Canadian Western Bank

Carolyn Graham - EVP and CFO Chris Fowler - President and CEO

Sohrab Movahedi - BMO Capital Markets Gabriel Dechaine - Canaccord Genuity Sumit Malhotra - Scotia Capital Peter Routledge - National Bank Financial Meny Grauman - Cormark Securities Doug Young - Desjardins Capital Markets

Thank you, Chris. Good afternoon and thank you for joining us for our 2016 third quarter results conference call.

Before we begin, please note that the conference call graphs, quarterly results news release, and supplemental financial information are available on our website at cwb.com in the Investor Relations section. Our forward-looking statements advisory is on slide 13.

The agenda for today’s call is on the second slide. In a moment, Chris Fowler, our President and CEO will comment on our current performance and strategic direction, as well as recent changes to our executive team.

I will follow with detail on our third quarter and year-to-date financial results including credit quality and stress testing. And Chris will conclude before we move to the question-and-answer session.

In addition to Chris, joining me today are the other members of CWB’s executive committee Kelly Blackett, Glen Eastwood, Darrell Jones, Stephen Murphy and Bogie Ozdemir. I’ll now turn the call over to Chris.

Thank you, Carolyn. Before I briefly touch on our third quarter performance and strategic direction, I’d like to acknowledge Greg Sprung and Randy Garvey, both of whom retired from our executive team today.

Greg and Randy have each made significant contributions during their time with CWB and we would not be what we are without them. On behalf of the Board and the entire CWB Group, I would like to sincerely thank them for their years of service and wish them long and healthy retirements.

Our current executive committee is included on slide three. And I would like to formally welcome Glen Eastwood and Darrell Jones to this Group.

Glen has been with CWB for more than 15 years and was most recently Senior Vice President and CWB’s Regional General Manager for the Prairies . Darrell joined us more than 10 years ago and was previously Senior Vice President and Chief Information Officer.

Both Glen and Darrell have taken on newly created worlds which tie to our continued evolution and support our strategic direction. We have stated before that CWB’s future will include deeper client relationships across the more diversified geographic footprint including improved funding and enhanced capital management.

To achieve these balanced growth objectives, each facet of the Group must grow and develop. This includes processes, products, people and structure.

In support of this development, Glen has been appointed Executive Vice President for Business Transformation. Glen’s background is branch-based banking and he will represent the voice of the branch network within our executive team.

In addition to business transformation, Glen has also assumed executive oversight for wealth management and trust services. It’s clear that technology has transformed banking and targeted technology investment is a key aspect of our strategic direction.

We are determined to use our investment in technology to improve how we build client relationships and manage our business. During his time as our Chief Information Officer, Darrell has fundamentally reshaped our technology strategy, positioning us well for future growth.

Validating Darrell’s role to the executive committee demonstrates our commitment to effective management of our technology investment. Moving to the next couple of slides, our strategy is to deliver strong balanced growth of both loans and funding sources.

We will also progress towards a more balanced geographic footprint and broader diversification within targeted sectors Canada’s commercial banking industry. We believe success against these objectives will deliver performance consistent with our medium-term target ranges and result in strong shareholder returns.

Slide five demonstrates our track record of very strong loan growth over the past five years. Loans grew 14% over the past 12 months, 2% this quarter and 12% year-to-date.

This contributed to 6% year-over-year growth of pre-tax, pre-provision earnings as well as the achievement of positive operating leverage. While continued pressure on net interest margin has constrained for the earnings growth, we’ve undertaken a number of strategic initiatives in support of margin.

These include efforts to optimize our funding mix and a focus on higher yielding commercial loans with attractive risk profile. On the funding side, branch-raised deposits grew 10% from last year and a very strong 4% from the prior quarter.

Targeting these deposits is a key objective of our strategy. They are lower cost and strengthen relationships by providing clients with relevant tools to manage their financing.

With the launch of our new core banking system on May the 2nd, we are now positioned to support delivery of the strategy with appropriate technology. We are moving from stabilization to sustainment for the new system, thanks to a tremendous team effort across our branches, corporate office and the project team.

The new system also supports our AIRB transition project, which is fully underway. We have now developed AIRB models for two of our portfolios and deployed them for use in the business.

We look forward to reporting further progress towards this important strategic objective in the quarters to come. Turning back to the loan book.

By the end of the third quarter, we have already achieved double-digit loan growth compared to last year. This marks the 26th time in 27 years that we have attained the significant level performance.

That said, growth within Alberta has slowed notably with the contraction of outstanding balances from last quarter. Our overall quarter-over-quarter growth rate was slower compared to the first half of the year.

This reflects both our disciplined approach to the market and our selective risk appetite. Our strategy is not to pursue growth for growth’s sake, but to deliver profitable growth through well-priced loans with an attractive risk profile.

Our ability to achieve strong growth outside of Alberta is the direct result of our strategy. We expect the trend of higher relative contributions from non-oil producing provinces to continue.

On slide six, you can see that Alberta now represents 38% of our total loan exposures, down from 42% one year ago and 50% in 2009. This is largely the result of consistent growth from our businesses with a nationwide presence including National Leasing and Optimum Mortgage and now complemented by CWB Maxium and CWB Franchise Finance.

From a business sector perspective, our portfolio of real estate project loans posted the highest growth in the past year but a slower growth rate in the third quarter. This was followed closely by general commercial loans including the portfolio acquisition of CWB Franchise Finance on July the 1st and originations within CWB Maxium.

Strong performance from our personal loans and mortgages also continues. We are carefully monitoring developments within the residential housing sector.

We are particularly focused on markets where a combination of rapid price increases and regulatory change including the potential impact of the new BC foreign buyer tax could impact pricing and the level of future activity. In recognition of risks within markets like Vancouver and Toronto, Optimum Mortgage has selectively adjusted available loan-to-value ratios for residential mortgages.

In general, we require large down payments on large sets of homes to manage our exposure. Carolyn will speak to stress test related to Optimum in a few minutes.

Our portfolio of real estate project loans in all provinces is strong and well-structured. Our loan funding structure requires strong presales, supported by non-refundable deposits.

These factors reduce our loss potential in the event of presale rescissions. Current high-rise construction projects in the Vancouver and Toronto area are more than 90% presold.

Ongoing monitoring of all in-progress projects confirms there’s been no material evidence of account deterioration. Overall, we are comfortable with our exposure to the housing market, the projections inherent in our secured lending business model and a proactive approach to loan management.

We are very close to our clients in this business and we continue to monitor risks related to changing levels of activity, very closely. Looking forward, we continue to maintain a realistic outlook.

We are carefully managing near-term risks related to Alberta exposures due to the direct and indirect impact of persistent low energy prices and the economic consequence of the Fort McMurray wildfires. Our business presence within Fort McMurray is limited, but it’s clear the impact of the wildfires has deepened Alberta’s current recession.

Every business cycle presents its challenges and we will continue to manage through those we face today. We are confident in our business model.

We believe our overall financial performance over the medium-term will benefit from an expanding geographic footprint with increased business diversification, a continued emphasis on secured lending, disciplined underwriting and proactive loan management, and ongoing success from strategic initiatives to build core funding sources through enhanced client offerings and effective investment in technology. As I said, I believe our well-defined strategic direction will translate into solid earnings growth and strong shareholder returns.

With that, I’ll turn things over to Carolyn.

Thanks Chris. Turning now to slides seven and eight, I’ll begin with the reminder that references to performance highlights refer to the results of continuing operations.

As Chris mentioned, third quarter pre-tax, pre-provision earnings of $82 million were up 6% from last year while common shareholders’ net income of $46 million was down 11% over the same period. The positive impacts of very strong 14% year-over-year loan growth and significantly higher non-interest income was more than offset by the combined influence of several factors.

These factors included increased energy related provisions compared to last year, a decline of 17 basis points in net interest margins, 5% growth in non-interest expenses, the new fair value charge related to the CWB Maxium acquisition, higher preferred share dividend, and the 20% increase to the Alberta corporate income tax rate. Of note, quarterly contingent consideration fair value changes of the current magnitude over the three-year settlement period would approximate the maximum earn-out for CWB Maxium.

Diluted earnings per common share of $0.55 and adjusted cash earnings per common share of $0.60 were down 14% and 8% respectively. Compared to the prior quarter, common shareholders’ net income was up 42%, diluted earnings per common share was 38% higher, and adjusted cash earnings per common share increased 46% as energy-related credit provisions were significantly lower.

Pre-tax pre-provision earnings declined 3%. Positive factors included 2% loan growth, two additional interest-earning days, consistent non-interest income along with stable non-interest expenses.

These were more than offset by a 7 basis-point decrease in net interest margin, the contingent consideration charge and higher preferred share dividend. On a year-to-date basis, pre-tax, pre-provision earnings of $248 million increased 6%, while common shareholders’ net income of 130 million was 16% lower.

The benefits of very strong 12% long growth and 7% higher non-interest income were more than offset by increased energy-related provisions for credit losses and 13 basis-point decrease in net interest margin. Diluted and adjusted cash earnings per common share declined 18% and 15% respectively.

Slide eight also shows our very strong capital ratios at July 31st. Using the standardized approach for calculating risk-weighted assets, our common equity Tier 1 ratio was 9.0%, Tier 1 ratio was 10.8%, and our total ratio was 12.9%.

With the 150 million issuance of common shares this quarter, our capital position is very strong. We are well-positioned to continue to execute against our balanced growth strategy, while ensuring balance sheet resilience and flexibility.

At 8.4%, our Basel III leverage ratio remains very conservative. Yesterday, our Board declared a quarterly cash dividend of $0.23 per common share, consistent with last quarter and 5% higher than the quarterly dividend declared one year ago.

Common share dividend increases are evaluated each quarter against the dividend payout ratio target of approximately 30%. Net interest margin on a taxable equivalent basis of 2.40% was 17 basis points lower than a year ago.

Of note, the decrease includes a onetime 3 basis-point impact related to a third quarter change in methodology for the recognition of certain loan fees. Compared to last year, the Bank of Canada’s July interest rate cut had a negative impact on loan and security yields, while competitive factors continued to affect loan pricing.

Corresponding reductions in funding costs and favorable changes in deposit mix partly resulting some strong growth in branch-raised demand and notice deposits did not fully offset the impact of these negative factors. Continued pressure on net interest margin is expected from the combined impact of the current low interest rate environment, the relatively flat yield curve and competitive factors.

Turning now to slide 10, excluding our portfolio of oil and gas production loans, credit quality remains stable. We continue to expect full year credit losses to fall between 35 basis points and 45 basis points of average loans.

Including the 78 basis points provision for credit losses last quarter and a sequentially improved third quarter provision of 32 basis points, the year-to-date provision is 43 basis points. Of the 32 basis-point provision this quarter, 12 basis points related direct to direct oil and gas exposures, 11 basis points to non-energy related exposures and 9 basis points was added to the collective allowance.

Significantly higher provisioning within the oil and gas portfolio has resulted from the influence of regulatory factors on a liquidity of assets securing these exposures, as well as the impact of persistently low and volatile energy commodity prices on producer cash flows. Slide 11 shows the level of gross impaired loans.

Total gross impaired loans of $107 million compared to $92 million in the third quarter last year and a $145 million last quarter. Total gross impaired within Alberta of $43 million at July 31st increased from $34 million one year ago and were down from $80 million at April 30th.

Gross impaired loans within the oil and gas production lending portfolio totaled $17 million at July 31st compared to $14 million one year ago and $54 million last quarter. Over the past several months, we have aggressively managed our exposures within this portfolio through both exiting accounts and write-offs.

And we will continue to be cautious and prudent in our approach. Our total outstanding balance of oil and gas production loans has decreased from 36 accounts with 343 outstanding at April 30 to 25 accounts with 273 outstanding at July 31st, and there were no new oil and gas impairments this quarter.

Total third quarter gross impaired loans within CWB’s equipment finance and leasing portfolio, the category which captures most of our exposure to oil and gas servicing, was $36 million, relatively unchanged from the prior quarter with approximately half of the balance represented by Alberta exposures. Impairments in this category one year ago were $23 million with approximately 30% represented by Alberta exposures.

Partially due to the extended period of economic weakness within Alberta, we expect periodic increases in the balance of impaired loans going forward. And as Chris mentioned, we continue to carefully monitor the entire loan portfolio for signs of weakness, and this includes monitoring emerging risks related to the housing markets in Vancouver and Toronto.

I will reiterate that we continue to anticipate loss rates on impaired loans outside of the oil and gas portfolio to reflect the combined positive impacts of our disciplined underwriting, secured lending practices and proactive account management. As such, we expect loss rates on non-energy loans to be consistent with our prior experience where actual losses have been low as a percentage of impairments.

It’s important to note that our loans to companies providing services to the oil and gas industry are primarily comprised of term-reducing advances against standard industrial equipment as opposed to operating lines of credit for loans secured against receivables or inventory. The total outstanding balance of equipment loans in Alberta has continued to contract as borrowers have been proactive in rationalizing their fleets.

The secondary market for standard industrial equipment remains liquid and global. Current pricing for non-specialized equipment has remained adequate in view of the rapid amortization of our typical equipment loans and the nature of our collateral.

Our business model remains focused on secured mid-market commercial lending. The balance of loans classified as past-due but not impaired at July 31st, increased to $276 million from a $186 million last quarter with the largest portion of the increase related to personal lending.

However, we have no material exposure to unsecured personal borrowing, credit cards, auto loan and in general to non-real estate personal borrowings. This focus reduces our exposure to the direct credit impact of elevated levels of unemployment compared to what would be expected from other lenders with the more pronounced focus on unsecured personal lending.

Three quarters of the current balance of past due loans has been in arrears for less than 30 days and nearly 95% for less than 60 days. As we said, our expectations for credit quality include periodic increases in the balance of gross impaired loans and we expect the degree of ongoing migration from soft arrears to the impaired category.

However, all past due loans do not to come impaired. And throughout our history, we have also shown that impaired loan balances do not reflect the dollar value of expected write-off.

The Alberta recession has led to an increase in soft arrears to-date while BC, Ontario and Atlantic Canada have been stable. Before I turn to stress testing in general, I’ll note that preliminary stress testing of Optimum’s portfolio is underway to stimulate the impact of 50% home price correction in Vancouver, 40% price correction in Toronto and a 30% price correction elsewhere across the country.

Along with related macroeconomic assumptions, these stressed conditions produce a one-year loss rate of approximately 50 basis points as a percentage of Optimum’s outstanding loans. Turning now to slide 12, we continue to stress our strong balance sheet as a whole, our income statement and capital to confirm our confidence in the resiliency inherent in our secured lending business model and to assess the potential impact of various scenarios.

These include the potential for significant and prolonged economic weakness within the oil-exposed provinces, as well as the potential for housing price corrections of various magnitude. Recent stress test incorporated the loss rate related to oil and gas production loans experienced this year and the number of related assumptions to increase the severity of those tests.

We include the assumption that stress conditions persist over a three-year timeframe with significant compression of net interest margin to 2.0% in each year. The assumed consolidated annual provision for credit losses in each year of the stress test is approximately 65 basis points.

Results of these tests support our confidence in CWB’s proven business model and the resilience of our strong capital position. While the combined impact of severe stress scenarios over a multi-year time period constrains earning growth, we remain profitable and financially stable even through what we believe are severe tail risk scenarios.

The durability of CWB’s capital position under the severe conditions attuned [ph] within these stress tests, reflects both our commercial lending focus and our use of the standardized approach for calculating risk-weighted assets. Under this approach, we carry more capital compared to banks that use the model-based methodology.

And I’ll now turn the call back over to Chris

Thank you, Carolyn. Before we ask the operator to begin the question-and-answer period, I’d like to underline a few key points related to CWB’s current performance and our outlook.

Our solid third quarter results reflect the continued successful execution of our strategy. We achieved strong growth on both loans and funding sources, and progressed towards a more balance geographic footprint and broader diversification within targeted sectors of the commercial banking industry.

We also delivered positive operating leverage and strengthened our capital position. We entered the final quarter of 2016 with the very strong balance sheet and are well-positioned to continue to deliver balanced growth over the medium term with an attractive risk profile.

We’re now happy to take your questions. And I’ll turn the call back to the operator.

Thanks. Carolyn, that was excellent with -- I really enjoyed the color you provided on that past due but not impaired.

I guess the obvious question that comes to mind is it’s been pretty good volume growth. Can you just confirm that it’s not coming at the expense of increased risk appetite?

I can absolutely confirm that.

Okay. So, the NIM compression here is obviously faster than -- it seems to be persistent and much more prevalent I’d say than I would have thought.

You’re obviously offsetting that with volume growth. But when you say this NIM compression is going to continue to persist, what -- are you thinking in the 5 basis points a quarter range?

We’re not thinking in the 5 basis; we’re thinking more about I’d say in the 1 or 2 basis points per quarter where there are small headwind factors in some quarters offset by some positive factors. In this quarter, we didn’t see the positive factors, we just saw accumulation of small headwinds.

Okay. And I guess, Chris, every time in banking we see pretty aggressive growth, notwithstanding your good history, you have to get your tentacles up, some of this growth that is coming on line is through the acquisitions you’ve made, the inorganic growth so to speak.

Is -- how comfortable are you that these loans that are being originated by -- through Maxium or the transportation or -- sorry, Franchise Finance business are congruent with the underwriting standards and risk appetite that CWB has historically had, or is it just a question of time will tell?

Well, we certainly -- before we entered into this whole process of looking at the opportunities, these two acquisitions, we did a very deep dive into what their history was, what business they conducted, the structure of the transactions, what their historical loss rate was. And both of these companies had a very strong credit track record and a very disciplined approach to their markets.

So, what we really have signed up for are two very targeted and strategic companies that have defined specialties in certain areas. And with that specialty.

they had a great both growth and credit quality track records. So, we have -- we feel very comfortable in the manner under which they underwrite and of course we do oversee it as well.

So, there’s not anything that is not within our control, but we are comfortable with the risk appetite we’ve taken on. And we have selected these as acquisitions in the face of other acquisitions that have been available in the market and we believe we picked the two best players.

I think the only other thing I’d add Sohrab is that consistent with lending across the rest of the Group, every business line is allocated and delegated lending limits, and anything over the lending limit delegated comes into our central credit risk management group and that’s the same case of Maxium and Franchise Finance.

Okay, perfect. And maybe, I don’t know if you could share this with us, you said you are testing the AIRB models for two of your portfolios, can you -- from a business decision making perspective I think is what you said.

Can you tell me, if I heard it correctly and which two portfolios are you using it for?

So, you did hear that correctly. The models have been implemented into the business for Optimum and National Leasing, which are the two portfolios that are most promising [ph] from a data perspective, so were the first two models that we started with.

Okay. And so the delinquency, early stage delinquency trends out of Optimum, is it possible that -- like, is it influenced by the models here do you think or it’s independent of this AIRB models being implemented?

I’d say it’s unrelated.

Okay. Thank you very much.

Just wanted to ask you about the stress test on Optimum and on your broader stress test there. I appreciate the disclosure.

But on the Optimum specifically, what kind of delinquency rate are you contemplating in that type of 50 basis-point loss rate, like how many or what’s -- on the $2.2 billion portfolio what would be the delinquency rate or impaired rate?

So, with the change in the macroeconomic assumption, we are calculating a probability of defaults about 5% in the stressed environment.

Okay. So, it would be 500 basis-point GILs [ph] rate in Lehman terms I guess.

Is that right?

Yes, 5%-- well, 5% of the portfolio would default, not necessarily become impaired but would show a sign of default with the payment or -- yes.

Well, let’s put it this way. Under the standardized model, as if the current loan is of 35% risk-weight for those mortgages, if it goes past due, over 90 days I guess it goes 200%; is that like the 5% -- that 5% goes to 100% risk weighting, is that how it would work?

It’s not only under the standardized approach, it’s not only whether it goes impaired but also whether there is a specific provision provided against it equal to 20%.

So, you…

Yes, we can take that offline…

Yes. I think just we focus a lot on the earnings issues but a lot of times the big six, these capital impacts have been actually fairly substantial in the oil and gas portfolio but this is similar.

Then your core banking system and probably into the AIRB issue, is there little bit of a race against clock to get the AIRB transition done in a few years because if the new standardized comes into play before your transition and you’re forced adopt that then there could be some pretty big risk weigh inflation on a big chunk of your lending portfolio; is that not right?

So, you are right as the new standardized approach as it has been currently proposed by the Basel were to come into play and as presented, it would have a significant impact on our portfolio. It was always our intent that once we have the core banking system finalized and implemented and giving us access to the data that we needed for AIRB models that we would launch those -- that project in a larger way and that has absolutely started.

So, certainly, we’re aware of what’s going on outside us, but continue the plan that we had in place. So, we are moving AIRB forward in a significant way.

So, recognizing that a change in the standardized approach and in the AIRB models, floors and those kinds of things could impact what the potential impact at the end of an AIRB journey.

AIRB journey sounds more fun than it actually is, but is that -- that’s probably a five-year process, I am going by what other banks have told me on their U.S. loans and stuff like that, something you are going to do for five years; are we in year one now or…?

We’ve talked about three years post banking system go live is what we’ve talked about in the past.

And then you need it approved by OSFI before you can actually use this?

That’s 100% correct.

Okay.

And we’re absolutely engaged, actively engaged with OSFI today as we work our way through that process.

Okay. And the past due loans, are these -- do they become more capital consumptive as they have become -- because the personal loans and that was a pretty big spike this quarter.

And you say, they don’t necessarily go impaired but I mean it’s definitely not a good trend, is it -- do we start to see impaired loans go back up next quarter after coming down this quarter or -- it’s nice to see, but I am just trying to if we revert back a little bit?

So, two questions. So, on the loans move to a higher risk weight, potentially once they are impaired.

So, moving through the past due, not until we identify them as impaired that they attract a higher capital ratio. And then, the tick down in impaired loans is very positive, but we believe we’ll still continue to see that number bounce around.

So, we think we could very well see further increases coming in other parts of the portfolio as Alberta is still in recession, and we know there will be ongoing challenges in that portfolio.

Thank you. And then, my last one, this may be a little weird one, if you had this call at 10 in the morning, I wouldn’t have as many questions.

But, the Maxium acquisition, just I was trying to get a sense for how profitable it can be in the future. And what I’m looking at is you got those $120 million of total consideration maximum in three years’ time.

If I take the multiples approach, is that kind of implying that this could be 10ish million dollar earnings contributor three, four years from now, is that possible?

We anticipate it to be much higher than that.

Much higher?

10% of our total earnings. So, we see this as a tremendous growth opportunity in terms of percentage of our total earnings.

So, it is -- over the next five years, it would get up to about 10% of total earnings. And the challenge of course is that we didn’t take on their book when we acquired them…

Right.

So, really to build the book back up, and that’s a process we are under right now.

Okay, thank you. Have a good rest of the week and long weekend.

Thank you.

Thanks, good afternoon. I want to start with Chris, and it’s around capital.

If we go back a year ago when you had divested of the two businesses, your CT1 ratio was up at 8.55% and you described the Bank as being significantly overcapitalized at that time. And obviously since then you’ve undertaken these acquisitions.

The thought process behind the equity raise you conducted in June, obviously overcapitalized of 8.55%, on that same logic, it would be considerably more or so 40 basis points higher. Just want to know on your thinking, what was the shift; whether it had to do with your bank on its own from a balance sheet risk perspective or is there macro consideration and more so regulatory considerations that prompted you to take that move?

So, as we think about our balance sheet and our strategic direction and the growth we’ve been able to put in place, and we’re -- obviously the sale of CDI and our share transfer business had a capital back to our balance sheet and that was very positive. It gave us the opportunity to make these two acquisitions that we did a portion with Maxium and then the opportunity that came forward with the GE Franchise Finance acquisition.

So, as we look forward, we’re really looking at supporting our ability to continue to grow. and to provide that support, we’ve made a significant investment in our core technology.

And we’ve now acquire these two companies that are really 80% of their businesses in Ontario. So, we are just giving ourselves more room to grow, and that’s the focus we have.

And we are taking forward a much stronger balance sheet at 9% that one.

I think you’ll agree though, it’s a good amount of dilution in shares outstanding and the short-term EPS that shareholders are experiencing as a result of that. So, my question to you would be here, it sounds like what you’re saying is that the growth from these businesses will be fast enough that they’re going to consume a good amount of RWA and thus capital under the standardized approach.

Maybe the bigger takeaway here becomes, what do you view is a level that CWB is going to manage that CET1 ratio at, as you run the business; what would be the level that we should see that number trend at?

Yes. We do see growth contributions absolutely from these acquisitions, and that’s really purpose of them and plus the opportunity for that geographic diversification.

So, we would see 9%, probably the high end of that, our goal would be to grow and manage that CET1 ratio in sort of balance with the overall growth in the portfolio. So, we would likely not see it going a lot higher than that, but 9% is a very healthy number.

Yes, it is dilutive. We see that dilution, we believe we can capture that back with the strong performance that we anticipate from these investments.

And just to be clear, 9% is the high, is there a low in terms of the band that you’re now comfortable with from a run rate perspective?

I think we’ll monitor that as we go forward. I mean, it’ll depending what we see as the opportunities for growth.

And certainly, our capital ratios are in line with -- we are standardized versus the large banks that are AIRB and I think we are in line with them in terms of where our capital levels are at, and we will manage them. As you know, we’ve historically been a very conservative organization, how we look to grow and look to put.

We like to get capital before we grow, we like to have our ducks in a row before we take a step. And we believe, we’re continuing to do that.

So coming into this next step with again a very strong balance sheet and what we believe are strong opportunities we believe are strong opportunities with our sort of balanced growth strategy and the broader diversification that we’re looking to achieve.

And I’ll just stay with you for one moment on this. The AIRB commentary that Carolyn provided, it feels like we’ve been talking about this transition to AIRB for quite some time now and the timelines have changed, from what Carolyn provided there.

So, the development and go-live of the core banking system, I think she said after that you need three more years. So, as we sit here right now, are you thinking it’s the beginning of 2020 approximately that CWB would now be reporting to us under the AIRB approach; do I have the timeline right there?

Our goal would be that is being finished in 2019 and really our timelines haven’t changed. The anchor for our timelines has always been three years after our go-live of our new banking system.

And our go-live was May the 2nd. Now, we did move that up by six months.

We before had planned that to be November of 2015, but it always has been three years go forward from the banking system, and that is unchanged. So where we sit today, we’re happy with our go-live.

We’ve got great internal work making sure that we move from sustainment to our -- or from stabilization to sustainment. And it is the source of data to allow us to make this AIRB transition.

So we’re very confident all the steps that we’ve made. So, we’re happy where we sit.

It is the process that takes time and energy, and we have the team in place to build it. And we are focused with the regulator to get to the application and have the approval as we move forward.

So, again, we’re targeting a three-year process.

Alright, thank you for that. Just a couple of quicker number ones and these are probably for Carolyn.

I think it was mentioned early in the call that someone called a loan growth aggressive. But when I look at loan balances and I believe you told us that the franchise finance contributed 350 million to balances this quarter.

If I take that out and look at more of an apples to apples, it looks like your sequential loan growth was only about 0.5%. And obviously we saw a decent sized decline in Alberta.

I am sure you’ll tell me if my numbers are wrong. But rather than being aggressive, it actually looks like you saw a decent sized deceleration in your loan balances.

Is that the right way to look at it and is this just one quarter or should we expect further declines in the Alberta portfolio going forward?

I think there is two factors. I think one is, Alberta has decelerated absolutely and those portfolios have -- growth has absolutely slowed primarily in equipment finance but in the other portfolios as well.

And the other thing is, is that in the first two quarters of this year, we had very strong growth from the real estate project portfolio. And that portfolio tends to be quite lumpy where we have large drives as projects move through and then have payouts that can occur very, very quickly where the loan pays down to zero, almost overnight as the transactions close.

So, I think it’s a combination of those two things, one being real estate and how it moves over time. But Alberta has absolutely slowed and we think that’ll continue certainly through the fourth quarter.

And to be clear, I’m not -- could be saying like slower loan growth isn’t a bad thing, necessarily given where we’re on the cycle. But just from a numbers perspective, it’s 350 that came in from Franchise Finance.

So, organically, the loan growth would have been slower in Q3?

That’s correct.

Okay, that’s good. Thank you for that.

And my last question, just on your commentary on NIM, the change in methodology for loan fees. If you could give me firstly just a quick idea what exactly happened here, what you changed?

And then maybe more importantly, when you call it a onetime item, you are not suggesting that all else equal, NIM would be up 3 basis points next quarter, are you, because it’s not the way I read it?

So, the change in the methodology for one small component of loan fees relates to functionality within the new banking system. So, in the old system, we used to recognize these fees immediately when we received them.

Under the new system, we amortize them over 30, 60 or 90 days. So, we had about $3 million of fees that we collected in the third quarter.

Under the old way, they would have been recognized in net interest income in the third quarter; under the new system, they’ll be recognized in Q4. And beginning with Q4 and for every quarter thereafter, there will be 90 odd days of that kind of income included in interest income each quarter.

So, all else being equal, yes, we would expect the 3 basis points higher compared to the third quarter.

Over time or just in Q4?

Just one, this is just a onetime catch up change, yes, just between sort of 3 basis points lower in Q3 compared to Q2 and then back 3 basis points in Q4.

Alright, I might follow-up with you to make sure I understand it, okay. But, thanks for your time.

Some real quick questions on your real estate project loans; total about 4.3 billion. Can you give us the numbers for BC, Alberta and Ontario?

Well that’s substantially what’s in the BC and Alberta…

Just a geographic breakdown.

That’s lion’s share of it. There is not a lot of exposure in Saskatchewan and Manitoba.

What about Ontario? If you don’t have, you can come back to me.

I don’t want to...

Yes, we can certainly.

We will come back to you.

Yes, cool. And I appreciate your comments about you are getting deposits and that helps to mitigate the probability of defaulter lower.

I had some investors come and so you have a -- the deposits are really low relative to the value of the apartments or condominiums purchased, and they are not payable 100% upfront, you only have to pay a couple of grand over two years each quarter, or each month and so therefore they can walk quite easily, and how would you respond to that?

I’d say that that’s a not entirely exact, [ph] these deposits can be up -- and we have projects where it’s as high as 25%, and it was 5% depending on the price of the unit. The lower price units have a lower deposit amount, higher price units have higher deposit.

And yes, they are often staged but the amount that it would be at signing would be somewhere in the 5% to 10% depending on the total deposit. So, I would say that history would tell us that they are meaningful and they have really been a strong supporter of the loan structure and it does impact that decision where there a purchaser, if there is a rescission on the presale or not and that the issue is that it is a strong factor of the loan structure that is…

Impacts behavior, right.

Yes, it absolutely does.

The another factor is that you also have to think about the timing of when the deposits were received. So, real estate project loans on average probably take somewhere between 18 and 36 months to build, close, complete.

So, presales and contracts that were entered into three years ago, there has been significant price appreciation since the borrower or since the purchaser put that deposit down. So, that purchaser is very unlikely to written [ph] on his purchase; it also depends on the ageing of the project.

And I imagine that’s specially the case in say Vancouver or…?

Yes, where there has been rapid price appreciation in the recent past.

All right. Are you putting the brakes on Vancouver?

Well, we have really focused on that Tier 1 borrowers in the Lower Mainland. And we’ve got a very strong group of borrowers in that area.

And we’re evaluating projects as they make sense. And I think we’ve got a group of borrowers that are astute and they are not looking take on risk that they don’t think is satisfactory…

They are putting on the brakes for you?

I think it’s much of that. There is that view that the market can sustain this, and if it makes great sense, they move forward; if they think it’s just too expensive, they are not going to be doing it.

And Vancouver again is a market with many different price points. Certainly, you’ve got the west side, west end of Vancouver that is very expensive.

But as you move further away from that center, it does get cheaper and you get out to [indiscernible] a tow house there would be in a $250 square foot range whereas that same product in west side or west end of Vancouver would be over $700 a square foot. So there is many different price points throughout the Lower Mainland.

And what we do is sort of look at the different markets and decide where we are looking to participate.

On the consumer delinquencies, you had great color there, I just -- and if I missed this, I apologize. But how -- there was a spike in 1 to 29 days delinquencies, and I know the weekend was part of that.

But, would also just the Fort Mc situation caused an unusual spike as well?

So, we factor in our under 30 days, we take 6 to 30. So, under 6 days, we don’t include in that table because of things like a weekend, so that shouldn’t impact our factors.

Fort McMurray could, but we don’t have a significant amount of exposure in Fort McMurray including in the optimum portfolio is quite limited.

Okay. And then, last one, recoveries on your -- the equipment loans, the few equipment loans that have defaulted, how have the recoveries on those defaulted loans been?

We continue to see low loss given default in that book, it is a fully amortizing book, so sort of typically three to five-year loan terms that all amortized to zero. So, again, if a company defaults early and that you’ve got the potential for higher loss, but our loss experience is being very, very conservative and it continues to perform.

So, it’s not like it’s 50%, like it’s low double-digit?

No, we haven’t seen that in the equipment finance book at all.

Great, thank you very much.

Thanks Peter.

Hi, good afternoon. I have a question on expenses, flat quarter-over-quarter expense growth seems surprising to me, given your commentary last quarter.

And I just wanted to know if you agree with that assessment, did your expense performance this quarter come in better than you’d expected; is there any change in terms of how you view your ability to manage your expenses even in the period where you’re kind of signaling that there are some upward pressures in some areas?

Great question on our expenses. So, we did see an increase in expenses this quarter as the new banking system came live.

We started to amortize the capital costs and we also started to expense the cost of the staff required to support and maintain that system. So that added about $1.2 million to our expenses this quarter.

We expect the go forward rate for that to be about 2 million a quarter. So, we were quite, call it at full capacity or full expensing in this quarter.

And that increase this quarter was largely offset as we revised our estimate around executive short-term incentives and our performance stock unit. So again, I think, yes, we added the expenses that we had talked about earlier, but we had a change an estimate this quarter that offset it.

So, the idea about the regular run rate of expenses on a quarterly basis being higher compared to the second quarter would still stand.

Okay. Thanks for that.

And then, if I could just ask more a timing question on credit. So, you talk about credit quality outside the oil and gas portfolio being stable, but then expecting the situation in Alberta to have an impact.

And just wondering when you look ahead, what timeframe do you expect that to play out? You said really hasn’t played out yet.

But when do you expect to see something more significant from the deterioration in the Alberta economy?

I would say -- Meny, I’d say, we’re just -- we’re monitoring it. I mean, we’re just not wanting to believe that the only portfolio that will be impacted would be the E&P book.

We do believe that clearly there is weakness that has occurred with any downturn. And we just are very attune to risk changes and credit changes and we’ll continue to follow the portfolio closely.

So, we just want to maintain a conservative outlook.

Hi. Good afternoon.

I guess, I’ve got a few credit ones, maybe for Carolyn. I guess first off, the collective increased in the quarter.

Can you talk a little bit more around what that was related to?

That was just a general increase in the collective. It has been our traditional practice to have the collective increased roughly in line with portfolio growth.

So, collective had been flat for most of the past year. So, as we ran our estimation models, it was appropriate to make a small add to the collective allowance.

Wasn’t related to any specific portfolio, but just to provide for our best estimate of incurred, but not losses that are incurred, but not yet identified to a particular portfolio.

Okay. So, there was nothing specific that you identified that you thought you needed to increase, this was more of a general portfolio growth…

Yes. It’s not tied to a particular sector or any of that.

And then, can you talk a little bit about -- you’ve talked about 2016 credit outlook, and I know it’s tough looking out to 2017. But reading your commentary, it sounds like you suggest you expect stable credit losses in your other non-energy book, albeit you may see a little bit of an increase in Alberta.

12 basis points related to oil and gas that it doesn’t feel like you think it’s going to continue to be that high. I mean you had 9 basis-point increase in collective.

So, starting with the 11 basis points plus maybe further erosion, are we going back next year in your view as you look out, back to your more historical normal range or is there still -- you still think you’re going to run closer to 30 basis-point range? Just hoping to get some color.

Great question. The 11 basis-point on call it net new specifics on the portfolio other than oil and gas, that is pretty much our historic run rate, our average over the last five or ten years is around 12 basis points.

So, 12 basis points for net new specifics and some amount to continue to add to the collective as the portfolio grows, I would say that would be normal condition. I think as we look out through 2017, which is not very far away now, I think I would say that we would expect it to be slightly -- credit quality be slightly weaker than our normal, over the past 10 years or so.

So, I think it would probably be a little bit higher from the 17-18 basis points that we’ve had in the last couple of years before this oil and gas. I don’t think it’ll -- from what we know today, I don’t think it’ll be as high as what we’ve seen in 2016.

Okay. And just, can you -- this isn’t a more number question but your specific allowances right now against your $17 million of impaired oil and gas production loans, but what those stand at?

So, $17 million of gross impaired energy loans and $14 million of specifics against them. So, the residual unprovided through specifics on our energy -- our impaired energy loans at the end of July is $3 million.

Okay, perfect, great. Thank you very much.

Thank you, Seth. Thanks very much for your continued interest in the CWB Group.

We look forward to reporting our fourth quarter and annual results on the 1st of December. In the meantime, if you have any follow-up questions or comments, please call us or contact us by email.

Have a great day.