2020, of a maximum of 1,740,000 common shares is in place. We may choose to activate the NCIB in fiscal We expect to deliver dividend growth in the high single digit range in 2020 should appropriate circumstances become apparent. Common fiscal 2020. 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 2019 • Solid 8% growth of net interest income to a record $786 million, • The yield on average loans increased 25 basis points to 5.07% in reflecting 8% loan growth and stable net interest margin of 2.60%. 2019. This primarily reflects an increase in the average prime rate of • Stable net interest margin reflects the positive impacts of higher asset yields and lower average balances of cash and securities as 47 basis points following Bank of Canada rate increases in July and October 2018, partially offset by competitive factors. a percentage of total average assets, offset by higher funding costs • The increase in funding costs also reflects the higher average prime rate, and changes in funding mix. along with longer fixed term deposit duration and competitive factors. Table 6 - Net Interest Income(1) ($ thousands) Assets Cash, securities and deposits with regulated financial institutions Securities purchased under 2019 2018 Average Balance Mix Interest Interest Rate Average Balance Mix Interest Interest Rate $ 2,405,937 8% $ 37,470 1.56% $ 2,731,904 10% $ 39,574 1.45% resale agreements 80,956 - 1,500 1.85 13,915 - 191 1.37 Loans Personal Business Total interest bearing assets Other assets Total Assets Liabilities Deposits Personal Business and government Securities sold under repurchase agreements Other liabilities Debt Shareholders' equity Non-controlling interests Total Liabilities and Equity Total Assets/Net Interest Income (1) See page 20 for a discussion of non-IFRS measures. 5,405,011 21,782,700 27,187,711 29,674,604 556,757 $ 30,231,361 18 72 90 98 2 100% 215,253 1,164,477 1,379,730 1,418,700 - $ 1,418,700 3.98 5.35 5.07 4.78 0.00 4.69% 4,951,222 19,653,260 24,604,482 27,350,301 550,806 $ 27,901,107 18 70 88 98 2 100% 190,802 994,728 1,185,530 1,225,295 - 1,225,295 $ $ 15,347,419 9,288,447 24,635,866 12,094 629,682 2,139,110 2,812,579 2,030 $ 30,231,361 $ 30,231,361 $ 51% 31 82 377,345 195,881 573,226 2.46% 2.11 2.33 $ 13,911,075 8,906,830 22,817,905 $ 50% 32 82 287,519 164,244 451,763 - 2 7 9 - 100% $ $ 253 - 59,637 - - 633,116 785,584 2.09 0.00 2.77 0.00 0.00 2.09% 2.60% 52,406 608,108 1,894,203 2,525,934 2,551 $ 27,901,107 $ 27,901,107 - 2 7 9 - 100% $ $ 763 - 47,779 - - 500,305 724,990 3.85 5.06 4.82 4.48 0.00 4.39% 2.07% 1.84 1.98 1.46 0.00 2.52 0.00 0.00 1.79% 2.60% Net interest income increased 8% to a record $786 million. Solid growth was primarily driven by the 8% increase in average interest-earning assets and stable net interest margin of 2.60% compared to the prior year. 28 CWB Financial Group 2019 Annual ReportThe yield on average loans increased 25 basis points to 5.07% in 2019. This primarily reflects an increase in the average prime rate of 47 basis points following Bank of Canada rate increases in July and October 2018, partially offset by competitive factors. The yield on average cash, securities and deposits with regulated financial institutions was up 11 basis points from last year, primarily reflecting the higher average prime rate. Average balances of cash and securities were lower compared to the prior year, reflecting reduced liquidity requirements based on the composition of our balance sheet and contractual maturities. Average deposit costs were up 35 basis points from last year and the overall cost of average interest bearing liabilities and equity increased 30 basis points to 2.09%. The average cost of both personal, and business and government deposits were higher due to changes in the interest rate environment, competitive factors on deposit pricing, as well as deposit mix. Debt-related costs were 25 basis points higher, mostly reflecting the higher average prime rate, partly offset by lower fixed rates on term debt. NON-INTEREST INCOME Highlights of 2019 • Non-interest income of $76 million was down 3%, or $2 million, from • Non-interest income represented 9% of total revenues, down from 2018. 10% in 2018. • Growth of credit related fees, positive net gains on securities, compared to losses last year, and higher retail services fees were more than offset by the impact of approximately $4 million of gains realized from the CWT strategic transactions recorded within ‘other’ non-interest income in 2018, along with slightly lower wealth management fees. Table 7 - Non-interest Income ($ thousands) Credit related Wealth management services Retail services Trust services Gains (losses) on securities, net Other(2) Total Non-interest Income Change from 2018 2019(1) 2018 $ 34,082 $ 32,165 $ 19,640 10,627 7,651 301 3,719 20,371 10,334 7,784 (217) 7,931 $ 76,020 $ 78,368 $ $ 1,917 (731) 293 (133) 518 (4,212) (2,348) % 6% (4) 3 (2) nm(3) (53) (3)% (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2 of the audited annual financial statements). Prior year comparatives have been prepared in accordance with IAS 39 and have not been restated. (2) Includes gains on loan portfolio sales, lease administration services, foreign exchange gains/losses, gains/losses on land, buildings and equipment disposals, and other miscellaneous non-interest revenues. Fiscal 2018 also includes the gains on CWT strategic transactions. nm – not meaningful Non-interest income of $78 million was down 3%, or $2 million, from 2018. transactions recorded within ‘other’ non-interest income last year, along Growth of credit related fees, positive net gains on securities, compared to with slightly lower wealth management fees. Higher credit related and retail losses last year, and higher retail services fees were more than offset by the services fee income mainly reflects overall growth of loans and deposits. impact of approximately $4 million of gains realized from the CWT strategic 29 CWB Financial Group 2019 Annual Report NON-INTEREST EXPENSES, EFFICIENCY AND OPERATING LEVERAGE Highlights of 2019 • The 2019 efficiency ratio of 46.5% compares to 45.7% in 2018. • Full-year operating leverage of negative 1.8%, reflects the same Revenue growth this year was outpaced by growth in expenses factors driving the change in the efficiency ratio. reflecting continued investment in strategic execution. Table 8 - Non-interest Expenses and Efficiency Ratio ($ thousands) Salaries and Employee Benefits Salaries Employee benefits Premises Rent Depreciation Other Equipment and Software Depreciation Other General Professional fees and services Marketing and business development Regulatory costs Banking charges Amortization of acquisition-related intangible assets Employee recruitment and training Travel Staff relations Communications Capital and business taxes Other 2019 2018 $ % Change from 2018 $ 213,452 $ 198,203 $ 44,514 257,966 39,025 237,228 22,460 5,310 3,842 31,612 22,127 16,776 38,903 13,824 12,546 12,022 5,048 5,007 4,690 4,028 2,248 1,995 1,888 13,704 77,000 20,730 5,074 3,854 29,658 18,321 14,775 33,096 12,241 11,151 10,107 5,519 6,313 4,844 3,805 2,323 1,795 1,453 13,950 73,501 15,249 5,489 20,738 1,730 236 (12) 1,954 3,806 2,001 5,807 1,583 1,395 1,915 (471) (1,306) (154) 223 (75) 200 435 (246) 3,499 31,998 8% 14 9 8 5 - 7 21 14 18 13 13 19 (9) (21) (3) 6 (3) 11 30 (2) 5 9% 80 bp(3) (370) Total Non-interest Expenses $ 405,481 $ 373,483 $ Efficiency Ratio(1)(2) Operating Leverage(1) (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. 46.5% (1.8) 45.7% 1.9 Total non-interest expenses of $405 million were up 9% ($32 million). The efficiency ratio of 46.5% compares to 45.7% last year. Revenue growth in Overall salaries and employee benefits increased 9% ($21 million), mainly 2019 was outpaced by growth of expenses reflecting continued investment reflecting hiring activity to support overall business growth and execution in strategic execution. of strategic priorities, along with annual salary increments. The increase in overall full-time equivalent employees was moderate at 5%. Operating leverage, which is calculated as the growth rate of total revenue less the growth rate of adjusted non-interest expenses, over the last 12 Equipment and software costs were up 18% ($6 million) primarily due to months was negative 1.8%, compared to positive 1.9% last year. Operating ongoing investment in technology infrastructure to position CWB for leverage in 2019 was impacted by the same factors as our full-year efficiency future growth and improve our client and employee experience. Premises ratio. In 2018, revenue growth benefited from very strong loan growth, a expenses were up 7% ($2 million) to position us for future growth. General four basis point improvement in net interest margin and gains from the non-interest expenses were up 5%, or $3 million, mainly due to increases in CWT strategic transactions. regulatory costs, and expenses related to the launch of the renewed CWB brand. 30 CWB Financial Group 2019 Annual ReportFigure 1 - Number of Full-time Equivalent Staff INCOME TAXES 1,928 (+8%) 1,966 (+2%) 2,058 (+5%) 2,278 (+5%) 2,178 (+6%) 2500 2000 1500 1000 500 0 Deferred tax assets and liabilities represent the cumulative amount of tax applicable to temporary differences between the carrying amount of assets and liabilities, and their values for tax purposes. Our 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. The 2019 effective income tax rate was 26.3%, compared to 26.8% in 2018. On June 28, 2019, the Alberta government enacted reductions to the provincial corporate income tax rate from 12% to 8% over four years, beginning with a 1% decrease on July 1, 2019 with further reductions of 1% on each of January 1, 2020, 2021 and 2022. Our 2019 effective income tax rate benefited from the re-measurement of our deferred tax assets and liabilities from the tax rate reductions, which resulted in a one-time deferred tax recovery of approximately $1.5 million. Our expected income tax rate for 2015 2016 2017 2018 2019 fiscal 2020 is approximately 26%. ACQUISITION-RELATED FAIR VALUE CHANGES Acquisition-related fair value changes in 2019 were $8 million, compared to $20 million last year, reflecting completion of the earn-out period on February 28, 2019 for the contingent consideration related to the successful and accretive acquisition of CWB Maxium Financial. Total contingent payments in cash and CWB common shares over the earn-out period of $70 million represented the maximum payout under the purchase agreement and confirm the successful integration and growth of the acquired business. CWB Maxium has delivered very strong performance since the acquisition in 2016, with contributions to financial performance and CWB’s strategic diversification objectives exceeding our expectations. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income (OCI), all net of income taxes. Our OCI includes changes in unrealized gains and losses on debt securities measured at FVOCI and equity securities designated at FVOCI, and fair value changes for derivative instruments designated as cash flow hedges. The growth in comprehensive income was primarily driven by a $98 million increase in the change in fair value of derivatives designated as cash flow hedges and a $54 million increase in the change in fair value of debt securities measured at FVOCI. Very strong 9% ($23 million) growth of net income also contributed to the increase. Our debt securities portfolio, which is classified at FVOCI, is comprised primarily of debt securities issued or guaranteed by Canada, a province or municipality. Fluctuations in value are generally attributed to changes in interest rates, movements in market credit spreads and shifts in the interest rate curve. Table 9 - Comprehensive Income ($ thousands) Net Income Other Comprehensive Income (Loss), net of tax Items that will be subsequently reclassified to net income Debt securities measured at fair value through other comprehensive income (2018: Available-for-sale securities debt and equity securities) Gains (losses) from change in fair value Reclassification to net income Derivatives designated as cash flow hedges Gains (losses) from change in fair value Reclassification to net income Items that will not be subsequently reclassified to net income Losses on equity securities designated at fair value through other comprehensive income Comprehensive Income 2019(1) 2018 Change from 2018 $ 287,846 $ 264,647 $ 23,199 34,301 (354) 33,947 71,361 (383) 70,978 (14,175) 90,750 378,596 $ $ (19,945) 158 (19,787) (26,848) (994) (27,842) n/a (47,629) 217,018 54,246 (512) 53,734 98,209 611 98,820 n/a 138,379 161,578 $ (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (see Notes 1 and 2 of the 2019 audited annual financial statements). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. n/a – not applicable 31 CWB Financial Group 2019 Annual ReportCASH AND SECURITIES Cash, securities and securities purchased under resale agreements attributed to changes in interest rates, movements in market credit spreads, amounted to $2.5 billion at October 31, 2019, compared to $2.2 billion last shifts in the interest rate curve, as well as volatility in equity markets. Total year. The cash and securities portfolio is mainly comprised of high-quality net unrealized losses before tax recorded on the balance sheet at October debt instruments along with a small portfolio of investment grade preferred 31, 2019 were $13 million, compared to $67 million last year. Unrealized shares that are not held for trading purposes and, where applicable, are gains or losses are reflected in the following table. typically held to maturity. Fluctuations in the value of securities are generally Table 10 - Unrealized Gains (Losses) on Debt Securities and Cash Resources Measured at FVOCI and Equity ($ thousands) Measured at FVOCI Interest bearing deposits with regulated financial institutions Debt securities issued or guaranteed by Canada A province or municipality Other debt securities Designated at FVOCI Preferred shares Total Available-for-sale Interest bearing deposits with regulated financial institutions Debt securities issued or guaranteed by Canada A province or municipality Other debt securities Preferred shares Total IFRS 9 As at October 31, 2019 Gross Unrealized Gains Gross Unrealized Losses Amortized Cost Fair Value $ 293,865 $ - $ 9 $ 293,856 1,344,455 468,989 190,803 477 75 291 3,606 393 48 1,341,326 468,671 191,046 26,648 $ 2,324,760 $ - 843 $ 8,484 12,540 $ 18,164 2,313,063 IAS 39 As at October 31, 2018 Gross Unrealized Gains Gross Unrealized Losses Amortized Cost Fair Value $ 26,825 $ - $ - $ 26,825 1,362,647 531,798 146,610 110,696 2,178,576 $ $ - - 1 - 1 $ 36,831 9,973 3,075 17,121 67,000 $ 1,325,816 521,825 143,536 93,575 2,111,577 We regularly review the level of unrealized losses on securities. See Table 28 – Valuation of Financial Instruments of this MD&A for additional information on significant financial assets and liabilities reported Impairment charges on debt securities are reflected in net gains (losses) at fair value. on securities only in the case of an issuer credit event. We have no direct investment in any sovereign debt or other securities issued outside of The balance and mix of cash and securities are managed as part of our Canada or the United States. overall liquidity management process; additional information is included in the Liquidity Management discussion of this MD&A. Net realized gains (losses) on securities recognized in income were insignificant in 2019 and 2018. For the preferred shares that have been designated as FVOCI, $20 million of realized losses were recognized directly in retained earnings in accordance with IFRS 9. 32 CWB Financial Group 2019 Annual ReportLOANS Highlights of 2019 • Overall loan growth was solid at 8%, with strong execution against • Growth in Ontario and Alberta was strong at 11% and 8%, respectively, our balanced growth strategic objectives. while growth in BC was 5%. • Achieved further geographic diversification, with very strong 13% • Achieved further industry diversification, with very strong 15% growth in Central and Eastern Canada and expansion in every growth in general commercial loans and 9% growth in equipment province. financing and leasing. • Ontario-based loans represented 22% of total loans at year end, • Solid 8% growth in personal loans and mortgages mainly reflected compared to 21% last year, and the proportion of loans in Central originations of “A” mortgages to leverage CWB’s securitization and Eastern Canada was 27%, compared to 26% in 2018. capabilities. Table 11 - Outstanding Loans by Portfolio ($ millions) General commercial loans Personal loans and mortgages Equipment financing and leasing Commercial mortgages Real estate project loans Oil and gas production loans Total Outstanding Loans(1) (1) Total loans outstanding by lending sector exclude the allowance for credit losses. Change from 2018 2019 2018 $ 8,600 $ 7,458 $ 5,690 5,192 5,088 3,752 155 5,247 4,779 4,865 3,855 129 $ 1,142 443 413 223 (103) 26 % 15% 8 9 5 (3) 20 $ 28,477 $ 26,333 $ 2,144 8% Total loans before the allowance for credit losses increased 8% to reach Total loans of $3.0 billion within CWB Optimum were relatively unchanged $28.5 billion at year end. Growth by lending sector was consistent with our balanced growth strategic objectives. In dollar terms, growth was led by the strategically targeted general commercial category ($1.1 billion). In percentage terms, annual growth within this category was 15% overall, including growth of 22% in Ontario, 14% in BC and 8% in Alberta. General commercial lending reflects activity across a broad range of industries, such as manufacturing, construction, transportation, retail trade, hospitality, healthcare, professional services, and wholesale trade. Targeted growth and very from last year. New CWB Optimum originations in fiscal 2019 were primarily driven by alternative mortgages secured via first mortgages carrying a weighted average loan-to-value at initiation of approximately 69%, along with an increasing proportion of “A” mortgages. The average size of CWB Optimum mortgages originated was approximately $333,000 and the average size of mortgages outstanding at October 31, 2019 was $296,000. The renewal rate with existing CWB Optimum borrowers was 72%, compared to 77% last year. The renewal rate in 2018 was unusually high, and reflected a temporary market adjustment in response to changes to OSFI’s Guideline B-20, Residential Mortgage Underwriting Practices and strong performance within this category reflects ongoing efforts to leverage Procedures (B-20). development of full-service relationships with business owners to support our funding diversification objectives. Personal loans and mortgages increased 8% ($443 million). Overall growth reflects continued origination of both “A” and alternative mortgages. Alternative mortgages originated within CWB’s broker-sourced residential mortgage business, CWB Optimum, represent approximately 52% of CWB’s personal loans and mortgage portfolio, or approximately 10% of CWB’s total loans (2018 – 11%). 33 CWB Financial Group 2019 Annual ReportComing into 2019, we expected growth within CWB Optimum to slow construction with high presale coverage continue and we have a strong compared to prior years. This reflected the expected combined impacts pipeline of new lending opportunities. Recent growth in Alberta has skewed of reduced housing market activity in certain regions following changes to toward the industrial sector in the Calgary market. B-20, our overall risk appetite for alternative mortgages as a proportion of total loans, and ongoing refinement of our risk appetite within the alternative mortgage market, including a preference for stronger credits. However, it is apparent that we tightened our risk appetite more than competing alternative mortgage originators, and growth within CWB Optimum this year was lower than expected. Lending activity in bank branches and our participation in the National Housing Act Mortgage Backed Security (NHA MBS) program comprise the remainder of CWB’s personal loans and mortgages exposure. The gross amount of mortgages securitized under the NHA MBS program was $837 million (2018 – $609 million). We continue to lend into oil and gas production on a syndicated basis and maintain a proactive approach to manage our small portfolio in this space. The $26 million increase in the past year reflects participation in syndicated lending facilities. The total balance of loans in this category comprises approximately 1% of our total loans, with underlying commodity exposures skewed toward oil and liquid rich natural gas. The mix of our portfolio (see Figure 2) shifted in a manner consistent with our balanced growth strategic objectives. Very strong growth in general commercial loans increased the proportion of loans in this category as a percentage of the total portfolio to 30%, compared to 28% in 2018. The proportion of loans in equipment financing and leasing decreased to 18% Growth of equipment financing and leasing was strong at 9% ($ 413 million) from 19% last year. Real estate project loans comprised 13% of the portfolio overall, with ongoing contributions from CWB’s branch-based equipment at year end, compared to 15% in 2018. financing teams and CWB National Leasing. Commercial mortgages increased 5% ($223 million), with strong 15% growth (see Figure 3) was also consistent with our balanced growth strategic in BC and 4% growth in Saskatchewan partially offset by contractions in objectives. BC and Alberta represented 33% and 32%, respectively, of total The change in the mix of our portfolio based on the location of security other provinces. Real estate project loans contracted $103 million with growth in Alberta, Ontario and Quebec more than offset by the impact of successful project completions and payouts in BC. While the pace of new project development in greater Vancouver has moderated, originations related to projects under loans at October 31, 2019, compared to 34% and 32% in 2018, respectively. Ontario represented 22% of total loans at the end of fiscal 2019, up from 21% last year. This result was underpinned by strong performance from our businesses with a national footprint, particularly CWB Maxium and CWB Franchise Finance, with continued support from CWB National Leasing and stable balances in CWB Optimum. Oil & Gas Production 1% (0%) General Commercial Loans 30% (28%) Personal Loans & Mortgages 20% (20%) Figure 2 - Outstanding Loans by Portfolio (October 31, 2018 in brackets) Real Estate Project Loans 13% (15%) Commercial Mortgages 18% (18%) Equiment Financing 18% (19%) 34 CWB Financial Group 2019 Annual ReportDIVERSIFICATION OF PORTFOLIO Figure 3 - Geographical Distribution of Loans based on Location of Security (October 31, 2018 in brackets) Other 2% (2%) Quebec 3% (3%) Manitoba 3% (3%) Saskatchewan 5% (5%) Ontario 22% (21%) Table 12 - Total Advances Based on Industry Sector(1) (% at October 31) Construction Consumer loans and residential mortgages Real estate operations Transportation and storage Finance and insurance Retail trade Hotel/motel Health and social services Manufacturing Agriculture Oil and gas service Professional, scientific and technical services Utilities Wholesale trade Logging/forestry Oil and gas production Accommodation and food services All other Total (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 significantly increased geographic and industry diversification delivered over the past several years. British Columbia 33% (34%) Alberta 32% (32%) 2019 20% 20 18 8 7 5 4 3 2 2 2 2 1 1 1 1 1 2 2018 21% 20 18 7 7 5 4 3 2 2 2 1 1 1 1 1 1 3 100% 100% 35 CWB Financial Group 2019 Annual ReportCREDIT QUALITY Highlights of 2019 • Stable credit quality with the provision for credit losses on impaired • Gross impaired loans represented 0.52% of gross loans, unchanged loans representing 21 basis points of average loans under IFRS 9, from last year. compared to 19 basis points last year under IAS 39. IMPAIRED LOANS The loan portfolio is delineated through the assignment of internal risk Gross impaired loans within Alberta of $78 million accounted for 53% ratings to each borrower. The rating is based on assessments of key of total impairments at year end, compared to 56% last year. Gross evaluation factors for the nature of the exposure applied on a consistent impairments outside of Alberta represented 0.36% of non-Alberta loans basis across the portfolio. Risk ratings are updated at least annually for at October 31, 2019, up from 0.34% last year. The ten largest accounts all loans, with the exception of consumer loans and single-unit residential classified as impaired, measured by dollars outstanding, represented 36% mortgages. As shown in Table 13, the dollar level of gross impaired loans at October 31, 2019 totaled $148 million, up from $138 million last year. This of total gross impaired loans at year end, down from 41%. New formations of impaired loans totaled $192 million, compared to $97 million last year. Strong resolutions of $119 million this year, compared to $82 million last year, reflects our ongoing commitment to proactive management of the amount represented 0.52% of total loans, unchanged from a year ago. loan portfolio. Table 13 - Change in Gross Impaired Loans ($ thousands) Gross impaired loans, beginning of period New formations Reductions, impaired accounts paid down or returned to performing status Write-offs Total, end of period(1) Balance of the ten largest impaired accounts Total number of accounts classified as impaired(2) Total number of accounts classified as impaired under $1 million(2) Gross impaired loans as a percentage of gross loans(3) Change from 2018 2019 2018 $ $ 137,872 $ 168,261 $ (30,389) 191,662 96,729 94,933 (119,018) (62,266) (81,759) (45,359) (37,259) (16,907) $ 148,250 $ 137,872 $ 10,378 $ 52,795 $ 56,748 $ (3,953) 330 308 0.52% 214 195 0.52% 116 113 % (18)% 98 46 37 8% (7)% 54 58 - bp(4) (1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $4,217 (2018 – $6,628). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations. (2) Total number of accounts excludes CWB National Leasing. (3) Total loans do not include an allocation for credit losses or deferred revenue and premiums. (4) bp – basis point change. We regularly review the overall loan portfolio and undertake credit decisions of expected write-offs given tangible security held in support of lending on a case-by-case basis to provide early identification of possible adverse exposures. A specialized team closely monitors loans that have become trends. The level of gross impaired loans fluctuates as loans become impaired impaired, with regular reviews of each loan and its realization plan. Please and are subsequently resolved, and does not directly reflect the dollar value see the Risk Management section of this MD&A for further information. 36 CWB Financial Group 2019 Annual ReportALLOWANCE FOR CREDIT LOSSES Allowances for credit losses are maintained to absorb both identified and The year-over-year change in the allowance for credit losses split between unidentified losses in the loan portfolio. At October 31, 2019, under IFRS the Stage 3 allowance by category of impaired loans and the Stage 1 and 2 9, the total allowance for credit losses consisted of $26 million of impaired allowance for credit risk is provided in the following table. (Stage 3) allowances and $89 million of performing (Stage 1 and 2) allowance for credit losses. One year ago, under IAS 39, the total allowance for credit losses consisted of $27 million of specific allowances and $120 million in the collective allowance for credit losses. Upon adoption of the new impairment requirements of IFRS 9 on November 1, 2018, CWB’s allowances for credit losses on performing loans (Stages 1 and 2) totaled $89 million, a decrease of $31 million from the IAS 39 collective allowance as at October 31, 2018. Further details related to the transition The Stage 3 allowance for impaired loans consists of the amounts required to IFRS 9 are included in Notes 1 and 2 of the audited annual consolidated to reduce the carrying value of individually identified impaired loans to their financial statements. estimated realizable value. We establish estimates through detailed analysis of both the overall quality and ultimate marketability of the security held against each impaired account. The Stage 1 and 2 allowance for performing loans consists of expected credit losses for losses in the portfolio that are not presently identifiable on an account-by-account basis. Table 14 - Allowance for Credit Losses ($ thousands) Impaired (Stage 3) Allowance Equipment financing and leasing General commercial loans Commercial mortgages Personal loans and mortgages Real estate project loans Oil and gas production loans Performing (Stage 1 and 2) Allowance Total Represented by: IAS 39 2018 Ending Balance IFRS 9 Remeasure- ment(1) IFRS 9 2019 Opening Balance Provision for Credit Losses Write-Offs, net of Recoveries(2) 2019 Ending Balance $ 15,606 $ 5,484 3,290 647 2,000 - 27,027 119,766 - - - - - - - (31,229) $ 15,606 $ 24,833 $ (25,305) $ 15,134 5,484 3,290 647 2,000 - 27,027 88,537 30,508 (28,962) 417 1,773 (191) (3) 57,337 524 (943) (1,384) (1,809) 3 (58,400) - 7,030 2,764 1,036 - - 25,964 89,061 $ 146,793 $ (31,229) $ 115,564 $ 57,861 $ (58,400) $ 115,025 Loans Committed but undrawn credit exposures and letters of credit(3) Total $ 110,834 4,191 $ 115,025 (1) Represents the transition impact of adopting IFRS 9 on November 1, 2019. For further information see Notes 1 and 2 of the 2019 audited annual financial statements. (2) Recoveries in 2019 totaled $3,866. (3) The performing 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. PROVISION FOR CREDIT LOSSES The provision for credit losses was estimated under IFRS 9 beginning in CWB has a long history of strong credit quality and low loan losses, both fiscal 2019, with the provision in fiscal 2018 estimated under IAS 39. Under of which compare very favourably to the Canadian banking industry. We IFRS 9, the provision for credit losses as a percentage of average loans continually analyze macroeconomic and other external factors that may of 21 basis points related entirely to impaired loans. This compares to 20 impact core geographic regions and/or industries in which our clients basis points last year under IAS 39, consisting of 19 basis points related to operate. impaired loans and one basis point related to performing loans. In dollar terms, the 2019 provision for credit losses of $58 million compares to $48 million last year. 37 CWB Financial Group 2019 Annual ReportTable 15 - Provision for Credit Losses ($ thousands) Provision for credit losses on total loans(1) Provision for credit losses on impaired loans(1)(2) Write-offs(1) IFRS 9 2019 0.21% 0.21 0.23 2018 0.20% 0.19 0.18 IAS 39 2017 0.23% 0.19 0.21 2016(3) 0.38% 0.32 0.34 2015 0.17% 0.12 0.06 (1) As a percentage of average loans. (2) Portion of the year’s provision for credit losses allocated to impaired loan provisions as a percentage of average loans. (3) Provision for credit losses, net new specific provisions and write-offs in 2016 reflected the credit performance of oil and gas production loans, including the impact of regulatory factors on the liquidity of assets securing those loans. DEPOSITS AND FUNDING Highlights of 2019 • Strong execution against our balanced growth strategic objectives • Reduced broker deposits by $153 million and decreased their for growth and diversification of funding. proportion as a percentage of total funding to 32% of total deposits • Very strong branch-raised deposit growth of 12% from last year, at year end, down from 35% in 2018. including 14% growth of demand and notice deposits. • Growth of debt capital markets with three successful senior deposit • Branch-raised deposits comprised 55% of total deposits at year end, note issuances totaling $900 million. compared to 52% in 2018. • Growth of debt related to securitization to support originations of both equipment loans and leases, and residential mortgages. Table 16 - Deposits ($ thousands) Personal Business and government Capital markets Total Deposits % of Total Personal Business and government Capital markets Total Deposits % of Total Demand Notice Term 2019 Total $ 34,296 $ 4,452,592 $ 10,813,617 $ 15,300,505 715,875 3,420,754 - - 2,595,531 3,318,696 6,732,160 3,318,696 $ 750,171 $ 7,873,346 $ 16,727,844 $ 25,351,361 3% 31% 66% 100% Demand Notice Term 2018 Total $ 35,889 $ 3,684,259 $ 10,763,538 $ 14,483,686 716,156 3,157,875 - - 2,335,785 3,006,455 6,209,816 3,006,455 $ 752,045 $ 6,842,134 $ 16,105,778 $ 23,699,957 3% 29% 68% 100% % of Total 60% 27 13 100% % of Total 61% 26 13 100% We delivered strong execution against our funding diversification strategy Personal deposits increased 6% ($817 million), including deposits issued in 2019. Total deposits of $25.4 billion were up 7% ($1.7 billion). through the deposit broker network, and business and government deposits Relationship-based, branch-raised funding increased 12% ($1.5 billion) from last year, with very strong 14% growth of demand and notice deposits. Branch-raised deposits represented 55% of total deposits at October 31, increased 8% ($522 million). The proportion of deposits raised through the capital markets was stable at 13% of total deposits, with three successful senior deposit note issuances totaling $900 million. We also increased debt related to securitization to support originations of equipment leases and 2019, compared to 52% last year. Demand and notice deposits comprised residential mortgages. 34% of total deposits, compared to 32% in 2018. 38 CWB Financial Group 2019 Annual ReportTable 17 - Deposits by Source (as a percentage of total deposits at October 31) Branches Deposit brokers Capital markets Total 2019 55% 32 13 100% 2018 52% 35 13 100% References to branch-raised deposits within this MD&A include all deposits Other types of deposits are primarily sourced through a deposit broker generated through CWB’s full-service banking branches, including insured network, through the deposit-taking franchises of both Canadian Western deposits raised through Valiant Trust’s deposit-taking franchise, as well as Bank and Canadian Western Trust, as well as debt capital markets. Deposits deposits raised via CWB Trust Services and Motive Financial. Increasing raised through deposit brokers are primarily insured, and the broker deposit the level of branch-raised business and personal deposits is an ongoing market remains an efficient and liquid source of funding. Although these strategic focus for us as success in this area provides the most reliable funds are subject to commissions, this cost is countered by a reduced and stable sources of funding. CWB’s banking branches contributed dependence on a more extensive branch network and the benefit of approximately half of the increase in branch-raised deposits from last year, generating insured fixed term retail deposits over a wide geographic base. with Motive Financial contributing approximately one third of the increase Of note, we actively raise only fixed term deposits through this funding and the remainder from CWB Trust Services. channel, with terms to maturity between one and five years, and do not CWB Trust Services raises deposits through notice accounts, including cash balances held in self-directed registered accounts as well as corporate trust deposits, and fixed term deposits through our CWB branch network. Motive Financial offers various deposit products to customers in all provinces and offer a High Interest Savings Account (HISA) product. Strong core deposit growth this year resulted in lower outstanding balances of broker-sourced deposits compared to last year. Broker deposits comprised 32% of total deposits at year end, down from 35% in 2018. territories except Quebec. Deposits in Motive Financial at October 31, 2019 We continue to invest in our securitization capabilities and utilize totaled $797 million, up from $305 million last year, mainly from strong securitization funding through participation in lease securitization vehicles, growth in the Motive Savvy Savings account. the NHA MBS program and the Canada Mortgage Bond (CMB) program. Consistent with our commercial focus, we generate a considerable portion of our branch-raised deposits from business clients that tend to hold larger balances compared to personal clients, which can increase the volatility of demand and notice deposits (see the Liquidity Management section of this MD&A). OTHER ASSETS AND OTHER LIABILITIES Fiscal 2019 funding from the securitization of leases, loans and mortgages was $907 million (2018 – $1.2 billion), including $704 million (2018 – $1.1 billion) of equipment leases and loans, and $203 million (2018 – $182 million) from participation in the CMB program. Other assets at October 31, 2019 totaled $583 million (2018 – $ 579 million). Other liabilities totaled $713 million at October 31, 2019 (2018 – $725 million). Goodwill and intangible assets recorded on the balance sheet at October 31, 2019 were $85 million (2018 – $85 million) and $174 million (2018 – $161 million), respectively. LIQUIDITY MANAGEMENT Highlights of 2019 • Maintained a prudent liquidity position and conservative investment • Higher balances of cash and securities at year end partly reflect profile. liquidity requirements related to the subordinated debenture • Continued to enhance reporting, forecasting and control activities redemption that occured early in fiscal 2020. for both liquidity and asset/liability management through further execution of our Treasury Infrastructure Program, which will support the implementation of a more robust Funds Transfer Pricing (FTP) framework. A schedule outlining the consolidated securities portfolio at October 31, • specific investment criteria and procedures are in place; and, 2019 is provided in Note 6 to the consolidated financial statements. A conservative liquid asset profile is maintained by ensuring: • all investments are high quality and include government debt securities (both Canadian and United States government debt securities), short- term money market instruments, and other marketable securities; • the Board Risk Committee, annually reviews and approves the structural interest rate, and liquidity and funding risk policies and risk appetite statements. 39 CWB Financial Group 2019 Annual ReportOur comprehensive liquidity management process includes, but is not • monitor liability diversification and maturity profile; limited to, the following priorities: • monitor deposit behaviour; • maintain a pool of high-quality liquid assets; • maintain access to deposit and capital market funding sources; and, • complete comprehensive liquidity scenario stress testing; • monitor microeconomic and macroeconomic factors and early warning • monitor the quality of the cash and securities portfolio; indicators. Table 18 - Liquid Assets ($ thousands) Cash and non-interest bearing deposits with financial institutions $ 116,963 $ 73,822 $ 43,141 2019 2018 Change from 2018 Deposits with regulated financial institutions Cheques and other items in transit Total Cash Resources Government of Canada, provincial and municipal debt, term to maturity 1 year or less Government of Canada, provincial and municipal debt, term to maturity more than 1 year NHA mortgage-backed securities(1) Other debt securities Securities purchased (sold) under resale agreements 293,856 5,023 415,842 1,071,125 738,872 394,342 191,046 10,401 26,825 52,574 153,221 377,657 1,469,984 330,599 143,536 (95,126) Total Securities Sold Under Repurchase Agreements and Marketable Securities 2,405,786 2,226,650 267,031 (47,551) 262,621 693,468 (731,112) 63,743 47,510 105,527 179,136 Total Liquid Assets Total Assets Liquid Assets as a Percentage of Total Assets Total Cash and Securities Cash and Securities as a Percentage of Total Assets Total Deposit Liabilities Liquid Assets as a Percentage of Total Deposit Liabilities $ 2,821,628 $ 31,424,235 $ $ 2,379,871 $ 441,757 29,021,463 $ 2,402,772 9% 8% 100 bp(2) $ 2,475,415 $ 2,237,973 $ 237,442 8% 8% - bp(2) $ 25,351,361 $ 23,699,957 $ 1,651,404 11% 10% 100 bp Includes securitized mortgages that were not transferred to third parties. These are reported in loans at amortized cost on the consolidated balance sheets. (1) (2) bp – basis points. Liquid assets, as defined by OSFI, comprised of cash, deposits, securities Additional sources of liquidity and funding in 2019 included $907 million sold under repurchase agreements and marketable debt securities (2018 – $1.2 billion) from the securitization of leases and mortgages, totaled $2.8 billion at October 31, 2019 (2018 – $2.4 billion). Liquid assets including $837 million (2018 – $608 million) of residential mortgages represented 9% (2018 – 8%) of total assets and 11% (2018 – 10%) of total which represent utilization of our NHA MBS allocation and $203 million (2018 – $182 million) from participation in the CMB program. Sources of incremental new funding included branch-raised deposits, issuances of senior deposit notes, subordinated debentures and preferred shares, as well as securitization activity. A summary of all outstanding deposits by contractual maturity date is presented in the two following tables. deposit liabilities at year end. Our liquidity management is based on an internal stressed cash flow model, with the level of cash and securities driven primarily by the term structure of both assets and liabilities, and the liquidity structure of liabilities. The composition of total liquid assets supports ongoing compliance with the OSFI Liquidity Adequacy Requirements guideline. Higher balances of cash and securities at year end partly reflect liquidity requirements related to the planned subordinated debenture redemption that occured in early fiscal 2020. Other key changes in the composition of liquid assets at October 31, 2019 compared to the prior year include: • maturities within one year comprise 59% (2018 – 39%); • Government of Canada, provincial and municipal debt securities and unencumbered NHA MBS comprise 78% (2018 – 92%); • deposits with regulated financial institutions comprise 15% (2018 – 6%); and, • other marketable securities and securities sold under repurchase agreements comprise 7% (2018 – 2%). 40 CWB Financial Group 2019 Annual Report Table 19 - Deposit Maturities Within One Year ($ millions) October 31, 2019 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 2018 Total Table 20 - Total Deposit Maturities ($ millions) Within 1 Month 1 to 3 Months 3 Months Cumulative to 1 Year Within 1 Year $ 750 $ - $ - $ 6,963 685 193 1,261 717 4,748 8,398 $ 1,454 $ 5,465 $ 750 7,873 6,694 15,317 8,201 $ 1,216 $ 4,285 $ 13,702 $ $ October 31, 2019 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 2018 Total $ $ Within 1 Year 1 to 2 Years 2 to 3 Years 3 to 4 Years 4 to 5 Years More than 5 Years $ 750 $ 7,873 6,694 $ - - $ - - $ - - $ - - 5,013 2,242 1,793 986 15,317 $ 5,013 $ 2,242 $ 1,793 $ 986 $ Total 750 7,873 16,728 25,351 - - - - $ $ 13,702 $ 3,831 $ 3,345 $ 1,321 $ 1,501 $ - $ 23,700 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. We continue to develop and implement strategies to compete for branch-raised deposits, and to strengthen this channel as 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. A summary of the subordinated debentures outstanding is presented in the following table: Table 21 - Subordinated Debentures Outstanding ($ thousands) Non-NVCC subordinated debentures NVCC subordinated debentures Interest Rate Maturity Date Earliest Date Redeemable by CWB at Par 3.463%(1) 3.668%(2) December 17, 2024 June 11, 2029 December 17, 2019 June 11, 2024 $ Par Value 250,000 250,000 (1) These conventional debentures had a 12-year term with a fixed interest rate for the first seven years. Thereafter, if not redeemed the interest rate would have reset quarterly at the 3-month Canadian Dollar Offered Rate (CDOR) plus 160 basis points. All of the outstanding 3.463% non-NVCC subordinated debentures were redeemed on November 18, 2019 at an aggregate amount of $253,900, representative of the early redemption value plus accrued interest. (2) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the 3-month CDOR plus 199 basis points. In addition to deposit liabilities and subordinated debentures, we have notional debt securities related to the securitization of loans, leases and mortgages to third parties (refer to Note 9 and 16 of the consolidated financial statements for additional information). 41 CWB Financial Group 2019 Annual Report CAPITAL MANAGEMENT Highlights of 2019 • We expect to submit final application and receive regulatory • Repurchased 1.8 million common shares on the open market at a approval in fiscal 2020 for transition to the AIRB approach for capital weighted average price of $27.08 per share under the normal course and risk management. issuer bid (NCIB) which terminated on September 30, 2019. • Very strong Basel III CET1 regulatory capital ratio of 9.1% under the • Launched a new NCIB authorizing the purchase for cancellation up Standardized approach for calculating risk-weighted assets. to 1.7 million common shares, terminating on September 30, 2020. • Cash dividends of $1.08 per share paid to common shareholders, up 8% • Reset the fixed rate non-cumulative cash dividend for Series 5 • Very conservative Basel III leverage ratio of 8.3%, compared to the preferred shares to 4.301% per annum. regulatory minimum of 3.0%, where a higher ratio indicates lower • Issued $125 million five-year rate reset non-viability contingent leverage. capital (NVCC) First Preferred Shares Series 9. • Issued $250 million of NVCC subordinated debentures due June 11, 2029. Subsequent Highlights • On December 4, 2019, the Board of Directors declared a cash • Redeemed all $250 million of outstanding non-NVCC subordinated dividend of $0.28 per common share, unchanged from the prior debentures on November 18, 2019. quarter and up 8% from the dividend declared in the same period last year. The Board also declared preferred share cash dividends of $0.2688125 per Series 5, $0.390625 per Series 7, and $0.375 per Series 9. This year we repositioned CWB’s capital structure to both optimize our cost of capital and support ongoing profitable growth and strategic execution. We issued $125 million of new Series 9 preferred shares and reset the rate on outstanding Series 5 preferred shares to lower the cost. We issued $250 million of NVCC subordinated debentures, and subsequent to year end, redeemed all $250 million of non-NVCC subordinated debentures. We also repurchased 1,829,944 common shares on the open market at a weighted average price of $27.08 per common share under the NCIB which terminated on September 30, 2019. We launched a new NCIB authorizing the purchase for cancellation up to 1,740,000 common shares, representing approximately 2% of the issued and outstanding common shares, terminating on September 30, 2020. We manage capital 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. We have implemented an ICAAP to establish target capital levels deemed prudent to effectively manage risks, including potential capital shocks from unexpected macroeconomic and/or CWB-specific events. We provide a share incentive plan to officers and employees who are in a position to materially impact the longer term financial success of the organization, as measured by overall profitability, earnings growth, share price appreciation and dividends. Note 18 to the 2019 annual 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 all series of preferred shares are deemed eligible by the Board and offered the choice to direct cash 42 dividends paid toward the purchase of common shares through a dividend reinvestment plan (DRIP). Further details regarding CWB’s DRIP are available at https://www.cwb.com/investor-relations. We complied with all internal and external capital requirements in 2019. AIRB TRANSITION PLAN Our project continues in support of an application to OSFI for transition to the AIRB methodology for capital and risk management. In the second quarter of 2019, we revised our expected date to submit our final application from 2019 to 2020. This change reflected the iterative and conservative approach we have undertaken to achieve this transformational milestone, which we expect to create meaningful and lasting value for shareholders. We continue to expect to receive regulatory approval to transition in 2020. Transition to the AIRB approach will put us on more equal footing with our competition and increase our addressable market. It will add risk sensitivity to our framework for capital management, increase risk quantification processes, improve risk-based pricing capabilities and economic capital estimations, improve stress testing capabilities and enhance our ICAAP. These improved risk management capabilities will better equip CWB to allocate resources to target business segments that generate the most attractive risk-adjusted returns. Our AIRB transition project is comprised of 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; and, submission of the final application to OSFI. All material AIRB models and related scorecards have been deployed into the business, with ongoing enhancement of existing models underway. Further development of ERM function is also ongoing, including: three lines of defence enhancement, stress testing capabilities, and economic capital estimation. Implementation of CWB’s AIRB risk-weighted asset calculation and capital reporting tools continues. CWB Financial Group 2019 Annual ReportBASEL III CAPITAL ADEQUACY ACCORD OSFI requires Canadian financial institutions to manage and report On October 30, 2018, OSFI revised its securitization framework to reflect regulatory capital in accordance with the Basel III capital management the adoption of the BCBS’ Revisions to the Securitisation Framework and framework. We currently report regulatory capital ratios using the Capital Treatment for Short-term “Simple, Transparent and Comparable” Standardized approach for calculating risk-weighted assets, which requires Securitisations. The new requirements were effective November 1, CWB to carry significantly more capital for certain credit exposures 2018, however OSFI provided transitional arrangements for transactions compared to requirements under the AIRB methodology. For this reason, undertaken before January 1, 2019. In addition, OSFI allowed a one-year regulatory capital ratios of banks that utilize the Standardized approach are grandfathering of the securitization framework for all exposures held at not directly comparable with the large Canadian banks and other financial October 31, 2018. Upon adoption of the revised guidelines, there was no institutions that utilize the AIRB methodology. CWB’s required minimum material impact to CWB’s capital ratios. regulatory capital ratios, including a 250 basis point capital conservation buffer, are 7.0% common equity Tier 1 (CET1), 8.5% Tier 1 and 10.5% Total capital. On October 30, 2018, OSFI also revised its guidelines to incorporate the new BCBS Standardized approach methodologies for measuring counterparty credit risk and capital requirements for exposures to central counterparties. With very strong capital ratios of 9.1% CET1, 10.7% Tier 1 and 12.8% Total The adoption required over-the-counter derivative exposures to be reflected capital at October 31, 2019, CWB is well positioned to create value for under the new Standardized Approach for Measuring Counterparty Credit shareholders through a range of capital deployment options consistent Risk (SA-CCR), instead of the previous methodology based on the current with our balanced growth strategic objectives. Ongoing support and exposure method. The adoption of these guidelines had no material impact development of each of CWB’s core businesses will remain a key priority, to CWB’s capital ratios. and we will continue to evaluate potential strategic acquisitions. CWB’s Basel III leverage ratio of 8.3% at year end remains very strong. On October 30, 2018, OSFI published its updated Leverage Requirements Guideline, effective for November 1, 2018. The revisions align the leverage The Basel Committee on Banking Supervision (BCBS) finalized Basel III guideline with OSFI’s 2019 adoption of the BCBS standard on SA-CCR and reforms in fiscal 2017, with an effective date of January 2022. The final Basel the revisions to the securitization framework discussed above. III reforms included adjustments to the calculation of risk-weighted assets (RWAs), which more specifically included changes to both the standardized approach (SA) and internal ratings based (IRB) approach to credit risk, operational risk, and credit valuation adjustments as well as to the AIRB capital floors. The reforms are mainly intended to reduce the variability in capital levels and to address a number of weaknesses in the existing capital framework. OSFI is currently engaged in a consultation process with interested stakeholders on its proposed policy direction and its timelines for implementation of the final Basel III reforms in Canada. On November 20, 2018, OSFI also finalized the Leverage Ratio Disclosure Requirements guideline, effective for November 1, 2018. The adoption of these guidelines had no material impact to CWB’s leverage ratio. On July 11, 2019, OSFI released a discussion paper titled Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit Taking Institutions. OSFI launched a public consultation process on the discussion paper and is now considering the submissions. Table 22 - Capital Structure and 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 (1) bp – basis points. 2019 2018 Change from 2018 $ 2,302,551 $ 2,153,019 $ 149,532 2,692,714 3,232,807 2,418,231 2,788,048 274,483 444,759 9.1% 10.7 12.8 8.3 9.2% 10.3 11.9 8.0 (10) bp 40 90 30 Our very strong CET1 capital ratio of 9.1% compares to 9.2% last year. The partially offset by the items noted above, as well as the fact that a portion impacts of earnings net of dividends, the IFRS 9 transitional adjustment of the $250 million of non-NVCC subordinated debentures outstanding to opening retained earnings and positive other comprehensive income during the year was not included in Total capital in 2019. At 8.3% (8.0% as were more than offset by the combined impact of strong risk-weighted at October 31, 2018), the Basel III leverage ratio remains very conservative. asset growth, and common shares repurchased under the NCIB. The Tier 1 and Total capital ratios increased 40 basis points and 90 basis points, respectively, primarily reflecting the issuance of $125 million NVCC Series 9 Preferred Shares and $250 million of NVCC subordinated debentures, 43 CWB Financial Group 2019 Annual ReportTable 23 - Regulatory Capital ($ thousands) Common Equity Tier 1 Capital Instruments and Reserves Directly issued qualifying common share capital plus related share-based payment reserve $ 756,279 $ 768,638 As at October 31 2019 As at October 31 2018 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 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 Directly issued capital instruments subject to phase out from Tier 2(2) General allowance for credit losses Tier 2 instruments issued by subsidiaries and held by third parties Tier 2 capital before regulatory adjustments Total capital 1,785,273 (8,600) 2,532,952 (230,401) 2,302,551 1,649,196 (48,962) 2,368,872 (215,853) 2,153,019 390,000 265,000 163 390,163 2,692,714 212 265,212 2,418,231 248,494 202,500 89,061 38 - 250,000 119,766 51 540,093 369,817 $ 3,232,807 $ 2,788,048 (1) CET1 deductions include goodwill and intangible assets, net of related tax. (2) The 2019 inclusion of non-qualifying capital instruments in regulatory capital under Basel III is capped at 30% (2018 – 40%) of the balance of non-common equity instruments outstanding at January 1, 2013. At October 31, 2019, $47,500 (2018 – nil) was excluded from Total regulatory capital related to outstanding non-NVCC subordinated debentures. Cash, Securities and Resale Agreements As at October 31, 2019 Loans Other Items Total Risk- Weighted Assets $ 94,491 $ 17,689,942 $ 1,852,338 426,966 9,297 51 65,086 5,690,445 - - 18,292 - - - - - 184,947 3,331,350 - 339,641 - 114,690 162,182 - 242,186 - 47,690 511,431 - - - - - - - - $ 17,784,433 $ 17,708,342 1,861,635 427,017 1,859 77,370 5,755,531 1,667,224 184,947 125,144 3,331,350 2,538,663 18,292 339,641 114,690 162,182 47,690 753,617 18,292 335,935 1,433,625 800,856 17,989 476,994 $ $ 2,457,173 $ 27,650,041 2,174,038 $ 25,443,612 $ $ 673,811 $ 30,781,025 $ 25,202,293 689,488 $ 28,307,138 $ 23,486,242 Table 24 - Risk-Weighted Assets ($ thousands) Corporate Sovereign Bank Retail residential mortgages Other retail Excluding small business entities Small business entities Equity Undrawn commitments Operational risk Securitization risk Derivative exposures Other As at October 31, 2019 As at October 31, 2018 44 CWB Financial Group 2019 Annual Report Table 25 - Risk-Weighting Category ($ thousands) Retail residential mortgages 1,067,378 - 4,641,167 1,852,338 9,297 40,376 386,589 - - Corporate Sovereign Bank Other retail Excluding small business entities Small business entities Equity Undrawn commitments Operational risk Securitization risk Derivative exposures 0% 20% 35% 50% 75% 100% As at October 31, 2019 150% and greater Balance Weighted $ 30,938 $ 89,078 $ - $ 10,065 $ - $ 17,592,067 $ 62,285 $ 17,784,433 $ 17,708,342 - - - - - - - - - - - - - - 52 - - 1,861,635 427,017 1,859 77,370 19,937 25,422 1,627 5,755,531 1,667,224 166,793 1 9 184,947 125,144 3,188,703 102,804 29,401 3,331,350 2,538,663 - 18,292 15,000 324,553 - - - - - - - 88 114,690 162,182 687 48,520 344,175 37,666 18,292 339,641 114,690 162,182 47,690 753,617 18,292 335,935 1,433,625 800,856 17,989 476,994 17,972 9,287 172 1,155 - - - - - - - - - 47,003 5,164 - - - - - - - - Other 318,092 As at October 31, 2019 $ 3,336,381 $ 538,458 $ 4,641,167 $ 10,065 $ 3,438,953 $ 18,407,366 $ 408,635 $ 30,781,025 $ 25,202,293 As at October 31, 2018 $ 3,052,548 $ 188,388 $ 4,412,605 $ 5,023 $ 3,133,833 $ 17,159,188 $ 355,553 $ 28,307,138 $ 23,486,242 FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS As a financial institution, most of CWB’s balance sheet is comprised of Further information on how the fair value of financial instruments is financial instruments and the majority of net income results from gains, determined is included in the Financial Instruments Measured at Fair Value losses, income and expenses related to the same. discussion in the Accounting Policies and Estimates section of this MD&A. Financial assets include cash resources, securities, securities purchased Income and expenses are classified as to source, either securities or loans under resale agreements, loans, derivative financial instruments and certain for income, and deposits or debt for expense. Gains (losses) on the sale of other assets. Financial liabilities include deposits, securities sold under securities, net and fair value changes in certain derivatives are classified repurchase agreements, derivative financial instruments, debt and certain to non-interest income. Contingent consideration fair value changes are other liabilities. classified as acquisition-related fair value changes in the consolidated statements of income. 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 this MD&A. 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. 45 CWB Financial Group 2019 Annual ReportTable 26 - Derivative Financial Instruments ($ thousands) Notional Amounts Interest rate swaps designated as cash flow hedges(1) Foreign exchange contracts not designated as accounting hedges(2) Interest rate swaps designated as fair value hedges(3) Bond forwards designated as cash flow hedges(4) Equity swaps designated as cash flow hedges(5) Equity swaps not designated as accounting hedges(6) Total 2019 2018 $ 6,828,000 $ 4,908,000 270,913 39,746 20,000 19,268 5,319 189,128 - 15,000 18,285 5,842 $ 7,183,246 $ 5,136,255 (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 cash flow hedges outstanding at October 31, 2019 mature between November 2019 and September 2024. Interest rate swaps designated as accounting fair value hedges outstanding at October 31, 2019 mature in August and December 2022. (2) Foreign exchange contracts outstanding at October 31, 2019 mature between November 2019 and April 2020. (3) (4) Bond forward contracts outstanding at October 31, 2019 mature in December 2019. (5) Equity swaps designated as accounting hedges outstanding at October 31, 2019 mature between June 2020 and June 2022. (6) Equity swaps not designated as accounting hedges outstanding at October 31, 2019 mature in June 2020. The active use of interest rate contracts remains an integral component to the counterparty. As part of our structural Market Risk Policy the use of manage the interest rate gap position. Derivative financial instruments are derivative financial instruments are approved, reviewed and monitored on entered into only for CWB’s own account. We do not act as an intermediary a regular basis by Asset Liability Committee (ALCo), and are reviewed and in derivatives markets. Transactions are entered into on the basis of industry approved by the Board Risk Committee no less than annually. standard contracts with approved counterparties subject to periodic and at least annual review, including an assessment of the credit worthiness of OFF-BALANCE SHEET Off-balance sheet items include assets under administration and assets Other off-balance sheet items are comprised of standard industry credit under management. Total assets under administration, which are comprised instruments (guarantees, standby letters of credit and commitments to of trust assets under administration, third-party leases under administration, extend credit). We do not utilize, nor do we have exposure to, collateralized and mortgages under service agreements, totaled $9.3 billion at October debt obligations or credit default swaps. For additional information 31, 2019 (2018 – $8.4 billion). regarding other off-balance sheet items refer to Note 20 of the consolidated Assets under management held within CWB Wealth Management, including CWB McLean & Partners Wealth Management, were $2.1 billion at year end (2018 – $2.1 billion). financial statements. 46 CWB Financial Group 2019 Annual Report SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER QUARTERLY RESULTS The financial results for each of the last eight quarters are summarized in Detailed MD&A along with unaudited interim consolidated financial Table 27. In general, our performance reflects a consistent growth trend, statements for each quarter, except for the fourth quarters, are available for although the second quarter contains three fewer revenue-earning days, review on SEDAR at www.sedar.com and on our website at www.cwb.com. and two fewer days during leap years. Non-interest income includes gains Copies of the quarterly reports to shareholders can also be obtained, free on sale related to the CWT strategic transactions of $0.6 million, $0.4 of charge, by contacting InvestorRelations@cwbank.com. million and $3.0 million in the fourth, third and first quarters of fiscal 2018, respectively. Among other things, quarterly results can also fluctuate from the recognition of periodic income tax items. Table 27 - Quarterly Financial Highlights(1) ($ thousands, except per share amounts) Results from Operations Net interest income Non-interest income Total revenue Pre-tax, pre-provision income Common shareholders' net income Earnings per common share Basic Diluted Adjusted cash Return on common shareholders’ equity Adjusted return on common shareholders’ equity Return on assets Efficiency ratio Net interest margin Operating leverage Provision for credit losses on total loans Q4 2019(2) Q3 Q2 Q1 Q4 2018 Q3 Q2 Q1 $ 201,439 $ 199,746 $ 191,057 $ 193,342 $ 189,093 $ 186,644 $ 177,986 $ 171,267 19,414 18,738 18,711 19,097 19,473 18,345 18,600 220,853 218,484 209,828 212,439 208,566 204,989 196,586 114,390 67,512 116,975 70,964 111,692 61,965 118,073 66,499 111,182 64,501 110,695 62,362 107,247 60,464 0.77 0.77 0.78 0.81 0.81 0.82 0.71 0.71 0.74 0.75 0.75 0.80 0.73 0.72 0.78 0.70 0.70 0.75 0.68 0.68 0.73 21,950 193,217 107,064 61,929 0.70 0.69 0.75 10.6% 11.3% 10.5% 11.1% 11.1% 10.8% 11.1% 11.1% 10.7 0.86 48.2 2.55 (3.4) 11.4 0.92 46.5 2.60 (1.1) 11.0 0.85 46.8 2.63 (3.1) 11.9 0.90 44.4 2.61 0.4 11.9 0.89 46.7 2.61 0.1 11.7 0.88 46.0 2.64 (1.4) 12.0 0.89 45.4 2.61 5.4 12.0 0.91 44.6 2.52 3.9 as a percentage of average loans 0.19 0.19 0.23 0.24 0.19 0.21 0.20 0.18 Provision for credit losses on impaired loans as a percentage of average loans 0.18 0.22 0.22 0.22 0.19 0.22 0.20 0.16 (1) See page 20 for a discussion of non-IFRS measures. (2) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2 of the 2019 audited annual financial statements). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. 47 CWB Financial Group 2019 Annual Report FOURTH QUARTER OF 2019 Overview of Operations Q4 2019 VS. Q4 2018 ADJUSTED ROE AND ROA Common shareholders’ net income of $68 million and pre-tax, pre-provision The fourth quarter adjusted ROE of 10.7% was 120 basis points lower income of $114 million were up 5% and 3%, respectively. Total revenue of compared to the same period last year. The change mainly reflects 10% $221 million was up 6% from last year, including a 7% increase in net interest growth of average common shareholders’ equity from the fourth quarter income. Higher net interest income reflects solid 8% loan growth, partially last year, with an increase in accumulated other comprehensive income and offset by a six basis point decrease in net interest margin to 2.55%. Net retained earnings growth, partially offset by the impact of common shares interest margin declined as higher asset yields and favourable changes in purchased for cancellation, compared to a 1% reduction in fourth quarter funding mix were more than offset by increased funding costs and changes adjusted common shareholders net income. Adjusted ROE was 70 basis points lower on a sequential basis, mainly reflecting 4% lower adjusted net income this quarter and 2% growth in average common shareholders’ equity. The fourth quarter return on assets (ROA) of 0.86% was three basis points lower than the prior year as growth of net income was outpaced by growth of average assets. ROA was down six basis points from the prior quarter, reflecting the same factors. EFFICIENCY RATIO The fourth quarter efficiency ratio of 48.2%, which measures adjusted non- interest expenses divided by total revenue, compares to 46.7% in the same period last year and 46.5% in the previous quarter. Compared to last year and last quarter, revenue growth was outpaced by growth of non-interest expenses, mainly reflecting continued investment in strategic execution. in asset mix. Non-interest income of $19 million was consistent with last year, with fourth quarter results in fiscal 2018 including $0.6 million of gains on sale related to the CWT strategic transactions. The IFRS 9 provision for credit losses on total loans as a percentage of average loans was 19 basis points. Under IAS 39, provisions for credit losses represented 19 basis points in the fourth quarter of last year. Non-interest expenses were up 9%, reflecting investments to support continued growth and strategic execution, including increased advertising. Higher salaries and benefits comprised two thirds of the increase and primarily reflect additional hiring. Three quarters of the increase in premises and equipment costs related to technology investment. Acquisition-related fair value changes were $5 million lower, reflecting completion of the earn-out period on February 28, 2019 for the contingent consideration related to the successful and accretive acquisition of CWB Maxium Financial. Preferred share dividends were $2 million higher. Diluted and adjusted cash earnings per common share of $0.77 and $0.78 were up 7% and nil, respectively. The higher growth rate of diluted earnings per common share primarily reflects no acquisition-related fair value changes this quarter. Q4 2019 VS. Q3 2019 Common shareholders’ net income and pre-tax, pre-provision income were down 5% and 2%, respectively. Total revenue was up 1%. Growth in net interest income of 1% reflected 1% loan growth, partially offset by a five basis point decrease in net interest margin. Moderate loan growth partly reflected payouts from successful project completions in our real estate portfolio. Within net interest margin, positive changes in funding mix from higher growth in demand and notice deposits was more than offset by changes in asset mix, lower asset yields and increased funding costs. Non-interest income was up 4% and the provision for credit losses as a percentage of average loans was unchanged. Non-interest expenses were 5% higher, reflecting the factors noted above. The fourth quarter also included higher consulting fees and customary seasonal increases in employee training and community investment. Diluted and adjusted cash earnings per common share were both down 5%. 48 CWB Financial Group 2019 Annual ReportACCOUNTING POLICIES AND ESTIMATES CRITICAL ACCOUNTING ESTIMATES CWB’s significant accounting policies are outlined in Note 1 to the audited FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE 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 Cash resources, securities, 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 according to a three-level hierarchy. Level 1 fair value measurements reflect unadjusted quoted prices in active markets for identical assets and An allowance for credit losses is maintained to absorb expected credit losses liabilities that CWB can access at the measurement date. Level 2 fair value for both performing assets and impaired assets based on management’s measurements were estimated using observable inputs, including quoted estimate at the balance sheet date and forward-looking information. Under market prices for similar assets or liabilities in active markets, quoted prices IFRS 9 effective November 1, 2018, the allowance for credit losses related for identical or similar assets or liabilities in inactive markets, and model to performing and impaired assets is estimated using an ECL approach that inputs that are either observable or can be corroborated by observable represents the discounted probability-weighted estimate of cash shortfalls market data for substantially the full term of the assets or liabilities. Level expected to result from defaults over the relevant time horizon. To do this, 3 fair value measurements were determined using one or more inputs that the ECL approach incorporates a number of underlying assumptions which are unobservable and significant to the fair value of the asset or liability. involve a high degree of management judgment and can have a significant Unobservable inputs are used to measure fair value to the extent that impact on financial results. Significant key drivers impacting the estimation observable inputs are not available at the measurement date. of ECL, which are interrelated, include: • changes in internal risk ratings attributable to a borrower or instrument reflecting changes in credit quality; • thresholds used to determine when a borrower has experienced a significant increase in credit risk; and, • changes in forward-looking information, specifically related to variables to which the ECL models are calibrated. The inputs and models used for estimating ECL may not always capture all emerging market conditions and as such, qualitative adjustments based on expert judgment that consider reasonable and supportable information may be incorporated. 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. At October 31, 2019, our total allowance for credit losses was $115 million which includes an allowances for credit losses related to impaired assets of $ 26 million and an allowances for credit losses related to performing assets of $89 million. Additional information on the process and methodology for determining the allowance for credit losses under IFRS 9 and IAS 39 during fiscal 2019 and 2018, respectively, and the transition between the standards on November 1, 2018 can be found in the discussions of Credit Quality and Changes in Accounting Policies and Financial Statement Presentation, respectively, in this MD&A and in Note 1, 2 and 8 to the consolidated financial statements. 49 CWB Financial Group 2019 Annual ReportThe following table summarizes the significant financial assets and liabilities recorded on the consolidated balance sheets at fair value. Table 28 - Valuation of Financial Instruments ($ thousands) As at October 31, 2019 Financial Assets Cash resources Securities Securities purchased under resale agreements Loans Derivatives Total Financial Assets Financial Liabilities Deposits Securities sold under resale agreements Debt Derivatives Total Financial Liabilities As at October 31, 2018 Financial Assets Cash resources Securities Loans Derivatives Total Financial Assets Financial Liabilities Deposits Securities sold under repurchase agreements Debt Contingent consideration(1) Derivative related Total Financial Liabilities Fair Value Level 1 Level 2 Level 3 Valuation Technique - - - - - $ 415,842 $ 139,876 $ 275,966 $ 2,019,207 40,366 28,478,436 47,815 141,070 - - - 1,878,137 40,366 - 28,478,436 47,815 - $ 31,001,666 $ 280,946 $ 2,242,284 $ 28,478,436 $ 25,544,270 $ 29,965 2,444,034 14,016 $ 28,032,285 $ - - - - - $ 25,544,270 $ 29,965 2,444,034 14,016 $ 28,032,285 $ Valuation Technique - - - - - Fair Value Level 1 Level 2 Level 3 $ 153,221 $ 144,019 $ 9,202 $ 219,570 1,865,182 2,084,752 26,551,146 2,496 - - - 26,551,146 2,496 - $ 28,791,615 $ 363,589 $ 1,876,880 $ 26,551,146 $ 23,502,200 $ 95,126 1,942,472 29,814 69,581 $ 25,639,193 $ - - - - - - $ 23,502,200 $ 95,126 1,942,472 - 69,581 - - - 29,814 - $ 25,609,379 $ 29,814 (1) The Level 3 financial liability at October 31, 2018 is related to the acquisition of CWB Maxium and the CWT strategic transactions. Notes 3, 5, 6, 7, 8, 12, 14, 16, 25 and 27 to the consolidated financial statements provide additional information regarding these financial instruments. 50 CWB Financial Group 2019 Annual ReportCHANGES IN ACCOUNTING POLICIES AND FINANCIAL STATEMENT PRESENTATION IFRS 9 FINANCIAL INSTRUMENTS CWB adopted IFRS 9, which replaces IAS 39 for the fiscal year beginning November 1, 2018. As permitted by IFRS 9, we have not restated prior period comparative figures and have recognized an adjustment to opening retained earnings and accumulated other comprehensive income (AOCI) to reflect the application of the new requirements at the adoption date. For further details, refer to Notes 1 and 2 of the consolidated financial statements. The most significant impact to CWB with the transition to IFRS 9 is the introduction of an ECL approach for measuring impairment that is applicable to financial assets measured at amortized cost, debt securities measured at FVOCI, and certain off-balance sheet loan commitments and financial guarantee contracts. The implementation of an ECL approach under IFRS 9, which results in allowances for credit losses being recognized on financial assets regardless of whether there has been an actual loss event, is a significant change from the incurred loss model under IAS 39. Under IFRS 9, we refer to allowances and provisions for credit losses on impaired loans (Stage 3) and performing loans (Stages 1 and 2). Our specific allowances under IAS 39 are consistent with Stage 3 allowances for credit losses under IFRS 9, while the collective allowance under IAS 39 is replaced by Stage 1 and 2 allowances for credit losses under IFRS 9. IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IFRS 15 Revenue from Contracts with Customers (IFRS 15) was issued in May 2014, and replaces IAS 18 Revenue, IAS 11 Construction Contracts and related Interpretations. IFRS 15 provides a single, principles-based five-step model that applies to all contracts with customers. The standard excludes from its scope revenue arising from items such as financial instruments and leases as these fall within the scope of other IFRSs. We performed a detailed analysis on each revenue stream that is within the scope of the new standard. We adopted IFRS 15 using the modified retrospective approach and have concluded that there is no significant impact in relation to the adoption of IFRS 15. FUTURE CHANGES IN ACCOUNTING POLICIES At initial application, we will elect the modified retrospective option permitted by IFRS 16, in which the lessee recognizes the cumulative effect, if any, on initial application in retained earnings as of November 1, 2019, subject to allowable and elected practical expedients. On initial adoption, we intend to use the following recognition exemptions and practical expedients, where applicable: • not apply the requirements of IFRS 16 to short-term and low value leases; • apply a single discount rate to a portfolio of leases with reasonably similar characteristics; • exclude initial direct costs relating to existing leases from the measurement of the right-of-use assets; • rely on previous assessment of whether leases are onerous in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, immediately before the date of initial application as an alternative to performing an impairment review; • use hindsight to determine the lease term where the lease contracts contain options to extend or terminate the lease; and, • treat existing operating leases with a remaining term of less than 12 months at November 1, 2019 as short-term leases. We have completed the process of assessing existing contractual relationships to identify leases that will be recorded on the consolidated balance sheets upon the adoption of IFRS 16. The main impact for CWB will be recognizing right-of-use assets and lease liabilities for premises leases. Currently, premises leases are classified as operating leases, with lease expense recorded over the term of the lease with no asset or liability recorded on the consolidated balance sheets. Based on preliminary assessments, we expect to recognize right-of-use assets of approximately $75 million to $85 million, lease liabilities of $90 million to $100 million and a decrease in the common equity Tier 1 capital ratio of approximately 10 basis points upon transition to IFRS 16. The adoption of IFRS 16 is expected to have a nominal impact to ongoing profitability, as amortization of right-of-use assets and interest expense on lease liabilities will be mostly offset by a reduction in lease expense previously recognized in premises and equipment expense. The recognition of interest expense on premises leases will marginally contribute to net interest margin compression. The actual impact of adopting IFRS 16 on November 1, 2019, may differ from A number of standards and amendments have been issued by the these estimates as we continue to review our calculations and refine certain International Accounting Standards Board (IASB), and the following inputs. changes may have an impact on our future financial statements. HEDGE ACCOUNTING IFRS 16 LEASES In September 2019, the IASB issued amendments to hedge accounting In January 2016, the IASB issued IFRS 16, which supersedes IAS 17 Leases requirements in IFRS 9, IAS 39 and IFRS 7 Financial Instruments: Disclosures (IAS 17). This standard provides principles for the recognition, measurement, which address the possible effects of uncertainties created by Inter-bank presentation and disclosure of leases. The standard sets out a single lessee Offered Rate (IBOR) reform. The amendments are effective for CWB’s fiscal accounting model for all leases by eliminating the distinction between year beginning November 1, 2020 with early adoption permitted. CWB is in operating and financing leases. IFRS 16 requires lessees to recognize a the process of assessing the impact of these amendments. right-of use asset and lease liability on the consolidated balance sheets for most leases. Lessees will also recognize depreciation expense on the right- CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING of-use asset and interest expense on the lease liability in the consolidated In March 2018, the IASB issued a revised version of the Conceptual statements of income. Lessor accounting remains substantially unchanged Framework for Financial Reporting which assists the IASB in developing IFRS other than additional disclosure requirements. IFRS 16 is effective for our standards and serves as an accounting policy guide when no IFRS standard fiscal year beginning November 1, 2019. There are two methods by which the new standard may be adopted: (1) a full retrospective approach with a restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment recognized in opening retained earnings as of the date of adoption. applies. The amendments provide revised definitions and recognition criteria for assets and liabilities, and guidance on different measurement bases. The IASB also issued amendments to IFRS standards to refer to the revised framework. The revisions are effective for CWB’s fiscal year beginning November 1, 2020 with early adoption permitted. CWB is in the process of assessing the impact of the revised framework. 51 CWB Financial Group 2019 Annual ReportRISK MANAGEMENT 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 52 to 68 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2019. CWB’S APPROACH TO RISK MANAGEMENT We maintain an integrated and disciplined approach to risk include an effective balance of risk and reward. This requires that each management. Effective risk management supports the creation of long- team member make common-sense business decisions by assessing term shareholder value by providing a framework to optimize capital risk and reward trade-offs considering our strategic objectives and risk management and risk-adjusted capital returns. Our risk management appetite, along with regulatory and legal requirements. We consciously framework guides us in prudent, balanced and measured risk-taking accept risks to create long-term value for stakeholders and support the aligned with our balanced growth strategic objectives. responsible and efficient delivery of products and services to valued The ERM group develops and maintains our risk management framework. This framework encompasses risk culture, risk governance, • Are aligned with CWB’s strategic objectives; clients, provided those risks: risk appetite, risk policies, and risk management processes. The framework also provides independent review and oversight across the enterprise on risk-related issues. To achieve our balanced growth strategic objectives and our long-term goal 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 levels. CWB’s core 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 clients, shareholders, creditors, employees, regulators and communities. Highlights of 2019 We undertook further enhancements to CWB’s Risk Management • Continued to enhance risk analytics, economic forecasting, and Framework in 2019 as part of the ongoing development and portfolio and systematic risk management capabilities; implementation of our 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 capital and risk management: - We plan to submit our final application and expect to receive regulatory approval for transition in 2020 - We developed, operationalized, and enhanced AIRB models and • Further developed and matured CWB’s ERM function and the three lines of defence framework to provide consistent, transparent and clearly documented allocation of accountabilities and segregation of functional responsibilities; • Developed an overall legal, regulatory compliance and reputation risk management policy and continued to develop and enhance underlying supporting frameworks, including regulatory compliance risk management capabilities; AIRB-based stress testing capabilities • Further developed and matured data governance frameworks; - The 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 ERM capabilities • Continued to mature a second line of defence for risk-based pricing to support profitable growth; and, • Continued to implement an advanced operational risk management framework. Outlook for Risk Management We will continue to support enhanced risk management capabilities • Further development of second line frameworks for liquidity and through further development of ERM and risk appetite frameworks, and technology risk; related risk policies. Key risk management priorities for 2020 include: • Utilization of CWB’s economic capital framework; • Submission of CWB’s final application and expected regulatory • Continuous utilization of CWB’s newly developed systematic risk approval to transition to the AIRB approach for capital and risk management capabilities, including stress testing applications; and, management; 52 • Production of an AIRB model-enabled ICAAP. CWB Financial Group 2019 Annual ReportRISK MANAGEMENT OVERVIEW We design risk management processes to complement CWB’s overall size, RISK MANAGEMENT PRINCIPLES level of complexity, risk profile and philosophy regarding risk. Our risk management philosophy emphasizes risk measurement, sound controls, effective governance, transparency and accountability. Selective choice and management of acceptable risks has been integral to our ability to grow profitably in both favourable and adverse market conditions. A strong risk culture continues to be a cornerstone of our approach to risk management. As with all financial institutions, we are in the business of managing risk and are therefore exposed to various risk factors that could adversely affect our 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 our businesses is subject to certain risks that CWB’s risk management principles are based on the premise that we are in the business of accepting risks for appropriate return. We do not seek to eliminate financial risk, but seek to manage risk appropriately and optimize risk-adjusted returns on capital. In conducting our business activities, we will take financial risks that are aligned with our balanced growth strategic objectives in a manner expected to create sustainable, long-term value for shareholders and other stakeholders. Our risk management principles are therefore aligned with CWB’s strategic objectives, and embedded within our management practices. The following principles guide the management of risks across all of our require unique mitigation strategies. operations: We have demonstrated our 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 our • 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 direct control. comprising the third line; A description of key internal and external risk factors we consider is included in this risk management discussion. We actively evaluate existing and • A commitment to utilize AIRB capabilities for management of systematic risk, capital and risk return optimization, stress testing and balance sheet potential risks to develop, implement and continually enhance appropriate optimization; risk mitigation strategies. RISK MANAGEMENT STRENGTHS • Secured lending business model; • 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 preventative and detection controls; • An enterprise-wide view of risk and the acceptance of risks required to • Disciplined underwriting with demonstrated strength through multiple build the business with continuous consideration for how those risks may credit cycles; affect CWB’s reputation; • Strong risk culture with a robust risk management framework which addresses risks throughout CWB; • Relatively low operational risk profile; • No trading book; • In-depth knowledge of CWB’s clients; • Increasing geographic diversification; • Low balance sheet leverage; • Low average duration of lending portfolios; and, • The belief that every employee is accountable to understand and manage the risks inherent in their 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; and, • Recognition that “knowing your client” reduces risks by ensuring the services provided are suitable for, and understood by, the client. • Relatively low exposure to economically sensitive, unsecured retail The mandate of our ERM function is to provide independent oversight of risk- lending portfolios. RISK MANAGEMENT CHALLENGES 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 • Capital requirements under the Standardized approach, which are managed by the first line within CWB’s three lines of defence framework. insensitive to the underlying economic risk, and do not adequately reflect This includes oversight of risk governance policies, establishment of risk CWB’s demonstrated risk management strengths through multiple credit appetites and key risk metrics, and development of risk infrastructure, including all risk management processes and practices. Independent of the business, ERM measures and reports risk exposures against risk appetite limits for all risk types. cycles; • The potential impact of low interest rates on net interest income; • Market volatility related to factors outside of CWB’s control which affect investors’ decisions to buy, sell or hold CWB shares or other securities; • Macroeconomic volatility, including the impacts of constrained energy transportation infrastructure in Western Canada; • Uncertainty related to trade agreements which could affect the outlook for Canadian exports and future economic growth; • Increasing volume and complexity of regulatory requirements and expectations; and, • Cyber security and other technology related risk. 53 CWB Financial Group 2019 Annual ReportRISK MANAGEMENT FRAMEWORK The primary goal of risk management is to ensure that the outcomes of risk- provides the foundation for achieving this goal. We utilize the ISO 31000 taking are consistent with our overall risk appetite, our balanced growth Standard for Risk Management as a comprehensive framework to help strategic objectives, and related business activities. The ERM framework ensure risk is managed effectively and efficiently. Figure 4 - CWB’s Risk Management Framework C W B’S R I S E RIS K V MIZ I T P O K M A N A G EMENT FRA IDENTIFY T U R N - S . R E e c Risk overn a n G U R is niv k e r s e M E W O R K M E A S U R E & CWB’s balanced growth strategic objectives E T A C I N A U p M p e M t i t O e C CWB’s Risk Culture R A F p r a p i s k nt n a geme Risk P olicies M a D M m e w e tite ork F & r a T m R O e P E work NITOR & CONTROL R O 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 ERM framework, including risk Principal risks within our Risk Universe include: management principles, values and accountabilities as defined within a three lines of defence framework. Key elements of our risk management framework include Risk Governance, the Risk Universe, Risk Management Policies, and Risk Appetite Framework. • 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. RISK CULTURE A strong risk culture emphasizes transparency and accountability. • Effective integration of our compensation strategy with desired risk Organizations with a strong risk culture have a consistent and repeatable behaviours; approach to risk management when making key business decisions, • Risk management principles, policies and processes, including including regular discussions of risk and reviews of risk scenarios that can implementation of a three lines of defence framework; help management and the Board understand the interrelationships and potential impacts of risks. Our strong risk culture starts with an appropriate “tone at the top” that demonstrates and sends consistent and clear messages throughout the organization. Our risk culture is demonstrated throughout CWB and is emphasized by the actions of senior management and the Board. CWB’s risk culture includes: • An environment where the first, second and third line can freely raise and escalate risk issues and concerns, issues are discussed diligently, and acted upon appropriately; and, • Zero tolerance for inappropriate risk taking in violation of core values, risk appetite and reputational risk management principles. Our 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, • “Tone at the top” as established through the CWB Code of Conduct and contributes to effective risk management and encourages continuous governance processes; improvement of risk management practices. Our three lines of defence • CWB’s core values: people first, relationships get results, embrace the framework is described in Table 29. new, the how matters, inclusion has power; 54 CWB Financial Group 2019 Annual Report Table 29 - Three Lines of Defence Framework 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 • Establish an ERM framework to provide • Provide independent assurance to the Audit business a consistent and integrated view of risk Committee as to the effectiveness and • Pursue suitable business opportunities within their established risk appetite and limits • Act within their delegated risk-taking authority as set out in established policies exposures across CWB appropriateness of (and adherence to) the • Set key risk metrics on which risk appetite risk framework and limits are based • Independently audit first and second lines • Establish policies, standards, processes and and report on their effectiveness in regard to practices that address all significant risks respective functional responsibilities • Establish appropriate operating guidelines across CWB • Independently review adherence to and internal control structures in accordance • Independently assess, quantify, monitor, controls, policies, standards, guidelines and with the risk policies control and report all significant risk regulations exposures against the risk appetite and limits • Identify operational weaknesses; recommend • Provide independent oversight, effective and track remediation actions challenge and independent assessment of risk RISK APPETITE FRAMEWORK Our risk appetite framework includes policies and processes to establish Key attributes of our overall risk appetite include the following: 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 we are willing to assume through our business activities, while considering the priorities of all stakeholders. The risk appetite framework is forward-looking and integrates with CWB’s balanced growth strategic objectives, including consideration for our capital plan and budget processes. Key components of CWB’s risk appetite framework include: • 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 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. • An appropriately conservative risk culture that is prevalent throughout CWB, from the Board to senior management to front-line employees; • A philosophy to only take risks that are aligned with our balanced growth strategic objectives and are expected to create sustainable, long-term value for stakeholders; • A philosophy to only take risks that are transparent and understood, and that can be measured, monitored and managed; • Careful and diligent management of risks at all levels led by a knowledgeable and experienced leadership team committed to sound management practices and the promotion of a highly ethical culture; • Targeted financial performance which supports maintenance of investment grade credit ratings to allow for competitive access to funding; • Maintenance of effective policies, standards, guidelines and controls, with 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 and other corporate functions, as the second line, endorsed by senior management, and ultimately approved by the Board Risk Committee. We conduct 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 periodic sensitivity testing of earnings and capital ratios ensures that CWB operates within Risk Limits. 55 CWB Financial Group 2019 Annual ReportRisk Management Governance Structure The foundation of CWB’s ERM framework is a governance approach, well as supporting corporate standards and operating guidelines. consistent with OSFI’s Corporate Governance Guideline, which The Risk Management Framework is governed through a hierarchy of includes a robust committee structure and a comprehensive set of committees and individual responsibilities as outlined in Figure 5: corporate policies and limits approved by the Board of Directors, as Figure 5 - CWB’s Enterprise-Wide Risk Management Framework Board of Directors Board Governance and Conduct Review Committee Board Risk Committee Board Audit Committee Chief Risk Officer Chief Executive Officer Chief Internal Auditor Regulatory and Reputation Risk Executive Risk Committee Group Disclosure Committee Group Credit Risk Committee Group ALCO Group Capital Risk Committee Group Operational Risk Committee Group Forecasting Committee Model Risk and Deployment Committees Credit Market Liquidity Funding Capital ICAAP Stress Testing Operational • Regulatory • Technology • People Economic Forecasting Model Risk First Line of Defence Business and Support Second Line of Defence Third Line of Defence ERM Other Corporate Teams Internal Audit Board of Directors – responsible for setting the strategies of CWB Board Human Resources Committee – provides oversight of people and overseeing management. The Board, either directly or through related risks, including employment practices and workplace health its Committees, is responsible for oversight in the following areas: and safety, and ensures compensation programs appropriately align to, strategic planning, risk appetite, identification and management of and support, CWB’s risk appetite framework. risk, capital management, promotion of a culture of integrity, internal controls, evaluation of senior management and succession planning, public disclosure and corporate governance. 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 ERM Board Risk Committee – assists the Board in fulfilling its oversight function and other corporate functions. 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. 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 Board Governance and Conduct Review Committee – assists the policies, and fostering a strong risk culture across the enterprise. The Board in fulfilling its oversight responsibilities with respect to developing CRO reports functionally to the Board Risk Committee. CWB’s corporate governance policies and practices, including oversight of legal, regulatory compliance and reputation risk. Executive Risk Committee – provides risk oversight and governance at the highest levels of management. The Executive Risk Committee Board Audit Committee – assists the Board in fulfilling its oversight reviews and discusses significant risk issues and action plans that arise responsibilities for the integrity of CWB’s financial reporting, in executing the enterprise-wide strategy. The Committee is chaired by effectiveness of CWB’s internal controls, and the performance of its the CRO and membership includes the full Executive Committee. internal and external audit functions. 56 CWB Financial Group 2019 Annual ReportSubcommittees of the Executive Risk Committee – the various sub- Group Operational Risk Committee – reviews the operational risk committees provide oversight of the processes whereby the risks management framework, operational loss reporting and business assumed across the enterprise are identified, measured, monitored, continuity plans. Reviews action plans for mitigating and improving held within delegated limits and reported in accordance with policy the management of operational risk; guidelines. They include: Group Credit Risk Committee – approves loans within delegated over public disclosures. Responsible for reviewing CWB’s internal limits and is responsible for ensuring that appropriate credit policies control over financial reporting and disclosure controls and are in place. An escalation sub-committee of the Group Credit Risk procedures to help ensure the accuracy, completeness and Committee considers credit related pricing and reputational issues timeliness of public disclosures; Group Disclosure Committee – supports CEO/CFO certification that may be relevant to specific loans; Group Forecasting Committee – develops an enterprise-wide view Group Asset Liability Committee (ALCo) – reviews and approves of the economic outlook; operational guidelines and programs for liquidity management and control, funding sources, investments, foreign exchange risk, structural interest rate risk and derivatives risk; Group Capital Risk Committee – responsible for the oversight of capital adequacy, CWB’s regulatory capital plan, ICAAP and stress testing; Group Model Risk and Model Deployment Committees – develop and oversee CWB’s model risk management framework and enterprise-wide model deployment. The following CWB oversight functions provide key support within the • Model Vetting – responsible for development and maintenance of an enterprise-wide risk management framework. enterprise-wide model risk management framework, and to monitor, Oversight teams include: effectively challenge and report on model risk in accordance with related policy and guidelines; • 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 Capital and IFRS 9 – produces risk-based expected credit losses (ECL) under IFRS 9, Economic Capital and oversees all periodic risk production, as well as CWB’s ICAAP; risk; • Integrated Risk Management – responsible for our interest rate and liquidity risk management framework, and to provide second line oversight for interest rate and liquidity risk management; implements • Finance – provides independent oversight of processes to manage financial reporting, external credit ratings, certain regulatory reporting, tax, and capital risk, including capital adequacy and capital management. This activity is overseen by CWB’s CFO, who reports functionally to the the operational risk management framework; operationalizes second Audit Committee; line oversight of risk-based pricing, with responsibility for profitability reporting and analysis; provides economic forecasting and develops stress-testing models; • Risk Technology and Model Deployment – responsible to deploy AIRB and other risk models within CWB’s risk technology infrastructure and produce AIRB risk ratings for Basel Capital Adequacy Requirements, • Legal, Regulatory Compliance and Investigations – provides second line oversight of legal, regulatory compliance, financial crime (including fraud, corruption and bribery, and anti-money laundering risks) and reputation risks with established and maintained relevant policies, frameworks and standards used by the first and second lines to identify, measure, mitigate and report on significant legal, regulatory compliance Economic Capital and ICAAP purposes; and reputation risks; and, • 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 that regulatory requirements are satisfied; RISK MANAGEMENT POLICIES • Human Resources – provides second line oversight of people risks across the organization by establishing and maintaining relevant policies, frameworks and standards related to workforce practices and safety. To support effective communication, implementation, and governance of second line governance documentation promotes the application of a our risk management framework, ERM and other corporate functions codify consistent approach to manage risk exposures across the enterprise. All risk processes and operational requirements in comprehensive management policies are developed by the second line and approved by the Board Risk policies, frameworks, and standards. The first line in turn implements Committee, Governance and Conduct Review Committee, or the full Board these second line protocols in guidelines and procedures. Such first and of Directors, on an annual basis. 57 CWB Financial Group 2019 Annual ReportRISK UNIVERSE – REPORT ON PRINCIPAL RISKS We pursue opportunities and the associated risks that are aligned with identified as principal risks, have the greatest potential to materially impact CWB’s balanced growth strategic objectives and are expected to create operations and financial performance. These risks materially comprise sustainable long-term value for shareholders and other stakeholders. While CWB’s risk universe as defined as part of our ERM framework. CWB’s operations are exposed to numerous types of risk, certain risks, 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 sector and product type. In order to minimize potential loss, most of our and individuals. Our credit risk management culture reflects the unique loans are secured by tangible collateral. CWB’s approach to managing combination of policies, standard practices, experience and management credit risk has proven to be very effective, as demonstrated by our relatively attitudes that support growth within chosen industries and geographic stable long-term average annual provision for credit losses and customarily markets. Underwriting standards are designed to ensure an appropriate low write-offs measured as a percentage of total loans. balance of risk and return, and are supported by established loan exposure limits in areas of demonstrated lending expertise. Concentration is Refer to the Loans and Credit Quality sections of this MD&A for additional measured against specified tolerance levels by geographic region, industry information. Risk Governance The credit approval process is centrally controlled, with all significant Requests for credit approval beyond the lending limit of the CEO credit requests submitted to Credit Risk Management for adjudication. are referred to the Group Credit Risk Committee or the Board Risk Credit Risk Management is independent of the originating business. Committee’s Loan Adjudication Panel. Risk Management We are committed to a number of important principles to manage • Pricing of credits commensurate with risk to ensure an appropriate credit exposures, which include: financial return; • 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, standards, 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; • 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 review by Internal Audit of the adequacy and effectiveness of governance, risk management and control over credit risk across CWB Financial Group, which includes direct reporting of results to senior management, the CEO and the Audit • A standard credit risk-rating classification established for all credits; Committee of the Board; and, • 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; • 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. Subject to independent oversight, effective challenge and independent assessment by the second line. A summary report of less than satisfactory accounts is reviewed on a quarterly basis by the Board Risk Committee. 58 CWB Financial Group 2019 Annual ReportCredit Risk Concentration Risk diversification is addressed by establishing portfolio limits by and loan security from more than one source, will increase to $200 geographic area, industry sector and product. The policy is to limit million commencing in fiscal 2020, up from $150 million. The connection loans to connected corporate borrowers to not more than 10% of limit remains $150 million for borrowers with credit ratings of BBB+. shareholders’ equity. Under the Credit Risk Concentration Policy, CWB clients with larger borrowing requirements can be accommodated the single risk exposure lending limit is $75 million. Our Credit Risk through loan syndications with other financial institutions. Concentration policy for certain quality connections with investment grade credit ratings of A- or better, that confirm debt service capacity Environmental Risk Portfolio Quality While the day-to-day operations of CWB do not have a material impact on Our strategy is to maintain a quality, secured and diversified loan portfolio the environment, environmental risks include the risk of loss if a borrower by engaging experienced personnel who provide a hands-on approach in is unable to repay loans due to environmental cleanup costs, and the risk of credit granting, account management and timely action when problems damage to CWB’s reputation resulting from the same. In order to manage develop. We target lending to small- and medium-sized businesses, and to these risks, and to help mitigate CWB’s overall impact on the environment, individuals. Relationship banking and “knowing your client” are important CWB evaluates potential environmental risks as part of its credit granting tenets of effective account management. Earning an appropriate financial process. If potential environmental risks are identified that cannot be return for the level of risk is also fundamental. resolved to CWB’s satisfaction, the application will be denied. Reports on environmental inspections and findings are provided quarterly is achieved through ongoing strong growth within CWB’s established to the Board Risk Committee. Where financing is provided, Internal Audit businesses with a national footprint, including CWB Optimum, CWB will sample test loan files to ensure environmental studies required as a National Leasing, CWB Maxium, and CWB Franchise Finance, as well as condition of financing are in place, including review for a transmittal letter participation in syndicated lending facilities primarily led by other Canadian from the author of the environmental study indicating that it may be relied banks, and periodically through acquisition. We will also open our first full- upon for financing purposes. service branch location in Ontario in fiscal 2020. Geographic diversification of the loan portfolio outside of Western Canada For additional information, see the Loans and Credit Quality sections of this MD&A. 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. Our market risk is primarily comprised of structural interest rate risk on the balance sheet, liquidity and funding risk, and foreign exchange risk. Risk Overview The most material market risks for CWB are those related to changes in in financial markets. We have limited direct exposure to foreign exchange interest rates. We do not have a trading book; we do not undertake market risk. We maintain some investment risk from exposure to our discretionary activities such as market making, arbitrage or proprietary trading and, investment portfolio comprised of preferred shares issued by public therefore, do not have direct risks related to those activities. Canadian companies across a variety of industries. We maintain a diversified cash and securities portfolio that is primarily comprised of high-quality debt instruments. These instruments are subject to price fluctuations based on movements in interest rates and volatility Risk Governance Market risk is managed in accordance with the approved structural ongoing oversight, review and endorsement of operational guidelines. interest rate risk, and liquidity and funding risk policies, the second line Integrated Risk Management provides independent second line standard and the accompanying first line guideline. As the first line of monitoring and reporting of market risk exposure against risk appetite defence, Treasury owns and manages CWB’s market risk on a daily basis. to ALCo, the Executive Risk Committee and Board Risk Committee. ALCo provides tactical and strategic direction and is responsible for 59 CWB Financial Group 2019 Annual Report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 Risk Metrics the cash flows, earnings and values of assets and liabilities. The objective Structural interest rate risk is measured using historical simulations to of structural interest rate risk management is to maintain an appropriate evaluate earnings sensitivity and economic value sensitivity analysis, stress balance between earnings volatility and economic value volatility while testing and gap analysis, in addition to other traditional risk metrics. keeping both within their respective risk appetite limits. Structural interest rate risk arises due to the duration mismatch between reduction in net interest income due to adverse interest rate movements assets and liabilities. Adverse interest rate movements may cause a reduction over a one-year horizon. • Earnings at Risk – Earnings at risk (EaR) is defined as the potential • 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. Both EaR and EVaR are measured against stress scenarios historically observed (historical simulation or historical Value at Risk (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 after Treasury hedging activity for periods of up to one year. The interest rate gap is measured at least monthly. Note 25 to the consolidated financial statements shows the gap position at October 31, 2019 for select time intervals. The analysis in Note 25 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 1.4% of total assets at October 31, 2019, compared to 0.8% one year ago, while the one-month and under gap was negative 3.1% compared to negative 1.8% one year earlier. in earnings; and/or a reduction in the economic value of our assets; and/or an increase in the economic value of our liabilities. Structural interest rate risk is primarily comprised of duration mismatch risk and option risk embedded within the structure of products. 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 is managed to a target profile through interest rate swaps and our cash and securities portfolio. Product-embedded option risk arises when product features allow customers to alter scheduled maturity or repricing dates. Such features 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 our assets, liabilities and off-balance sheet (OBS) positions. Thus, the sensitivity of CWB’s economic value to fluctuations in interest rates is an important consideration for management, regulators and shareholders. The economic value of an instrument represents an assessment of the present value of the expected net cash flows, discounted to reflect market rates. By extension, the economic value of our equity can be viewed as the present value of our 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 against volatility in the long-term value of CWB’s equity. Treasury manages the economic value of the balance sheet within a range around a target duration. Duration limits are approved by ALCo. The duration limits consider 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. 60 CWB Financial Group 2019 Annual ReportInterest 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. The estimated sensitivity of net interest income to a change in interest rates • A constant structure in the interest sensitive asset liability portfolio; is presented in Table 30. The amounts represent the estimated change in net interest income over one year resulting from a one percentage point change in interest rates. The estimates are based on a number of assumptions and factors, which include: • 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. 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 1 year 1 year percentage change Impact of 1% decrease in interest rates Period 1 year 1 year percentage change 2019 2018 $ 4,556 $ 6,234 0.58% 0.86% $ 2019 (7,463) (0.95)% 2018 $ (7,467) (1.03)% We estimate that a one-percentage point increase in all interest rates cash flow hedges, which would increase other comprehensive income by at October 31, 2019 would decrease unrealized gains related to FVOCI approximately $112 million, net of tax (October 31, 2018 – $107 million). securities and the fair value of interest rate swaps designated as cash flow hedges, and result in a reduction in other comprehensive income of approximately $108 million, net of tax (October 31, 2018 – $105 million). We maintain 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 We estimate that a one-percentage point decrease in all interest rates at in the respective sensitivity of net interest income and other comprehensive October 31, 2019 would result in an increase of unrealized gains related to income to changes in interest rates compared to last year primarily reflects FVOCI securities and the fair value of interest rate swaps designated as 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. In providing financial services to our customers, we have assets and We have established policies that include limits on the maximum liabilities denominated in U.S. dollars. At October 31, 2019, assets allowable differences between U.S. dollar assets and liabilities. We denominated in U.S. dollars were 1.3% (2018 – 1.4%) of total assets and measure the difference daily and manage it through use of U.S. dollar U.S. dollar liabilities were 1.4% (2018 – 1.6%) of total liabilities. We do forward contracts or other means. The Board Risk Committee reviews not buy or sell currencies other than U.S. dollars other than to meet and approves policy respecting foreign exchange exposure at least specific client needs. We have no material exposure to currencies other annually. Any deviations from compliance with policy are reported than U.S. dollars. monthly 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 or deposit maturities or commitments to provide credit. 61 CWB Financial Group 2019 Annual Report Risk Overview We maintain a sound, prudent and conservative approach to managing • Broad funding access, including preserving and growing a reliable base exposure to liquidity risk, including holding a portfolio of high-quality liquid of core deposits and continual access to diversified sources of funding; assets to allow continued operation as a going concern under stressed conditions that may be caused by CWB-specific or systemic events. This pool of high-quality liquid assets 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. Our key risk mitigation strategies include: • An appropriate balance between the level of risk we undertake and the corresponding cost of risk mitigation that considers the potential impact of extreme but plausible events; RISK GOVERNANCE • A comprehensive group-wide liquidity contingency plan supported by a pool of unencumbered high-quality liquid assets and marketable securities that would provide assured access to liquidity in a crisis; and, • 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. Liquidity management is centralized to better facilitate the effective is responsible for managing liquidity and funding risk. ALCo oversees management of liquidity risk. The Board Risk Committee approves the treasury function and provides tactical and strategic direction. market risk management policies and delegates liquidity risk Integrated Risk Management, as the second line, is responsible for authorities to senior management. As the first line of defence, Treasury independent oversight. RISK MANAGEMENT We have a comprehensive liquidity risk management policies. The key We stress test liquidity as per the OSFI Liquidity Adequacy elements of managing liquidity risk for CWB include the following: Requirement guideline. Stress test results are reviewed by ALCo • Policy – Liquidity risk management policies establish a target 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; 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 • Reporting – Treasury oversight of all significant liquidity risks that event; supports 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 to our liquidity position. Liquidity stress tests consider the effect of changes in funding assumptions, depositor behaviour and the market behaviour of liquid assets. • Funding diversification – We actively pursue diversification of our deposit liabilities by source, type of depositor, instrument and term. Supplementary funding sources currently include securitization, capital market issuance and whole loan sales; and, • Core liquidity – We maintain a pool of highly liquid, unencumbered assets that can be readily sold, or pledged to secure borrowings, under stressed market conditions or due to CWB-specific events. We remain in compliance with OSFI’s Liquidity Adequacy Requirements guideline. Contractual Obligations We enter into contracts in the normal course of business that give rise to of this MD&A, as well as Notes 14, 16, 20 and 24 to the consolidated commitments of future minimum payments that may affect the liquidity financial statements, the following contractual obligations are outstanding position. In addition to the obligations related to deposits and subordinated at October 31, 2019: debentures discussed in the Deposits and Liquidity Management sections 62 CWB Financial Group 2019 Annual ReportTable 31 - Contractual Obligations ($ thousands) Lease commitments Purchase obligations for operating and capital expenditures October 31, 2019 October 31, 2018 Credit Ratings Within 1 Year 14,946 1,659 16,605 15,768 $ $ $ $ $ $ 1 to 3 Years 27,192 1,393 28,585 37,713 $ $ $ 4 to 5 Years 22,503 - 22,503 8,971 $ $ $ More than 5 Years 27,943 - 27,943 24,338 $ $ $ Total 92,584 3,052 95,636 86,790 CWB’s ability to efficiently access capital markets funding on a cost- for funding capacity or access to capital markets. Changes in credit ratings effective basis is partially dependent upon the maintenance of satisfactory may also affect the ability and/or the cost of establishing normal course credit ratings. Such credit ratings, accompanied with a stable or positive derivative or hedging transactions. outlook, increase the breadth of clients and investors able to participate in various deposit and debt offerings, while also lowering our overall cost of capital. 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 Credit ratings are largely determined by the quality of earnings, the withdrawal at any time by the rating organization. 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. The following table summarizes the credit ratings issued by DRBS Morningstar for CWB, as well as the corresponding rating agency outlook, last confirmed on November 27, 2019. DBRS Morningstar has discontinued There can be no assurance that CWB’s credit ratings and the corresponding CWB’s legacy, non-NVCC subordinated debt rating as all outstanding non- outlook will not be changed, potentially resulting in adverse consequences NVCC debt was repaid on November 18, 2019. Table 32 - DBRS Morningstar Credit Ratings Long-term senior debt and long-term deposits Short-term instruments Subordinated debentures (NVCC) Preferred shares Outlook A (low) R1 (low) BBB (low) Pfd-3 Stable CAPITAL RISK Capital risk is the risk that we have insufficient capital resources, in either quantity or quality, to support economic risk taken, regulatory requirements, strategic initiatives and current or planned operations. Risk Overview We follow three main principles to facilitate the effective management of • The objective of capital management is to ensure: 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 expectations of our shareholders and other stakeholders; and, - 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; - We have 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. 63 CWB Financial Group 2019 Annual ReportRisk Governance The Board approves the annual regulatory capital plan, and the Board In addition, Integrated Risk Management, Risk Capital and IFRS 9, Risk Committee approves the periodic ICAAP and capital management and Finance comprise the ICAAP core team and are closely involved policies. The Group Capital Risk Committee is responsible for capital risk in capital management. The core team is closely supported by other management. ERM oversees the demand side of capital management, key departments, including Treasury, Credit Risk Management, and including risk capital and economic capital. Separate from ERM, CWB’s Strategy. Finance team provides independent oversight of processes to manage capital risk. In effect, the CFO is responsible for the supply side of capital adequacy, and the CRO is responsible for the demand side of risk capital and capital risk management. Risk Management The following are key elements of capital risk management: • Forecast models used to analyze the likely capital impact of projected • The annual regulatory capital plan, inclusive of the capital operations, various balance sheet and income statement scenarios, approaches used to calculate regulatory capital, and/or significant management policy and three-year capital projections; transactions; and, • A quarterly regulatory capital risk update provided to the Board Risk • Regulatory capital ratios reported to senior management and the Committee; Board on a monthly basis. For additional information, please refer to the Capital Management section of this MD&A. 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. Risk Overview Operational risk is inherent in all of CWB’s business activities, including The regulatory framework requires certain amounts of capital to be allocated banking, trust, and wealth management. We are exposed to operational to support operational risk. We use the Standardized approach to measure risk from internal business activities, external threats and outsourced operational risk. We have a group-wide Operational Risk Management business activities. Its impact can be financial loss, loss of reputation, loss Policy to ensure that all employees understand their responsibilities with of competitive position, regulatory penalties, or failure in the management respect to operational risk management. The Operational Risk Management of other risks. While operational risk cannot be eliminated, proactive Policy encompasses a common language of risk coupled with programs and operational risk management is a key strategy to mitigate this risk. The methodologies for identification, measurement, control, and management primary financial measure of operational risk is actual losses incurred. of operational risk. Risk Governance Business and support areas are the first line of defence, and are fully the enterprise. Integrated Risk Management, as the second line, is accountable to manage and mitigate the operational risks associated responsible for the continual enhancement of the Operational Risk with their activities. The Operational Risk Committee oversees the Management Framework and supporting policies. The Board Risk implementation and adoption of the Operational Risk Management Committee has ultimate oversight and approves the Operational Risk Policy across the enterprise and facilitates the involvement of Management Policy. relevant stakeholders in the first and second line of defence across 64 CWB Financial Group 2019 Annual ReportRisk Management Following is a summary of strategies and factors that assist with the • Management is very engaged with promoting CWB’s operational risk effective management of operational risk: tolerance and appetite; and, • 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; • Ongoing enhancement of enterprise-wide operational risk management processes. Key elements of the Operational Risk Management Framework include: In addition to the second line Operational Risk Management Framework, • Common definitions of operational risk – We incorporate standard additional key components include: risk terms and certain key operational risk definitions as part of our • Implementation of policies and procedural controls appropriate to operational risk management framework and supporting policies; address identified risks (including segregation of duties and other • Risk Control Assessments (RCA) – Utilized to develop a forward-looking fundamental checks and balances); view of operational risk exposure based on proactive identification of key • Continual enhancements to fraud prevention processes, policies and sources of operational risk exposures. The results of RCAs are aggregated communication; 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 exposure to future losses; • Root cause analysis – For significant operational risk events we employ a standardized methodology to identify the underlying cause of the operational risk event and document the corrective actions taken to avoid similar events in the future; and, • New initiative risk assessments – Integrated with our change management process, requires project owners to proactively identify all relevant stakeholders across significant functional areas and conduct detailed RCAs for new initiatives. • Established “whistleblower” processes, a robust employee code of conduct and ethical concerns hotline; • Maintenance of an outsourcing management program; • At least annual assessment and benchmarking of business insurance; • Human resource guidelines 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 protection 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). We have adopted an Operational Risk Taxonomy as part of our Operational Risk Management Framework. This taxonomy forms the basis for all operational risk management reporting, with loss events and identified risks categorized consistently. The taxonomy is based on 15 distinct risk types that are aligned within the seven Basel Operational Risk categories. 65 CWB Financial Group 2019 Annual ReportTable 33 - Operational Risk Taxonomy Operational Risk Level Description Financial crime risk The risk of loss or harm arising from crimes committed against CWB, our clients, or by our employees or third parties. Loss in this context refers to economic loss including time, recovery costs, and overhead. Category External Fraud and Internal Fraud Regulatory compliance risk The risk of loss or harm created by failing to comply with or satisfy the laws, regulatory requirements or prescribed practices that apply to CWB. It does not include risk arising from non-conformance with ethical standards. Clients, Products, and Business Practices Legal risk Reputation risk The risk of loss or harm arising from the ways in which laws, regulatory requirements, prescribed practices or contractual obligations apply to CWB. It does not include risk arising from non-conformance with ethical standards. The risk of loss or harm to the CWB brand or reputation. It may arise even if other operational risks are effectively managed, and includes the risk arising from non- conformance with ethical standards. Legal Risk Reputation Risk Damage to physical assets (excludes investment assets) The risk of loss or harm to physical assets caused by natural disaster, mechanical failures, or intentional or unintentional human actions. Damage to Physical Assets People risk The risk that we cannot attract and retain sufficient qualified resources to implement our strategies and/or achieve our objectives. Employment Practices and Workplace Safety Business disruption risk The risk of loss or harm due to the failure to ensure the ongoing continuation of critical business operations caused by disruptions impacting the availability of staff, systems, and/or premises. Business Disruption and System Failure Technology risk Information security risk Accounting risk (excludes model errors related to financial statements) Model risk Reporting risk Outsourcing and third-party supplier risk Change management risk (excludes technology change) The risk of loss or harm related to the operational performance, confidentiality, integrity and availability of our information, systems and infrastructure. The risk of loss 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. Business Disruption and System Failure The risk of loss or harm due to the compromising of our information assets (i.e., the unauthorized use, loss, damage, disclosure, or modification of company information and information systems) caused by a failure to protect our information assets (including cyber risk). External Fraud and Client, Products, and Business Practices The risk of loss or harm due to misstatements of assets, liabilities and/or income, caused by internal financial control failures or deficiencies. Execution, Delivery, and Process Management The risk of loss or harm due to inaccurate model outputs or incorrect interpretations of model outputs, caused by inadequate model design, use and/or assumptions. Execution, Delivery, and Process Management The risk of loss or harm 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. The risk of loss or harm 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. The risk of loss or harm 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. Execution, Delivery, and Process Management Execution, Delivery, and Process Management Execution, Delivery, and Process Management Process and execution risk The risk of loss or harm due to a failure to achieve the desired outcome caused by inadequately designed or executed processes. Execution, Delivery, and Process Management Product and customer/client selection risk (includes design, development, distribution, and sales) The risk of loss or harm due to the inability to effectively design, develop, distribute, and sell products and services, or attract profitable clients caused by a breakdown of the product development and sales distribution process, or the failure to properly vet clients. Clients, Products, and Business Practices Risk of loss or harm due to CWB failing to meet professional obligations to our clients, caused by an inadequate understanding and/or execution of the obligation/ suitability requirements. Clients, Products, and Business Practices Fiduciary risk 66 CWB Financial Group 2019 Annual ReportA discussion of several of CWB’s key operational risks follows: People Risk Competition for qualified employees in our key markets has remained consistent and reflects the generally stable level of economic activity and evolving needs of other financial services participants within and outside CWB’s geographic footprint. We intend to continually attract and retain qualified employees to successfully execute against our vision to become the best full-service bank for business owners in Canada. We do this by proactively investing in our practices and programs to build a positive, rewarding and collaborative work environment, where teams are empowered to deliver exceptional client experiences. Our refreshed brand and values include a people first approach to planning and execution, a focus to drive inclusion and diversity as key business advantages, and specific strategies to increase CWB’s brand awareness in the markets where we operate. We complement this with a specialized and knowledgeable approach to talent acquisition, a competitive total rewards offering with differentiated benefits, flexible work arrangements, comprehensive learning and development opportunities and a proactive focus on succession planning. An inability to attract and retain an appropriate staff complement would adversely affect our ability to achieve CWB’s strategic objectives. Technology Risk We are 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 our ability to conduct regular business and/ or deliver products and services to clients. Ongoing diligence is required to ensure systems are secure from threats. CWB currently has a number of projects underway focused to increase our digital capabilities which increase risk exposure related to information systems and technology. We continuously identify and assess key services to ensure potential failure points are highlighted and related risk is mitigated the best possible way (i.e. direction, a decline in client and shareholder confidence, and damage to our reputation. Management of these risks is a key priority for us, and we do so in accordance with our three lines of defence framework. Legal Risk Legal risk is the potential for loss or harm resulting from a failure to comply with laws or satisfy contractual obligations. We are subject to litigation arising in the ordinary course of business, and the unfavourable resolution of any such litigation could have a material adverse effect on our financial results and damage our reputation. We are required to disclose material litigation to which we are party. In assessing the materiality of litigation, factors considered include a case-by-case assessment of specific facts and circumstances, our past experience and the opinions of legal experts. Regulatory Compliance Risk Our businesses are highly regulated through the laws, regulatory requirements and prescribed practices applicable to CWB that have been put in place by various authorities, including federal and provincial governments and regulators. Changes to these applicable requirements, including changes in their interpretation or implementation, could adversely affect us, and we anticipate ongoing scrutiny from our regulatory authorities and strict enforcement of such requirements as reforms continue at the federal and provincial levels to strengthen the stability of the financial system and protect stakeholders. 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 timeframes for new requirements. Certain requirements may also impact our ability to compete against both federally regulated and non-federally regulated entities. We actively monitor these developments and implement required changes to systems and processes. We have implemented a robust regulatory compliance risk management framework and developed supporting protocols to manage regulatory compliance risk across the enterprise. Financial Crime Risk Safeguarding our customers, employees, information and assets from upgrades, enhancements, new products). In the last year, our Information exposure to criminal risk is an important priority for us. Criminal risk is the Services team has worked closely with ERM to apply further rigour to, and potential for loss or harm resulting from a failure to comply with criminal enhanced governance around, identification and evaluation of potential laws and includes acts by employees or third parties against us and acts by risks in the technology environment. Information and Cyber Security Risk We manage 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. We rely upon a complete suite of advanced controls to protect CWB’s operations and our customers from attack and have partnered with leading third-party service providers to provide counsel and support should the need arise. We regularly test the completeness and effectiveness of our information and cyber security program. Legal, Regulatory Compliance and Reputation Risk Legal and regulatory compliance risk is the potential for loss or harm created by legal, regulatory compliance, financial crimes and reputation risks. Failing to manage these risks may result in civil or criminal litigation, administrative penalties, supervisory findings, enforcement actions, external parties using CWB to engage in unlawful conduct, such as fraud, theft, money laundering, violence, cyber crime, bribery and corruption. We govern, oversee and assess principles and procedures designed to help ensure compliance with legal and regulatory requirements and internal risk parameters related to anti-money laundering, anti-terrorist financing and sanctions measures, and our compliance with anti-corruption and anti- bribery laws and regulations. Reputation Risk Damage to our reputation and negative public perception could be an outcome of operational risk events that result from breakdowns in internal processes, deficient systems, actual or alleged misconduct of employees or external partners representing non-conformance with our ethical standards, or external events. Significant reputation risk events typically lead to questions about business ethics and integrity, competence, corporate governance practices, quality and accuracy of financial reporting disclosures, or quality of products and service. financial loss, reputation damage, restricted business activities, increased Negative public opinion could adversely affect our ability to attract and regulatory supervision or intervention or the imprisonment or regulatory examination of officers and directors, an inability to execute our strategic retain clients and/or employees and could expose us to litigation and/or regulatory action. Responsibility for managing the impact of operational 67 CWB Financial Group 2019 Annual Report(and other) risks on our reputation falls to all of our teams, including senior conduct policies, in a manner that minimizes operational risks and aligns to management and the Board. All directors, officers and employees have a our three lines of defence framework. responsibility to conduct their activities in accordance with our personal 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 our business, financial condition and results of operations. ADEQUACY OF CWB’S RISK MANAGEMENT FRAMEWORK The Risk Management Framework is comprised of various processes and strategies for managing risk exposure. Given the structure and scope of our 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 IASB continues to change the financial accounting and reporting standards that govern the preparation of our financial statements. These types of changes can be significant and may materially impact how we record and report our financial condition and results of operations. Where we are required to retroactively apply a new or revised standard, we may be required to restate prior period financial statements OTHER FACTORS We caution that the above discussion of risk factors is not exhaustive. Other factors beyond our 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 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 our markets include, but are not limited to, changes in: short-term and long-term interest rates; energy and other commodity prices, including the impact of constrained energy transportation infrastructure; 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 Our performance is impacted by competition in the markets in which we operate. Client retention may be influenced by many factors, including relative client experience, the relative price and attributes of products and services, changes in products and services, and actions taken by competitors. While transition from the Standardized to the AIRB approach for risk and capital management will not affect the attributes or behaviour of our competitors, we expect this transition to enhance our competitiveness by enabling CWB to price more effectively for risk. ACCURACY AND COMPLETENESS OF INFORMATION ON CLIENTS AND COUNTERPARTIES We depend on the accuracy and completeness of information about clients and counterparties. In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by them, including financial statements, appraisals, external credit ratings and other financial information. We 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. Our 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 our transformational strategy, we intend to continue growing our business through a combination of organic growth and strategic acquisitions. The ability to successfully grow organically will depend 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 we anticipate. 68 CWB Financial Group 2019 Annual ReportUPDATED SHARE INFORMATION As at November 30, 2019, there were 87,264,636 common shares and the dividend declared one year ago. The Board of Directors also declared 1,615,178 stock options outstanding. On December 4, 2019, CWB’s Board of preferred share cash dividends of $0.2688125 per Series 5, $0.390625 Directors declared a cash dividend of $0.28 per common share, payable per Series 7, and $0.375 per Series 9, all payable on January 31, 2020 to on January 7, 2020 to shareholders of record on December 17, 2019. This shareholders of record on January 24, 2020. quarterly dividend is consistent with the prior quarter and 8% higher than CONTROLS AND PROCEDURES As of October 31, 2019, an evaluation was carried out on the effectiveness On November 1, 2018, CWB adopted IFRS 9 and updated or modified of CWB’s disclosure controls and procedures. Based on that evaluation, the certain internal controls over financial reporting as a result of the new CEO and CFO have certified that the design and operating effectiveness of accounting standard. There were no other significant changes in CWB’s CWB’s disclosure controls and procedures were effective. ongoing internal controls over financial reporting that occurred during the Also at October 31, 2019, an evaluation was carried out on the effectiveness of internal controls over financial reporting to provide reasonable assurance year ended October 31, 2019 that have materially affected, or are reasonably likely to materially affect, CWB’s internal controls over financial reporting. regarding the reliability of financial reporting and the preparation of Prior to its release, this MD&A was reviewed by the Audit Committee and, financial statements in accordance with IFRS. Based on that evaluation, the on the Audit Committee’s recommendation, approved by the Board of CEO and CFO have certified that the design and operating effectiveness of Directors of CWB. 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. 69 CWB Financial Group 2019 Annual ReportConsolidated Financial Statements MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements of Canadian Western Bank (CWB) The system of internal controls is also supported by our internal audit and related financial information presented in this annual report have been function, which carries out periodic internal audits of all aspects of CWB’s prepared by management, who are responsible for the integrity and fair operations. The Chief Internal Auditor has full and free access to the Audit presentation of the information presented, which includes the consolidated Committee and to the external auditors. 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 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 consolidated 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 The consolidated financial statements, MD&A and related financial results of the external audit. The Audit Committee also meets regularly with information reflect amounts which must, of necessity, be based on informed the Chief Financial Officer, Chief Internal Auditor and the external auditors estimates and judgments of management with appropriate consideration to without management present. materiality. The financial information represented elsewhere in this annual report is fairly presented and consistent with the consolidated financial statements. The Governance and Conduct Review 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 Management has designed the accounting system and related internal and reporting to the Board of Directors, those related party transactions controls, and supporting procedures are maintained to provide reasonable which may have a material impact on CWB. 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 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 any resulting matters. Chris H. Fowler President and Chief Executive Officer December 4, 2019 Carolyn J. Graham, FCPA, FCA Executive Vice President and Chief Financial Officer 70 CWB Financial Group 2019 Annual ReportINDEPENDENT AUDITORS’ REPORT To the Shareholders of Canadian Western Bank In connection with our audit of the financial statements, our responsibility OPINION We have audited the consolidated financial statements of Canadian Western Bank (the Entity), which comprise: is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated. • the consolidated balance sheets as at October 31, 2019 and October 31, 2018 We obtained the information, other than the financial statements and the auditors’ report thereon, included in Management’s Discussion and Analysis • the consolidated statements of income and comprehensive income for filed with the relevant Canadian Securities Commissions. the years then ended • the consolidated statements of changes in equity for the years then ended • the consolidated statements of cash flows for the years then ended • and notes to the consolidated financial statements, including a summary of significant accounting policies (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at October 31, 2019 and October 31, 2018, and its consolidated financial performance, and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). BASIS FOR OPINION We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard. The information, other than the financial statements and the auditors’ report thereon, included in a document likely to be entitled “2019 Annual Report” is expected to be made available to us after the date of this auditors’ report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. EMPHASIS OF MATTER – CHANGE IN ACCOUNTING POLICY Those charged with governance are responsible for overseeing the Entity‘s financial reporting process. Without qualifying our opinion on the consolidated financial statements, we draw attention to Note 1(J) to the consolidated financial statements, which indicates that the Bank has changed its method of accounting for financial instruments in 2019 due to the adoption of IFRS 9 Financial Instruments. Our opinion is not modified in respect of this matter. AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes OTHER INFORMATION our opinion. Management is responsible for the other information. Other information Reasonable assurance is a high level of assurance, but is not a guarantee comprises: that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it • the information, other than the financial statements and the auditors’ exists. report thereon, included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions. Misstatements can arise from fraud or error and are considered material • the information, other than the financial statements and the auditors’ if, individually or in the aggregate, they could reasonably be expected to report thereon, included in a document likely to be entitled “2019 Annual influence the economic decisions of users taken on the basis of the financial Report”. statements. Our opinion on the financial statements does not cover the other information As part of an audit in accordance with Canadian generally accepted auditing and we do not and will not express any form of assurance conclusion standards, we exercise professional judgment and maintain professional thereon. skepticism throughout the audit. 71 CWB Financial Group 2019 Annual ReportWe also: • Identify and assess the risks of material misstatement of the financial statements, including the disclosures, and whether the financial statements, whether due to fraud or error, design and perform audit statements represent the underlying transactions and events in a manner procedures responsive to those risks, and obtain audit evidence that is that achieves fair presentation. sufficient and appropriate to provide a basis for our opinion. • Communicate with those charged with governance regarding, among • The risk of not detecting a material misstatement resulting from fraud is other matters, the planned scope and timing of the audit and significant higher than for one resulting from error, as fraud may involve collusion, audit findings, including any significant deficiencies in internal control forgery, intentional omissions, misrepresentations, or the override of that we identify during our audit. internal control. • Provide those charged with governance with a statement that we have • Obtain an understanding of internal control relevant to the audit in order complied with relevant ethical requirements regarding independence, to design audit procedures that are appropriate in the circumstances, but and communicate with them all relationships and other matters that not for the purpose of expressing an opinion on the effectiveness of the may reasonably be thought to bear on our independence, and where Entity’s internal control. applicable, related safeguards. • Evaluate the appropriateness of accounting policies used and the • Obtain sufficient appropriate audit evidence regarding the financial reasonableness of accounting estimates and related disclosures made by information of the entities or business activities within the Group Entity management. to express an opinion on the financial statements. We are responsible • Conclude on the appropriateness of management’s use of the going for the direction, supervision and performance of the group audit. We concern basis of accounting and, based on the audit evidence obtained, remain solely responsible for our audit opinion. whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going The engagement partner on the audit resulting in this auditors’ report is concern. If we conclude that a material uncertainty exists, we are required Carlo De Mello. to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial KPMG LLP Chartered Professional Accountants Edmonton, Canada December 4, 2019 72 CWB Financial Group 2019 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 Derivatives Other assets Total Assets Liabilities and Equity Deposits Personal Business and government Other Cheques and other items in transit Securities sold under repurchase agreements Derivatives Other liabilities Debt Debt related to securitization activities Subordinated debentures Equity Preferred shares Common shares Retained earnings Share-based payment reserve Accumulated other comprehensive income Total Shareholders' Equity Non-controlling interests Total Equity Total Liabilities and Equity As at October 31 2019(1) As at October 31 2018 116,963 293,856 5,023 415,842 1,341,326 468,671 191,046 18,164 2,019,207 40,366 5,689,833 22,786,894 28,476,727 (110,834) 28,365,893 63,166 85,392 173,748 47,815 212,806 582,927 31,424,235 15,300,505 10,050,856 25,351,361 22,532 29,965 14,016 646,386 712,899 1,913,799 498,494 2,412,293 390,000 731,970 1,785,273 24,309 14,258 2,945,810 1,872 2,947,682 31,424,235 $ $ $ $ 73,822 26,825 52,574 153,221 1,325,816 521,825 143,536 93,575 2,084,752 - 5,247,160 21,085,968 26,333,128 (128,529) 26,204,599 59,098 85,168 160,790 2,496 271,339 578,891 29,021,463 14,483,686 9,216,271 23,699,957 28,489 95,126 69,581 531,953 725,149 1,757,854 250,000 2,007,854 265,000 744,701 1,649,196 23,937 (97,082) 2,585,752 2,751 2,588,503 29,021,463 (Note 5) $ (Note 6) (Note 7) (Note 8) (Note 10) (Note 11) (Note 11) (Notes 12 and 28) (Note 13) $ $ (Note 14) (Notes 7 and 9) (Notes 12 and 28) (Note 15) (Notes 9 and 16) (Note 16) (Note 17) (Note 17) (Note 18) (Note 19) $ (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 Financial Instruments (IFRS 9) (refer to Notes 1 and 2). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 Financial Instruments: Classification and Measurement (IAS 39) and have not been restated. The accompanying notes are an integral part of the consolidated financial statements. Robert L. Phillips Chair of the Board Chris H. Fowler President and Chief Executive Officer 73 CWB Financial Group 2019 Annual Report CONSOLIDATED STATEMENTS OF INCOME For the Years 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 Retail services Trust 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 2019(1) 2018 (Note 26) $ 1,379,730 $ 1,185,530 30,696 8,274 35,529 4,236 1,418,700 1,225,295 573,479 59,637 633,116 785,584 34,082 19,640 10,627 7,651 301 3,719 76,020 861,604 57,758 7,854 257,966 70,515 77,000 405,481 390,511 102,665 287,846 1,052 286,794 19,854 452,526 47,779 500,305 724,990 32,165 20,371 10,334 7,784 (217) 7,931 78,368 803,358 48,257 20,094 237,228 62,754 73,501 373,483 361,524 96,877 264,647 1,141 263,506 14,250 $ 266,940 $ 249,256 87,513 87,739 88,806 89,285 $ $ 3.05 3.04 2.81 2.79 (Notes 6 and 8) (Note 27) (Note 22) (Note 17) (Note 23) (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. The accompanying notes are an integral part of the consolidated financial statements. 74 CWB Financial Group 2019 Annual ReportCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended October 31 ($ thousands) Net Income Other Comprehensive Income (Loss), net of tax Items that will be subsequently reclassified to net income Debt securities measured at fair value through other comprehensive income (2018: Available-for-sale debt and equity securities) Gains (losses) from change in fair value(2) Reclassification to net income(3) Derivatives designated as cash flow hedges Gains (losses) from change in fair value(4) Reclassification to net income(5) Items that will not be subsequently reclassified to net income Losses on equity securities designated at fair value through other comprehensive income(6) 2019(1) 2018 $ 287,846 $ 264,647 34,301 (354) 33,947 71,361 (383) 70,978 (14,175) 90,750 (19,945) 158 (19,787) (26,848) (994) (27,842) n/a (47,629) Comprehensive Income $ 378,596 $ 217,018 Comprehensive income for the year attributable to: Shareholders Non-controlling interests Comprehensive Income $ 377,544 $ 215,877 1,052 1,141 $ 378,596 $ 217,018 (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. (2) Net of income tax of $12,132 (2018 – $7,351). (3) Net of income tax of $116 (2018 – $59). (4) Net of income tax of $26,007 (2018 – $9,930). (5) Net of income tax of $140 (2018 – $367). (6) Net of income tax of $4,982 (2018 – n/a). n/a – not applicable The accompanying notes are an integral part of the consolidated financial statements. 75 CWB Financial Group 2019 Annual ReportCONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Years Ended October 31 ($ thousands) Preferred Shares Balance at beginning of year Issued Balance at end of year Common Shares Balance at beginning of year Purchased for cancellation Issued under dividend reinvestment plan Transferred from share-based payment reserve on the exercise or exchange of options Issued on acquisition-related contingent consideration instalment payment Balance at end of year Retained Earnings Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 on November 1, 2018 Balance at beginning of year under IFRS 9 Shareholders' net income Dividends - Preferred shares - Common shares Net premium on common shares purchased for cancellation Realized losses reclassified from accumulated other comprehensive income Issuance costs on preferred shares Increase (decrease) in equity attributable to non-controlling interests ownership change 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 Accumulated Other Comprehensive Income (Loss) Debt securities measured at fair value through other comprehensive income (2018: Available-for-sale debt and equity securities) Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 on November 1, 2018 Balance at beginning of year under IFRS 9 Other comprehensive income (loss) Balance at end of year Derivatives designated as cash flow hedges Balance at beginning of year Other comprehensive income (loss) Balance at end of year Equity securities designated at fair value through other comprehensive income Impact of adopting IFRS 9 on November 1, 2018 Balance at beginning of year under IFRS 9 Other comprehensive loss Realized losses reclassified to retained earnings Balance at end of year Total accumulated other comprehensive income (loss) Total Shareholders' Equity Non-controlling Interests Balance at beginning of year Net income attributable to non-controlling interests Dividends to non-controlling interests Partial ownership increase (decrease) Balance at end of year Total Equity (Note 17) (Note 17) (Note 27) (Note 2) (Note 17) (Note 17) (Note 17) (Note 6) (Note 18) (Note 2) (Note 2) (Note 6) (Note 19) 2019(1) 2018 $ 265,000 125,000 390,000 $ 265,000 - 265,000 744,701 (15,326) 1,350 1,245 - 731,970 1,649,196 22,514 1,671,710 286,794 (19,854) (94,573) (34,266) (20,370) (3,007) (1,161) 1,785,273 23,937 1,617 (1,245) 24,309 731,885 - 4,248 2,818 5,750 744,701 1,488,634 n/a n/a 263,506 (14,250) (88,819) - n/a - 125 1,649,196 24,979 1,776 (2,818) 23,937 (48,962) 12,994 (35,968) 33,947 (2,021) (29,175) n/a n/a (19,787) (48,962) (48,120) 70,978 22,858 (20,278) (27,842) (48,120) (12,774) (12,774) (14,175) 20,370 (6,579) 14,258 2,945,810 n/a n/a n/a n/a n/a (97,082) 2,585,752 2,751 1,052 (1,071) (860) 1,872 $ 2,947,682 2,797 1,141 (1,431) 244 2,751 $ 2,588,503 (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. n/a – not applicable The accompanying notes are an integral part of the consolidated financial statements. 76 CWB Financial Group 2019 Annual ReportCONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended October 31 ($ thousands) Cash Flows from Operating Activities Net income Adjustments to determine net cash flows: Provision for credit losses Current income taxes receivable and payable, net Accrued interest receivable and payable, net Depreciation and amortization Fair value change in contingent consideration Amortization of fair value of employee stock options Deferred income taxes, net (Gains) losses on securities, net Net gains on CWT strategic transactions Change in operating assets and liabilities Deposits, net Loans, net Securities sold under repurchase agreements, net Securities purchased under resale agreements, net Debt related to securitization activities, net Other items, net Cash Flows from Financing Activities Debentures issued, net of issuance costs Preferred shares issued, net of issuance costs Dividends Common shares purchased for cancellation Purchases from non-controlling interests Dividends to non-controlling interests Contributions by non-controlling interests Cash Flows from Investing Activities Interest bearing deposits with regulated financial institutions, net Securities, purchased Securities, sales proceeds Securities, matured Property, equipment and intangible assets Acquisition-related contingent consideration instalment payments Proceeds from CWT strategic transactions 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 2019(1) 2018(2) $ 287,846 $ 264,647 (Note 8) 57,758 48,257 56,162 (3,456) 41,672 28,415 32,444 29,708 (Note 27) 7,854 20,094 (Note 18) 1,617 1,776 (1,433) (7,677) (301) 217 (Note 4) - (4,030) 1,651,404 1,796,975 (2,202,000) (3,024,939) (65,161) 36,768 (40,366) - 155,945 531,518 36,547 17,436 19,988 (264,291) (Note 16) 248,447 - (Note 17) 121,993 - (113,077) (98,821) (Note 17) (49,592) - (2,708) - (1,071) (1,431) 459 1,316 204,451 (98,936) (267,031) 477,070 (5,543,483) (2,892,129) 2,454,694 1,266,827 3,219,365 1,704,328 (49,069) (44,203) (Note 27) (37,368) (17,250) (Note 4) - 4,135 (222,892) 498,778 1,547 97,907 135,551 (37,644) $ 99,454 $ 97,907 $ 116,963 $ 73,822 5,023 52,574 (22,532) (28,489) $ 99,454 $ 97,907 $ 1,428,117 $ 1,237,809 588,740 462,691 80,566 88,116 (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. (2) During fiscal 2019, cash flows from debt related to securitization activities, net was reclassified from Financing Activities to Operating Activities. Comparative figures have been reclassified to conform to the current period presentation. The accompanying notes are an integral part of the consolidated financial statements. 77 CWB Financial Group 2019 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended October 31, 2019 and 2018 ($ thousands, except per share amounts) 1. NATURE OF OPERATIONS AND BASIS OF E) SIGNIFICANT JUDGMENTS PRESENTATION A) REPORTING ENTITY Canadian Western Bank (CWB) is a publicly traded, federally regulated Canadian bank headquartered in Edmonton, Alberta. CWB is a diversified 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 Note 8 Loans, Impaired Loans and Allowance for Credit Losses. financial services organization serving businesses and individuals across F) BUSINESS COMBINATIONS Canada. The consolidated financial statements were authorized for issue by the Board of Directors on December 4, 2019. 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 CWB’s subsidiaries. The consolidated financial statements have been prepared on a historic cost basis, except the revaluation of the following items: financial instruments classified as fair value through profit or loss, or as fair value through other comprehensive income 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). 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 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 a 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. Revenue 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 The significant accounting policies used in the preparation of these transaction may result in the recognition of a provision or the disclosure financial statements, including the accounting requirements of OSFI, are of a contingent liability. Provisions are recognized in the consolidated 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 financial statements when management determines that it is 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 as at the date of the consolidated financial statements as well as the reported provision. 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, impairment of goodwill and intangible assets, valuation of deferred tax assets and liabilities, impairment of financial instruments classified as fair value through profit or loss, or as fair value through other comprehensive income and fair value of stock options. Therefore, actual results could differ from these estimates. 78 CWB Financial Group 2019 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 Transition to IFRS 9 Financial instruments Strategic transactions Cash resources Securities Securities sold under repurchase agreements and purchased under resale agreements Loans, impaired loans and allowance for credit losses Financial assets transferred but not derecognized Property and equipment Goodwill and intangible assets Derivative financial instruments and hedging activities Other assets Deposits Other liabilities 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 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 Interest income Fair value of financial instruments Financial instruments - offsetting Risk management Capital management Subsidiaries J) CHANGES IN ACCOUNTING POLICIES IFRS 9 Financial Instruments CWB adopted IFRS 9 Financial Instruments (IFRS 9) effective November 1, 2018, which replaces IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). The adoption of IFRS 9 resulted in changes in accounting policies primarily related to the classification, measurement and impairment of financial assets. Classification of CWB’s financial liabilities is unchanged. Additional information on significant accounting policy changes related to the transition to IFRS 9 are described in Notes 2, 6 and 8. IFRS 9 was applied on a retrospective basis and as permitted, prior period comparatives were not restated. Upon transition, an adjustment to opening retained earnings and accumulated other comprehensive income (AOCI) was recorded to reflect the application of the new requirements at the adoption date. Refer to Note 2 for further details on the impact of the transition to the opening balance sheet on November 1, 2018. CWB has elected to continue to apply the hedge accounting requirements of IAS 39. CWB’s policy for hedge accounting is described in Note 12. i. Classification and Measurement of Financial Assets Derivatives continue to be measured at FVTPL under IFRS 9, except to the extent that they are designated in a hedging relationship, in which case the IAS 39 hedge accounting requirements continue to apply as described in Note 12. Debt Instruments Debt instruments, including loans and debt securities, are initially measured at fair value and are subsequently classified and measured at FVTPL, FVOCI or amortized cost based on the contractual cash flow characteristics of the instrument and the business model under which the asset is held. The intent of the assessment of the contractual cash flow characteristics of an instrument is to determine if contractual payments to be received represent solely principal and interest (SPPI), consistent with a basic lending arrangement. Principal, for the purposes of the test, is defined as the fair value of the instrument at initial recognition and is subject to change over its life due to transactions such as repayments and amortization of related premiums or discounts. Interest represents consideration for the time value of money, credit risk, other basic lending risks and costs, such as liquidity risk and administrative costs, as well as a profit margin. Contractual terms that introduce risks or volatility that are unrelated to a basic lending arrangement do not represent cash flows that are SPPI and as a result, the related financial asset is classified and measured at FVTPL. For debt instruments that meet the requirements of the SPPI test, classification at initial recognition is determined based on the business model under which the assets are managed. Considerations include how performance of the debt instruments is evaluated, the risks that affect the performance of the business model, and how those risks are managed, and the manner in which management is compensated. Potential business models are as follows: • Held to collect: Objective is to collect contractual cash flows. • Held to collect and sell: Objective is to both collect contractual cash flows and sell the financial assets. • Held for sale or other business models: Encompasses all other business models. CWB does not currently hold assets within this category. The use of judgment is required in assessing both the contractual cash flow characteristics and the business model of debt instruments. Measured at Amortized Cost Debt instruments measured at amortized cost are managed under a ‘held to collect’ business model and have contractual cash flows that satisfy the requirements of the SPPI test. These financial assets are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest rate method, net of allowance for credit losses estimated based on the expected credit loss (ECL) approach. Initial Recognition and Measurement Measured at Fair Value through Other Comprehensive Income Financial assets consist of both debt and equity instruments. Under IFRS 9, financial assets are initially recognized at fair value and subsequently measured at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost. Debt instruments measured at FVOCI, which are managed under a ‘held to collect and sell’ business model and have contractual cash flows that represent SPPI, are initially recorded at fair value, net of transaction costs. Subsequent to initial recognition, unrealized gains and losses related to the debt instruments are recorded in other comprehensive income (OCI), net of tax. Impairment losses and recoveries, estimated using an ECL approach, are recognized in the 79 CWB Financial Group 2019 Annual Report consolidated statements of income and correspondingly reduce the cash flows due and those that CWB expects to receive, including accumulated changes in fair value recorded in OCI. Gains and losses consideration for the amount and quality of collateral held. EAD realized on disposal of debt instruments classified at FVOCI are represents an estimate of the exposure at a future default date, taking included in the consolidated statements of income. into account estimated future repayments of principal and draws on Equity Instruments Equity instruments are classified and measured at FVTPL unless an irrevocable election is made to designate non-trading instruments at FVOCI at the time of initial recognition. If the election is applied, unrealized gains and losses are recorded in OCI, net of tax, and are not committed facilities. For most financial assets, ECL is estimated on an individual basis. Financial assets for which an allowance for credit losses is estimated on a collective basis are grouped based on similar credit risk characteristics. subsequently reclassified to the consolidated statements of income. As part of the transition to IFRS 9, CWB updated governance When realized, gains and losses that arise upon derecognition are frameworks impacted by the transition to IFRS 9 and implemented new reclassified from AOCI to retained earnings. Equity securities are not controls related to key processes and significant areas of judgment. An subject to an impairment assessment under IFRS 9. Expected Credit Loss Committee, which includes senior management ii. Impairment Expected Credit Loss Approach IFRS 9 introduces an ECL approach to estimate the allowance for credit losses that is applicable for financial assets measured at amortized cost, debt securities measured at FVOCI, and certain off-balance sheet loan commitments and financial guarantee contracts which were previously provided for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37). The implementation of an ECL approach under IFRS 9, which results in the recognition of an allowance for credit losses on financial assets regardless of whether an actual loss event has occurred, is a significant change from the representation from Risk, Finance and the business was established to provide oversight to the IFRS 9 impairment process. The Expected Credit Loss Committee is responsible to review key inputs and assumptions used in ECL estimates and assess the appropriateness of the performing loan allowance for credit losses. Forward-looking Information The estimation of ECL and the assessment of SICR consider information about past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment. incurred loss model under IAS 39 as described in Note 2. With consideration of several external sources of information, CWB The ECL approach categorizes financial assets into three stages based on changes in credit risk since inception. A financial asset can move between stages depending on improvement or deterioration of credit risk. Performing Assets • Stage 1: From initial recognition until the date on which the financial asset experiences a significant increase in credit risk (SICR), the allowance for credit losses is measured based on ECL from defaults occurring in the 12 months following the reporting date. • Stage 2: A financial asset migrates to Stage 2 when it formulates a base case view of the future direction of relevant macroeconomic variables, which is updated quarterly. A representative range of other possible forecast scenarios is developed to incorporate multiple probability-weighted outcomes. The base case scenario represents the best estimate of forecast macroeconomic variables while other scenarios represent more optimistic or pessimistic outcomes. Additional information regarding the incorporation of forward-looking information and the related judgment and estimation involved in the process is described in Note 8. Assessment of Significant Increases in Credit Risk experiences a SICR since initial recognition and the allowance At each reporting date, CWB assesses whether a financial asset has for credit losses is measured based on ECL from defaults experienced a SICR since initial recognition by comparing the risk occurring over the remaining life of the asset. of a default occurring over the asset’s remaining expected life at the Impaired Assets • Stage 3: When a financial asset is identified as credit-impaired, it migrates to Stage 3 and an allowance for credit losses equal to full lifetime ECL is recognized. Interest income is recognized on the carrying amount of the asset, net of the allowance for credit losses. ECL represents the discounted probability-weighted estimate of cash shortfalls expected to result from defaults over the relevant time horizon. ECL estimations are a function of the probability of default reporting date and the date of initial recognition. The assessment of changes in credit risk is performed at least quarterly, generally at the instrument level. Significant judgment is also required in the application of SICR thresholds. The thresholds used to define SICR are not expected to change frequently, and will be reassessed as needed based on significant changes in credit risk management practices. Refer to Note 8 for additional information regarding the assessment of SICR. (PD), loss given default (LGD) and exposure at default (EAD). PD, which Expected Life represents the estimate of the likelihood of default, considers past events, current market conditions and forward-looking information over the relevant time horizon. LGD represents an estimate of loss arising from default based on the difference between the contractual When measuring ECL, CWB considers the maximum contractual period over which an exposure to credit risk exists. For most instruments, the expected life is limited to the remaining contractual 80 CWB Financial Group 2019 Annual Reportlife, including prepayment and extension options. For certain revolving IFRS 15 Revenue from Contracts with Customers credit facilities, the expected life is estimated based on the period over which CWB is exposed to credit risk and how credit losses are mitigated by management actions. Modified Financial Assets The original terms of a financial asset may be renegotiated or otherwise modified, resulting in an impact to contractual cash flows. In particular, in an effort to minimize CWB’s realized losses, modifications may be granted in situations where a borrower experiences financial difficulty. Modifications may include payment deferrals, extension of amortization periods, interest rate reductions, principal forgiveness, debt consolidation or forbearance. If it is determined that the modification results in expiry of cash flows, the original asset is derecognized and a new asset is recognized based on the new contractual terms. Where a modification does not result in derecognition, the gross carrying amount of the financial asset is recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the original effective interest rate, and a gain or loss is recognized immediately in the consolidated statements of income. The financial asset continues to be subject to the same assessment for SICR relative to initial recognition. Expected cash flows arising from the modified contractual terms are considered when estimating ECL for the modified asset. Financial assets that are modified while having an allowance for credit losses equal to lifetime ECL may revert to having to an allowance for credit losses equal to 12-month ECL after a period of performance and improvement in the borrower’s financial condition. Definition of Default The definition of default used in the estimation of ECL is consistent with the definition of default used for internal credit risk management purposes. Loans are determined to be in default and classified as impaired when payments are contractually past due 90 days or more, 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 may include significant financial difficulty of a borrower, default or delinquency of a borrower, breach of loan covenants or conditions, or indications that a borrower will enter bankruptcy. Financial assets are reviewed on an ongoing basis to assess whether any should be classified as impaired. Loans that have become impaired are monitored closely by a specialized team with regular reviews of each loan and its realization plan. Impaired loans are returned to performing status when the timely collection of both principal and interest is reasonably assured and all delinquent principal and interest payments are brought current. Write-offs Financial assets are written off, either partially or in full, against the related allowance for credit losses when CWB concludes that there is no realistic prospect of future recovery in respect of those amounts. When financial instruments are secured, this is generally after all collateral has been realized or transferred to CWB, or in certain circumstances, when the net realizable value of any collateral and other available information suggests that there is no reasonable expectation of further recovery. In subsequent periods, any recoveries of amounts previously written off are recorded as a reduction to the provision for credit losses in the consolidated statements of income. IFRS 15 Revenue from Contracts with Customers (IFRS 15) was issued in May 2014, and replaces IAS 18 Revenue, IAS 11 Construction Contracts and related Interpretations. IFRS 15 provides a single, principles-based five-step model that applies to all contracts with customers. The standard excludes from its scope revenue arising from items such as financial instruments and leases as these fall within the scope of other IFRSs. CWB performed a detailed analysis on each revenue stream that is within the scope of the new standard. CWB adopted IFRS 15 using the modified retrospective approach and has concluded that there is no significant impact in relation to the adoption of IFRS 15. K) FUTURE ACCOUNTING CHANGES A number of standards and amendments have been issued by the IASB, and the following changes may have an impact on CWB’s future financial statements. IFRS 16 Leases In January 2016, the IASB issued IFRS 16 Leases (IFRS 16), which supersedes IAS 17 Leases (IAS 17). This standard provides principles for the recognition, measurement, presentation and disclosure of leases. The standard sets out a single lessee accounting model for all leases by eliminating the distinction between operating and financing leases. IFRS 16 requires lessees to recognize a right-of-use asset and lease liability on the consolidated balance sheets for most leases. Lessees will also recognize depreciation expense on the right-of-use asset and interest expense on the lease liability in the consolidated statements of income. Lessor accounting remains substantially unchanged other than additional disclosure requirements. IFRS 16 is effective for CWB’s fiscal year beginning November 1, 2019. There are two methods by which the new standard may be adopted: (1) a full retrospective approach with a restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment recognized in opening retained earnings as of the date of adoption. At initial application, CWB will elect to adopt the modified retrospective option permitted by IFRS 16, in which the lessee recognizes the cumulative effect, if any, on initial application in retained earnings as of November 1, 2019, subject to allowable and elected practical expedients. On initial adoption CWB intends to use the following recognition exemptions and practical expedients: • not apply the requirements of IFRS 16 to short-term and low value leases; • apply a single discount rate to a portfolio of leases with reasonably similar characteristics; • exclude initial direct costs relating to existing leases from the measurement of the right-of-use assets; • rely on previous assessment of whether leases are onerous in accordance with IAS 37 immediately before the date of initial application as an alternative to performing an impairment review; • use hindsight to determine the lease term where the lease contracts contain options to extend or terminate the lease; and • treat existing operating leases with a remaining term of less than 12 months at November 1, 2019 as short-term leases. CWB has completed the process of assessing existing contractual relationships to identify leases that will be recorded on the consolidated balance sheets upon the adoption of IFRS 16. The main impact for CWB will be recognizing right-of-use assets and lease liabilities for premises leases. Currently, premises leases are classified as operating leases, with lease expense recorded over the term of the lease with no asset or liability recorded on the consolidated balance sheets. Based on preliminary assessments, CWB expects to recognize right-of-use assets of approximately $75 million to $85 million, lease liabilities of $90 million to $100 million and a decrease in the common equity Tier 1 capital ratio of 81 CWB Financial Group 2019 Annual ReportConceptual Framework for Financial Reporting In March 2018, the IASB issued a revised version of the Conceptual Framework for Financial Reporting which assists the IASB in developing IFRS standards and serves as an accounting policy guide when no IFRS standard applies. The amendments provide revised definitions and recognition criteria for assets and liabilities, and guidance on different measurement bases. The IASB also issued amendments to IFRS standards to refer to the revised framework. The revisions are effective for CWB’s fiscal year beginning November 1, 2020 with early adoption permitted. CWB is in the process of assessing the impact of the revised framework. approximately 10 basis points upon transition to IFRS 16. The adoption of IFRS 16 is expected to have a nominal impact to ongoing profitability, as amortization of right-of-use assets and interest expense on lease liabilities will be mostly offset by a reduction in lease expense previously recognized in premises and equipment expense. The actual impact of adopting IFRS 16 on November 1, 2019, may differ from these estimates as CWB continues to review its calculations and refine certain inputs. Hedge Accounting In September 2019, the IASB issued amendments to hedge accounting requirements in IFRS 9, IAS 39 and IFRS 7 Financial Instruments: Disclosures which address the possible effects of uncertainties created by Inter-bank Offered Rate (IBOR) reform. The amendments are effective for CWB’s fiscal year beginning November 1, 2020 with early adoption permitted. CWB is in the process of assessing the impact of these amendments. 2. TRANSITION TO IFRS 9 Reconciliation of IAS 39 to IFRS 9 The following table details the impact of the transition to IFRS 9 on the consolidated balance sheets as at November 1, 2018. Reclassification adjustments reflect the movement of assets between measurement categories with no impact to shareholders’ equity or change to the assets’ carrying value. Remeasurement adjustments, which include changes to the allowance for credit losses related to the adoption of the impairment requirements of IFRS 9, result in a change to the carrying value of the assets and an impact to shareholders’ equity, net of tax. Refer to Note 1 for additional information regarding accounting policy changes related to the transition to IFRS 9. IAS 39 Measurement Category IFRS 9 Measurement Category IAS 39 Carrying Value as at October 31, 2018 Re- classification Re- measurement IFRS 9 Carrying Value as at November 1, 2018 Assets Cash resources Securities Amortized cost Available-for-sale n/a n/a FVOCI Amortized cost $ 126,396 26,825 - 153,221 $ - (26,825)(2) 26,825 (2) - $ (35)(1) - - (35) $ 126,361 - 26,825 153,186 Available-for-sale n/a n/a FVOCI 2,084,752 - 2,084,752 (2,084,752)(3) 2,084,752 (3) - - - - - 2,084,752 2,084,752 Loans, net of allowance for credit losses Amortized cost Amortized cost 26,204,599 - 19,810 (4) 26,224,409 Other Total Assets Liabilities and Equity Deposits Other Debt Total Liabilities Equity Preferred shares Common shares Retained earnings Share-based payment reserve Accumulated other comprehensive income Total Shareholders' Equity Non-controlling interests Total Equity Total Liabilities and Equity 578,891 $ 29,021,463 - - $ (7,633)(5) 12,142 571,258 $ 29,033,605 $ Amortized cost Amortized cost Amortized cost Amortized cost $ 23,699,957 725,149 2,007,854 26,432,960 $ - - - - $ - (10,592)(6) - (10,592) $ 23,699,957 714,557 2,007,854 26,422,368 265,000 744,701 1,649,196 23,937 (97,082) 2,585,752 2,751 2,588,503 $ 29,021,463 - - - - - - - - - $ - - 22,514 (7) - 220 (8) 22,734 - 22,734 12,142 265,000 744,701 1,671,710 23,937 (96,862) 2,608,486 2,751 2,611,237 $ 29,033,605 $ (1) Recognition of an allowance for credit losses related to cash resources measured at amortized cost. (2) Available-for-sale interest bearing deposits with regulated financial institutions have been reclassified to FVOCI as the securities met the SPPI criteria and are managed in a ‘hold to collect and sell’ business model. Cash and non-interest bearing deposits with regulated financial institutions as well as cheques and other items in transit continue to be measured at amortized cost. (3) Available-for-sale debt securities totaling $1,991,177 have been reclassified to FVOCI as the securities met the SPPI criteria and are managed in a ‘hold to collect and sell’ business model. Available-for-sale equity securities of $93,575 have been designated at FVOCI. (4) Decrease in the allowance for credit losses related to loans (see the ‘Reconciliation of Allowance for Credit Losses’ below). (5) Decrease in deferred tax assets of $7,563 combined with the recognition of an allowance for credit losses of $70 related to other financial assets. (6) Decrease in the allowance for credit losses related to committed but undrawn credit exposures and letters of credit of $11,419 (see the ‘Reconciliation of Allowance for Credit Losses’ below) partially offset by an increase in deferred tax liabilities of $827. (7) Cumulative after-tax impact of the adoption of IFRS 9. (8) After-tax impact of the recognition of an allowance for credit losses related to debt securities measured at FVOCI. n/a – not applicable. 82 CWB Financial Group 2019 Annual Report Reconciliation of Allowance for Credit Losses The reconciliation of CWB’s allowance for credit losses in accordance with IAS 39 and provisions for committed but undrawn credit exposures and letters of credit in accordance with IAS 37 to the corresponding amount determined under IFRS 9 as at November 1, 2018 follows: IAS 39 / IAS 37 as at October 31, 2018 IFRS 9 as at November 1, 2018 Specific Allowance Collective Allowance Total Re- measurement Stage 1 Stage 2 Stage 3 Total Debt securities at FVOCI(1)(2) $ - $ - $ - $ 301 $ 301 $ - $ - $ 301 Loans 27,027 101,502 128,529 (19,810) 57,999 23,693 27,027 108,719 Committed but undrawn credit exposures and letters of credit(3) - 18,264 18,264 (11,419) 2,787 4,058 - 6,845 Total(4) $ 27,027 $ 119,766 $ 146,793 $ (30,928) $ 61,087 $ 27,751 $ 27,027 $ 115,865 (1) The allowance for credit losses on debt securities measured at FVOCI is recorded in AOCI in the consolidated balance sheets. (2) Previously available-for-sale debt securities under IAS 39. (3) (4) Excludes an insignificant allowance for credit losses related to cash resources and other financial assets of $105. Included in other liabilities in the consolidated balance sheets. Accounting Policies for Financial Instruments Under IAS 39 event occurring after the impairment loss was recognized in net income, the impairment loss was reversed, with the reversal recognized in net income. The following accounting policies were applied to comparative information Securities Sold Under Repurchase Agreements and Purchased Under for CWB’s 2018 fiscal year end as prior periods were not restated upon Resale Agreements adoption of IFRS 9. Cash Resources Interest bearing deposits with regulated financial institutions included in cash resources were designated as available-for-sale and reported on the Securities purchased under resale agreements were designated as available-for-sale and reported on the consolidated balance sheets at fair value with changes in fair value reported in other comprehensive income, net of income taxes. consolidated balance sheets at fair value with changes in fair value reported Embedded Derivatives in other comprehensive income, net of income taxes. Securities Available-for-sale securities were 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 Certain derivatives embedded in other financial instruments were treated as separate derivatives when their economic characteristics and risk were not closely related to those of the host contract and the combined contract was not carried at fair value. Identified embedded derivatives were separated from the host contract and were recorded at fair value. taxes, until the security was sold or became impaired. Interest income Loans from securities, which included amortization of premiums and discounts, was recognized using the effective interest method in the consolidated Loans, including leases, were recorded at amortized cost and stated net of statements of income. Dividend income was recognized when the right to unearned income, unamortized premiums and allowance for credit losses receive payment was established, which was typically on the ex-dividend (see Note 8). Interest income was recorded using the effective interest date. method. Securities are purchased with the original intention to hold the instrument Loans were determined to be impaired when payments were contractually to maturity or until market conditions render alternative investments past due 90 days, where CWB had commenced realization proceedings, more attractive. Gains and losses realized on disposal of securities and or where CWB was of the opinion that the loan should be regarded as adjustments to record any impairment in value were included in non- impaired based on objective evidence. Objective evidence that a loan was interest income. At each reporting date, CWB assessed whether there was objective evidence that available-for-sale securities were impaired. Objective evidence that a security was impaired included significant financial difficulty of the issuer, indications that an issuer would enter bankruptcy or the lack of an active market for a security. Impairment losses on available-for-sale securities were recognized by reclassifying the cumulative loss recognized in other comprehensive income to the income statement as gains (losses) on securities, net. The reclassified amount was 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 increased and the increase could be objectively related to an impaired included significant financial difficulty of the borrower, default or delinquency of a borrower, breach of loan covenants or conditions, or indications that a borrower would enter bankruptcy. An exception could be made where CWB determined that the loan was well secured and in the process of collection, and the collection efforts were 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 were classified as impaired when a payment was 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 were classified as impaired when payment was 365 days in arrears. Impairment was measured as the difference between the carrying value of the loan at the time it was 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 could not be reliably estimated, either the fair value of the 83 CWB Financial Group 2019 Annual Reportsecurity underlying the loan, net of any expected realization costs, or Specific Allowance the current market price for the loan was used to measure the estimated realizable amount. Impaired loans were returned to performing status when the timely collection of both principal and interest were reasonably assured, all delinquent principal and interest payments were brought current, and all charges for loan impairment had been reversed. Loan fees integral to the yield on the loan, net of directly related costs, were amortized to interest income using the effective interest method. Premiums paid on the acquisition of loan portfolios were amortized to interest income using the effective interest method. The specific allowance included 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 8 for the identification process of impaired loans. If the amount of an impairment loss decreased in a subsequent period, and the decrease could be objectively related to an event occurring after the impairment was recognized, the specific loan impairment allowance was reduced accordingly. The reversal of impairment was recognized in the consolidated statements of income in provision for credit losses. Loans were considered past due when a customer had not made a payment by the contractual due date. These loans were not classified as impaired as Collective Allowance they were either less than 90 days past due or well secured and collection efforts were reasonably expected to result in repayment or restoring it to current status in accordance with CWB’s policy. Allowance for Credit Losses The collective allowance for credit risk included provisions for losses that had been incurred but had not yet been identified on an individual loan or account basis by CWB. As soon as information became available which identified losses on individual loans within the collective group, those loans were removed from the group and assessed on an individual basis for The allowance for credit losses was calculated on individual loans (specific impairment. allowance) and on groups of loans, committed but undrawn credit exposures and letters of credit assessed collectively (collective allowance). The collective allowance for credit risk was established by taking into The adequacy of the allowance for credit losses was reviewed at least consideration: quarterly. The allowance for credit losses related to drawn exposures was deducted from the outstanding loan balance. The allowance for credit losses related to committed but undrawn credit exposures and letters of credit was included with other liabilities. Losses expected from future events were not recognized. • 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 were such that the actual level of inherent losses at the balance sheet date was likely to be greater or less than that suggested by historical experience. 3. FINANCIAL INSTRUMENTS As a financial institution, most of CWB’s balance sheet is comprised of The use of financial instruments exposes CWB to credit, liquidity and financial instruments and the majority of net income results from gains, market risk. A discussion of how these are managed can be found in the losses, income and expenses related to the same. Risk Management section of the MD&A. Financial assets include cash resources, securities, securities purchased Income and expenses are classified as to source, either securities or loans under resale agreements, loans, derivative financial instruments and certain for income, and deposits or debt for expense. Gains (losses) on the sale of other assets. Financial liabilities include deposits, cheques and other items securities, net and fair value changes in certain derivatives are classified in transit, securities sold under repurchase agreements, derivative financial to non-interest income. Contingent consideration fair value changes are instruments, debt and certain other liabilities. classified as acquisition-related fair value changes in the consolidated statements of income. recorded in other non-interest income on the consolidated statements of income for the year ended October 31, 2018, reflecting sales proceeds less the carrying value of assets sold and related transaction costs. The carrying value of deposits transferred in fiscal 2018 totaled $30,409. The transactions were completed in fiscal 2018 with no further transfers conducted in fiscal 2019. 4. STRATEGIC TRANSACTIONS Equipment Loans and Leases and General Commercial Lending Assets On January 31, 2018, CWB acquired a portfolio of equipment loans and leases and general commercial lending assets, which added $845,990 to performing loans at fair value. No goodwill or intangible assets were included in the purchase. 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 CWB loans. Canadian Western Trust (CWT) On August 16, 2017, CWB announced that CWT, a wholly-owned subsidiary of CWB, will no longer offer self-directed account services to clients holding certain securities, and CWT initiated a process to appoint successor trustees for these accounts. Pre-tax gains of $4,030 related to these transactions are 84 CWB Financial Group 2019 Annual Report5. CASH RESOURCES Cash resources include highly liquid investments that are readily convertible collect and sell’ business model. Changes in fair value are reported in other to cash and are subject to an insignificant risk of change in value. Cheques comprehensive income, net of income taxes. and other items in transit included in cash resources are recorded at amortized cost and represent the net position of uncleared cheques and other items in transit. At October 31, 2019, the fair value of deposits with regulated financial institutions was $293,856 (October 31, 2018 – $26,825) with $20,355 (October 31, 2018 – $20,310) restricted from use in relation to the Interest bearing deposits with regulated financial institutions included in securitization of equipment financing leases and loans. cash resources are classified and measured at FVOCI as the requirements of the SPPI test are satisfied and the deposits are managed under a ‘hold to 6. SECURITIES Classification and Measurement The securities portfolio consists of both debt securities and preferred shares. The applicable measurement categories are as follows: Debt Securities Preferred Shares Debt securities, which are measured at FVOCI, have contractual cash flows CWB has made the irrevocable election to measure preferred shares, that satisfy the requirements of the SPPI test and are purchased with the which are equity instruments held for long-term investment purposes, at objective of collecting contractual cash flows and selling the assets in FVOCI. Dividends from preferred shares are recognized in interest income response to, or in anticipation of, changes in interest rate, credit or foreign in the consolidated statements of income. Unrealized gains and losses are currency risk, funding sources, terms or to meet liquidity requirements. recorded in OCI, net of tax, and are subsequently transferred directly to retained earnings if the instrument is sold. Debt securities measured at FVOCI are initially recorded at fair value, net of transaction costs. They are subsequently measured at fair value, with unrealized gains and losses recorded in OCI, net of tax, until the security is sold. Gains and losses realized upon sale of the securities are recorded in gains (losses) on securities, net in the consolidated statements of income. Interest income earned is recorded using the effective interest method. The analysis of securities at carrying value, by type and maturity or reprice date, follows: Measured at FVOCI Interest bearing deposits with regulated financial institutions(1) Debt securities issued or guaranteed by Canada A province or municipality Other debt securities(2) Designated at FVOCI Preferred shares Total Available-for-sale Interest bearing deposits with regulated financial institutions(1) Debt securities issued or guaranteed by Canada A province or municipality Other debt securities(2) Preferred shares Total (1) (2) Included in cash resources on the consolidated balance sheets. Includes securities issued or guaranteed by the United States of $76,033 (October 31, 2018 – $125,995). IFRS 9 Maturity/Reprice Within 1 Year 1 to 3 Years 3 to 5 Years As at October 31 2019 $ 293,856 $ - $ - $ 293,856 705,704 608,274 27,348 1,341,326 365,421 93,244 10,006 468,671 150,653 19,803 20,590 191,046 3,670 5,672 8,822 18,164 $ 1,519,304 $ 726,993 $ 66,766 $ 2,313,063 IAS 39 Maturity/Reprice Within 1 Year 1 to 3 Years 3 to 5 Years As at October 31 2018 $ 26,825 $ - $ - $ 26,825 322,435 599,537 403,844 1,325,816 55,222 257,475 209,128 521,825 61,205 54,951 27,380 143,536 14,022 57,654 21,899 93,575 $ 479,709 $ 969,617 $ 662,251 $ 2,111,577 85 CWB Financial Group 2019 Annual ReportUnrealized Gains and Losses Unrealized gains and losses related to debt securities and cash resources measured at FVOCI and equity securities designated at FVOCI are as follows: Measured at FVOCI Interest bearing deposits with regulated financial institutions Debt securities issued or guaranteed by Canada A province or municipality Other debt securities Designated at FVOCI Preferred shares Total Available-for-sale Interest bearing deposits with regulated financial institutions Debt securities issued or guaranteed by Canada A province or municipality Other debt securities Preferred shares Total IFRS 9 As at October 31, 2019 Amortized Cost(1) Unrealized Gains Unrealized Losses Fair Value $ 293,865 $ - $ 9 293,856 1,344,455 468,989 190,803 477 75 291 3,606 1,341,326 393 468,671 48 191,046 26,648 - 8,484 18,164 $ 2,324,760 $ 843 $ 12,540 $ 2,313,063 IAS 39 As at October 31, 2018 Amortized Cost(1) Unrealized Gains Unrealized Losses Fair Value $ 26,825 $ - $ - $ 26,825 1,362,647 531,798 146,610 110,696 - - 1 - 36,831 1,325,816 9,973 521,825 3,075 143,536 17,121 93,575 $ 2,178,576 $ 1 $ 67,000 $ 2,111,577 (1) The amortized cost of debt securities and cash resources measured at FVOCI is net of an allowance for credit losses of $196 (October 31, 2018 – n/a). During the year ended October 31, 2019, CWB disposed of preferred shares income on preferred shares that were held at October 31, 2019 totaled $999. with a fair value of $56,279. Related to the dispositions, CWB reclassified Dividend income recognized in the consolidated statements of income cumulative after-tax realized losses of $20,370 from AOCI to retained related to preferred shares disposed during the year totaled $1,355. earnings. Dividend income recognized in the consolidated statements of Impairment Impairment losses and recoveries on debt securities measured at FVOCI, During the year ended October 31, 2019, reversals for credit losses of estimated using an ECL approach, are recognized in the provision for credit $103 were recorded in the consolidated statements of income related to a losses in the consolidated statements of income and correspondingly reduction in the estimated allowance for credit losses on performing debt reduce the accumulated changes in fair value recorded in OCI. securities measured at FVOCI, all of which were in Stage 1 as at October 31, 2019. 86 CWB Financial Group 2019 Annual Report7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND PURCHASED UNDER RESALE AGREEMENTS Securities sold under repurchase agreements represent the sale of effected with a simultaneous agreement to sell them back at a specified Government of Canada securities by CWB effected with a simultaneous price on a future date, which is generally short term. The difference agreement to purchase them back at a specified price on a future date, between the cost of the purchase and the predetermined proceeds to be which is generally short term. The difference between the proceeds of received on a resale agreement is recorded as securities interest income. the sale and the predetermined cost to be paid on a resale agreement is recorded as deposit interest expense. Securities sold under repurchase agreements and purchased under resale agreements are classified and measured at amortized cost on the Securities purchased under resale agreements represent the purchase consolidated balance sheets. of Government of Canada or United States Treasury securities by CWB 8. LOANS, IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans at Amortized Cost Loans, including leases, which are measured at amortized cost and the requirements of the SPPI test. Loan fees integral to the yield, net of stated net of unearned income, unamortized premiums or discounts and transaction costs, are amortized to interest income using the effective allowance for credit losses, are originated or purchased with the objective interest method. of collecting contractual cash flows and generate cash flows that satisfy The composition of CWB’s loan portfolio by geographic region and industry sector follows: ($ millions) Personal(1) Business BC AB ON SK MB QC Other Total Composition Percentage Oct. 31 2019 Oct. 31 2018 $ 1,509 $ 1,558 $ 2,122 $ 261 $ 126 $ - $ 114 $ 5,690 20 % 20 % General commercial loans 2,497 2,766 2,339 Equipment financing and leasing(2) 772 1,398 Commercial mortgages Real estate project loans 2,343 2,160 2,227 1,052 Oil and gas production loans - 139 1,385 144 275 - 298 463 289 132 16 266 248 137 47 - 269 586 15 17 - 165 8,600 30 28 340 5,192 - 2 - 5,088 3,752 155 18 18 13 1 18 19 15 - Total(3) Composition Percentage October 31, 2019 October 31, 2018 7,839 7,515 4,143 1,198 698 887 507 22,787 $ 9,348 $ 9,073 $ 6,265 $ 1,459 $ 824 $ 887 $ 621 $ 28,477 80 100 % 100 % 80 33% 32 % 22 % 5 % 3 % 3 % 2 % 100 % 34% 32 % 21 % 5 % 3 % 3 % 2 % 100 % Includes mortgages securitized through the National Housing Act Mortgage Backed Securities program reported on-balance sheet of $837 (October 31, 2018 – $609) (see Note 9). Includes securitized leases and loans reported on-balance sheet of $1,613 (October 31, 2018 – $1,622) (see Note 9). (1) (2) (3) This table does not include an allocation of the allowance for credit losses. Credit Quality Internal Risk Ratings Within CWB’s loan portfolios, borrowers are assigned a borrower risk ratings, borrowers that trigger a review based on adverse changes in rating (BRR) that reflects the credit quality of the obligor using industry and financial performance and borrowers requiring or requesting changes to sector-specific risk models and expert credit judgment. BRRs are assessed credit facilities. Each BRR has a PD calibrated against it, which is estimated and assigned at the time of loan origination and reviewed at least annually, based on CWB’s historical loss experience for each risk segment or risk with the exception of consumer loans and single-unit residential mortgages. rating level, adjusted for forward-looking information. CWB’s BRR scale More frequent reviews are conducted for borrowers with weaker risk broadly aligns to external ratings as follows: Description CWB Rating Category Standard & Poor’s Moody’s Investor Services Investment grade or low risk Non-investment grade or medium risk Watchlist or high risk Impaired 1 to 6M 6L to 8L 9H to 10L 11 to 12 AAA to BBB- BB+ to CCC+ Aaa to Baa3 Ba1 to Caa1 CCC and below Caa2 and below Default Default 87 CWB Financial Group 2019 Annual ReportCarrying Value of Exposures by Risk Rating Gross carrying amounts of loans and the contractual amounts of committed but undrawn credit exposures and letters of credit, categorized based on internal risk ratings, are as follows: Loans – Personal Low risk Medium risk Watchlist or high risk Impaired Total Allowance for credit losses Total, net of allowance for credit losses Loans – Business Investment grade or low risk Non-investment grade or medium risk Watchlist or high risk Impaired Total Allowance for credit losses Total, net of allowance for credit losses Total loans Allowance for credit losses Total Loans, Net of Allowance for Credit Losses Committed but Undrawn Credit Exposures and Letters of Credit Investment grade or low risk Non-investment grade or medium risk Watchlist or high risk Impaired Total Allowance for credit losses Total, Net of Allowance for Credit Losses Impaired and Past Due Loans As at October 31, 2019 Performing Stage 1 Stage 2 Impaired Stage 3 Total $ 2,955,248 $ 48,534 $ - $ 3,003,782 2,034,651 507,047 - 2,541,698 - 114,085 - 114,085 - - 30,268 30,268 4,989,899 (1,614) 669,666 (1,469) 30,268 (1,036) 5,689,833 (4,119) 4,988,285 668,197 29,233 5,685,714 1,667,859 32,794 - 1,700,653 20,059,887 617,162 - 20,677,049 - 291,210 - 291,210 - - 117,982 117,982 21,727,746 (59,957) 941,166 (21,830) 117,982 (24,928) 22,786,894 (106,715) 21,667,789 919,336 93,054 22,680,179 26,717,645 1,610,832 148,250 28,476,727 (61,571) (23,299) (25,964) (110,834) $26,656,074 $ 1,587,533 $ 122,286 $28,365,893 $ 1,029,967 $ 2,655 $ - $ 1,032,622 4,518,220 108,812 - 4,627,032 - 19,484 - 19,484 - - - - 5,548,187 (2,601) 130,951 (1,590) - - 5,679,138 (4,191) $ 5,545,586 $ 129,361 $ - $ 5,674,947 Outstanding gross loans and impaired loans, net of allowance for credit losses, by loan type, are as follows: IFRS 9 As at October 31, 2019 IAS 39 As at October 31, 2018 Gross Amount Gross Impaired Amount(1)(2) Stage 3 Allowance Net Impaired Loans Gross Amount Gross Impaired Amount(1)(2) Specific Allowance Net Impaired Loans $ 5,689,833 $ 30,268 $ 1,036 $ 29,232 $ 5,247,160 $ 28,961 $ 647 $ 28,314 Personal Business General commercial loans 8,599,527 26,030 7,030 19,000 7,458,010 21,815 5,484 16,331 Equipment financing and leasing 5,191,901 43,767 15,134 28,633 4,779,005 47,800 15,606 32,194 Commercial mortgages(3) 5,088,193 22,950 2,764 20,186 4,865,183 29,376 3,290 26,086 Real estate project loans 3,752,480 5,446 - 5,446 3,854,681 9,920 2,000 7,920 Oil and gas production loans 154,793 19,789 - 19,789 129,089 - - - Total $ 28,476,727 $ 148,250 $ 25,964 $ 122,286 $26,333,128 $ 137,872 $ 27,027 $ 110,845 (1) Under IFRS 9, all loans that are over 90 days past due are considered impaired. Under IAS 39, residential mortgages guaranteed or insured for both principal and interest by the Canadian government, a province, or a Canadian government agency and loans that were fully secured and in the process of collection were not classified as impaired until payments were 365 or 180 days in arrears, respectively. (2) Gross impaired loans include foreclosed assets with a carrying value of $4,217 (October 31, 2018 – $6,628). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations. (3) Multi-family residential mortgages are included in commercial mortgages. During the year, interest recognized as income on impaired loans totaled $3,328 (2018 – $5,743). 88 CWB Financial Group 2019 Annual Report Outstanding impaired loans, net of allowance for credit losses, by provincial location of security are as follows: Alberta British Columbia Ontario Saskatchewan Manitoba Quebec Other Total IFRS 9 As at October 31, 2019 IAS 39 As at October 31, 2018 Gross Impaired Amount Stage 3 Allowance Net Impaired Loans Gross Impaired Amount Specific Allowance Net Impaired Loans $ 77,891 $ 10,692 $ 67,199 $ 77,018 $ 12,627 $ 64,391 17,488 1,349 16,139 13,699 2,069 11,630 20,126 4,157 15,969 16,829 3,016 13,813 10,529 2,181 8,348 8,957 1,330 7,627 11,831 4,795 7,036 9,873 4,006 5,867 6,622 1,886 4,736 4,826 2,345 2,481 3,763 904 2,859 6,670 1,634 5,036 $ 148,250 $ 25,964 $ 122,286 $ 137,872 $ 27,027 $ 110,845 Loans are considered past due when a customer has not made a payment by the contractual due date. The following table presents the carrying value of loans that are contractually past due but not classified as impaired: As at October 31, 2019 1 - 30 days 31 - 60 days 61 - 90 days More than 90 days(1) Total Personal Business Total $ 40,138 143,206 $ 18,902 62,468 $ 591 10,764 $ - - $ 59,631 216,438 $ 183,344 $ 81,370 $ 11,355 $ - $ 276,069 As at October 31, 2018 $ 169,739 $ 49,387 $ 9,779 $ 1,970 $ 230,875 (1) Under IFRS 9, all loans that are over 90 days past due are considered impaired. Under IAS 39, residential mortgages guaranteed or insured for both principal and interest by the Canadian government, a province, or a Canadian government agency and loans that were fully secured and in the process of collection were not classified as impaired until payments were 365 or 180 days in arrears, respectively. Allowance for Credit Losses Allowance for credit losses related to performing loans is estimated using an looking information, and certain other criteria such as 30 days past due and ECL approach that incorporates a number of underlying assumptions which migration to watchlist status. involve a high degree of management judgment and can have a significant impact on financial results. The allowance for credit losses is CWB’s most significant accounting estimate. Significant key drivers impacting the estimation of ECL, which are interrelated, include: Forecasting Forward-looking Information for Multiple Scenarios Forward-looking information is incorporated into both the assessment of whether a loan has experienced a SICR since its initial recognition and the estimation of ECL. The models used to estimate ECL consider macroeconomic factors that are most closely correlated with credit risk • changes in internal risk ratings attributable to a borrower or instrument in the relevant portfolios and are calibrated to consider CWB’s geographic reflecting changes in credit quality; diversification. • thresholds used to determine when a borrower has experienced a SICR; and • changes in forward-looking information, specifically related to variables to which the ECL models are calibrated. To account for the non-linear nature of projected losses, CWB incorporates multiple probability-weighted macroeconomic scenarios into the estimation of ECL. Each scenario includes a projection of all relevant macroeconomic variables for a five year period. While the base case scenario represents the The inputs and models used for estimating ECL may not always capture all best estimate of projected macroeconomic variables, additional scenarios emerging market conditions at the reporting date and as such, qualitative represent more optimistic or pessimistic outcomes. To capture a wide range adjustments based on expert judgment that consider reasonable and of possible outcomes, CWB simulates multiple macroeconomic scenarios supportable information may be incorporated. that are above or below the base case based on historical and current trends and with consideration for the degree of uncertainty surrounding Assessment of Significant Increases in Credit Risk macroeconomic outlooks. The determination of whether a loan has experienced a SICR has a significant impact on the estimation of allowance for credit losses as 12-month ECL is recorded for loans in Stage 1 and lifetime ECL are recorded for loans that have migrated to Stage 2. Movement between Stages 1 and 2 is impacted by changes in borrower-specific risk characteristics as well as changes ECL is sensitive to changes in both the base case scenario as well as the incorporation of multiple probability-weighted macroeconomic scenarios. Incorporating multiple probability-weighted macroeconomic scenarios into ECL estimates resulted in an increase of approximately 9% to the performing loan allowance for credit losses, relative to the base case scenario, as at in applicable forward-looking information. The main factors considered October 31, 2019. in assessing whether a loan has experienced a SICR are relative changes in internal risk ratings since initial recognition, incorporating forward- 89 CWB Financial Group 2019 Annual Report The primary macroeconomic variables, over the next 12 months and the remaining forecast period, incorporated into the estimation of ECL are as follows: Macroeconomic Variable Annual GDP growth Unemployment rate MLS housing resale price growth (decline) Three month treasury bill rate U.S. dollar/Canadian dollar exchange rate Oil price (U.S. dollar per barrel) (1) Represents one standard deviation above the base case scenario. (2) Represents one standard deviation below the base case scenario. Base Scenario Optimistic(1) Pessimistic(2) Next 12 Months Remaining Forecast Period Next 12 Months Remaining Forecast Period Next 12 Months Remaining Forecast Period 1.5% 6.0% 3.0% 1.6% $ $ 1.32 62 $ $ 1.7% 6.3% 1.9% 1.8% 1.33 61 2.1% 5.8% 6.0% 2.2% $ $ 1.36 73 $ $ 3.1% 5.7% 10.9% 2.7% 1.44 81 1.0% 6.3% 0.1% 1.1% $ $ 1.28 52 $ $ 0.4% 7.0% (7.2)% 0.9% 1.21 40 The primary macroeconomic variables impacting ECL for personal loan rates and interest rates will generally correlate with higher expected credit portfolios are unemployment rates and Multiple Listings Service (MLS) losses while increases in oil price, annual gross domestic product (GDP) housing resale price growth. Business portfolios are impacted by all of the growth, and MLS housing resale price growth, and the U.S. dollar/Canadian variables in the table above, to varying degrees. Increases in unemployment dollar exchange rate will generally result in lower ECL. Stage 3 Allowance for Credit Losses For impaired loans in Stage 3, the allowance for credit losses is measured either the fair value of the security underlying the loan, net of any expected as the difference between the carrying value of the loan at the time it is realization costs, or the current market price for the loan may be used to classified as impaired and the present value of the cash flows CWB expects measure the estimated realizable amount. Security can vary by type of to receive, using the original effective interest rate of the loan. When the loan and may include real property, working capital, guarantees, or other amounts and timing of future cash flows cannot be reliably estimated, equipment. 90 CWB Financial Group 2019 Annual ReportReconciliation A reconciliation of changes in the allowance for credit losses related to loans, committed but undrawn credit exposures and letters of credit under IFRS 9 follows: Personal Balance at beginning of year Transfers to (from) Stage 1(1) Stage 2(1) Stage 3(1) Net remeasurement(2) New originations Derecognitions and maturities Provision for (reversal of) credit losses(3) Write-offs Recoveries Balance at end of year Business Balance at beginning of year Transfers to (from) Stage 1(1) Stage 2(1) Stage 3(1) Net remeasurement(2) New originations Derecognitions and maturities Provision for (reversal of) credit losses(3) Write-offs Recoveries Balance at end of year Total Allowance for Credit Losses(4) IFRS 9 2019 Performing Stage 1 Stage 2 Impaired Stage 3 Total $ 1,461 $ 1,181 $ 647 $ 3,289 211 (211) - - (369) 389 (20) - (10) (96) 106 - (1,236) 594 1,860 1,218 1,870 - - 1,870 (307) (377) (172) (856) 159 299 1,774 2,232 - - (1,422) (1,422) - - 37 37 1,620 1,480 1,036 4,136 $ 59,325 $ 26,570 $ 26,380 $ 112,275 13,802 (13,802) - - (5,780) 6,788 (1,008) - (158) (3,231) 3,389 - (34,446) 14,896 53,477 33,927 46,846 - - 46,846 (17,037) (7,812) (295) (25,144) 3,227 (3,161) 55,563 55,629 - - (60,844) (60,844) - - 3,829 3,829 62,552 23,409 24,928 110,889 $ 64,172 $ 24,889 $ 25,964 $ 115,025 Represented by: Loans Committed but undrawn credit exposures and letters of credit(4) Total Allowance for Credit Losses(5) $ 61,571 $ 23,299 $ 25,964 $ 110,834 2,601 1,590 - 4,191 $ 64,172 $ 24,889 $ 25,964 $ 115,025 (1) Represents stage movements prior to remeasurement of the allowance for credit losses. (2) Represents credit risk changes as a result of significant increases in credit risk, changes in credit risk that did not result in a transfer between stages, changes in model inputs and assumptions, including changes in forward-looking macroeconomic forecasts and qualitative adjustments, and changes due to partial repayment. Included in the provision for credit losses in the consolidated statements of income. Included in other liabilities in the consolidated balance sheets. (3) (4) (5) Allowance for credit losses related to debt securities measured at FVOCI, cash resources and other financial assets classified at amortized cost were excluded from the table above. See Note 6 for details related to the allowance for credit losses on debt securities measured at FVOCI. Cash resources and other financial assets classified at amortized cost are presented in the consolidated balance sheets, net of allowance for credit losses. The following table shows the changes in the allowance for credit losses under IAS 39: Balance at beginning of year Provision for credit losses Write-offs Recoveries Balance at End of Year Represented by: IAS 39 2018 Specific Allowance Collective Allowance $ 16,617 47,789 (45,359) 7,980 27,027 $ $ 119,298 468 - - 119,766 $ Loans Committed but undrawn credit exposures and letters of credit Total Allowance $ 27,027 - $ 27,027 $ 101,502 18,264 119,766 $ Total $ $ 135,915 48,257 (45,359) 7,980 146,793 $ $ 128,529 18,264 146,793 91 CWB Financial Group 2019 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 risk 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 related to securitization activities for the cash proceeds received (see Note 16). During 2019, CWB securitized equipment financing leases and loans of $784,125 (2018 – $1,178,726) which were sold to thrid parties for cash proceeds of $704,392 (2018 – $1,063,792). 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 the Canada Mortgage and 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. 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 related to securitization activities (see Note 16). During 2019, CWB securitized residential mortgages of $203,455 which were sold to the CHT for cash proceeds of $202,871 (2018 – $184,213 sold for cash proceeds of $181,635) and did not sell any securitized residential mortgages directly to third party investors (2018 – nil). 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 7). These securities are not derecognized and the cash proceeds from the sale are recognized within other liabilities on the consolidated balance sheets. Details about the nature of transferred financial assets that do not qualify for derecognition and the associated liabilities are as follows: Transferred Assets that do not Qualify for Derecognition Securitized leases and loans Securitized residential mortgages Securities sold under repurchase agreements Associated Liabilities(1) Net Position As at October 31, 2019 As at October 31, 2018 Carrying Value Fair Value Carrying Value Fair Value $ 1,613,426 $ 1,616,653 $ 1,621,943 $ 1,690,933 442,310 440,983 277,942 271,492 29,965 29,965 95,126 95,126 2,085,701 2,087,601 1,995,011 2,057,551 1,943,764 1,965,313 1,852,980 1,786,645 $ 141,937 $ 122,288 $ 142,031 $ 270,906 (1) Associated liabilities consist of $1,469,509 related to securitized leases and loans (October 31, 2018 – $1,479,133), $444,290 related to residential mortgages securitized through the NHA MBS program (October 31, 2018 – $278,721) and $29,965 related to securities sold under repurchase agreements (October 31, 2018 – $95,126). Additionally, CWB has securitized residential mortgages through the NHA MBS program totaling $394,342 with a fair value of $393,159 (2018 – $330,599 with a fair value of $322,926) that were not transferred to third parties. 92 CWB Financial Group 2019 Annual Report 10. PROPERTY AND EQUIPMENT Land is carried at cost. Buildings, equipment and furniture, and leasehold When components of an item of property and equipment have different improvements are carried at cost less accumulated depreciation and useful lives, they are accounted for as separate items. Gains and losses impairment. Depreciation is calculated primarily using the straight-line method over the 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 estimated useful life of the asset, as follows: may not be recoverable. • Buildings: 20 years • Equipment and furniture: 3 to 10 years • Leasehold improvements: over the shorter of the term of the lease and the remaining useful life Cost Balance at November 1, 2018 Additions Disposals Leasehold Improvements Land and Buildings Computer Equipment Office Equipment Total $ 76,505 $ 18,905 $ 36,701 $ 44,321 $ 176,432 4,277 165 5,713 5,326 15,481 - (417) (217) (495) (1,129) Balance at October 31, 2019 80,782 18,653 42,197 49,152 190,784 Accumulated Depreciation and Impairment Balance at November 1, 2018 Depreciation for the year Disposals Balance at October 31, 2019 51,324 6,129 26,140 33,741 117,334 4,389 - 55,713 564 (307) 6,386 3,539 (217) 29,462 2,810 (494) 36,057 11,302 (1,018) 127,618 Net Carrying Amount at October 31, 2019 $ 25,069 $ 12,267 $ 12,735 $ 13,095 $ 63,166 Cost Balance at November 1, 2017 $ 72,398 $ 18,754 $ 31,444 $ 40,842 $ 163,438 Additions Disposals 4,179 151 5,262 3,573 13,165 (72) - (5) (94) (171) Balance at October 31, 2018 76,505 18,905 36,701 44,321 176,432 Accumulated Depreciation and Impairment Balance at November 1, 2017 Depreciation for the year Disposals Balance at October 31, 2018 47,263 5,580 23,461 31,019 107,323 4,133 549 2,684 2,816 10,182 (72) - (5) (94) (171) 51,324 6,129 26,140 33,741 117,334 Net Carrying Amount at October 31, 2018 $ 25,181 $ 12,776 $ 10,561 $ 10,580 $ 59,098 93 CWB Financial Group 2019 Annual Report 11. GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess Goodwill is stated at cost less impairment losses. Goodwill is reviewed of the fair value of the purchase consideration, including any amount of any for impairment annually or more frequently if there are indications that non-controlling interest in the acquiree, over the net recognized amounts of impairment may have occurred. Goodwill is allocated to cash-generating the identifiable assets, including identifiable intangible assets, and liabilities units for the purpose of impairment testing considering the business level assumed. For the purposes of calculating goodwill, fair values of acquired at which goodwill is monitored for internal management purposes. On this assets and liabilities are determined by reference to market values or by basis, CWB’s cash-generating units with goodwill allocated are: 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. • CWB Maxium Financial Inc. (MX); • CWB National Leasing Inc. (NL); • CWB McLean & Partners Wealth Management Ltd. (M&P); and • CWB Wealth Management Ltd. (WM). Balance at November 1, 2018 Partial ownership change Balance at October 31, 2019 Balance at November 1, 2017 Partial ownership change Balance at October 31, 2018 Intangible Assets MX NL M&P WM Total $ 38,869 - $ 35,776 - $ 6,575 13 $ 3,948 211 $ 85,168 224 $ 38,869 $ 35,776 $ 6,588 $ 4,159 $ 85,392 $ 38,869 - $ 35,776 - $ 7,099 (524) $ 3,925 23 $ 85,669 (501) $ 38,869 $ 35,776 $ 6,575 $ 3,948 $ 85,168 Intangible assets represent identifiable non-monetary assets without Amortization of acquisition-related intangible assets with finite useful lives physical substance and are acquired either separately through a business is reported in other expenses and amortization of internally generated combination, or generated internally. Intangible assets with a finite useful software is included in premises and equipment expenses on the life are recorded at cost less any accumulated amortization and impairment consolidated statements of income and provided on a straight-line basis losses. Certain intangible assets, such as trademarks and trade names, have from the date at which it is available for use as follows: an indefinite useful life. These indefinite life intangibles are not amortized but are tested for impairment at least annually or more frequently if events • Software and related assets: or changes in circumstances indicate that impairment may have occurred. • Customer relationships: The assets’ useful lives are assessed at least annually. • Non-competition agreements: • Other: 3 to 15 years 10 to 15 years 4 to 5 years 3 to 5 years 94 CWB Financial Group 2019 Annual Report Cost Balance at November 1, 2018 Additions Partial ownership change Disposals Software and Related Assets Customer Relation- ships Trademarks and Tradenames Non- competition Agreements Other Total $ 184,271 $ 59,211 $ 6,564 $ 11,084 $ 5,150 $ 266,280 34,073 - - - - 34,073 - 4 23 - - 27 (749) - - - - (749) Balance at October 31, 2019 217,595 59,215 6,587 11,084 5,150 299,631 Accumulated Amortization Balance at November 1, 2018 Amortization Disposals 60,066 29,745 - 11,039 4,640 105,490 16,135 4,657 - 20 330 21,142 (749) - - - - (749) Balance at October 31, 2019 75,452 34,402 - 11,059 4,970 125,883 Net Carrying Amount at October 31, 2019 $ 142,143 $ 24,813 $ 6,587 $ 25 $ 180 $ 173,748 Cost Balance at November 1, 2017 $ 154,761 $ 59,606 $ 6,632 $ 11,153 $ 5,150 $ 237,302 Additions 31,118 - - - - 31,118 Partial ownership change - (395) (68) (69) - (532) Disposals (1,608) - - - - (1,608) Balance at October 31, 2018 184,271 59,211 6,564 11,084 5,150 266,280 Accumulated Amortization Balance at November 1, 2017 Amortization Disposals 48,462 24,709 - 10,288 4,113 87,572 13,212 5,036 - 751 527 19,526 (1,608) - - - - (1,608) Balance at October 31, 2018 60,066 29,745 - 11,039 4,640 105,490 Net Carrying Amount at October 31, 2018 $ 124,205 $ 29,466 $ 6,564 $ 45 $ 510 $ 160,790 Impairment The carrying amounts of CWB’s intangible assets with finite useful lives are • Cash flows are projected based on past experience, actual operating reviewed at each reporting date to determine whether there is any indication results and the five-year future business plan. Cash flows for a further 15- of impairment. If an indication exists, CWB tests for impairment. For year period are extrapolated using a constant growth rate of 1.7% (2018 goodwill and intangible assets with indefinite useful lives, the impairment – 2.0%), which is based on the long-term forecast Canadian GDP growth tests are performed each year. rates. The forecast period is based on CWB’s long-term perspective with 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 costs of disposal, and its value in use. If the respect to the operation of these cash-generating units. • A pre-tax discount rate of 9.3% (2018 – 10.1%) is applied in determining the recoverable amounts, which is comprised of a risk-free interest rate and a market risk premium. recoverable amount is less than the carrying value, an impairment loss is The key assumptions described above may change as economic and market charged to the consolidated statements of income. conditions change. CWB estimates that reasonable possible changes in The recoverable amounts for CWB’s cash-generating units are calculated based on the higher of their value in use and fair value less costs of disposal. these assumptions are not expected to cause the recoverable amounts of the cash-generating units to decline below the carrying amounts. Fair value less costs of disposal is determined by using a market-based No impairment losses on goodwill or intangible assets were identified approach of the associated cash-generating unit, whereby the fair value is during 2019 or 2018. determined using comparable market transactions for similar businesses. Value in use is 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 is determined similarly as in the comparative year. The calculation of the value in use is based on the following key assumptions: 95 CWB Financial Group 2019 Annual Report12. DERIVATIVE FINANCIAL INSTRUMENTS Interest rate, foreign exchange, bond forward and equity swaps/contracts highly probable future cash flows attributable to a recognized asset or such as futures, options, swaps, floors and rate locks are entered into liability or a forecast transaction (cash flow hedges). On an ongoing basis, for risk management purposes in accordance with CWB’s asset liability the derivatives used in hedging transactions are assessed to determine management policies. It is CWB’s policy not to utilize derivative financial whether they are effective in offsetting changes in fair values or cash flows instruments for trading or speculative purposes. Interest rate swaps and of the hedged items. If a hedging transaction becomes ineffective or if the floors are primarily used to reduce the impact of fluctuating interest rates. derivative is not designated as a cash flow hedge, any subsequent change in Equity swaps are used to reduce earnings volatility related to restricted the fair value of the hedging instrument is recognized in net income. share units and deferred share units linked to CWB’s common share price. Bond forward contracts are used to manage interest rate risk related to CWB’s participation in the NHA MBS program. Foreign exchange contracts are used for the purposes of meeting the needs of clients, day-to-day business and liquidity management. Use of Derivatives Potential sources of ineffectiveness can be attributed to the differences between hedging instruments and the hedged items: • Mismatches in terms of hedged item and hedging instrument, such as the repricing dates and frequency of payments. • The effect of the counterparty and CWB’s own credit risk. CWB enters into derivative financial instruments for risk management Interest income received or interest expense paid on derivative financial purposes. Derivative financial instruments are financial contracts whose instruments designated as cash flow hedges is accounted for on the accrual value is derived from an underlying interest rate, foreign exchange rate, basis and recognized as interest expense over the term of the hedge 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; • bond forward contracts, which are a contractual obligation to purchase or sell a bond at a predetermined future date; • 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 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 consolidated 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 consolidated statements of income. dividends of a notional CWB common share. Interest Rate Risk Embedded Derivatives When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments. If the host contract is a financial asset within the scope of IFRS 9, the classification and measurement criteria are applied to the entire hybrid instrument and there is no separation of the embedded derivative. If the host contract is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are treated as separate derivatives when their economic characteristics and risk are not closely related to those of the host contract, unless an election is made to measure the contract at fair value. Identified embedded derivatives that are separated from the host contract are recorded at fair value. Fair Value Derivative financial instruments are recorded on the balance sheet at fair value 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 non- interest income on the consolidated statements of income. 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, liabilities or firm commitments (fair value hedges), or a hedge of Interest rate risk arises when changes in interest rates affect the cash flows, earnings and values of assets and liabilities. CWB has a policy of interest rate risk management to maintain an appropriate balance between earnings volatility and economic value volatility while keeping both within their respective risk appetite limits. 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 achieved partly by using interest rate swaps and bond forward contracts as a hedge to interest rate changes. Only the changes in fair value and cash flows related to changes in benchmark interest rates are designated as hedges for accounting purposes. Other risk elements present in these relationships, such as credit risk, have a less significant impact on changes in fair value and cash flows, and are not designated as accounting hedges. The hedging ratio is established by matching the notional amount of the hedging instrument with the notional amount of the hedged item. The existence of an economic relationship between the hedging instrument and hedged item is based on the reference interest rates, tenors, repricing dates and maturities, and the notional or par amounts. Equity Risk Equity risk arises when changes in CWB common share price affects the payout of share-based payment plans (see Note 18) that have not yet vested. CWB has a policy to hedge a portion of the earnings volatility related to restricted share unit (RSU) and deferred share unit (DSU) grants by using equity swaps, where CWB makes periodic interest payments to a counterparty and receives the capital gain or loss plus dividends of a CWB common share. 96 CWB Financial Group 2019 Annual Report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, 2019 As at October 31, 2018 Favourable Contracts Unfavourable Contracts Favourable Contracts Unfavourable Contracts Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Cash Flow Hedges Interest rate risk Interest rate swaps $ 4,952,000 $ 42,855 $ 1,876,000 $ (13,104) $ - $ - $ 4,908,000 $ (65,130) Bond forward contracts - - 20,000 (91) 15,000 55 - - Equity risk Equity swaps Fair Value Hedges Interest rate risk 13,084 3,049 6,184 (159) 9,008 2,203 9,277 (1,339) Interest rate swaps 19,746 20 20,000 (58) - - - - Not Designated as Accounting Hedges Foreign exchange contracts 106,575 1,005 164,338 (604) 27,195 238 161,933 (2,307) Equity swaps Total 5,319 886 - - - - 5,842 (805) $ 5,096,724 $ 47,815 $ 2,086,522 $ (14,016) $ 51,203 $ 2,496 $ 5,085,052 $ (69,581) The aggregate contractual or notional amount of the derivative financial The average fair values of the derivative financial instruments on hand instruments on hand, the extent to which instruments are favourable or during the year are set out in the following table: unfavourable and, thus, the aggregate fair values of these financial assets and liabilities can fluctuate significantly from time to time. Favourable derivative financial instruments (assets) Unfavourable derivative financial instruments (liabilities) 2019 2018 $ $ 40,853 22,174 $ $ 9,248 49,001 The following table summarizes the maturities of derivative financial instruments and the weighted average interest rates paid and received on contracts: As at October 31, 2019 Maturity As at October 31, 2018 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 Cash Flow Hedges Interest rate risk Interest rate swaps(1) $2,100,000 1.92% $4,728,000 2.01% $1,070,000 1.72% $3,838,000 1.98% Bond forward contracts(2) 20,000 - - - 15,000 - - - Equity risk Equity swaps(3) Fair Value Hedges Interest rate risk 9,365 2.58% 9,903 2.62% 9,233 2.85% 9,052 2.86% Interest rate swaps(4) - - 39,746 1.72% - - - - Not Designated as Accounting Hedges Foreign exchange contracts(5) Equity swaps(6) Total 270,913 - - - 189,128 - - - 5,319 $2,405,597 2.47% - - 5,842 2.65% - - $4,777,649 $1,289,203 $3,847,052 (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 cash flow hedges outstanding at October 31, 2019 mature between November 2019 and September 2024. (2) Bond forward contracts outstanding at October 31, 2019 mature in December 2019. (3) Equity swaps designated as accounting hedges outstanding at October 31, 2019 mature between June 2020 and June 2022. (4) (5) Foreign exchange contracts outstanding at October 31, 2019 mature between November 2019 and April 2020. The contractual interest rate is not meaningful for foreign exchange contracts. (6) Equity swaps not designated as accounting hedges outstanding at October 31, 2019 mature in June 2020. Interest rate swaps designated as accounting fair value hedges outstanding at October 31, 2019 mature in August and December 2022. 97 CWB Financial Group 2019 Annual Report The following tables present the details of the hedged items categorized by their hedging relationships: Cash Flow Hedges Interest rate risk Variable rate liabilities Statement of Consolidated Balance Sheets Line Item As at October 31, 2019 Changes in Fair Value Used for Calculating Hedge Ineffectiveness AOCI - Cash Flow Hedges Deposits - Personal, Deposits - Business and government $ 94,881 $ 21,991 Forecasted NHA MBS issuances n/a (146) (224) Equity risk Restricted share units n/a - not applicable Other - Other liabilities 2,024 1,091 As at October 31, 2019 Carrying Amount of Hedged Item Accumulated Amount of Fair Value Adjustments on the Hedged Item Assets Liabilities Assets Liabilities Consolidated Balance Sheets Line Item Changes in Fair Value Used for Calculating Hedge Ineffectiveness Fair Value Hedges Interest rate risk Fixed rate assets $ 40,393 $ - $ (13) $ - Securities - Issued or guaranted by a province or municipality, Other debt securities $ (38) The following table contains information regarding the effectiveness of the hedging relationships, as well as the impacts on the consolidated statements of income and consolidated statements of comprehensive income: Cash Flow Hedges Interest rate risk Interest rate swaps(1) Bond forward contracts(1) Equity risk Equity swaps(2) Fair Value Hedges Interest rate risk Interest rate swaps 2019 Change in Fair Value of Hedging Instrument Hedge Ineffectiveness Recognized in Income Change in the Fair Value of the Hedging Instrument Recognized in OCI Amount Reclassified from AOCI - Cash Flow Hedges to Income $ 94,881 (146) $ - - $ 69,538 (99) $ (3) 147 2,024 - 1,922 (527) (38) - - - (1) Amounts reclassified from OCI into Interest Expense – Deposits (2) Amounts reclassified from OCI into Non-interest expenses – Salaries and employee benefits The following table shows a reconciliation of the accumulated other comprehensive income from derivatives designated as cash flow hedges and an analysis of other comprehensive income relating to hedge accounting: Accumulated Other Comprehensive Income - Cash Flow Hedges Balance at beginning of year Amounts recognized in other comprehensive income: Interest rate risk - Interest rate swaps and bond forward contracts Effective portion of changes in fair value Amounts reclassified to net income Equity risk - Equity swaps Effective portion of changes in fair value Amounts reclassified to net income Balance at End of Year At October 31, 2019, hedged cash flows are expected to occur and affect profit or loss within the next five years. 98 2019 $ (48,120) 69,439 144 1,922 (527) $ 22,858 CWB Financial Group 2019 Annual Report13. OTHER ASSETS Accrued interest receivable Accounts receivable Deferred tax asset Prepaid expenses Financing costs(1) Derivative collateral receivable Income tax receivable Other Total (1) Amortization for the year amounted to $3,016 (2018 – $2,502). 14. DEPOSITS As at October 31 2019 As at October 31 2018 $ 79,709 $ 77,004 63,150 37,868 10,396 6,986 4,070 2,092 8,535 60,533 45,877 9,181 6,480 55,550 7,547 9,167 $ 212,806 $ 271,339 (Note 22) (Note 28) Deposits are accounted for on an amortized cost basis. Costs relating to the issuance of fixed term deposits are amortized over the expected life of the deposit using the effective interest method. Payable on demand Payable after notice Payable on a fixed date Total Payable on demand Payable after notice Payable on a fixed date Total A summary of all outstanding deposits payable on a fixed date, by contractual maturity date, 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, 2019 Individuals Business and Government Total $ 34,296 $ 715,875 $ 750,171 4,452,592 3,420,754 7,873,346 10,813,617 5,914,227 16,727,844 $ 15,300,505 $ 10,050,856 $ 25,351,361 As at October 31, 2018 Individuals Business and Government Total $ 35,889 $ 716,156 $ 752,045 3,684,259 3,157,875 6,842,134 10,763,538 5,342,240 16,105,778 $ 14,483,686 $ 9,216,271 $ 23,699,957 As at October 31 2019 As at October 31 2018 $ 6,694,117 $ 6,108,436 5,013,286 3,830,943 2,242,094 3,344,859 1,793,324 1,320,789 985,023 1,500,751 $ 16,727,844 $ 16,105,778 99 CWB Financial Group 2019 Annual Report15. OTHER LIABILITIES Accounts payable and accrued liabilities Accrued interest payable Income taxes payable Derivative collateral payable Deferred tax liability Deferred revenue Allowance for committed but undrawn credit exposures and letters of credit(1) Leasehold inducements Contingent consideration Other Total As at October 31 2019 As at October 31 2018 $ 333,123 $ 290,560 208,548 164,171 60,501 9,794 (Note 28) 19,370 - (Note 22) 4,716 5,745 4,357 5,534 (Note 8) 4,191 18,264 2,694 3,170 (Note 27) - 29,814 8,886 4,901 $ 646,386 $ 531,953 (1) Amounts for fiscal 2019 have been prepared in accordance with IFRS 9 (refer to Notes 1 and 2). Fiscal 2018 comparatives have been prepared in accordance with IAS 39 and have not been restated. 16. DEBT A) DEBT SECURITIES A summary of outstanding debt related to the securitization of equipment financing leases and loans and residential mortgages by contractual maturity date follows: Securitized leases and loans Securitized residential mortgages Total B) SUBORDINATED DEBENTURES Within 1 Year 1 to 3 Years 3 to 5 Years As at October 31 2019 As at October 31 2018 $ 576,621 88,404 $ 756,426 133,051 $ 136,462 222,835 $ 1,469,509 444,290 $ 1,479,133 278,721 $ 665,025 $ 889,477 $ 359,297 $ 1,913,799 $ 1,757,854 Financing costs relating to the issuance of subordinated debentures are The following qualify as bank debentures under the Bank Act and are amortized over the expected life of the related subordinated debenture subordinate in right of payment to all deposit liabilities. All redemptions are using the effective interest method. subject to the approval of OSFI. Non-NVCC subordinated debentures NVCC subordinated debentures(2) Interest Rate 3.463%(1) 3.668% Maturity Date Earliest Date Redeemable by CWB at Par Par Value December 17, 2024 June 11, 2029 December 17, 2019 June 11, 2024 $ 250,000 250,000 (1) These conventional debentures have a 12-year term with a fixed interest rate for the first seven years. Thereafter, if not redeemed, the interest rate would have been reset quarterly at the three month Canadian Dollar Offered Rate (CDOR) plus 160 basis points. (2) The balance reported on the consolidated balance sheets as at October 31, 2019 includes unamortized financing costs relating to the issuance of subordinated debentures of $1,506. On June 11, 2019, CWB issued $250,000 Non-Viability Contingent Capital principal amount of the debenture plus accrued but unpaid interest times a (NVCC) subordinated debentures with a fixed annual interest rate of multiplier of 1.5) by the common share value (the greater of (i) the floor price 3.668% until June 11, 2024. Thereafter, the rate will be set quarterly at the of $5.00 and (ii) the current market price calculated as the volume-weighted three-month CDOR plus 199 basis points until maturity on June 11, 2029. average trading price for the ten consecutive trading days ending on the day The debentures are redeemable by CWB on or after June 11, 2024, subject immediately prior to the date of conversion). to the prior written consent of OSFI. Upon the occurrence of a trigger event (as defined by OSFI), each outstanding 3.463% non-NVCC subordinated debentures. The debentures subordinated debenture will be automatically converted, without the were redeemed on November 18, 2019 at an aggregate amount of $253,900, consent of the holders, into CWB common shares. Conversion to common representative of the early redemption value plus accrued interest. shares will be determined by dividing the debenture conversion value (the On October 18, 2019, CWB announced the redemption of all $250,000 of 100 CWB Financial Group 2019 Annual Report 17. CAPITAL STOCK Authorized: • An unlimited number of common shares without nominal or par value; • An unlimited number of first preferred shares, without nominal or • 33,964,324 class A shares without nominal or par value; and par value, issuable in series, provided that the maximum aggregate consideration for all outstanding first preferred shares at any time does not exceed $1,000,000. Issued and Fully Paid: Preferred Shares - Series 5 Outstanding at beginning and end of year Preferred Shares - Series 7 Outstanding at beginning and end of year Preferred Shares - Series 9 Outstanding at beginning of year Issued Outstanding at end of year Common Shares Outstanding at beginning of year Purchased for cancellation Issued on exercise or exchange of options(1) Issued under dividend reinvestment plan 2019 2018 Number of Shares Amount Number of Shares Amount 5,000,000 $ 125,000 5,000,000 $ 125,000 5,600,000 140,000 5,600,000 140,000 - - - - 5,000,000 125,000 - - 5,000,000 125,000 - - 15,600,000 390,000 10,600,000 265,000 88,952,099 744,701 88,494,353 731,885 (1,829,944) (15,326) - - 77,667 1,245 178,279 2,818 49,889 1,350 119,174 4,248 Issued on acquisition-related contingent consideration instalment payment (Note 27) - - 160,293 5,750 Outstanding at end of year Share Capital 87,249,711 731,970 88,952,099 744,701 $ 1,121,970 $ 1,009,701 (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 regulatory directives issued under the Bank Act. This limitation does not shares when CWB is or would be placed, as a result of the declaration, restrict the current level of dividends. in contravention of the capital adequacy and liquidity regulations or any A) COMMON SHARES The normal course issuer bid (NCIB) announced on September 27, 2018, On September 26, 2019, CWB announced the approval of OFSI and originally for the purchase of up to 1,767,000 common shares and amended the Toronto Stock Exchange (TSX) to repurchase for cancellation up to on April 10, 2019 to 3,534,000 common shares, was for the 12-month period 1,740,000 common shares, representing approximately 2% of the issued that expired on September 30, 2019. CWB repurchased 1,829,944 common and outstanding common shares, under a NCIB during the 12-month period shares at an average price of $27.08 under this NCIB, all in fiscal 2019. expiring September 30, 2020. No common shares have been repurchased The total cost of these purchases, including related transaction costs was under this NCIB. $49,592. B) PREFERRED SHARES PREFERRED SHARES – SERIES 5 On April 30, 2019, CWB elected to reset the NVCC First Preferred Shares preferential cash dividends in the amount of $0.2688125 per share, when Series 5 (Series 5 Preferred Shares) annual dividend rate from 4.40% to declared by the Board of Directors of CWB. CWB may redeem the Series 5 4.30%, representing the five year Government of Canada Bond Yield as at Preferred Shares, in whole or in part, on April 30, 2024 and on April 30 every April 1, 2019 plus 276 basis points. Beginning May 1, 2019, holders of Series 5 five years thereafter. All other terms remain unchanged. Preferred Shares are entitled to receive quarterly fixed rate non-cumulative PREFERRED SHARES – SERIES 9 On January 29, 2019, CWB issued 5,000,000 non-cumulative, five year Directors of CWB, for the initial period ending April 30, 2024. The quarterly rate reset NVCC First Preferred Shares Series 9 (Series 9 Preferred Shares) dividend represents an annual yield of 6.00% based on the stated issue at $25.00 per share, for gross proceeds of $125,000. Holders of Series 9 price per share. Thereafter, the dividend rate will reset every five years at Preferred Shares are entitled to receive a non-cumulative fixed dividend in 404 basis points over the then five year Government of Canada Bond Yield. the amount of $0.3832 per share on April 30, 2019 and thereafter, dividends will be at a quarterly rate of $0.375 per share, when declared by the Board of 101 CWB Financial Group 2019 Annual ReportNON-VIABILITY CONTINGENT CAPITAL PREFERRED SHARE RIGHTS AND PRIVILEGES Redemption Amount Quarterly Non-cumulative Dividend(1) Annual Yield(5) Date Redeemable/ Convertible(6)(7) Convertible to(8) Preferred Shares - Series 5 Preferred Shares - Series 7 Preferred Shares - Series 9 $ $ $ 25.00 25.00 25.00 $ 0.2688125(2) $ 0.390625(3) $ 0.375(4) 4.30% 6.25% 6.00% April 30, 2024 July 31, 2021 April 30, 2024 Preferred Shares - Series 6 Preferred Shares - Series 8 Preferred Shares - Series 10 (1) Non-cumulative fixed dividends are payable quarterly as and when declared by the Board of Directors of CWB. (2) The dividend rate reset on April 30, 2019 and 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. Prior to the April 30, 2019, the annual yield was 4.40% representing a quarterly non-cumulative dividend of $0.275 per share. (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) The dividend rate will reset on the date redeemable and every five years thereafter at a level of 404 basis points over the then five year Government of Canada Bond Yield. (5) Based on the stated issue price per share of $25.00. (6) Redeemable by CWB, subject to the approval of OSFI, on the date noted and every five years thereafter. (7) 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, Series 8, and Series 10 which are non- (8) cumulative, floating rate preferred shares. If converted, holders of the First Preferred Shares Series 6, Series 8, and Series 10 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, 547, and 404 basis points, respectively. Upon the occurrence of a non-viability trigger event (as defined by OSFI), share value (the greater of (i) the floor price of $5.00 and (ii) the current each preferred share will be automatically converted, without the consent market price calculated as the volume-weighted average trading price for of the holders, into CWB common shares. Conversion to common shares the ten consecutive trading days ending on the day immediately prior to the will be determined by dividing the preferred share conversion value ($25.00 date of the conversion). per preferred share plus any declared but unpaid dividends) by the common C) DIVIDENDS The following dividends were declared by CWB’s Board of Directors and paid by CWB during the year: $1.08 per common share (2018 – $1.00) $1.09 per preferred share - Series 5 (2018 – $1.10) $1.56 per preferred share - Series 7 (2018 – $1.56) $1.13 per preferred share - Series 9 (2018 – nil) Total 2019 2018 $ 94,573 $ 88,819 5,438 5,500 8,750 8,750 5,666 - $ 114,427 $ 103,069 Subsequent to October 31, 2019, the Board of Directors of CWB declared and $0.375 per Series 9 preferred share payable on January 31, 2020 to a dividend of $0.28 per common share payable on January 7, 2020 to shareholders of record on January 24, 2020. With respect to these dividend shareholders of record on December 17, 2019, and cash dividends for declarations, no liability was recorded on the consolidated balance sheets preferred shares of $0.2688125 per Series 5, $0.390625 per Series 7, at October 31, 2019. D) DIVIDEND REINVESTMENT PLAN Under the dividend reinvestment plan (plan), CWB provides holders of At the option of CWB, the common shares may be issued from CWB’s CWB’s common shares and holders of any other class of shares deemed treasury at an average market price based on the closing prices of a board eligible by CWB’s Board of Directors with the opportunity to direct cash lot of common shares on the TSX for the five trading days immediately dividends paid on any class of their eligible shares towards the purchase of preceding the dividend payment date, with a discount of between 0% to 5% additional common shares. Currently, the Board of Directors has deemed or through the open market at market prices. During the year, 49,889 (2018 that the holders of CWB’s Series 5, Series 7, and Series 9 Preferred Shares – 119,174) common shares were issued under the plan from CWB’s treasury are also eligible to participate in the plan. The plan is open to shareholders with no discount (2018 – no discount). Beginning in the third quarter of 2019, residing in Canada. CWB satisfied the requirements of the plan through purchases of common shares in the open market. 102 CWB Financial Group 2019 Annual Report 18. SHARE-BASED PAYMENTS A) STOCK OPTIONS Stock options are accounted for using the fair value method. The estimated options exercisable into 1,676,604 shares (2018 – 2,833,461) are issued value is recognized over the applicable vesting period as an increase to and outstanding. The outstanding options vest within three years and are both salary expense and share-based payment reserve. When options are exercisable at a fixed price equal to the average of the market price on the exercised, the proceeds received and the applicable amount in share-based day of and the four days preceding the grant date. Options granted after payment reserve are credited to common shares. 2015 expire within seven years of the grant date. Previously granted options expire within five years of the grant date. Outstanding options expire from CWB has authorized 6,321,061 common shares (2018 – 6,398,728) for issuance under the share incentive plan. Of the amount authorized, March 2020 to March 2026. The details of, and changes in, the issued and outstanding options are as follows: Options Balance at beginning of year Granted Exercised or exchanged Expired Forfeited Balance at End of Year Exercisable at End of Year 2019 2018 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price 2,833,461 $ 31.90 3,390,759 $ 31.02 380,728 29.43 262,563 (407,134) 25.66 (782,769) (1,105,653) (24,798) 38.58 (37,092) 31.50 - 35.15 28.95 36.94 - 1,676,604 718,481 $ $ 28.41 2,833,461 24.36 1,628,324 $ $ 31.90 34.64 Further details relating to stock options outstanding and exercisable are as follows: Range of Exercise Prices $23.70 to $26.13 $29.43 to $29.99 $30.85 to $35.15 Total Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Number of Options Number of Options Weighted Average Exercise Price 718,481 2.6 $ 24.36 718,481 $ 24.36 376,409 6.3 29.44 - - 581,714 4.8 32.74 - - 1,676,604 4.2 $ 28.41 718,481 $ 24.36 All exercised options are settled via cashless settlement, which provides the (2018 – 2.0%), (ii) expected option life of 5.0 (2018 – 5.0) years, (iii) expected option holder the number of shares equivalent to the excess of the market annual volatility of 29% (2018 – 28%), and (iv) expected annual dividends of value of the shares under option, determined at the exercise date, over the 3.7% (2018 – 2.9%). Expected volatility is estimated by evaluating historical exercise price. During fiscal 2019, option holders exchanged the rights to volatility of the share price over multi-year periods. The weighted average 407,134 (2018 – 782,769) options and received 77,667 (2018 – 178,279) shares fair value of options granted was estimated at $4.93 (2018 – $6.48) per in return by way of cashless settlement. share. Salary expense of $1,617 (2018 – $1,776) was recognized relating to the During the year, $1,245 (2018 – $2,818) was transferred from the share-based estimated fair value of options granted. The fair value of options granted payment reserve to share capital, representing the estimated fair value during the year was estimated using a binomial option pricing model with recognized for 407,134 (2018 – 782,769) options exercised during the year. the following variables and assumptions: (i) risk-free interest rate of 1.6% 103 CWB Financial Group 2019 Annual ReportB) RESTRICTED SHARE UNITS Under the RSU plan, certain employees are eligible to receive an award expense is recognized between the grant date and the date the employee in the form of RSUs. Each RSU entitles the employee to receive the cash is eligible to retire. 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 During the year, salary expense of $9,683 (2018 – $9,160) was recognized related to RSUs. As at October 31, 2019, the liability for the RSUs held under this plan was $10,966 (October 31, 2018 – $10,821). At the end of each period, the liability is 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 C) PERFORMANCE SHARE UNITS 2019 2018 626,814 731,930 410,225 283,083 (337,425) (367,752) (24,418) (20,447) 675,196 626,814 Under the Performance Share Unit (PSU) plan, certain employees are eligible originally granted and any accrued notional dividends such that the total to receive an award in the form of PSUs on an annual basis. At the time of value of the PSUs may vary from 0% to 200% of the value of an equal a grant, each PSU represents a unit with an underlying value equivalent to number of CWB common shares. 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. During the year, salary expense of $1,643 (2018 – $2,951) was recognized related to PSUs. As at October 31, 2019, the liability for the PSUs held under this plan was $4,416 (October 31, 2018 – $5,225). At the end of each period, the liability and salary expense are adjusted to reflect changes in the fair At the end of each specified performance period, a multiplier based on value of the PSUs. performance targets set at grant date is applied to a portion 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 2019 2018 194,233 209,263 78,789 54,929 (87,652) (69,959) 185,370 194,233 Under the DSU plan, non-employee directors receive a portion of their During the year, other non-interest expenses included $1,180 (2018 – $858) retainer in DSUs. The DSUs are not redeemable until the individual is no related to the DSUs. As at October 31, 2019, the liability for DSUs held under longer a director and must be redeemed for cash. Common share dividend this plan was $6,575 (October 31, 2018 – $5,238). At the end of each period, equivalents accrue to the directors in the form of additional units. The the liability and expense are adjusted to reflect changes in the market value expense related to the DSUs is recorded in the period the award is earned of the DSUs. by the director. Number of DSUs Balance at beginning of year Granted Paid out Balance at End of Year 104 2019 2018 171,069 172,833 41,002 28,888 (14,860) (30,652) 197,211 171,069 CWB Financial Group 2019 Annual Report19. NON-CONTROLLING INTERESTS Non-controlling interests relate to the following: CWB Wealth Management Ltd. CWB McLean & Partners Wealth Management Ltd. Total 20. CONTINGENT LIABILITIES AND COMMITMENTS A) CREDIT INSTRUMENTS As at October 31 2019 As at October 31 2018 $ 1,091 781 $ 2,056 695 $ 1,872 $ 2,751 In the normal course of business, CWB enters into various commitments and has contingent liabilities, which are not reflected in the consolidated balance sheets. These items are reported below and are expressed in terms of the contractual amount of the related commitment. Credit Instruments Commitments to extend credit Guarantees and standby letters of credit Total As at October 31 2019 As at October 31 2018 $ 5,173,866 $ 4,748,747 505,272 480,341 $ 5,679,138 $ 5,229,088 Commitments to extend credit to customers also arise in the normal course extending over a period of months. In some instances, authorizations are of business and include undrawn availability under lines of credit and never advanced or may be reduced because of changing requirements. business operating loans of $2,568,449 (October 31, 2018 – $2,374,512) and Revolving credit authorizations are subject to repayment which, on a pooled authorized but unfunded loan commitments of $2,605,417 (October 31, 2018 basis, also decreases liquidity risk. – $2,374,235). In the majority of instances, availability of undrawn business 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 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 undrawn credit exposures and letters of credit is included in other liabilities year. on the consolidated balance sheets. From a liquidity perspective, undrawn credit authorizations will be funded over time, with draws in many cases B) LEASE COMMITMENTS CWB has obligations under long-term, non-cancellable operating leases for years. Total costs, including free rent periods and step-rent increases, are the rental of premises and automated teller machines. The leases typically expensed on a straight-line basis over the lease term. run 5 to 15 years, with an option to renew the lease for an additional five Minimum future lease commitments for each of the five succeeding years and thereafter are as follows: 2020 2021 2022 2023 2024 2025 and thereafter Total $ 14,946 14,795 12,397 11,995 10,508 27,943 $ 92,584 105 CWB Financial Group 2019 Annual ReportC) PURCHASE OBLIGATIONS CWB has contractual obligations related to operating and capital expenditures which typically run one to five years. Purchase obligations for each of the succeeding years are as follows: 2020 2021 Total D) GUARANTEES $ 1,659 1,393 $ 3,052 A guarantee is defined as a contract that contingently requires the counterparties for costs incurred as a result of various contingencies, guarantor to make payments to a third party based on (i) changes in an such as changes in laws and regulations and litigation claims. A maximum underlying economic characteristic that is related to an asset, liability potential liability cannot be identified as the terms of these arrangements or equity security of the guaranteed party, (ii) failure of another party to vary and generally no predetermined amounts or limits are identified. The perform under an obligating agreement, or (iii) failure of another third party likelihood of occurrence of contingent events that would trigger payment to pay indebtedness when due. under these arrangements is either remote or difficult to predict and, in the past, payments under these arrangements have been insignificant. Significant guarantees provided to third parties include guarantees and standby letters of credit as discussed above. No amounts are reflected in the consolidated financial statements related to these guarantees and indemnifications. In the ordinary course of business, CWB enters into contractual arrangements under which CWB may agree to indemnify the other party. Under these agreements, CWB may be required to compensate E) LEGAL AND REGULATORY PROCEEDINGS In the ordinary course of business, CWB and its subsidiaries are party to legal and regulatory proceedings. Based on current knowledge, CWB does not expect the outcome of any of these proceedings to have a material effect on the consolidated financial position or results of operations. 21. EMPLOYEE FUTURE BENEFITS All employee future benefits related to CWB’s group retirement savings and employee share purchase plans are recognized in the periods during which services are rendered by employees. CWB’s contributions to the group retirement savings plan and employee share purchase plan totaled $ 16,654 (2018 – $15,038). 106 CWB Financial Group 2019 Annual Report22. INCOME TAXES CWB follows the deferred method of accounting for income taxes whereby or substantively enacted tax rates anticipated to apply to taxable income current income taxes are recognized for the estimated income taxes in the years in which those temporary differences are anticipated to be payable for the current period. Deferred tax assets and liabilities represent recovered or settled. Changes in deferred taxes related to a change in tax the cumulative amount of tax applicable to temporary differences between rates are recognized in income in the period of the tax rate change. All the carrying amount of the assets and liabilities, and their values for tax deferred tax assets and liabilities are expected to be realized in the normal purposes. Deferred tax assets and liabilities are measured using enacted 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: Items that will be subsequently reclassified to net income Items that will not be subsequently reclassified to net income(1) Derivatives designated as cash flow hedges Total 2019 2018 $ 105,140 $ 105,381 (2,475) (8,504) 102,665 96,877 12,016 (7,410) (4,982) n/a 25,867 (10,297) 32,901 (17,707) $ 135,566 $ 79,170 (1) Amounts for fiscal 2019 have been prepaid in accordance with IFRS 9 (refer to note 1 and 2). Fiscal 2018 comparatives have been prepaid in accordance with IAS 38 and have not been restated. n/a – not applicable The combined statutory tax rate changed in 2019 as a result of a decrease in the Alberta provincial tax rate from 12% to 8% over four years, beginning with a 1% decrease on July 1, 2019 with further reductions of 1% on each of January 1, 2020, 2021 and 2022. 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: Deferred tax related to provincial tax rate increase Tax-exempt income Stock-based compensation Other Provision for Income Taxes and Effective Tax Rate 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 2019 2018 $ 104,433 26.7% $ 97,324 26.9% (1,530) (634) 428 (32) $ 102,665 (0.4) (0.1) 0.1 - - - (1,708) (0.4) 479 0.1 782 0.2 26.3% $ 96,877 26.8% 2019 2018 $ 13,527 $ 25,847 21,869 18,608 10,573 12,068 (6,367) (8,219) (1,734) (2,427) $ 37,868 $ 45,877 $ 3,324 $ 4,373 1,392 1,372 $ 4,716 $ 5,745 107 CWB Financial Group 2019 Annual Report23. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based on the treasury stock method, which assumes that any proceeds from in-the-money stock options are used to purchase CWB’s common shares at the average market price during the period. The calculation of earnings per common share follows: Numerator Common shareholders’ net income Denominator 2019 2018 $ 266,940 $ 249,256 Weighted average number of common shares outstanding - basic 87,512,616 88,806,458 Dilutive instruments: Stock options(1) Weighted Average Number of Common Shares Outstanding - Diluted Earnings Per Common Share Basic Diluted 225,988 478,441 87,738,604 89,284,899 $ 3.05 3.04 $ 2.81 2.79 (1) At October 31, 2019, the denominator excludes 958,123 (2018 – 1,368,216) employee stock options with an average exercise price of $33.22 (2018 – $38.76), adjusted for unrecognized stock-based compensation, that is greater than the average market price. 24. RELATED PARTY TRANSACTIONS Transactions with and between subsidiary entities are made at normal and employees and their immediate family at preferred rates. The total market prices and eliminated on consolidation. amount outstanding for these deposits is $323,308 (October 31, 2018 – Preferred Rates and Terms CWB makes loans, primarily residential mortgages, to its officers and $313,004). Key Management Personnel employees at various preferred rates and terms. The total amount Key management personnel of CWB are those that have authority and outstanding for these types of loans is $184,130 (October 31, 2018 – responsibility for planning, directing and controlling the activities of CWB $147,886). CWB offers deposits, primarily fixed term deposits, to its officers and include independent directors of CWB. Compensation of key management personnel 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. 2019 2018 $ 5,168 3,449 $ 5,326 3,132 $ 8,617 $ 8,458 Loans outstanding with key management personnel totaled $259 as at October 31, 2019 (October 31, 2018 – $190). No loans were outstanding with CWB’s independent directors as at October 31, 2019 and 2018, reflecting CWB’s policies that preclude lending to those directors. 108 CWB Financial Group 2019 Annual Report 25. INTEREST RATE SENSITIVITY CWB is exposed to interest rate risk as a result of a difference, or gap, within the risk appetite of CWB. The repricing profile of these assets and between the maturity or repricing behaviour of interest sensitive assets liabilities has been incorporated in the table following, which contains the and liabilities. The interest rate gap is managed by adjusting the repricing gap position at October 31 for select time intervals. Figures in brackets behaviour of interest sensitive assets or liabilities to ensure the gap falls represent an excess of liabilities over assets or a negative gap position. Asset Liability Gap Positions ($millions) October 31, 2019 Assets Cash resources and securities Loans(1) Other assets(2) Derivatives(3) Total Liabilities and Equity Deposits(1) Securities sold under repurchase agreements Other liabilities(2) Debt Equity Derivatives(3) Total Interest Rate Sensitive Gap Cumulative Gap Cumulative Gap as a 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 $ 752 $ 318 $ 654 $ 1,724 $ 744 $ - $ 7 $ 2,475 13,195 - 1,298 - 190 510 14,137 2,126 4,484 - 1,475 6,613 18,977 - 2,175 9,184 - 4,738 22,876 14,666 294 - - 294 (89) 583 270 771 28,366 583 7,183 38,607 8,151 1,536 4,823 14,510 10,869 - (27) 25,352 30 - 311 - 6,828 - - 118 - 45 15,320 1,699 - - 30 - 483 912 - - 5,306 - 6,873 22,325 - - 1,499 390 40 12,798 - - - - - - - 683 - 2,558 270 3,484 30 683 2,411 2,948 7,183 38,607 $ $ (1,183) (1,183) $ $ 427 (756) $ $ 1,307 551 $ $ 551 551 $ $ 1,868 2,419 $ $ 294 2,713 $ $ (2,713) - $ $ - - Percentage of Total Assets (3.1)% (2.0)% 1.4% 1.4% 6.3% 7.0% - - October 31, 2018 Cumulative Gap Cumulative Gap as a $ (619) $ (318) $ 287 $ 287 $ 2,326 $ 2,526 $ - $ - Percentage of Total Assets (1.8)% (0.9)% 0.8% 0.8% 6.8% 7.4% - - (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, 2019 Total assets Total liabilities Floating Rate and Within 1 Month 4.4% 1.9 Interest Rate Sensitive Gap 2.5% 1 to 3 Months 3.5% 2.3 1.2% 3 Months to 1 Year 3.8% 2.4 1.4% Total Within 1 Year 4.1% 2.1 1 Year to 5 Years 3.7% 2.7 2.0% 1.0% More than 5 Years 5.3% - 5.3% Total 3.9% 2.1 1.8% October 31, 2018 Total assets Total liabilities 4.4% 1.7 3.5% 2.3 4.1% 2.2 4.3% 3.6% 1.9 2.5 6.0% - 4.0% 2.1 Interest Rate Sensitive Gap 2.7% 1.2% 1.9% 2.4% 1.1% 6.0% 1.9% Based on the current interest rate gap position, it is estimated that a one of tax, respectively, over the following twelve months. A one percentage percentage point increase in all interest rates would increase net interest point decrease in all interest rates would decrease net interest income income by approximately $4,556 (October 31, 2018 – $6,234) and decrease by approximately $7,463 (October 31, 2018 – $7,467) and increase other other comprehensive income $107,812 (October 31, 2018 – $104,554) net comprehensive income $111,563 (October 31, 2018 – $107,162), net of tax. 109 CWB Financial Group 2019 Annual Report 26. INTEREST INCOME The composition of CWB’s interest income follows: Loans measured at amortized cost(1) Securities Debt securities measured at FVOCI(1) Equity securities designated at FVOCI Securities purchased under resale agreements measured at amortized cost(1) Deposits with regulated financial institutions measured at FVOCI(1) Total (1) Interest income is calculated using the effective interest method. 2019 $ 1,379,730 26,841 2,354 1,501 8,274 $ 1,418,700 110 CWB Financial Group 2019 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 Changes in interest rates are the main cause of changes in the fair value the transaction price (i.e. the value of the consideration given or received). of CWB’s financial instruments. The carrying value of loans, deposits, Subsequent to initial recognition, financial instruments measured at fair subordinated debentures and debt related to securitization activities are value that are quoted in active markets are based on bid prices for financial not adjusted to reflect increases or decreases in fair value due to interest assets and offer prices for financial liabilities. For certain securities and rate changes as CWB’s intention is to realize their value over time by holding derivative financial instruments where an active market does not exist, fair them to maturity. 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. The table below provides the carrying amount of financial instruments by category as defined in IFRS 9 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. Several of CWB’s significant financial instruments, such as loans and The table does not include assets and liabilities that are not considered deposits, lack an available trading market as they are not typically financial instruments. The table also excludes assets and liabilities which exchanged. Therefore, these instruments have been valued assuming they are considered financial instruments, but are not recorded at fair value and will not be sold, using present value or other suitable techniques and are for which the carrying amount approximates fair value. not necessarily representative of the amounts realizable in an immediate settlement of the instrument. October 31, 2019(1) Financial Assets Cash resources Securities(2) Securities purchased under resale agreements Loans(3) Derivatives Total Financial Assets Financial Liabilities Deposits(3) Securities sold under repurchase agreements Debt Derivatives Total Financial Liabilities October 31, 2018 Financial Assets Cash resources Securities Loans(3) Derivatives Total Financial Assets Financial Liabilities Deposits(3) Securities sold under repurchase agreements Debt Contingent consideration Derivatives Total Financial Liabilities IFRS 9 Derivatives Amortized Cost FVOCI Total Carrying Amount Fair Value Fair Value Over (Under) Carrying Amount (Note 5) (Note 6) $ - - $ 121,986 - $ 293,856 2,019,207 $ 415,842 2,019,207 $ 415,842 2,019,207 $ - - - - 47,815 47,815 $ 40,366 28,450,811 - $ 28,613,163 - - - $ 2,313,063 40,366 28,450,811 47,815 $ 30,974,041 40,366 28,478,436 47,815 $ 31,001,666 - 27,625 - $ 27,625 $ - $ 25,380,204 $ - $ 25,380,204 $ 25,544,270 $ 164,066 - - 14,016 $ 14,016 29,965 2,412,293 - $ 27,822,462 - - - - $ 29,965 2,412,293 14,016 $ 27,836,478 29,965 2,444,034 14,016 $ 28,032,285 - 31,741 - $ 195,807 IAS 39 Loans and Receivables, and Non-trading Liabilities Derivatives Available- for-sale Total Carrying Amount Fair Value (Note 5) (Note 6) $ - - - 2,496 $ 2,496 $ - - 26,390,375 - $ 26,390,375 $ 153,221 2,084,752 - - $ 2,237,973 $ 153,221 2,084,752 26,390,375 2,496 $ 28,630,844 $ 153,221 2,084,752 26,551,146 2,496 28,791,615 $ Fair Value Over (Under) Carrying Amount $ - - 160,771 - $ 160,771 $ - $ 23,743,618 $ - $ 23,743,618 $ 23,502,200 $ (241,418) - - - 69,581 $ 69,581 - 2,007,854 29,814 - $ 25,781,286 95,126 - - - $ 95,126 95,126 2,007,854 29,814 69,581 $ 25,945,993 95,126 1,942,472 29,814 69,581 $ 25,639,193 - (65,382) - - $ (306,800) (1) For further information on interest rates associated with financial assets and liabilities, including derivative instruments, refer to Note 25. (2) Under IFRS 9, securities are comprised of $2,001,043 measured at FVOCI and $18,164 designated at FVOCI. (3) Loans and deposits exclude deferred premiums, deferred revenue and allowance for credit losses, which are not financial instruments. 111 CWB Financial Group 2019 Annual ReportThe methods and assumptions used to estimate the fair values of financial goodwill and other intangible assets, deferred tax asset, prepaid and instruments are as follows: deferred expenses, financing costs, deferred tax liability, deferred • Interest bearing deposits with regulated financial institutions and securities are reported on the consolidated balance sheets at the fair value disclosed in Notes 5 and 6. Remaining cash resources and securities purchased under resale agreements are reported at amortized cost, which is equal to fair value, 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 reflect changes in the general level of interest rates that have occurred since the loans were originated and exclude the allowance for credit losses. 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 floating rate loans at October 31, 2018 where, due to a differing estimation method at that time, the fair value was assumed to be equal to book value. • With the exception of derivative financial instruments and contingent consideration, other assets and other liabilities reported on the revenue and leasehold inducements. • 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 was determined by estimating the expected value of the contingent consideration, taking into consideration the potential financial outcomes and their associated probabilities. • The estimated fair values of deposits are determined by discounting the contractual cash flows at current market rates for deposits of similar terms, with the exception of deposits with no stated maturity at October 31, 2018 where, due to a differing estimation method at that time, the fair values were assumed to be equal to their carrying values. • The fair values of debt are determined by reference to current market prices for debt with similar terms and risks. consolidated balance sheets are either not considered financial Fair values are based on management’s best estimates based on market instruments, or are assumed to approximate their carrying value due conditions and pricing policies at a certain point in time. The estimates are to their short-term nature. Other assets and other liabilities which are subjective and involve particular assumptions and matters of judgment and, not considered financial instruments include property and equipment, as such, may not be reflective of future fair values. 112 CWB Financial Group 2019 Annual ReportFair Value Hierarchy CWB categorizes its fair value measurements of financial instruments inputs that are either observable or can be corroborated by observable according to a three-level hierarchy. Level 1 fair value measurements market data for substantially the full term of the assets or liabilities. Level reflect unadjusted quoted prices in active markets for identical assets and 3 fair value measurements are determined using one or more inputs that liabilities that CWB can access at the measurement date. Level 2 fair value are unobservable and significant to the fair value of the asset or liability. measurements are estimated using observable inputs, including quoted Unobservable inputs are used to measure fair value to the extent that market prices for similar assets or liabilities in active markets, quoted prices observable inputs are not available at the measurement date. for identical or similar assets or liabilities in inactive markets, and model As at October 31, 2019 Financial Assets Cash resources Securities Securities purchased under resale agreements Loans Derivatives Total Financial Assets Financial Liabilities Deposits Securities sold under repurchase agreements Debt Derivatives Total Financial Liabilities As at October 31, 2018 Financial Assets Cash resources Securities Loans Derivatives Total Financial Assets Financial Liabilities Deposits Securities sold under repurchase agreements Debt Contingent consideration Derivatives Total Financial Liabilities Fair Value Level 1 Valuation Technique Level 2 Level 3 $ 415,842 2,019,207 40,366 28,478,436 47,815 $ 31,001,666 $ 25,544,270 29,965 2,444,034 14,016 $ 28,032,285 $ $ $ $ 139,876 141,070 - - - 280,946 $ $ 275,966 1,878,137 40,366 - 47,815 2,242,284 $ - - - 28,478,436 - $ 28,478,436 - - - - - $ 25,544,270 29,965 2,444,034 14,016 $ 28,032,285 $ $ - - - - - Fair Value Level 1 Level 2 Level 3 Valuation Technique $ $ 153,221 2,084,752 26,551,146 2,496 28,791,615 $ 23,502,200 95,126 1,942,472 29,814 69,581 25,639,193 $ $ $ $ $ 144,019 219,570 - - 363,589 $ $ 9,202 1,865,182 - 2,496 1,876,880 - - - - - - $ 23,502,200 95,126 1,942,472 - 69,581 $ 25,609,379 $ $ $ $ - - 26,551,146 - 26,551,146 - - - 29,814 - 29,814 B) LEVEL 3 FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE The Level 3 financial liabilities measured at fair value on the consolidated expected value of the contingent consideration, taking into consideration balance sheets as at October 31, 2019 are related to the acquisition of CWB the potential financial outcomes and their associated probabilities. The Maxium Financial Inc. and the divestiture related to the CWT strategic following table shows a reconciliation of the fair value measurements transactions (see Note 4). Fair value was determined by estimating the related to the Level 3 financial instruments: Acquisitions Balance at beginning of year Acquisition-related fair value changes Contingent consideration instalment payments(1) Divestitures Balance at beginning of year Divestiture-related fair value changes Balance at End of Year 2019 2018 $ 29,514 7,854 (37,368) - $ 32,420 20,094 (23,000) 29,514 300 (300) - - $ 500 (200) 300 $ 29,814 (1) Under the terms of the March 2016 purchase agreement relating to the acquisition of CWB Maxium Financial Inc., contingent consideration payment instalments were made annually with determination of the total amount payable based on CWB Maxium Financial Inc.’s cumulative business performance over a 36-month period ended February 28, 2019. Up to 50% of each contingent consideration payment could have been settled with CWB common shares at the vendor’s option, provided the average share price over the preceding 20 days exceeded $30.00, with the remainder paid in cash. CWB completed the third instalment and final settlement contingent payments in cash in fiscal 2019. The 2018 instalment was paid with cash totaling $17,250 and the issuance of 160,293 CWB common shares with a fair value of $5,750. 113 CWB Financial Group 2019 Annual Report 28. FINANCIAL INSTRUMENTS - OFFSETTING The following table provides a summary of financial assets and liabilities agreements do not meet the netting criteria required by IAS 32 Financial which are subject to enforceable master netting agreements and similar Instruments: Presentation as the right to set-off is only enforceable in the arrangements, as well as financial collateral received and pledged to event of default or occurrence of other predetermined events. mitigate credit exposures related to these financial instruments. The As at October 31, 2019 Financial Assets Derivatives Financial Liabilities Derivatives As at October 31, 2018 Financial Assets Derivatives Financial Liabilities Derivatives Amounts not Offset on the Consolidated Balance Sheet Gross Amounts Reported on the Consolidated Balance Sheet Impact of Master Netting Agreements Cash Securities Received as Collateral(1) Collateral(1)(2) Net Amount $ 47,815 $ 13,788 $ 19,370 $ 5,939 $ 8,718 $ 14,016 $ 13,788 $ 228 $ - $ - Amounts not Offset on the Consolidated Balance Sheet Gross Amounts Reported on the Consolidated Balance Sheet Impact of Master Netting Agreements Cash Securities Received as Collateral(1) Collateral(1)(2) Net Amount $ 2,496 $ 2,496 $ - $ - $ - $ 69,581 $ 2,496 $ 55,550 $ - $ 11,535 (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. 29. RISK MANAGEMENT As part of CWB’s risk management practices, the risks that are significant to The relevant MD&A sections are identified by shading within boxes and the business are identified, monitored and controlled. The most significant the content forms an integral part of these audited consolidated financial risks include credit risk, market risk, capital risk and operational risk. The statements. nature of these risks and how they are managed is provided in the Risk Management section of the MD&A. Information on specific measures of risk, including the allowance for credit losses, derivative financial instruments, interest rate sensitivity, fair value of As permitted by the IASB, certain aspects of the risk management disclosure financial instruments and liability for unpaid claims are included elsewhere related to risks inherent with financial instruments is included in the MD&A. in these notes to the consolidated financial statements. 30. CAPITAL MANAGEMENT Capital funds are managed in accordance with policies and plans that are in accordance with instructions for determining risk-adjusted capital and regularly reviewed and approved by the Board of Directors and take into risk-weighted assets, including off-balance sheet commitments. Based on account forecasted capital needs and markets. The goal is to maintain the deemed credit risk of each type of asset, a standardized weighting of adequate regulatory capital to be considered well-capitalized, protect 0% to 150% is assigned. As an example, a loan that is fully insured by CMHC customer deposits and provide capacity for internally generated growth and is applied a risk weighting of 0% as CWB’s risk of loss is nil, while uninsured strategic opportunities that do not otherwise require accessing the public business loans are assigned a risk weighting of 100% to reflect the higher capital markets, all while providing a satisfactory return for shareholders. level of risk associated with this type of asset. The ratio of regulatory capital CWB has a share incentive plan that is provided to officers and employees who are in a position to impact the longer term financial success of CWB as measured by share price appreciation and dividend yield. Note 18 to the consolidated financial statements details the number of shares under options outstanding, the weighted average exercise price and the amounts exercisable at year end. Regulatory capital and capital ratios are calculated in accordance with the requirements of OSFI. Capital is managed and reported in accordance with the requirements of the Basel III Capital Adequacy Accord (Basel III) using the Standardized approach. OSFI requires banks to measure capital adequacy 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. CWB’s required minimum regulatory capital ratios, including a 250 basis point capital conservation buffer, are 7.0% common equity Tier 1 (CET1), 8.5% Tier 1 and 10.5% Total capital. 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. 114 CWB Financial Group 2019 Annual ReportSignificant Changes Basel III rules, effective January 1, 2013, provide for transitional adjustments During the year, CWB purchased for cancellation 1,829,944 common shares with certain aspects of the new rules phased in between 2013 and 2019. at an average price of $27.08 per share for a total cost of $49,592. This The only available transition allowance in the Basel III capital standards resulted in a decrease to the capital ratios of approximately 20 basis points. permitted by OSFI for Canadian banks relates to the multi-year phase For further details, refer to Note 17. out of non-qualifying capital instruments. The 2019 inclusion of non- qualifying capital instruments in regulatory capital under Basel III is capped at 30% (2018 – 40%) of the balance of non-common equity instruments outstanding at January 1, 2013. At October 31, 2019, $47,500 (2018 – nil) was On January 29, 2019, CWB issued First Preferred Shares Series 9 for gross proceeds of $125,000. This issuance resulted in an increase to the Tier 1 and Total capital ratios of approximately 50 basis points. For further details, excluded from Total regulatory capital related to outstanding non-NVCC refer to Note 17. subordinated debentures. This resulted in a decrease to the Total capital ratio of approximately 20 basis points. CWB adopted IFRS 9 on November 1, 2018 and recorded an increase to shareholders’ equity of $22,734 upon transition, primarily related to the implementation of the new impairment guidelines. This resulted in an increase to the CET1 and Tier 1 capital ratios of approximately 10 basis points and a nominal impact to the Total ratio. For further details, refer to Notes 1 and 2. On June 11, 2019, CWB issued $250,000 NVCC subordinated debentures. This issuance resulted in an increase in the Total capital ratio of approximately 100 basis points. For further details, refer to Note 16. During the year, CWB complied with all internal and external capital requirements. Capital Structure and Regulatory Ratios Regulatory Capital, Net of Deductions Common equity Tier 1 Tier 1 Total Capital Ratios Common equity Tier 1 Tier 1 Total Leverage Ratio Subsequent Event 2019 2018 $ 2,302,551 $ 2,153,019 2,692,714 2,418,231 3,232,807 2,788,048 9.1% 9.2% 10.7 10.3 12.8 8.3 11.9 8.0 On November 18, 2019, CWB redeemed all $250,000 non-NVCC the Basel III transitional adjustments will no longer be applicable to CWB subordinated debentures. The redemption will result in a decrease in the as all remaining issued and outstanding capital instruments are considered Total capital ratio of approximately 80 basis points. For further details, refer qualifying capital instruments. to Note 16. With the redemption of the non-NVCC subordinated debentures, 115 CWB Financial Group 2019 Annual Report 31. SUBSIDIARIES As at October 31, 2019, 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) CWB National Leasing 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 Bank(4) $ 134,458 30,812 CWB Wealth Management Ltd.(2) Suite 3000, 10303 Jasper Avenue 30,454 CWB McLean & Partners Wealth Management Ltd.(3) Canadian Western Financial Ltd. Edmonton, Alberta 801 10th Ave SW Calgary, Alberta 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 (1) Unless otherwise noted, CWB, either directly or through its subsidiaries, owns 100% of the voting shares of each entity. (2) CWB owns 93.91% of the voting shares of CWB Wealth Management Ltd. (October 31, 2018 – 89.14%). (3) CWB Wealth Management Ltd. owns 73.70% of CWB Mclean & Partners Wealth Management Ltd. (October 31, 2018 – 73.55%). (4) The carrying value of voting shares is stated at the cost of CWB’s equity in the subsidiaries in thousands of dollars. 116 CWB Financial Group 2019 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 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 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 Series 9 Preferred Shares: CWB.PR.D 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 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 2019 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. 2020 Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held in Edmonton, AB, on April 2, 2020 at The Fairmont Hotel Macdonald (Empire Ballroom) at 1:00 p.m. MT (3:00 p.m. ET). Corporate Secretary Bindu Cudjoe Senior Vice President, General Counsel and Corporate Secretary CWB Financial Group corporatesecretary@cwbank.com Complaints or Concerns regarding Accounting, Internal Accounting Controls or Auditing Matters Please contact either: Carolyn J. Graham Executive Vice President and Chief Financial Officer CWB Financial Group Telephone: (780) 423-8854 Fax: (780) 969-8326 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 chairoftheboard@cwbank.com 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 Vlad Ahmad Senior Vice President, Operations and Transformation Matt Rudd, CPA, CA Senior Vice President, Finance Allen D. Stephen, CPA, CA Vice President and Chief Accountant 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 John Steeves Senior Vice President and Regional General Manager, Northern Alberta Mario Furlan Senior Vice President, Real Estate and Specialized Lending Jeff Wright Senior Vice President, Client Solutions CWB National Leasing Michael Dubowec President and Chief Executive Officer CWB Optimum Mortgage Rejean Roberge Vice President Canadian Western Trust Scott Scobie Vice President and General Manager Executive Vice President, Banking CWB Wealth Management H. Bogac (Bogie) Ozdemir Executive Vice President and Chief Risk Officer Senior Corporate Officers Kelly Martin Senior Vice President and Chief Internal Auditor Niall Boles David Schaffner President and Chief Executive Officer McLean & Partners Wealth Management Kevin Dehod President and Chief Executive Officer Senior Vice President and Treasurer CWB Maxium Financial David L. Thompson Senior Vice President, Credit Risk Management Bindu Cudjoe Senior Vice President, General Counsel and Corporate Secretary Daryl MacLellan President and Chief Executive Officer Ombudsman Michael Novak 117 CWB Financial Group 2019 Annual Report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 Mississauga 2000 Argentia Road Plaza 1, Suite 300 (289) 998-0284 cwbfranchise.com CWB Wealth Management Edmonton 3000, 10303 Jasper Avenue NW (855) 292-9655 cwbwealth.com CWB McLean & Partners Wealth Management Calgary 801 - 10 Avenue SW (403) 234-0005 Toll-free: 1-888-665-0005 mcleanpartners.com CWB Trust Services Edmonton 1250, 10303 Jasper Avenue NW (780) 423-8888 canadianwesternfinancial.com Locations Canadian Western Bank Regional Offices British Columbia 2200, 666 Burrard Street Vancouver (604) 669-0081 Blaine Forer Northern Alberta 201, 12230 JasperAvenue NW Edmonton (780) 424-4846 John Steeves Prairies 606 - 4 Street SW Calgary (403) 861-9087 Jeff Bowling Toronto 1701, 150 King Street P.O. Box 32 (647) 598-0788 Equipment Financing 3000, 10303 Jasper Avenue NW Edmonton (780) 918-9084 Kirby Hill Real Estate 220, 666 Burrard Street Vancouver (604) 669-0081 Mario Furlan BRANCHES Alberta Edmonton Downtown: Edmonton Main 100, 12230 Jasper Avenue NW (780) 424-4846 Andy McPherson 103 Street 10303 Jasper Avenue NW (780) 423-8801 Andy McPherson Edmonton: Old Strathcona 7933 - 104 Street NW (780) 433-4286 Donna Austin West Point 17603 - 100 Avenue NW (780) 484-7407 David Hardy Edmonton South: South Edmonton Common 2142 - 99 Street NW (780) 988-8607 Surinder Gakhal Leduc 5407 Discovery Way (780) 986-9858 Surinder Gakhal Calgary Main: 606 - 4 Street SW (403) 262-8700 Dean Proctor 118 Calgary South: Calgary Chinook 6606 Macleod Trail SW (403) 252-2299 Rick Vandergraaf Calgary Foothills 6127 Barlow Trail SE (403) 269-9882 Rick Vandergraaf Strawberry Hill 1, 7548 - 120 Street (604) 591-1898 Dylan Watson Vancouver Island: Courtenay 200, 470 Puntledge Road (250) 334-8888 Kevin Wilson Calgary South Trail Crossing 300, 5222 - 130 Avenue SE (403) 257-8235 Rick Vandergraaf Victoria 1201 Douglas Street (250) 383-1206 Kevin Wilson Calgary: Calgary Northeast 2810 - 32 Avenue NE (403) 250-8838 Terri Lawrence Broker Buying Centre 285, 4000 Glenmore Court SE (403) 720-8960 David Miller Grande Prairie 11226 - 100 Avenue (780) 831-1888 Kyle Small Lethbridge 744 - 4 Avenue S (403) 328-9199 Daryn Wenaas Medicine Hat 101, 2810 - 13 Avenue SE (403) 527-7321 Daniel Kitching Red Deer 4822 - 51 Avenue (403) 341-4000 Rama Alluri Sherwood Park 251 Palisades Way (780) 449-6699 Victoria Girardo St. Albert 300 - 700 St. Albert Trail (780) 458-4001 Blair Zahara British Columbia Vancouver Downtown: Kitsilano 3190 West Broadway (604) 732-4262 Brian Korpan Park Place 100, 666 Burrard Street (604) 688-8711 Brian Korpan West Broadway 110, 1333 West Broadway (604) 730-8818 Brian Korpan Surrey: Panorama Ridge 103, 15230 Highway 10 (604) 575-3783 Dylan Watson Nanaimo 101, 6475 Metral Drive (250) 390-0088 Kevin Wilson Abbotsford 100, 2548 Clearbrook Road (604) 855-4941 Hugh Ellis Coquitlam 310, 101 Schoolhouse Street (604) 540-8829 Dave McGregor Langley 100, 19915 - 64 Avenue (604) 539-5088 Craig Martin Richmond 4991 No. 3 Road (604) 238-2800 Daniel Preto Kamloops 101, 1211 Summit Drive (250) 828-1070 Romi Arora Kelowna 1674 Bertram Street (250) 862-8008 Bob Brown Prince George 300 Victoria Street (250) 612-0123 Tony Stancati 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 Kelly Walker Yorkton 5, 259 Hamilton Road (306) 782-1002 Kelly Denis Manitoba Winnipeg: Winnipeg Downtown 230 Portage Avenue (204) 956-4669 Mike McAulay Winnipeg Kenaston 125 Nature Park Way (204) 452-0939 Chris Voogt Real Estate: Vancouver Real Estate 2200, 666 Burrard Street Vancouver (604) 669-0081 Jenny Siman Greater Vancouver Real Estate Group 100, 5455-152 Street Surrey (604) 576-4600 Puneet Agrawal Edmonton Real Estate 100, 12230 Jasper Avenue NW Edmonton (780) 429-6863 George Bawden Calgary Real Estate 606 - 4 Street SW Calgary (403) 750-3591 Ryan Bradley Corporate Lending: 100, 12230 Jasper Avenue NW Edmonton (780) 429-6863 George Bawden CWB National Leasing Group Winnipeg 1525 Buffalo Place (204) 954-9000 Toll-free: 1-800-665-1326 cwbnationalleasing.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 CWB Trust Services Toll-free: 1-800-663-1124 cwt.ca Vancouver 300, 750 Cambie Street (604) 685-2081 CWB Financial Group 2019 Annual ReportGroup Financial CWB.COM Great Place To Work® Certified OCT 2019-OCT 2020 CANADA 

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