Canadian Western Bank Annual Report 1997

Plain-text annual report

C A N A D I A N W E S T E R N B A N K A N N U A L R E P O R T 1 9 9 7 S U I T E 2 3 0 0 1 0 3 0 3 J A S P E R AV E N U E E D M O N T O N , A L B E RTA T 5 J 3 X 6 Achieving our goals Printed in Canada We are continuing to meet the banking needs of Westerners in a personalized, innovative way. We are sustaining the balanced, responsible growth strategy that has contributed to the Bank’s success. We are rewarding our employees for their dedicated customer service by providing them with security, advancement and personal development opportunities. We are continuing to conduct our business in the West with due respect for our citizens and environment. Corporate Directory Corporate Office Suite 2300, 10303 - Jasper Avenue Edmonton, Alberta T5J 3X6 Telecopier (403) 423-8897 Telephone (403) 423-8888 Website: www.cwbank.com Stock Exchange Listings The Toronto Stock Exchange The Alberta Stock Exchange The Vancouver Stock Exchange Share Symbol - CWB Convertible Debenture Symbol - CWB.DB Registrar And Transfer Agent Montreal Trust Concourse Level 10050 Jasper Avenue Edmonton, Alberta T5J 1V7 Telephone (403) 448-7598 Corporate Secretary Charles R. Allard WIC Premium Television Ltd. Edmonton, Alberta Inquiries From Shareholders Any notification regarding change of address or change in registration of shares should be directed to the Transfer Agent. Any inquiries other than change of address or change in registration may be directed to the President and Chief Executive Officer. Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held on March 12, 1998 at the Crowne Plaza Chateau Lacombe, 10111 Bellamy Hill, Edmonton, Alberta at 2:00 p.m. (MST). A L B E RTA Edmonton Corporate Office Suite 2300, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 (403) 423-8888 Agent Processing Centre/ RSP Administration Suite 2200, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 (403) 423-8888 Branch Manager – Winnie Lee Edmonton Main 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 (403) 424-4846 Branch Manager – Bill Book 103rd Street Main Floor, 10303 Jasper Avenue Edmonton, Alberta T5J 3N6 (403) 423-8801 Branch Manager – Jake Muntain Southside 7933 - 104 Street Edmonton, Alberta T6E 4C9 (403) 433-4286 Branch Manager – Heinz Kleist Plaza 170 10015 - 170 Street Edmonton, Alberta T5P 4R5 (403) 484-7407 Branch Manager – Trent Stolz Calgary Calgary Main 441 - 5th Avenue S.W. Calgary, Alberta T2P 2V1 (403) 262-8700 Branch Manager – Michael Halliwell Chinook Station 6606 MacLeod Trail S.W. Calgary, Alberta T2H 0K6 (403) 252-2299 Branch Manager – Al Steingart Banking Offices Camrose 4895 - 50th Street Camrose, Alberta T4V 1P6 (403) 672-7769 Branch Manager – Bill Wachko Red Deer 5013 - 49 Avenue Red Deer, Alberta T4N 3X1 (403) 341-4000 Branch Manager – Don Odell Lethbridge 744 - 4th Avenue South Lethbridge, Alberta T1J 0N8 (403) 328-9199 Branch Manager – Donald Grummett Grande Prairie Industrial Lending Centre 5th Floor, 214 Place 9909 - 102 Street Grande Prairie, Alberta T8V 2V4 (403) 831-1888 Branch Manager – Kevin MacMillen B R I T I S H C O L U M B I A Vancouver Regional and Business Lending Office Suite 900, Two Bentall Centre 555 Burrard Street Vancouver, B.C. V7X 1M8 (604) 669-0081 Agent Processing Centre/ RSP Administration Suite 1035, Two Bentall Centre 555 Burrard Street Vancouver, B.C. V7X 1M8 (604) 669-2610 1-800-663-1000 Branch Manager – Huguette Holmes Dunsmuir 888 Dunsmuir Street Vancouver, B.C. V6C 3K4 (604) 688-8711 Branch Manager – John Cedervall Granville & 13th 2899 Granville Street Vancouver, B.C. V6H 3J4 (604) 730-8818 Branch Manager – Rob Berzins Courtenay 470 Puntledge Road Courtenay, B.C. V9N 3R1 (250) 334-8888 Branch Manager – Bill Lineham Kamloops Industrial Lending Centre 200 - 124 Seymour Street Kamloops, B.C. V2C 2E1 (250) 314-9642 Manager – Harold Lavack Kelowna 387 Bernard Avenue Kelowna, B.C. V1Y 6N6 (250) 862-8008 Branch Manager – Ian Graham Nanaimo #101, 6475 Metral Drive Nanaimo, B.C. V9T 2L9 (250) 390-0088 Branch Manager – Barry Butler Victoria 1201 Douglas Street Victoria, B.C. V8W 2E6 (250) 383-1206 Branch Manager – Gerry Laliberte Guildford Industrial Lending Centre 401, 15127 - 100 Avenue Surrey, B.C. V3R 0N9 (604) 583-7500 Branch Manager – Dean Cudmore S A S K AT C H E WA N Regina 1881 Scarth Street McCallum Hill Centre II Regina, Saskatchewan S4P 4K9 (306) 757-8888 Branch Manager – Ken MacDonald Saskatoon 244 - 2nd Avenue S. Saskatoon, Saskatchewan S7K 1K9 (306) 477-8888 Branch Manager – Dean Rhoden Yorkton #45, 277 Broadway Street E. Yorkton, Saskatchewan S3N 3G7 (306) 782-1002 Branch Manager – Barb Apps M A N I T O B A Winnipeg 234 Portage Avenue Winnipeg, Manitoba R3C 0B1 (204) 956-4669 Branch Manager – Robert Bean C A N A D I A N W E S T E R N T R U S T C O M PA N Y Suite 2230, 666 Burrard Street Vancouver, B.C. V6C 2Y8 (604) 685-1208 Vice President – Richard Mackin Designed by: Vision Design Communications Inc. Highlights FIVE YEAR FINANCIAL SUMMARY ($ thousands, except per share data) Annual Operating Results Net interest income Other income Net income Return on common shareholders’ equity Return on average total assets Annual Results Per Common Share Average common shares outstanding (thousands) Net income basic fully diluted Annual dividend Book value Market Price High Low Close – October 31 Financial Position Total assets Cash resources and securities Loans Deposits Subordinated debentures Shareholders’ equity Capital Adequacy Tier 1 ratio Total ratio Other Information Net interest margin * Net impaired loans as a percentage of total loans Productivity ratio ** Number of full time equivalent staff Number of branches 1997 1996 1995 1994 1993 $ $ $ 45,414 11,520 15,837 13.12% 0.85% 9,322 1.70 1.55 0.25 13.70 22.10 12.20 20.25 $ $ $ 40,731 10,466 12,822 13.27% 0.81% 8,116 1.58 1.45 0.15 12.61 13.00 9.25 12.80 $ 33,973 $ 18,744 $ 13,118 6,876 10,808 13.36% 0.88% 7,420 1.46 1.33 0.10 11.37 11.38 9.13 10.13 $ $ 4,420 4,967 10.74% 0.78% 3,944 1.26 1.14 0.07 12.39 $ $ $ 10.00 $ 6.13 9.50 4,114 1,805 4.19% 0.33% 3,944 0.46 0.43 0.05 11.20 6.75 3.90 6.25 $ 2,022,951 $ 1,754,072 $ 1,330,596 $ 705,709 $ 597,559 271,883 1,710,007 1,817,512 37,116 128,533 247,614 1,478,392 1,585,855 26,000 102,554 174,670 1,135,173 1,192,663 8,000 92,299 95,006 599,881 634,379 8,000 48,870 75,957 511,341 535,053 4,000 44,179 8.4% 11.0% 2.48% 0.5% 64.4% 388 22 8.1% 10.2% 2.59% 1.0% 64.8% 359 20 10.3% 11.1% 2.78% 1.8% 64.4% 314 20 8.6% 9.9% 3.07% 1.6% 68.3% 182 13 9.0% 9.8% 2.52% 1.9% 76.5% 159 11 * ** Net interest income divided by average assets Non-interest expenses expressed as a percentage of net interest income and other income 1 Mission To provide competitive full service consumer and commercial banking to Western Canadians. In doing so we aim to provide our shareholders with a sound and profitable return on their investment. is Profile Canadian Western Bank the only federally chartered, Schedule I bank based in the West. The Bank serves Canada’s four west- ern provinces through a network of over twenty branches stretching from Victoria to Winnipeg. The Bank provides sound financial services, inno- vative and well - priced loan arrangements, and highly competitive rates and fea- tures on deposit products. Its trust arm, Canadian Western Trust, specializes in the administration of retirement self-directed products in addition to offering deposit and mortgage lending services, with Western Canada as its primary market. The Bank has also announced take a controlling interest in a brokerage firm which will operate under the name Canadian Western Capital Limited. intention its to Total Assets ($ millions) Net Income* Per Common Share 2,023 1,754 1,331 706 598 1997 1996 1995 1994 1993 *Basic $1.70 $1.58 $1.46 $1.26 $0.46 Financial highlights achieved record net earnings of $15.8 million, an increase of 23% over last year surpassed the $2 billion milestone in total assets through highly satisfactory internal loan growth reduced net impaired loans to 0.53% of net outstanding loans 1997 1996 1995 1994 1993 • • • • maintained a consistent and slightly improved return on assets ratio of 0.85% • amalgamated the Bank with B.C. Bancorp, adding almost $13 million in capital and providing signiﬁcant tax shelter • market capitalization reached a record $190 million Operating highlights • • • • opened the ﬁrst branch catering primarily to industrial ﬁnancing and leasing clients in Surrey, British Columbia; the subsequent success of this concept prompted the opening of a similar branch in Grande Prairie, Alberta purchased an interest in Bank Northwest of Bellingham, Washington to promote cross-border business and explore future expansion prospects in the United States successfully connected the Apex® Debit card to the Interac® Direct Payment system, enabling our customers to make payments to retailers directly from their accounts relocated the Lethbridge and Nanaimo branches to superior locations; renovated and expanded the Edmonton Southside and Camrose branches 3 To our shareholders  ’  can be a source of satisfaction for our shareholders as well as for our employees. Our net proﬁt for the year has increased 23% from 1996 to over $15.8 million. Concurrently our assets have grown to over $2 billion, up 15% year over year, due primarily to an increase in loans of 16%. The return on this larger asset base has improved to 0.85% from 0.81% last year, and our return on equity is essentially unchanged at 13.12%, compared to 13.27% last year. Earnings per share for the year are $1.70 ($1.55 fully diluted) compared to $1.58 ($1.45) last year. The increase of over 1.1 million shares resulting from the B.C. Bancorp amalgamation, which took effect at the beginning of the year, makes the increase in earnings less apparent when stated on a per share basis. Your bank has expanded and been “in the news” for the last several years with announcements of acquisition and amalgamation - transactions carried out at a corporate level rather than through line or branch activity. This year, we demonstrated the asset growth we can achieve independent of the impact of acquisitions as our corporate activity did not materially impact the balance sheet. Our corporate activity included the B.C. Bancorp transaction, which provided signiﬁcant tax shelter and almost $13 million in new capital. As well, our Trust’s amalgamation with Inland Mortgage Corporation contributed to the enhancement of shareholder value. We recently announced our intention to acquire a controlling interest in Majendie Charlton Securities Limited, which is a strategic initiative to improve non-interest income. This transaction should close in the near future. Performance can also be measured by the way we are seen from outside. Investors have been rewarded with an increase in the market price of our stock to $20.25 from $12.80 at last year end. Despite this impressive gain we can still point to a price/earnings ratio which is lower than the domestic banking industry as a whole. We have also succeeded in attracting, as clients, a number of mid-size businesses who can now have all their needs met through us, and who, more importantly, see us as a preferred alternative to other funding and banking sources. As well, many sizable institutions are attracted to our service and our rates on short-term wholesale funds. What we interpret as increased respect in the industry has come, we believe, from demonstrating that we can do what we say we will. Market Price Per Share 1997 1996 1995 1994 1993 $20.25 $12.80 $10.13 $9.50 $6.25 4 October 31 close Our progress has been achieved in economic conditions in Western Canada which have surpassed most of the rest of the country. The best news is that there is no reason to expect any softening in the immediate future. The trickle down effects of massive expansion taking place in the oil sands, combined with continuing buoyant sales of agricultural, mining, and forest products into export markets, will beneﬁt many of our present and prospective business clients. Construction continues to maintain a steady pace, and this has, and will continue to keep our real estate ﬁnancing and mortgage areas busy. The year has also seen us improve services to our retail banking customers. We were able to launch a self- directed RSP program for branch customers through Canadian Western Trust which is distinctive in its scope – allowing the inclusion of third party mortgages and private company shares. The connection to the Interac® Direct Payment system was completed, making day-to- day banking easier and more convenient. We have upgraded facilities at a number of our branches, notably Lethbridge, Camrose, Southside Edmonton, and Nanaimo, to accommodate increased business. In addition we launched branches in both Surrey and Grande Prairie whose initial primary focus is service to our industrial equipment borrowers. Changes to our banking software and our computer network are being implemented to continue to improve the service our customers expect. But while it is necessary to stay abreast of technology developments, our commitment to personal and friendly service – which includes the option of sit-down service in all branches – will remain the most signiﬁcant factor by which we differentiate ourselves from our larger competitors. The key small and medium business sectors have been a crucial element in our ability to grow, not just this year but always. We like to think we do a better job than most in understanding what they need, and then delivering it. As a result we also expect our satisfaction Q Do you expect the Bank’s stock to be able to sustain the present price to book and price/earnings ratios? A Yes, I believe so. When you look at the large Canadian banks the average price/earnings ratio is higher than CWB. On the other hand, if we were not a bank we would be looked at as a high quality small cap growth stock which would make our stock look like a bargain. LARRY M. POLLOCK, PRESIDENT & CEO rating to be higher. Nonetheless we have a well deﬁned process for addressing dissatisfaction, and this year we added the services of an Ombudsman to that process. The fact that we have concentrated on internal growth should not be interpreted as an intention to rely solely on this in the future. While we have succeeded in establishing ourselves as a credible player in the ﬁnancial services industry in Western Canada, there remains potential for much greater penetration of our market, and we have proved over and again our people can make it happen. Our commitment to provide full ﬁnancial services to an expanding number of Western Canadians and their business enterprises motivates us to seek out and examine all avenues leading to growth. Strong growth, a steady and promising economic outlook, and a team of people who thrive on the challenges of building a bank for the West are the key ingredients for continuation of our success, and the reason for our ongoing high expectations of superior achievement for your bank. “Jack C. Donald” “Larry M. Pollock” Jack C. Donald Chairman Larry M. Pollock President and Chief Executive Ofﬁcer 5 All over the West businesses are flourishing individuals are attaining their objectives families are realizing their dreams. We continue to support their efforts by performing as promised. Achieving our goals “Thinking of ourselves as a service business ﬁrst, and as a ﬁnancial institution second has helped to set us apart from our larger competitors.” DOUGLAS R. DALGETTY, EXECUTIVE VICE PRESIDENT S E R V I C E We know we don’t always behave like a bank is expected to, but when you’re younger and smaller you have to try harder. Besides, our customers tell us they appreciate all the extra care and attention we give them, and we truly believe our continuing growth is the result of our consistent drive to improve service delivery in all areas. That’s why we give customers in all our branches the choice of sit-down service or fast, convenient counter service; and why we work so hard at looking after their transactional banking needs capably and efﬁciently. We also have discovered that people like to have continuity in their banking relationships, and yet most banks train personnel by moving them from position to position through a series of branches. At Canadian Western Bank we make a point of hiring well-trained, experienced people right from the start. So when a customer forms a bond of mutual trust with the personnel in a particular branch, chances are they’ll be able to continue that relationship for years to come. Our customers like that. So do we. Good service means good business. R O D & J A C K I E M I C I A K New home owners, Edmonton “We were so impressed with the way Canadian Western Bank handled our ﬁrst mortgage that we recently bought our second home with their help.” R O B E R T L . B R E W S President, R.L. Brews Ltd., Calgary Electrical wholesale supplier “Canadian Western Bank has supported me through the signiﬁcant growth in our business.” “We’re growing, yes, but our focus remains on being the best at what we do.” DON WATSON, VP INDUSTRIAL LENDING F O C U S The strong, steady growth of Canadian Western Bank proves there is plenty of room for a bank that specializes in the things Westerners need. One of those needs is a bank that will ﬁnance small and medium-sized businesses – primarily private companies with a single owner-operator looking to borrow up to $12 million. “We are the small business of the Canadian banking community”, says Doug Dalgetty, Executive Vice President. “As such, I think it is fair to say we understand the frustrations, challenges, and excitement smaller and growing businesses face better than most players in the ﬁnancial industry.” The Bank has resolved not to try to be all things to all people, but to keep adding to our considerable expertise in speciﬁc niche markets. That’s why we have recruited strong performers in oil and gas lending to serve the small to medium producer; and other experts in the areas of construction, real estate development, and the ﬁnancing and leasing of industrial equipment. We believe these are the things that will ensure our long-term success and prosperity. 9 S T R A T E G Y P A R T N E R S H I P S The differences between our bank and the rest are perhaps our greatest strengths. For instance, we use our size to our advantage. As a Schedule I bank, we bring strength and stability to a banking relationship, and because we are much smaller than the ‘big six’ banks, we are in a better position to really understand the businesses in the West. We have much in common with our customers, and we make our decisions in the same environment. New technologies are changing the way people do their banking and we stay on top of these groundbreaking developments. We don’t, however, rush to accept every innovation just because it’s the ﬂavour of the month. We take a good look at each new development and assess its possible beneﬁts for our customer and for the Bank itself. If a new product, method or modiﬁcation passes the test, we’re small enough and sufﬁciently mobile to implement it at once. Observers have always given us high marks for structure and strategy. We plan carefully in order to provide our customers with the best range of services they’ll need today and in the future. We are conﬁdent that if we continue to recognize good growth opportunities, anticipate our customers’ needs, think innovatively, and stay nimble, we will achieve the level of success we have set for ourselves. Canadian Western Bank continues to form valuable alliances and afﬁliations across the country and beyond. Our subsidiary, Canadian Western Trust, enables us to offer our customers experience and expertise in the administration of self-directed retirement funds. An afﬁliation with Crown Life of Regina provides us with access to expertise in the insurance industry. Our interest in Bank Northwest of Bellingham will be invaluable in helping us to promote cross-border business and explore future expansion prospects in the United States. Our proposed interest in Canadian Western Capital Limited will provide us with access to the brokerage industry and equity markets for our clients. Q Why aren’t your branches selling mutual funds? A We have been concerned in the past that we would be eroding our own deposit base. However, mutual funds are so widely accepted and purchased by all types of investors these days, we are actively reviewing both mutual funds and other market linked GIC products. LARRY M. POLLOCK, PRESIDENT & CEO 1 0 P A T R I C I A M . B E R A R D & A L A N F. P I T T S Valued customers, Victoria, B.C. “You’d be surprised what an important role your bank plays in your life when you are semi-retired and beginning to enjoy the rewards of a long career.” D E P O S I T O P T I O N S Canadian Western Bank provides a wide range of chequing and savings accounts to meet the individual needs of our personal customers. We also offer a number of convenient transaction options including: regular teller service, InTouch® Telephone Banking (which allows customers to conduct a wide range of transactions, including bill payments and account transfers, by phone), plus free access to over 15,000 banking machines through membership in the Interac® and Exchange® networks of instant tellers. And, as of June 1997, customers had the ability to use their Apex® card at over 250,000 Interac® Direct Payment terminals in retail stores. We also help build the wealth of Western Canadians by providing competitive rates and features on personal deposits. In addition, many people place their retirement funds (RRSPs and RRIFs) with us because of our highly competitive rates and the security of principal. Others buy regular interest bearing instruments, again because of the rate we offer, but also because they can talk to the people managing their accounts. Their money concerns are important and we take the time to listen. In addition, hundreds of deposit agents across Canada, in centres large and small, make it possible for their clients to take advantage of the attractive rates and features of our term deposit instruments and retirement products. On the commercial side, we provide our business customers with the choice of placing deposits into regular current accounts, interest bearing accounts, or ﬁxed term deposits. These deposit products and services are made available through our 22 branches across Western Canada. Q Are you concerned about falling behind the industry technologically, given your bank’s emphasis on personal, sit-down service rather than other service delivery options? A When you are small you have the luxury of converting quickly and staying with the leaders. We do not provide all things to all people, but what we do provide is done so efﬁciently and cost effectively. LARRY M. POLLOCK, PRESIDENT & CEO 1 1 L E N D I N G S E R V I C E S C O M M U N I T Y As a lender, we service small business particularly well, because our focus and expertise are in the same market as our borrowers. The largest percentage of our lending – about 75 percent – is to small and medium-sized businesses. The remainder is to individuals for mortgages and personal loans for renovations, cars, consolidation, vacations, etc. We’ve targeted certain lending segments where we can offer the expertise of our people and in the process carve a niche for ourselves. COMMERCIAL LOANS (our core strength) are typically arranged to ﬁnance assets, such as buildings, or to provide day-to-day operating capital. INDUSTRIAL EQUIPMENT FINANCING (purchase or lease) is provided to acquire commercial and industrial equipment such as a ﬂeet of school buses, a highway tractor, or logging equipment. CONSTRUCTION AND REAL ESTATE PROJECT FINANCING is conducted quickly and successfully as a direct result of the vast market knowledge and experience of our people. ENERGY LENDING is offered primarily through our Calgary ofﬁces and is a market segment in which our experts have been players for years. Without exception, the managers and employees of our branches across the West have shown a sincere commitment to their respective communities by contributing signiﬁcant resources of time, money and effort in response to local needs. One example: When the Greater Victoria Hospital Society launched its “Better Together” campaign in response to an urgent need to replace outdated medical equipment, the Victoria branch pledged $10,000 on behalf of staff and customers and their families. Q What geographic expansion plans do you have? A Within Western Canada we are continuing to seek increased market share to provide our quality service to more Westerners. We will focus our growth on Western Canada which is growing and developing in a very dynamic way. Were we to expand outside the West, we might be seen as just a small bank with no particular niche. LARRY M. POLLOCK, PRESIDENT & CEO N E W N O R T H E D M O N T O N Y M C A “Canadian Western Bank is proud to take part in the growth of the West by providing interim ﬁnancing for exciting building projects such as the impressive new Castle Downs YMCA in Edmonton.” Raymond L. Young, VP Real Estate Lending 1 2 B A R B A R A H A S T I N G S Registered nurse, Greater Victoria Hospital, Victoria & S O N M A T T H E W Z U P A N C Patient, Greater Victoria Hospital “Matthew and I really appreciate the support they’ve given Greater Victoria Hospital.” “One of our more important goals, as a corporation and as individuals, is to make a positive contribution to the fabric of the West in general, and to our own communities in particular.” S. WAYNE BAMFORD, VP & REGIONAL MANAGER 1 9 9 7 A W A R D S Our employees are, like the Bank as a whole, involved in their communities. We offer them the opportunity to participate in an employee share purchase plan which includes contributions from the Bank. We also support them strongly in their pursuit of formal education in the form of courses on banking-related topics, giving them the opportunity for personal growth. Since 1990 the Bank has given special recognition to a select number of employees in the form of Chairman’s Awards and President’s Awards. These are based on nominations of employees below the executive level, by their peers, and include cash awards of $1,000 and $250 respectively. This year’s award winners are:     Chairman’s Award Christina Jones, Calgary Main President’s Award Lucy Cabral-Roehler, Edmonton 103rd Street Kevin MacMillen, Grande Prairie        Chairman’s Award Wendy Herdin, Canadian Western Trust President’s Award Jennifer Cyr, Vancouver, Real Estate Susan Thesen, Kelowna  Chairman’s Award Donna Bereska, Loan Administration, Edmonton President’s Award Deb Nahorniak, CAP, Edmonton Stan Plaisier, Treasury, Edmonton We extend congratulations to these people, each of whom has shown the personal initiative to go beyond the expected. “We’re grateful for the positive response Westerners have given us, and we’re conﬁdent in the potential the West continues to hold.” WILLIAM J. ADDINGTON, SENIOR VP CORPORATE & STRATEGIC OPERATIONS “The economy in the West has outperformed the rest of Canada the last few years, and we expect it will continue to do so.” JACK C. WRIGHT, VP & REGIONAL MANAGER F U T U R E The Bank will continue to stick to its core business – retail and domestic banking, by increasing market penetration of the western provinces through an expanded branch network to better serve its existing and new customers. We’re grateful for the positive response Westerners have given us, and we’re conﬁdent in the potential the West continues to hold. “Don’t watch us grow; help us! Come in and become a customer!” states President & CEO Larry Pollock. “You’ll soon be hooked on our Specialty Service and Western Hospitality.” Q Are you still keen to take over Alberta Treasury Branches? A The Bank is keen on looking at all acquisitions, however ATB seems to be the one we are asked about most often. Yes, of course ATB would be very interesting for us. We have Schedule I status, a head ofﬁce in Alberta and very few of our own branches. For these reasons and more, we think ATB would make a better ﬁt with CWB than with anyone else. LARRY M. POLLOCK, PRESIDENT & CEO 1 6 Financial Report 1 8 M A N A G E M E N T ’ S A N A L Y S I S O F O P E R A T I O N S A N D F I N A N C I A L C O N D I T I O N 1 8 Overview of  1 8 Amalgamation of Canadian Western Bank and B.C. Bancorp 1 9 Net Interest Income 2 0 Other Income 2 0 Non-Interest Expenses 2 2 Taxes 2 3 Loans 2 4 Deposits 2 5 Capital Funds and Adequacy 2 6 Risk Management 3 7 Off-Balance Sheet Financial Instruments Including Derivatives 3 8 C O R P O R A T E G O V E R N A N C E 4 2 F I N A N C I A L S T A T E M E N T S 4 2 Management’s Report 4 2 Auditors’ Report 4 3 Consolidated Balance Sheet 4 4 Consolidated Statement of Income 4 5 Consolidated Statement of Changes in Shareholders’ Equity 4 5 Consolidated Statement of Changes in Financial Position N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 4 6 5 6 E X E C U T I V E O F F I C E R S 5 6 B O A R D O F D I R E C T O R S 5 7 C O R P O R A T E D I R E C T O R Y A N D B A N K I N G O F F I C E S Management’s Analysis of Operations and Financial Condition Key Performance Indicators Net income ($ thousands) Net income per common share basic fully diluted Productivity ratio (expenses as a percentage of total revenue) (1) Return on common shareholders’ equity Return on average total assets (1) A decrease in the ratio reﬂects improved productivity O V E RV I E W O F 1 9 9 7 Consolidated net income for the year ended October 31, 1997 was $15.8 million, an increase of 23% from $12.8 million reported in 1996. Earnings per share and return on assets have also risen. The signiﬁcant growth in earnings is not as apparent in earnings per share and return on equity because the average number of common shares increased year over year primarily as a result of the 1,119,000 shares issued November 1, 1996 to B.C. Bancorp shareholders at the time of the amalgamation (see following section). The improvement in results was primarily attributable to: • increased net interest income of $4.7 million or 12% due to growth of 16% in average interest bearing assets; and • increased other income of $1.0 million or 10% due to greater business volumes and a full year’s contribution from Canadian Western Trust Company (“CWT”) (acquired in April, 1996). In achieving this growth non-interest expenses were contained to an increase of $3.5 million or 11%. Total assets grew to $2.02 billion, an increase of $269 million or 15% over October 31, 1996, with loans providing $232 million or 86% of the growth. Capital funds, made up of shareholders’ equity and debentures, increased by $37 million to $166 million. This growth included the private placement of $13 million of non-convertible debentures and the $ $ 1997 15,837 1.70 1.55 64.43% 13.12% 0.85% $ $ 1996 12,822 1.58 1.45 64.79% 13.27% 0.81% 1997/1996 Increase (decrease) $ $ 3,015 0.12 0.10 (0.36)% (0.15)% 0.04% $13 million of new share capital from the B.C. Bancorp amalgamation. The total capital adequacy ratio at October 31, 1997 was 11.0% (1996 - 10.2%) with a Tier 1 component of 8.4% (1996 - 8.1%). A M A L G A M AT I O N O F C A N A D I A N W E S T E R N B A N K A N D B . C . B A N C O R P Effective November 1, 1996, the Bank and B.C. Bancorp (“BCB”) were issued letters patent of amalgamation by the Minister of Finance, amalgamating and continuing the banks as a Schedule I bank under the name Canadian Western Bank (“CWB”) (see also Note 17 to the Consolidated Financial Statements). The highlights of the amalgamation were: • the receipt of $13.6 million in consideration by shareholders of BCB, made up of cash ($796,000) and 1,119,000 CWB common shares ($12.8 million); • the assumption of approximately $83.0 million in unclaimed tax deductions which are available for deduction by CWB without any time limit and $15.0 million in tax loss carryforwards; • a broader and more diversiﬁed shareholder base as well as improved liquidity; and • an increased earnings potential as a result of leverage gained from the new share capital and the retention of greater earnings from the tax savings. 18 Loans Call loans Residential mortgages Other loans Total loans Total interest bearing assets Other assets Total Assets Liabilities Deposits Demand Notice Fixed term Total deposits Other liabilities Debentures Shareholders’ equity Total Liabilities Management’s Analysis of Operations and Financial Condition N E T I N T E R E S T I N C O M E Table 1 – Net Interest Income ($ thousands) Assets Securities and deposits with 1997 1996 Average Balance Mix Interest Rate Interest Average Balance Mix Interest Rate Interest regulated ﬁnancial institutions $ 196,976 11% $ 8,543 4.34% $ 178,687 11% $ 11,003 6.16% 16,752 257,057 1,318,020 1,591,829 1,788,805 39,028 1 14 72 87 98 2 522 18,757 104,095 123,374 131,917 – 3.12 7.30 7.90 7.75 7.37 0.00 26,571 265,335 1,076,418 1,368,324 1,547,011 26,405 2 17 68 87 98 2 1,291 22,053 99,052 122,396 133,399 – 4.86 8.31 9.20 8.94 8.62 0.00 $ 1,827,833 100% $ 131,917 7.22% $ 1,573,416 100% $ 133,399 8.48% $ 25,842 1% $ – 0.00% $ 16,821 1% $ – 0.00% 151,698 1,460,738 1,638,278 38,140 30,644 120,771 8 80 89 2 2 7 $ 1,827,833 100% $ Total Assets/Net Interest Income $ 1,827,833 $ Net interest income is the difference between interest and dividends earned on assets and interest expensed on deposits and other liabilities, including debentures. Net interest spread, or margin, is net interest income as a percentage of average total assets. In 1997 net interest income increased by $4.7 million, or 12%, due to: • increased average interest bearing assets of $242 million (16%); partially offset by, • decreased net interest spread to 2.48% from 2.59%. The lower spread was the result of the decreased yield on the securities portfolio due to a lower interest rate environment. The continued use of interest rate derivative ﬁnancial instruments to hedge against a declining rate scenario resulted in an increase of approximately $1.1 million (1996 - $1.2 million) in net interest income vis a vis net interest income that would have been recorded had these derivative instruments not been in place. 1,803 82,511 84,314 – 2,189 – 86,503 45,414 1.19 5.65 5.15 0.00 7.14 0.00 115,057 1,282,789 1,414,667 43,468 18,206 97,075 7 82 90 3 1 6 4.73% $ 1,573,416 100% $ 2.48% $ 1,573,416 $ 3,088 88,325 91,413 – 1,255 – 92,668 40,731 2.68 6.89 6.46 0.00 6.89 0.00 5.89% 2.59% Other factors affecting loan portfolio yields during the year were: • decreased average net impaired loans to $11.6 million in 1997 from $17.1 million in 1996 and increased yield on these loans to 6.4% from 5.4%; and • the collection of payout and prepayment penalties on ﬁxed rate loans which totalled approximately $1.0 million in 1997 compared to $1.2 million in 1996. In 1998 we expect: • interest rates will be relatively stable with an upward movement in prime rate; • yields on securities will show some improvement year over year; and • net interest spread will be comparable to 1997. As explained in the Interest Rate Risk section the portfolio has a positive gap with maturing assets exceeding maturing liabilities during the one year time frame. If market rates increase this would have a positive impact on spreads. 19 Management’s Analysis of Operations and Financial Condition Table 2 – Other Income ($ thousands) Credit related Retail services Trust services Net gains on securities sales Loan administration Foreign exchange services Other (1) Total 1997/1996 Increase (decrease) $ $ 1997 6,423 1,614 1,113 911 609 579 271 $ 1996 6,241 1,377 686 824 736 467 135 $ 182 237 427 87 (127) 112 136 $ 11,520 $ 10,466 $ 1,054 % 3% 17 62 11 (17) 24 101 10% (1) Other includes gains and losses on capital asset disposals and other miscellaneous non-interest revenues. O T H E R I N C O M E N O N - I N T E R E S T E X P E N S E S Other income, which includes all revenues not classiﬁed as net interest income, increased $1.1 million in 1997 to $11.5 million. Notable changes include: • increased trust services fees of $427,000 due to a full year of CWT operations and growth in self-administered registered retirement savings plan (“RRSP”) fees; • increased retail and foreign exchange services of $349,000 due to increased activity and deposit growth in the retail branches; • decreased loan administration fees of $127,000 due to renewed contracts at reduced volumes; and • the requirement, effective November 1, 1996, of the Ofﬁce of the Superintendent of Financial Institutions (“OSFI”) that all gains and losses realized on the sale of securities be reported in other income. Previously these gains and losses were reported in interest income from securities. Other income as a percentage of total revenue was 8% in 1997 compared to 7% in 1996. In 1998 total other income is expected to be comparable to 1997. We expect: • credit fees will be comparable to 1997 levels due to continued competitive market conditions; • retail and trust fees will increase due to ongoing focus on growth; and • loan administration fees will decline as the current contracts wind down and expire in March, 1998. Non-interest expenses increased $3.5 million to $36.7 million in 1997 due to: • new costs totalling $1.1 million for branches opened in ﬁscal 1997 and late in ﬁscal 1996; • higher volumes of activity due to continued growth; and • increased provincial capital taxes of $545,000 due to increased capital ($264,000) and for Alberta ($281,000) both increased proﬁtability and a further reduction in the remission (see the Taxes section). The productivity ratio improved to 64.4% since the rate of growth of revenues exceeded that of non-interest expenses. This was achieved in spite of the net interest margin declining to 2.48% from 2.59%. Non-interest expenses as a percentage of average assets was 1.98% in 1997, a signiﬁcant improvement over the 2.09% recorded in 1996. This means overhead costs grew at a slower rate than growth in assets. In 1998 we expect: • the full time staff complement will increase by approximately 6% to accommodate growth in volumes and activity at the branches; • other increases in non-interest expenses will be primarily attributable to volume increases from growth; and • a small improvement (i.e. decrease) in the productivity ratio. 20 Management’s Analysis of Operations and Financial Condition Table 3 – Non-Interest Expenses ($ thousands) Salaries and Staff Beneﬁts Salaries Pension and other staff beneﬁts Total Premises Rent Depreciation Other Total Equipment and Furniture Depreciation Other Total General Deposit insurance premiums Capital and business taxes Professional fees and services Postage and stationery Marketing and business development Banking charges Travel Communications Other Total Total Non-Interest Expenses Productivity Ratio Net interest income Other income Total revenue Non-interest expenses 1997/1996 Increase (decrease) 1997 1996 $ 16,590 $ 15,100 $ 2,421 19,011 2,254 17,354 2,686 623 750 4,059 1,162 1,127 2,289 2,254 2,088 1,879 1,059 984 641 623 484 1,310 11,322 36,681 45,414 11,520 56,934 36,681 $ $ $ 2,593 601 685 3,879 811 1,058 1,869 2,128 1,598 1,532 1,000 906 497 481 434 1,493 10,069 33,171 40,731 10,466 51,197 33,171 $ $ $ $ $ $ $ 1,490 167 1,657 93 22 65 180 351 69 420 126 490 347 59 78 144 142 50 (183) 1,253 3,510 4,683 1,054 5,737 3,510 % 9.9% 7.4 9.6 3.6 3.7 9.5 4.6 43.3 6.5 22.5 5.9 30.7 22.7 5.9 8.6 29.0 29.5 11.5 (12.3) 12.4 10.6% 11.5% 10.1 11.2 10.6% Productivity Ratio (expenses as a percentage of total revenue) 64.4% 64.8% Capital expenditures of $3.6 million are budgeted for 1998 and will be funded from general operating revenues. Approximately 90% of this total, or $3.3 million, relates to proposed expenditures on computer hardware and software, the largest component of which relates to the proposed acquisition, installation and testing of a new banking system. No speciﬁc commitments existed at year end for these capital expenditures. Productivity Ratio 1997 1996 1995 1994 1993 64.4% 64.8% 64.4% 68.3% 76.5% 21 Management’s Analysis of Operations and Financial Condition TA X E S As a result of the amalgamation with BCB, effective November 1, 1996, the Bank assumed approximately $15.0 million in tax loss carryforwards, and $83.0 million in unclaimed tax deductions which are available for deduction in computing net income for tax purposes without time limitation. Of the consideration received by the BCB shareholders, $10.3 million was allocated to a deferred income tax asset which will be amortized to current income tax expense over the same period as the losses and unclaimed deductions are utilized. The current year’s tax provision includes current tax expense of $1.8 million (1996 - $1.2 million) offset by deferred tax credits of $1.4 million (1996 - $33,000). The current tax provision represents income tax of the trust subsidiary of $599,000 (1996 - $890,000), consolidated large corporations tax of $348,000 (1996 - $274,000) and the amortization of $876,000 of the deferred tax asset acquired. Deferred income taxes arise from current year timing differences related to claiming deductions for income tax purposes on a basis different from accounting and relate primarily to the provision for credit losses. Approximately $8.0 million (1996 - $7.1 million) of tax loss carryforwards and $9.0 million of acquired tax loss carryforwards were used to eliminate taxes otherwise payable for the year ended October 31, 1997. At October 31, 1997, the Bank has approximately $6.0 million of tax loss carryforwards which expire in 2003, and approximately $83.0 million of unclaimed deductions which are available to reduce future years’ income for tax purposes. In addition, the trust subsidiary has $2.6 million of tax loss carryforwards, which expire up to 2004. The tax beneﬁt of these losses has not been recognized in income. Table 4 – Capital Taxes ($ thousands) Capital Tax Rate 1.00% 2.00% (1) 3.25% 3.00% Capital Allocation (2) 40% $ 52% 5% 3% 1997 1996 $ 661 949 193 131 351 771 151 116 British Columbia Alberta Saskatchewan Manitoba Total Capital Taxes $ 1,934 $ 1,389 (1) Capital tax for ﬁnancial institutions headquartered in Alberta is limited to 10% of pre-tax net income allocated to Alberta provided that value is less than Alberta capital taxes otherwise payable. This reduction decreases on a relative basis when a ﬁnancial institution’s capital base totals more than $100 million and is eliminated when its capital base reaches $200 million. The Bank’s taxable capital base was approximately $129 million at October 31, 1997 (1996 - $103 million). (2) These capital allocation percentages are for the Bank only, although total capital tax includes capital taxes paid in British Columbia by the trust company. Capital taxes for 1997 totalled $1.9 million compared to $1.4 million in 1996. The increase is primarily attributable to: • increased capital due to the BCB amalgamation and the retention of earnings; • increased proﬁtability, which increased the Alberta capital tax; and • a reduction of $158,000 (1996 - $26,000) in the remission amount respecting Alberta capital tax. In 1998 capital taxes are expected to increase due to: • increased retained earnings; and • increased capital tax in Alberta as proﬁtability is expected to rise and total capital will increase further over the $100 million threshold level, reducing the remission. The goods and services tax (GST) carries with it a signiﬁcant cost to the Bank as it does to all ﬁnancial institutions to the extent that GST paid is not recoverable through increased service charges, increased loan costs or reduced deposit rates. This is because the majority of the Bank’s activities, except leasing and loan administration, are exempt under GST legislation and thus GST cannot be charged and collected from customers as occurs in the majority of Canadian businesses. As a result, the ability to recover the GST paid on most purchased goods and services is lost. The estimated cost of unrecoverable GST during 1997 was $694,000 compared to $653,000 in 1996. 22 Management’s Analysis of Operations and Financial Condition L O A N S Table 5 – Outstanding Loans by Portfolio Type and by Provincial Location of Branch ($ millions) October 31, 1997 British Columbia Alberta Saskatchewan Manitoba Total (1) Composition% Loans to Individuals Residential mortgages $ Other Total Loans to Businesses Call Commercial Construction and real estate Industrial Energy Other Total Total Loans Composition % October 31, 1996 Loans to Individuals Residential mortgages Other Total Loans to Businesses Call Commercial Construction and real estate Industrial Energy Other Total Total Loans Composition % $ $ $ 118 34 152 – 233 361 146 – – 740 892 52% 117 29 146 – 181 341 130 – – 652 798 $ $ $ $ 104 45 149 24 122 203 131 42 – 522 671 39% 117 30 147 20 72 192 87 38 8 417 564 $ $ $ $ 31 5 36 – 6 27 20 – – 53 89 5% 24 4 28 – 2 28 10 – – 40 68 $ $ $ $ 4 3 7 – 13 39 12 – – 64 71 4% 4 1 5 – 8 39 10 – – 57 62 53% 38% 5% 4% $ $ $ $ 257 87 344 24 374 630 309 42 0 1,379 1,723 100% 262 64 326 20 263 600 237 38 8 1,166 1,492 100% (1) This table does not include an allocation of the allowance for credit losses and deferred revenue and discounts. 15% 5 20 1 22 37 18 2 0 80 100% 18% 4 22 1 18 40 16 2 1 78 100% Loans, as reported on the consolidated balance sheet, totalled $1.71 billion at the end of 1997 compared to $1.48 billion at the end of 1996, an increase of 16%. Highlights of the year over year changes are: P O RT F O L I O • growth in commercial loans of $111 million (42%) which represents 22% of the portfolio versus 18% a year ago; • an increased industrial portfolio of $72 million (30%) which also increased the relative mix to 18% from 16% in 1996; • growth in construction and real estate loans of $30 million (5%) which represents 37% of the portfolio versus 40% a year earlier; • decreased residential mortgages to 15% of the total portfolio versus 18% one year ago due to continuing highly competitive market conditions in a segment that is not within our primary focus; and • growth in the energy portfolio, a specialty in our Calgary market, of $4 million (11%). Loans by Portfolio Commercial 22% Energy 2% Industrial 18% Personal 20% Call 1% Construction and real estate 37% 23 Management’s Analysis of Operations and Financial Condition L O C AT I O N • loan growth of $94 million (12%) in British Columbia and $137 million (20%) in the prairie provinces; and • a relatively constant overall percentage distribution In 1998 the Bank’s business plan focuses on growing the industrial and energy portfolios. Although the market remains competitive, especially in this low rate environment, signiﬁcant overall loan growth is planned for 1998 as the Bank expands its activities. D E P O S I T S by province. Table 6 – Deposits ($ thousands) Canadian Currency Personal chequing and savings Business demand and savings Fixed term: Under $100,000 $100,000 and over Registered retirement products Foreign Currency (Canadian equivalent) Banks Others Total Deposits grew to $1.82 billion, an increase of 15%. The analysis of these deposits is presented in Table 6 and the mix is primarily consistent year over year. Highlights of the year include: • increased balances in the business component of demand and savings accounts which signals some success in a continuing effort to lower our overall cost of funds; • the introduction of the Interac® Direct Payment system as a service to personal customers which took place in the second half of the year and is expected to improve demand balances; and • increased total deposits raised in our retail branches of almost 16%. The mix of deposits by source also remained relatively consistent with last year: • branches – 45% (1996 - 44%) • deposit agents – 48% (1996 - 50%) • wholesale clients – 7% (1996 - 6%) 1997 1996 Amount % of Total Amount % of Total $ 78,798 141,873 929,712 250,393 401,831 1,802,607 7,042 7,863 14,905 4.3% $ 7.8 51.2 13.8 22.1 99.2 0.4 0.4 0.8 73,135 95,549 803,872 197,487 404,937 1,574,980 6,704 4,171 10,875 4.6% 6.0 50.7 12.5 25.5 99.3 0.4 0.3 0.7 $ 1,817,512 100.0% $ 1,585,855 100.0% CWT, whose portfolio mix is included in the above numbers, does not have retail branches and so gathers most of its deposits through deposit agents, although $11.2 million of CWT’s growth was generated through CWB’s retail branches. Retail branch deposits are generally considered to be more stable and the Bank’s ongoing objective is to decrease reliance on deposits other than these over time. Agent deposits are slightly more expensive because a commission is paid, but this added cost is countered by a reduced need for establishment of an extensive branch network. Deposits by Source ($ millions) 1997 1996 1995 1994 1993 131 870 817 97 786 703 91 475 627 69 262 303 57 225 253 24 Wholesale Agent Branches Management’s Analysis of Operations and Financial Condition C A P I TA L F U N D S A N D A D E Q U A C Y Table 7 – Capital Structure and Ratios at Year End ($ thousands) Tier 1 Capital Retained earnings Common shares Less: unamortized goodwill Total Tier 1 capital Tier 2 Capital General impairment allowance (1) Subordinated debentures Total Tier 2 capital Total Capital Capital Ratios to Risk-weighted Assets Tier 1 capital Tier 2 capital Total Capital Assets to Capital Multiple (2) 1997 1996 1997/1996 Increase (decrease) $ 39,476 89,057 (593) $ 27,418 75,136 (666) 127,940 101,888 $ 2,282 37,116 39,398 – 26,000 26,000 $ 167,338 $ 127,888 $ 8.4% 2.6% 11.0% 12.2 8.1% 2.1% 10.2% 13.9 12,058 13,921 73 26,052 2,282 11,116 13,398 39,450 0.3% 0.5% 0.8% (1.7) (1) Effective October 31, 1997 upon approval of application made to OSFI, banks were allowed to include their general allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2 capital. The Bank made application and was granted an inclusion rate of .15% of risk-weighted assets. (2) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less investments in associated corporations and goodwill divided by total capital. Table 8 – Risk-weighted Assets ($ thousands) Balance Sheet Assets Cash resources Securities Loans Other assets Total balance sheet assets Credit Instruments (1) (contract amounts) Guarantees and standby letters of credit Commitments to extend credit (2) Total credit instruments Derivative Financial Instruments (3) (notional amounts) Interest rate contracts Foreign exchange contracts Total derivative ﬁnancial instruments Total Risk-weighted Assets 1997 Risk- weighted Balance Balance Balance $ 129,163 $ 25,662 $ 63,405 $ 142,720 1,710,007 41,061 8,510 1,425,868 38,460 184,209 1,478,392 28,066 1996 Risk- weighted Balance 12,491 27,327 1,179,035 25,847 $ 2,022,951 $ 1,498,500 $ 1,754,072 $ 1,244,700 $ $ 24,279 1,800 26,079 $ 107,000 5,489 $ 112,489 $ $ $ $ 21,307 1,080 22,387 97 11 108 $ $ $ $ 18,479 440 18,919 60,000 1,341 61,341 $ $ $ $ 15,356 0 15,356 231 3 234 $ 1,520,995 $ 1,260,290 See Note 11 to the Consolidated Financial Statements for further details. (1) (2) Greater than one year only. (3) See Note 15 to the Consolidated Financial Statements for further details. 25 Management’s Analysis of Operations and Financial Condition C A P I TA L F U N D S A N D A D E Q U A C Y OSFI requires banks to measure capital adequacy in accordance with instructions for determining risk-adjusted capital and risk-weighted assets including off-balance sheet commitments. Based on the deemed credit risk of each type of asset a weighting of 0% to 100% is assigned. Published regulatory guidelines require banks to maintain a minimum ratio of capital to risk-weighted assets and off-balance sheet items of 8% of which 4% must be core capital (Tier 1) and the remainder supplementary capital (Tier 2). However, OSFI encourages Canadian banks to maintain a total capital adequacy ratio of 10% with a target Tier 1 ratio of not less than 7%. In the Bank, Tier 1 capital is comprised of common shareholders’ equity and Tier 2 capital includes subordinated debentures and an inclusion of the general allowance for credit losses at a prescribed inclusion rate of .15% of risk-weighted assets. Capital funds are managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and which take into account forecasted capital needs and markets. Our goal is to maintain adequate regulatory capital to provide enough support for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, while still improving our return on equity through a better capital mix. Medium term plans include growing Tier 2 capital relative to Tier 1 in order to achieve more efﬁciency, but keeping Tier 2 weighting within industry norms of 30% of total capital. At October 31, 1997 the total capital ratio coverage was 11.0% (1996 - 10.2%) of which 8.4% (1996 - 8.1%) was Tier 1 capital. Total regulatory capital increased $39.5 million over 1996 as a result of: • earnings net of dividends of $13.5 million; • increased subordinated debt through the issue of conventional debt totalling $13.1 million, offset by the redemption of a $2.0 million convertible debenture and a related charge of $1.1 million to retained earnings, representing consideration received by the holder for the conversion option; • additional share capital of $12.8 million, representing 1,119,000 shares issued upon amalgamation with BCB, effective November 1, 1996, offset by a charge to retained earnings of $337,000 for share issue expenses; • additional share capital of $1.1 million issued upon the exercise of 128,400 stock options; and • the newly allowable inclusion of the general allowance for credit losses. Subordinated debentures include both convertible ($24.0 million) and conventional ($13.1 million) debentures. Note 8 to the Consolidated Financial Statements details the terms of the debentures. The Bank has share option plans that are provided as an incentive to ofﬁcers and employees who are in a position to materially impact the longer term ﬁnancial success of the Bank as measured by shareholder wealth. Note 9 to the Consolidated Financial Statements details the number of shares under option outstanding and the associated exercise price and dates of exercisability. R I S K M A N A G E M E N T O V E RV I E W The Bank’s risk management policies have evolved and improved over the past several years in order to accommodate the new challenges that come with growth, expansion and changes in the regulatory and public domain. Effective risk management is central to the ability to remain strong and proﬁtable and includes identifying, assessing, managing and monitoring all forms of risk. The Bank is primarily exposed to four basic types of risk: • credit risk • liquidity risk • market risk • operational risk The most senior executives are responsible for identifying risks and establishing appropriate risk management policies and frameworks. The Board of Directors, either directly or through its committees, reviews and approves the key policies, and implements speciﬁc reporting procedures to enable them to monitor ongoing compliance over signiﬁcant risk areas. At least annually a report on signiﬁcant internal controls is presented to the Board and the Audit Committee. 26 Management’s Analysis of Operations and Financial Condition The Loans Committee of the Board, which maintains a close working relationship with the credit risk management group, is responsible for: The Bank employs and is committed to a number of important principles to manage credit exposures which include: • the review and approval of credit risk management • a Loans Committee of the Board whose duties policies; • loans in excess of delegated limits; • the review and monitor of impaired and other less than satisfactory loans; and • the recommendation of the adequacy of the allowance for credit losses to the Audit Committee. At the operational level, the Asset Liability Committee (“ALCO”) plays a key role in the management of liquidity and market risk. ALCO is a management committee chaired by the Senior Vice President, Corporate & Strategic Operations with the President and Chief Executive Ofﬁcer (“CEO”) and other senior executives as members and is responsible for: • the establishment and maintenance of policies and programs for liquidity management and control, funding sources, investments, foreign exchange risk, interest rate risk and derivatives; and • regular meetings to review compliance and discuss strategy in this area. Asset liability management policies are approved and reviewed at least annually by the Board with quarterly status reporting provided to the Board. The Operations Committee meets regularly and is made up of experienced bank ofﬁcers from all areas of operations and is chaired by a member of senior management. This committee is responsible for developing appropriate policies and procedues, including internal controls, respecting day-to-day, routine operations. The internal audit group performs inspections in all areas of the Bank, including CWT, and reports the results directly to senior management, the President and CEO and the Audit Committee. C R E D I T R I S K M A N A G E M E N T Credit risk is the risk that a ﬁnancial loss will be incurred due to the failure of a counterparty to discharge its obligation to the Bank. This risk can relate to balance sheet assets, such as loans, as well as off-balance sheet assets such as guarantees and letters of credit. Exposure to a single borrower or associated borrowers is normally limited to 10% of capital funds. The current approved maximum credit exposure is $10 million excepting government risk. include approval of lending policies, establishment of lending limits of the Bank, the delegation of lending limits and the review of larger credits as well as quarterly reports prepared by management on watch list loans, impaired loans, the adequacy of the allowance for credit losses, environmental risk and diversiﬁcation of the portfolio; • delegated lending authorities which are clearly communicated to personnel engaged in the credit granting process, a deﬁned approval process for loans in excess of limits and the review of larger credits by a senior management group prior to recommendation to the Loans Committee; • credit policies, guidelines and directives which are communicated to all branches and ofﬁcers whose activities and responsibilities include credit granting and risk assessment; • appointment of personnel engaged in credit granting who are qualiﬁed, experienced bankers; • a credit risk rating classiﬁcation established for all credits and reviewed no less than annually; • annual reviews of individual credit facilities (excepting consumer loans and residential mortgages); • diversiﬁcation of risk by client, geographic area, industry sectors and products; • pricing of credits commensurate with risk to ensure appropriate compensation; • management of growth within quality objectives; • early recognition of problem accounts with utilization of a specialist in managing accounts; • independent annual reviews of credit valuation, risk classiﬁcation and credit management procedures by the internal audit group which include reporting the results to senior management, the President and CEO and the Audit Committee; and • detailed quarterly reviews of accounts rated less than satisfactory including a watch list report recording accounts with evidence of weakness, an impaired loan report covering loans which show impairment to the point where a loss is probable, and the establishment of an action plan for each account. 27 Management’s Analysis of Operations and Financial Condition Environmental Risk The operations conducted by the Bank do not impose a material effect on the environment. However, losses can be incurred if a borrower is unable to repay loans due to environmental clean up costs or if the Bank becomes directly liable for clean up costs if it is deemed to have taken control or ownership of a contaminated property. Impaired Loans During 1997 impaired loans declined steadily and at the same time the general (unallocated) allowance for credit losses grew to a record high of $7.5 million. The general allowance for credit losses, which is in addition to provisions for speciﬁc losses, provides a cushion for future credit losses which are not yet speciﬁcally identiﬁable. Risk assessment criteria and procedures are in place to manage environmental risks and these are communicated to lending personnel. Reports on environmental inspections and ﬁndings are reviewed by senior management and reported upon quarterly to the Board. Portfolio Quality The Bank’s strategy is to continually improve and maintain a quality portfolio. Efforts are directed towards achieving a wide diversiﬁcation, engaging experienced personnel who provide a hands on approach in credit granting, account management and quick action when problems develop. The lending focus is primarily directed to small and medium-sized businesses and individuals with operations conducted in the four western provinces. Relationship banking and “know your customers” are important tenets of account management. An appropriate return on the level of risk is fundamental. Table 9 – Change in Gross Impaired Loans ($ thousands) Gross impaired loans, beginning of year Net additions (reductions) in impaired loans Write-offs Gross Impaired Loans, End of Year Gross Impaired Loans as a Percentage of Total Loans Gross impaired loans declined $6.0 million in 1997 reﬂecting both a concerted effort to resolve problem accounts and general industry trends. In 1996, a work out specialist was engaged to focus exclusively on selected impaired loans. This has resulted in accelerating a reduction of loans in this category. As shown in Table 9 gross impaired loans have reduced to $21.5 million representing 1.26% (1996 - 1.86%) of total outstanding loans. 1997/1996 Increase 1997 1996 (decrease) $ 27,556 $ 30,878 $ (1,457) (4,565) 441 (3,763) (3,322) (1,898) 802 $ 21,534 $ 27,556 $ (6,022) 1.26% 1.86% (0.60)% 28 Management’s Analysis of Operations and Financial Condition Impaired loans net of the allowance for credit losses have also reduced substantially over the past year and represent a very satisfactory .53% (1996 - .99%) of net loans outstanding. The Bank expects this trend to continue in 1998 with a moderate decline in net impaired loans. Table 10 shows the year over year changes to the allocation of the allowance for credit losses to speciﬁc provisions by category of impaired loans and to the general allowance for credit losses. Table 10 – Allowance for Credit Losses ($ thousands) Speciﬁc Provisions Consumer and personal Real estate Industrial Other General Allowance Total (1) Recoveries in 1997 totalled $11,000 (1996 - $103,000). Allowance for Credit Losses as a Percentage of Gross Impaired Loans 1997 1996 1995 1994 1993 57.5% 47.0% 32.8% 29.7% 32.5% Net Impaired Loans as a Percentage of Net Loans Outstanding 1997 1996 1995 1994 1993 0.53% 0.99% 1.83% 1.58% 1.85% 1996 Ending Balance Write-offs, net of Recoveries (1) Provision for Credit Losses 1997 Ending Balance $ $ 577 2,638 1,070 2,644 6,012 $ 647 2,537 96 1,274 – $ 12,941 $ 4,554 $ 546 724 457 809 1,464 4,000 $ 476 825 1,431 2,179 7,476 $ 12,387 Allowance for Credit Losses The allowance for credit losses consists of $4.9 million in speciﬁc provisions and $7.5 million in the general allowance for credit losses with the latter now representing 0.43% of gross outstandings. This compares very favourably with the Bank’s ﬁve year loan loss average of 0.35%. The general allowance is available to cover credit losses inherent in the portfolio which are not currently identiﬁable on an account by account basis. An assessment of the adequacy of the general allowance is conducted quarterly and measured against the Bank’s ﬁve year loan loss average. In addition a method of applying a progressive (increases with higher risk) loss ratio range against groups of loans of a common risk rating is utilized to test the general allowance adequacy. As a further reﬁnement to this method, the Bank is committed 29 Management’s Analysis of Operations and Financial Condition to develop a credit migration methodology to determine loan loss probabilities during the life of individual loans or groups of loans with common characteristics. We expect to have this new methodology structured early in ﬁscal 1998 with testing throughout the year. Provision for Credit Losses Provision for Credit Losses as a Percentage of Average Loans Outstanding 1997 1996 1995 1994 1993 0.25% 0.30% 0.32% 0.41% 0.46% The trend of improving credit quality in the portfolio is reﬂected in the above graph. For the year ended October 31, 1997 the provision for credit losses represented 0.25% of average loans. This improvement is further illustrated by Table 10 which shows signiﬁcant growth in the general allowance. We anticipate this improvement to carry on through 1998. Diversiﬁed Portfolio Total Advances Based on Location (also see Table 5) Geographical Distribution of Loans British Columbia 52% Saskatchewan 5% Manitoba 4% Alberta 39% During 1997 we expanded our analysis of the loan portfolio to provide more detail on loans to the various sectors we are servicing. The following table illustrates the diversiﬁcation in our lending operations by industry sector. 30 Total Advances Based on Industry Sector As at October 31 (Sector) (%) Real estate operations Consumer loans & residential mortgages Construction Transportation & storage Manufacturing Hotel/motel Government guaranteed Oil & gas (production) Finance & insurance Logging/forestry Other services Wholesale trade Other Total 1997 22.3% 19.4 18.2 5.5 4.5 3.8 3.7 3.3 2.8 2.7 2.6 2.4 8.8 100.0% Management of the loan portfolio includes the strategy of avoiding high concentration in one geographic area or industry sector. The Bank’s portfolio is well diversiﬁed with a mix of corporate and personal business. Areas currently in focus are industrial and oil and gas lending. Industrial lending units are set up within branches or stand alone operations while oil and gas lending is conducted by specialists in our Calgary market. In addition to these areas, we also have real estate divisions established in the major centres in which we operate. L I Q U I D I T Y R I S K Liquidity risk is the risk that the Bank will not have sufﬁcient cash to meet its obligations as they become due. This risk arises from ﬂuctuations in cash ﬂows from lending, deposit taking, investing and other activities. Effective liquidity management ensures that adequate cash is available to honour all cash outﬂow obligations. Maintenance of a prudent liquidity base also provides ﬂexibility to fund loan growth and to react to other market opportunities. The liquidity policy includes: • measurement and forecast of cash ﬂows; • maintenance of a high quality pool of liquid assets; • a stable base of core deposits built from retail and commercial customers; • limitations on single deposits and sources of deposits; • diversiﬁcation of funding sources to the greatest extent possible; and • an approved contingency plan. Management’s Analysis of Operations and Financial Condition Key features of liquidity management are: • the daily monitor of expected cash inﬂows and outﬂows, with management information systems also in place to track and forecast the liquidity position, including the ﬂows from off-balance sheet items, on a weekly and forward three month rolling basis; • consideration of the term structure of assets and liabilities, with emphasis on deposit maturities, as well as expected loan fundings and other commitments to provide funds when determining required levels of liquidity; and • the separate management of the liquidity position of the Bank and CWT so as to comply with related party and other regulatory tests. A schedule outlining the consolidated securities portfolio at October 31, 1997 is provided in Note 2 to the Consolidated Financial Statements. A conservative policy is maintained in this area with: • investments limited to high quality debt securities to meet objectives of liquidity management and to provide an appropriate return; • development and implementation of speciﬁc investment criteria and procedures for purposes of management of the securities portfolio; • regular review, monitoring and approval by ALCO of policies regarding these investments with subsequent review and approval by the Board of Directors at least annually; and • the presentation of quarterly reports to the Board on the securities portfolio. Table 11 – Liquid Assets ($ thousands) Cash Deposits with regulated ﬁnancial institutions Cheques in transit Total Cash Resources Call loans/repurchase agreements Government of Canada treasury bills Government of Canada and provincial bonds term to maturity 1 year or less Government of Canada and provincial bonds term to maturity over 1 year Other marketable securities Total Call Loans and Marketable Securities Total Liquid Assets Total Assets Liquid assets as a percentage of total assets Total Deposit Liabilities Liquid assets as a percentage of total deposit liabilities $ 1997 854 109,845 18,464 129,163 24,000 63,538 $ 1996 952 56,048 6,405 63,405 20,000 109,335 1997/1996 Increase (decrease) $ (98) 53,797 12,059 65,758 4,000 (45,797) 10,736 20,625 (9,889) 59,936 7,490 165,700 26,921 26,578 203,459 33,015 (19,088) (37,759) $ 294,863 $ 266,864 $ 27,999 $ 2,022,951 $ 1,754,072 $ 268,879 14.6% 15.2% (0.6)% $ 1,817,512 $ 1,585,855 $ 231,657 16.2% 16.8% (0.6)% 31 Management’s Analysis of Operations and Financial Condition As shown in Table 11, liquid assets comprised of cash, interbank deposits, items in transit, call loans/repurchase agreements and marketable securities, totalled $294.9 million at October 31, 1997, an increase of $28.0 million from October 31, 1996. Liquid assets represented 14.6% (1996 - 15.2%) of total assets and 16.2% (1996 - 16.8%) of total deposit liabilities at that date. These liquidity levels are within the Bank’s targeted range with somewhat higher liquidity typically held during periods of high deposit activity such as the January through March RRSP season. Highlights of the composition of liquid assets at October 31, 1997 follow: • maturities within one year total 79% or $233.9 million; • Government of Canada treasury bills make up 22% of the book value with other Government of Canada and provincial debt securities accounting for 24% of liquid assets; • highly rated short term commercial paper totalled $6.5 million compared to $25.6 million one year ago; and • CWT’s security portfolio, which is included in the above ﬁgures, is comprised of $20 million of treasury bills which substantially exceeded regulatory liquidity requirements. Table 12 – Deposit Maturities Within One Year ($ millions) At October 31, 1997 Demand deposits Notice deposits Deposits payable on a ﬁxed date Totals At October 31, 1996 Totals Also included in liquid assets are interest bearing deposits held with regulated ﬁnancial institutions, including bankers acceptances, and call loans and repurchase agreements. Call loans and/or repurchase agreements are short term advances, typically no more than several days in duration, to securities dealers and are either secured by treasury bills or other high quality liquid securities, or require the dealer to repurchase the securities. During the year, deposits with ﬁnancial institutions increased while holdings of treasury bills decreased in order to take advantage of the wider spreads that emerged between bank paper and treasury bills. The amount invested in government bonds with maturities over one year also increased in view of the additional yield to be gained by extending term. Short term credit facilities have been arranged with a number of other ﬁnancial institutions. The expansion of such facilities will continue to be pursued as an additional liquidity safeguard. The government insured/guaranteed mortgage and loan portfolios also represent a potential source of liquidity. The primary source of new funding is the issuance of deposit instruments. A summary of the deposit maturity mix is presented in Tables 12 and 13. Within 1 Month 1-3 Months 3 Months Cumulative - 1 Year Within 1 Year $ $ $ 41 185 281 507 416 $ $ $ – – 167 167 142 $ $ $ – – 461 461 420 $ $ $ 41 185 909 1,135 978 32 Management’s Analysis of Operations and Financial Condition Table 13 – Total Deposit Maturities ($ millions) At October 31, 1997 Demand deposits Notice deposits Deposits payable on a ﬁxed date Totals At October 31, 1996 Totals Within 1 Year 41 185 909 1,135 978 $ $ $ $ $ $ 1-2 Years – – 211 211 227 2-3 Years – – 192 192 146 $ $ $ 3-4 Years – – 166 166 95 $ $ $ 4-5 Non-interest Years Sensitive Total $ $ $ – – 108 108 140 $ $ $ – _ 6 6 – $ $ $ 41 185 1,592 1,818 1,586 A breakdown of deposits by source is provided under the heading Deposits. Target limits by source have been established as part of the Bank’s overall liquidity policy and are monitored to ensure an acceptable level of diversiﬁcation in sources of funding is maintained. The Bank continues to aggressively pursue retail deposits generated through its branch network as a core funding source. However, the total dollar value of agent generated deposits will likely continue to increase even though the goal is to decrease funding from this source as a percentage of total deposit liabilities. CWT has historically raised essentially all of its funding through deposit agents. The Bank distributes CWT’s deposit products through the Bank’s branch network and at October 31, 1997, $11.2 million of CWT deposits had been raised in this manner. M A R K E T R I S K Market risk is the impact on earnings resulting from changes in ﬁnancial market variables such as interest rates and foreign exchange rates. Market risk arises when making loans, taking deposits and making investments. The Bank does not undertake trading activities and, therefore, does not have risks related to such activities as market making, arbitrage or proprietary trading. The Bank’s market risks are conﬁned to interest rates and foreign exchange as discussed below. Interest Rate Risk Interest rate risk or sensitivity can be deﬁned as the impact on net interest income, both current and future, resulting from a change in market interest rates. This risk and potential variability in earnings arises when cash ﬂows associated with interest sensitive assets and liabilities have different repricing dates. The differential is commonly referred to as the interest rate gap position. Interest rate gaps arise as a result of the ﬁnancial intermediation process and reﬂect differences in term preferences on the part of borrowers and depositors. A positive interest rate gap exists when interest sensitive assets exceed interest sensitive liabilities for a speciﬁc maturity or repricing period. A positive gap will tend to lead to an increase in net interest income when market interest rates rise since assets are repricing earlier than liabilities. The opposite impact will occur when market interest rates fall. A negative gap is the opposite of a positive gap. To manage interest rate risk, ALCO establishes policy guidelines for interest rate gap positions and meets regularly to monitor the Bank’s position and decide future strategy. The objective is to manage the interest rate risk within prudent guidelines. Interest rate risk policies are also approved and reviewed at least annually by the Board with quarterly reporting provided to the Board as to the Bank’s position, both consolidated and non-consolidated. Exposure to interest rate risk is controlled by managing the size of the static gap position between interest sensitive assets and interest sensitive liabilities for future periods. Gap analysis is supplemented by computer simulation of the asset liability portfolio structure and dollar estimates of net interest income sensitivity for periods of up to one year. The interest rate gap is measured monthly. Table 14 shows the consolidated gap position for selected time intervals. Figures in brackets represent an excess of liabilities over assets or a negative gap position. 33 Management’s Analysis of Operations and Financial Condition Table 14 – Asset Liability Gap Positions ($ millions) Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year $ At October 31, 1997 Assets Cash resources Securities Loans Other assets Off-balance sheet swaps Total assets Liabilities and Equity Deposits Other liabilities Debentures Shareholders’ equity Off-balance sheet swaps Total liabilities and equity Interest Rate Sensitive Gap $ Cumulative Gap $ Cumulative Gap as a 75 11 705 – 5 796 507 – – – 107 614 182 182 Percentage of Total Assets 8.5% At October 31, 1996 Total assets $ Total liabilities and equity Interest Rate Sensitive Gap $ Cumulative Gap $ Cumulative Gap as a 612 471 141 141 $ $ $ $ $ $ Total Within 1 Year 90 81 1,037 – 107 1,315 1,135 – – – 107 1,242 73 73 $ $ $ 1 Year to 5 Years Over 5 Years Non- interest Sensitive $ $ $ – 52 686 – – 738 676 – 33 – – 709 29 102 $ $ $ – 9 – – – 9 – – 4 – – 4 5 107 $ $ 39 1 (13) 41 – 68 6 40 – 129 – 175 $ $ (107) – $ $ 10 13 71 – 30 124 167 – – – – 167 (43) 139 $ $ $ 5 57 261 – 72 395 461 – – – – 461 (66) 73 6.5% 3.4% 3.4% 4.8% 5.0% (5.0)% 127 147 (20) 121 $ $ $ 389 420 (31) 90 $ $ $ 1,128 1,038 90 90 $ $ $ 648 628 20 110 $ $ $ 3 6 (3) 107 $ 34 141 $ 1,813 1,813 $ (107) $ $ – $ Total 129 143 1,710 41 107 2,130 1,817 40 37 129 107 2,130 – – – – – – Percentage of Total Assets 7.8% 6.7% 5.0% 5.0% 6.1% 5.9% (5.9)% Notes: 1. 2. Accrued interest is excluded in calculating interest sensitive assets and liabilities. 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. Deposits with a redemption option totalled approximately $61 million as at October 31, 1997. The majority of ﬁxed rate loans, mortgages and leases are either closed or carry prepayment penalties. The gap analysis in Table 14 is a static measurement of interest rate sensitive gaps at a speciﬁc time. These gaps can change signiﬁcantly in a short period of time. The impact of changes in market interest rates on earnings will depend upon the magnitude and rate of change in interest rates as well as the size and maturity structure of the cumulative interest rate gap position and the management of those positions over time. During the year: • the one year and under cumulative gap decreased from 5.0% of assets to 3.4%; • the one month and under gap increased from 7.8% to 8.5%; and • the ﬁve year and under cumulative gap decreased from 6.1% to 4.8%. 34 Management’s Analysis of Operations and Financial Condition Of the $909 million in ﬁxed term deposit liabilities maturing within one year from October 31, 1997, approximately $107 million (5.9% of total deposit liabilities) are ﬁxed term RRSP deposits maturing between December 1, 1997 and April 30, 1998. The term in which these deposits are retained will have an impact on the future asset liability structure and hence interest rate sensitivity. Given the current historically low interest rate environment and recent short term interest rate increases, strong demand from borrowers wishing to ﬁx loan rates for longer terms out to ﬁve years is expected. Conversely, depositors may give preference to shorter terms, in anticipation of possible future rate increases, as well as possibly being attracted to alternative investments offering potentially higher returns. The effective interest rates for each class of ﬁnancial asset and liability, including off-balance sheet instruments, are shown in Table 15. Table 15 – Weighted Average Effective Interest Rates (%) Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year Total Within 1 Year 1 Year to 5 Years Over 5 Years Total At October 31, 1997 Assets Cash resources Securities Loans Off-balance sheet swaps Total assets Liabilities and Equity Deposits Debentures Off-balance sheet swaps Total liabilities and equity Interest Rate Sensitive Gap At October 31, 1996 Total assets Total liabilities and equity Interest Rate Sensitive Gap 3.2% 3.7% 3.9% 3.3% – % – % 3.3% 3.5 6.7 8.3 6.3 2.8 – 3.7 3.0 3.3% 6.3% 3.1 3.2% 3.4 7.3 4.7 6.0 4.5 – – 4.5 1.5% 6.9% 5.1 1.8% 4.0 7.9 4.2 6.6 5.0 – – 5.0 1.6% 7.6% 5.9 1.7% 3.8 7.1 4.5 6.4 4.0 – 3.7 3.9 5.3 8.2 – 8.0 6.3 6.7 – 6.3 5.3 8.2 – 5.3 – 9.0 – 9.0 4.4 7.5 4.5 7.0 4.8 6.9 3.7 4.8 2.5% 1.7% (3.7)% 2.2% 6.8% 4.5 2.3% 8.7% 7.0 1.7% 5.3% 7.7 (2.4)% 7.5% 5.4 2.1% The estimated sensitivity of net interest income to a change in interest rates is presented in Table 16. The amounts represent the estimated change in net interest income over the time period shown resulting from a one percentage point increase in interest rates. The estimates are based on a number of assumptions/ factors which include: • a constant structure in the asset liability portfolio; • interest rates affecting interest sensitive assets and liabilities that change by the same amount and are applied at the appropriate repricing dates; and • no early redemptions. Table 16 – Estimated Increase in Net Interest Income as a Result of a One Percentage Point Increase in Interest Rates ($ thousands) Period 90 days 1 year 1 year percentage change $ 1997 384 1,478 3.0 % $ 1996 262 1,157 2.7 % A one percentage point decrease in interest rates would also result in an estimated decrease in net interest income as shown in Table 16. The interest sensitivity of the portfolio increased in both absolute dollar terms 35 Management’s Analysis of Operations and Financial Condition and as a percentage of estimated future net interest income during the year, but remained well within policy guidelines. It is management’s intention to continue to manage the asset liability structure and interest rate sensitivity through pricing and product policies to attract appropriate assets and liabilities as well as through the use of interest rate swaps or other appropriate hedging techniques (see discussion under Off-balance Sheet Financial Instruments Including Derivatives). Assets and liabilities having a term to maturity in excess of ﬁve years are subject to speciﬁc review and control and with the exception of debentures, as outlined in Note 8 to the Consolidated Financial Statements, such items were not material at October 31, 1997. Foreign Exchange Risk In providing ﬁnancial services to its customers, the Bank has assets and liabilities denominated in United States dollars. At October 31, 1997, assets denominated in U.S. dollars were 0.6% (1996 - 0.6%) of total assets and U.S. dollar liabilities were 0.8% (1996 - 0.7%) of total liabilities. Currencies other than U.S. dollars are not bought or sold other than to meet speciﬁc customer needs and, therefore, the Bank has no material exposure to currencies other than U.S. dollars. Foreign exchange risk arises when there is a difference between assets and liabilities denominated in U.S. dollars. Policies are established setting limits on the difference between U.S. dollar assets and liabilities. The difference is measured daily and managed by use of U.S. dollar contracts or other means. Policies respecting foreign exchange exposure are reviewed and approved at least annually by the Board, and deviations from policy are reported to the Board and ALCO. O P E R AT I O N A L R I S K Operational risk is the potential for loss as a result of a failure in communication, information or transaction processing due to system or procedural failures, errors, natural disasters or fraudulent activities. These risks can never be completely eliminated but the Bank’s strategy to minimize operational risk includes: • a knowledgeable and experienced management team that is committed to the Bank’s risk management policies; • regular meetings of the Operations Committee, a management committee made up of supervisory and management personnel from all operational areas and chaired by a member of senior management, which is responsible for the development and recommendation of policies and procedures regarding day to day, routine operations; • communication of the importance of effective risk management to all levels of staff through training and policy implementation; • regular inspections for compliance and the effectiveness of procedural controls by a strong, independent internal audit team; • implementation of policies and procedural controls appropriate to address identiﬁed risks and which include segregation of duties and built-in checks and balances; • use of technology via automated systems with built- in controls; • continual review and upgrade of systems and procedures; and • updated and tested procedures for disaster recovery and business continuity. In addition, the shareholders’ auditors report annually on the efﬁciency and effectiveness of internal controls over signiﬁcant risk areas and provide their report to the Audit Committee. The Bank also maintains appropriate insurance coverage through a ﬁnancial institution bond policy. 36 Management’s Analysis of Operations and Financial Condition O F F - B A L A N C E S H E E T F I N A N C I A L I N S T R U M E N T S I N C L U D I N G D E R I VAT I V E S Table 17 – Off-balance Sheet Financial Instruments ($ thousands) Credit Instruments Guarantees and standby letters of credit (1) Commitments to extend credit (2) Total Derivative Financial Instruments (notional amount) Interest rate contracts (3) Foreign exchange contracts (4) Purchase Sale Total Assets Under Administration 1997 1996 $ 24,279 $ 18,479 233,842 185,096 $ 258,121 $ 203,575 $ 107,000 $ 60,000 3,237 2,252 1,341 – $ 112,489 $ 395,486 $ 61,341 $ 371,798 (1) Letters of credit and guarantees are issued on behalf of clients to third party beneﬁciaries as part of normal business operations. (2) Commitments to extend credit to customers arise in the normal course of business. Includes authorized undrawn availability under lines of credit and commercial operating loans of $109 million (1996 - $78 million) and recently authorized but unfunded loan commitments of $125 million (1996 - $107 million). (3) Interest rate swaps are used as hedging devices to control interest rate risk. The outstanding swaps mature between November, 1997 and October, 1998. The total gross positive replacement cost of interest rate swaps was a positive $485,000 (1996 - $1.1 million). This market value represents an unrealized gain, or the payment the Bank would receive if these contracts were unwound and settled at that date. (4) U.S. dollar foreign exchange contracts are used to manage the difference between U.S. dollar assets and liabilities. At October 31, 1997 forward foreign exchange contracts had been entered into for hedging purposes, calling for the future purchase of $2.3 million U.S. at the equivalent amount of $3.2 million Canadian and the future sale of $1.6 million U.S. for $2.3 million Canadian. More detailed information on the nature of the Bank’s off-balance sheet ﬁnancial instruments is shown in Notes 11, 12 and 15 to the Consolidated Financial Statements. Continued use of interest rate swaps, interest rate ﬂoors or caps and similar off-balance sheet hedging instruments is expected in the future for the purpose of asset liability structuring and management. Interest rate derivatives, including swaps and rate ﬂoors or caps, are used to manage interest rate risk. The Bank only enters into these off-balance sheet derivative ﬁnancial instruments for its own account and does not act as an intermediary in this market. Transactions are entered into on the basis of industry standard contracts with approved counterparties subject to periodic and at least annual review. Policies regarding the use of off-balance sheet ﬁnancial instruments are approved, reviewed, and monitored on a regular basis by ALCO and reviewed and approved by the Board at least annually. Through its trust subsidiary, the Bank has assets under administration which totalled approximately $395 million at October 31, 1997 (1996 - $372 million). These assets are primarily in self-administered RRSPs and RRIFs (registered retirement income funds). These assets, and the fees earned for their administration, are expected to increase in 1998. 37 Corporate Governance I N T R O D U C T I O N The Board of Directors and management of the Bank are committed to maintaining an effective corporate governance framework which is critical to the effective and efﬁcient management of the Bank’s operations. In 1997, the Board organized and attended a retreat solely on corporate governance to critically review and assess the Bank’s current framework. As a result of this focus the Corporate Governance & Human Resources Committee was established (replacing the former Nominating and Compensation Committees) to provide direction, monitor compliance and recommend to the Board the optimum approach to governance issues and the enhancement of corporate performance. The Bank’s corporate governance structure and procedures are in compliance with the Guidelines for Improved Corporate Governance adopted by The Toronto Stock Exchange in 1995 (“the TSE Guidelines”). T H E B O A R D A N D B O A R D C O M M I T T E E S The Bank is a federally regulated Schedule I bank. Pursuant to the Bank Act (“the Act”), no one shareholder, or shareholders acting in concert, can own more than ten percent of any class of shares of a Schedule I bank. Therefore, the Bank has no signiﬁcant shareholders. The Board is comprised of twelve members. The number of directors reﬂects the desire to have the members represent the geographical jurisdictions in which the Bank operates and the need to ﬁll the memberships of the two required committees, the Audit and Conduct Review Committees, and the other board committees which are the Loans Committee and the Corporate Governance & Human Resources Committee. The Board has reviewed the status of each of its directors and determined if they are afﬁliated or unafﬁliated (as deﬁned by the afﬁliation rules set forth in the Act), and not unrelated or unrelated directors, as deﬁned in the TSE Guidelines. As a result of this review, the Board has determined that two of the directors are afﬁliated (the President and Chief Executive Ofﬁcer (“CEO”) and Executive Vice President); they are also the only inside directors. A third director who is a partner of the law ﬁrm which acts as general legal counsel to the Bank is not unrelated for TSE guideline purposes. At the time of appointment to the Board, at least 75 percent of the board members must be resident Canadians and no more than four members may be employees of the Bank. The Chairman is an independent director and is appointed annually by the members of the Board. Responsibilities not delegated to senior management or to a committee of the Board remain those of the full Board. The Board expects all signiﬁcant risks and internal controls to be identiﬁed and reported upon by senior management to the Board and/or its committees. The Board as a whole has expressly assumed responsibility for developing the Bank’s approach to governance issues although the Corporate Governance & Human Resources Committee plays a key role by recommending and reporting on governance issues to the Board. In addition, certain governance issues have been delegated to other committees of the Board. The Act contains several sections dealing with the governance of a bank through its board of directors. These sections prescribe matters such as limitations on the number of directors who can be afﬁliated or non- resident, certain powers that must be transacted by the full Board, and requirements to establish both an audit committee and a conduct review committee. The Act also prescribes certain minimum benchmarks for board and committee membership, quorums and the transaction of business by a board. The three encompassing duties in the Act that form the basis for the Board’s mandate are: • to manage or supervise the management of the business and affairs of the Bank; • to act honestly and in good faith with a view to the best interests of the Bank and exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances; and • to comply with the Act, the regulations, the Bank’s incorporating instrument and its by-laws. 38 Corporate Governance The mandate of the Board also includes references to compliance with the Canada Deposit Insurance Corporation’s (“CDIC”) Standards of Sound Business and Financial Practices. Generally speaking, these practices and related standards cover all major risk areas of a bank and call for the Board to at least annually approve the policies and review the management programs associated with: • interest rate risk management • securities portfolio management • liquidity management • foreign exchange risk management • capital management • internal control • real estate appraisals • credit risk management The areas of real estate appraisals and credit risk management have been delegated to the Loans Committee of the Board described below. The mandate of the Board also speciﬁcally includes other matters which are not necessarily stated in the Act or in the CDIC standards and they are summarized as follows: • approve the annual statement and speciﬁed returns, prior to release to the public or submission to OSFI; • review and approve the annual strategic business plan and accompanying capital plan and ﬁnancial operating budget, including capital expenditures; • declare dividends; • outline the content and frequency of management reports on ﬁnancial operations; • review and ratify the employment, appointment, grade levels and compensation of the top ﬁve executive employees and approve all senior ofﬁcer appointments; • review the Bank’s succession plan; • review any recommendations from regulators or external auditors respecting their assessment of the effectiveness of the internal controls that come to their attention in the conduct of their work; • ensure an independent audit/inspection function is in place to monitor the effectiveness of organizational and procedural controls; • review and accept reports from the Audit, Conduct Review and Corporate Governance & Human Resources Committees; and • approve loan write-offs. A U D I T C O M M I T T E E This committee is comprised of four outside directors and its mandate is summarized as follows: • review and approve the annual statement and speciﬁed returns prior to submission to the Board, including adequacy of credit loss provisions and loan write-offs as recommended by the Loans Committee; • review and approve other returns as required by the Superintendent of Financial Institutions; • ensure that appropriate internal control procedures are in place; • review investments and transactions of the Bank, that could adversely affect its well-being, which are brought to the committee’s attention by the internal or shareholders’ auditors, or an ofﬁcer of the Bank or other committee of the Board; • review the annual statement and any speciﬁed return with the shareholders’ auditors, ensuring any items of concern are duly considered; • ensure the adequacy/effectiveness of the internal control procedures and review any signiﬁcant ﬁndings with the Chief Inspector and senior management; • review the interim unaudited statements, as well as other public information, before public disclosure; • review the terms of the shareholders’ auditors’ engagement, their level of compensation, the audit plan, any proposed changes in accounting policies, and key estimates and judgements of management; and • meet regularly with the internal and shareholders’ auditors without management present. C O N D U C T R E V I E W C O M M I T T E E This committee is comprised of four outside directors, one of whom is not unrelated, and its mandate is summarized as follows: • establish procedures to ensure disclosure of transactions with related parties of the Bank and, further, to review any such transactions to ensure compliance with internal policies and the Act, either approving or declining the transactions, as required; • review and approve internal policies for credit arrangements and ﬁnancial services available to employees under the regulations concerning ofﬁcers and associated parties; 39 Corporate Governance • monitor aggregate transactions with directors as well as ofﬁcers and their interests to ensure continued compliance with the Act; • review the conduct policy on an annual basis to ensure relevance and completeness in regard to legislation requirements; and • monitor procedures for conﬂicts of interest, conﬁdential information, disclosure of information and handling of customer complaints, and be satisﬁed that the procedures are being adhered to. • establish an executive compensation structure to compensate all levels of executive employees and, within such compensation structure as may at that time be in effect, to make adjustments and annual revisions as necessary; • ensure an annual performance appraisal is completed for the President and CEO and that it is reviewed with him by the Chairman of the Board; • establish, amend and, where appropriate, terminate: • programs and other personal beneﬁts granted to C O R P O R AT E G O V E R N A N C E & H U M A N R E S O U R C E S C O M M I T T E E This committee is comprised of ﬁve outside directors, one of whom is not unrelated and its mandate is summarized as follows: • recommend to the Board appropriate structure and process required to address governance issues and maintain compliance with all corporate governance guidelines; • review and monitor compliance with corporate governance guidelines and follow any issues as noted by the members or as reported to them by management or other directors from time to time; • no less than annually, report to the Board on corporate governance issues and any instances of non-compliance, with appropriate recommendations; • hire appropriate consultants, to request management to perform studies and to furnish other information as appropriate; to review such information and take such actions based thereon as appropriate; • review and recommend to the Board the employment and appointment of the top ﬁve (5) executive employees, to establish their grade levels and compensation, as well as promotion, and to make changes in the level of compensation and grade of incumbent executive employees and ofﬁcers upon reviews of their performance; • review the position descriptions for the top ﬁve (5) executive employees, ensuring they remain current and accurate and further, to also ensure position descriptions are in place for all other executive ofﬁcers; • • • executive employees; incentive compensation plans and other bonus arrangements and to administer such plans and to make appropriate interpretations and determinations as required; share incentive plans and similar arrangements involving the grant or sale of share options, or other beneﬁts to employees attendant upon the issuance of securities, and, in addition, to make grants of options under any share incentive plan and generally to administer such plans, subject to necessary regulatory and shareholder approval; and annuity, pension, and retirement programs for executive employees; • review the human resource succession plan as prepared by senior management for all ofﬁcers and any other senior position considered critical to operations; • seek and recommend individuals to be considered for Board membership as required by the Board and forward their recommendations with written rationale, compared against published terms of reference, to the Board for their consideration; • review, monitor, and make recommendations regarding new director orientation and the ongoing development of existing Board members; • evaluate, at least bi-annually, Board membership (including composition and size) and the involvement/performance of the membership with noted concerns recorded, and brought to the attention of the committee chair, who, in conjunction with the committee, determines if further action is required; • review and recommend to the Board the fees and other beneﬁts to be paid to directors; and • make recommendations to the Board regarding revisions or additions to the Directors Manual. 40 Corporate Governance L O A N S C O M M I T T E E This committee is comprised of eight directors, six of whom are unrelated. The President and CEO and the Executive Vice President, who are afﬁliated, inside directors are also members. Its mandate is summarized as follows: • review, approve and/or decline all credit applications for amounts in excess of delegated limits up to the limit established, not to exceed ten percent of capital; • recommend for approval of the full Board, any loan proposals in excess of the Bank’s limit; • review and approve changes to delegated lending limits; • annually review and approve the credit risk management program and policies, including management’s real estate appraisal policies and procedures, to ensure they are sound and prudent and adequately and effectively support related credit and investment activities; • review and recommend acceptance of management’s recommendations for credit loss provisions and loan write-offs to the Audit Committee for their presentation to the Board; and • review and approve action plans, as required, on loans reported by management to be less than satisfactory. O T H E R A R E A S O F C O N S I D E R AT I O N The Bank has not adopted a formalized process of orientation for new Board members although all Directors are provided with a Directors Manual, outlining key governance information and reference material. It is worthy of note that seven out of the ten outside directors have served on the Board for nine years or more. Also, the Board has put in place a policy providing for individual directors to engage outside advisors if the circumstances are warranted. The Bank has engaged an independent Ombudsman to receive complaints from banking clients who are unable to obtain satisfaction from the Bank’s internal complaint handling mechanism. C O N C L U S I O N The Bank’s corporate governance approach is in compliance with the TSE Guidelines. It will continue to develop over time with the Corporate Governance & Human Resources Committee playing a key role in monitoring, developing and recommending to the Board on governance issues as warranted. 41 Financial Statements M A N A G E M E N T ’ S R E P O RT The accompanying consolidated ﬁnancial statements of Canadian Western Bank and related ﬁnancial information presented elsewhere in this annual report have been prepared by management, who are responsible for their integrity, objectivity and reliability. They are prepared as stipulated by the requirements of the Bank Act and related rules and regulations issued by the Superintendent of Financial Institutions Canada. The accounting policies followed in the preparation of these ﬁnancial statements conform with generally accepted accounting principles. The ﬁnancial information presented elsewhere in this annual report is consistent with that in the consolidated ﬁnancial statements. The Bank’s accounting system and related internal controls are designed, and supporting procedures are maintained, to provide reasonable assurance that ﬁnancial records are complete and accurate and that assets are safeguarded against loss from unauthorized use or disposition. 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 the Bank. The system of internal controls is also supported by the internal audit division which carries out periodic inspections of all aspects of the Bank’s operations. The Chief Inspector has full and free access to the Audit Committee and to the shareholders’ auditors. The Audit Committee, appointed by the Board of Directors, is composed of directors who are not ofﬁcers or employees of the Bank. The committee is responsible for reviewing the ﬁnancial statements and annual report and recommending them to the Board of Directors for approval. Their responsibilities also include meeting with management, the Chief Inspector and the shareholders’ auditors to discuss the effectiveness of internal controls over the ﬁnancial reporting process, and the planning and results of the external audit. The Conduct Review Committee, appointed by the Board of Directors, is composed of directors who are not ofﬁcers or employees of the Bank. Their responsibilities include reviewing related party transactions, and reporting to the Board of Directors, those transactions which may have a material impact on the Bank. The Superintendent of Financial Institutions Canada, at least once a year, makes such examination and enquiry into the affairs of the Bank as he may deem necessary or expedient to satisfy himself that the provisions of the Bank Act, having reference to the safety of the creditors and shareholders of the Bank, are being duly observed and that the Bank is in a sound ﬁnancial condition. Deloitte & Touche, the shareholders’ auditors, are appointed by the shareholders of the Bank. They have full and free access to, and meet periodically with, the Audit Committee to discuss their audit and matters arising therefrom. “Larry M. Pollock” “Tracey C. Ball” Larry M. Pollock President and Chief Executive Ofﬁcer December 5, 1997 Tracey C. Ball, C.A. Vice President and Chief Financial Ofﬁcer A U D I T O R S ’ R E P O RT T O T H E S H A R E H O L D E R S O F C A N A D I A N W E S T E R N B A N K We have audited the Consolidated Balance Sheet of Canadian Western Bank as at October 31, 1997 and 1996 and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Changes in Financial Position for the years then ended. These ﬁnancial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. 42 In our opinion, these consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Bank as at October 31, 1997 and 1996 and the results of its operations and the changes in its ﬁnancial position for the years then ended in accordance with generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada. “Deloitte & Touche” Deloitte & Touche Chartered Accountants Edmonton, Alberta December 5, 1997 Financial Statements C O N S O L I D AT E D B A L A N C E S H E E T (Note 2) As at October 31 ($ thousands) Assets Cash Resources Cash Deposits with regulated ﬁnancial institutions Cheques and other items in transit, net Total Cash Resources Securities Issued or guaranteed by Canada Issued or guaranteed by a province Other securities Total Securities Loans (net of allowance for credit losses) (Notes 3 & 4) Call loans Residential mortgages Other loans Total Loans Other Land, buildings and equipment Other assets Total Other Total Assets Liabilities and Shareholders’ Equity Deposits Payable on demand Payable after notice Payable on a ﬁxed date Total Deposits Other Other liabilities Subordinated Debentures Conventional Convertible Total Subordinated Debentures Shareholders’ Equity Capital stock Retained earnings Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity (Note 5) (Note 6) (Note 7) (Note 8) (Note 9) 1997 1996 $ 854 $ 109,845 18,464 129,163 106,646 27,564 8,510 142,720 24,000 257,122 1,428,885 1,710,007 10,568 30,493 41,061 952 56,048 6,405 63,405 130,073 26,809 27,327 184,209 20,000 261,460 1,196,932 1,478,392 9,389 18,677 28,066 $ 2,022,951 $ 1,754,072 $ 40,742 $ 26,333 184,912 1,591,858 1,817,512 144,687 1,414,835 1,585,855 39,790 39,663 13,126 23,990 37,116 89,057 39,476 128,533 – 26,000 26,000 75,136 27,418 102,554 $ 2,022,951 $ 1,754,072 “Jack C. Donald” Jack C. Donald Chairman “Larry M. Pollock” Larry M. Pollock President and Chief Executive Ofﬁcer 43 Financial Statements C O N S O L I D AT E D S TAT E M E N T O F I N C O M E For the year ended October 31 ($ thousands, except per share amounts) Interest Income Loans Securities Deposits with regulated ﬁnancial institutions Total Interest Income Interest Expense Deposits Debentures Total Interest Expense Net Interest Income Provision for credit losses Net Interest Income after Provision for Credit Losses Other Income Credit related Retail services Trust services Loan administration Net gains on securities sales Other Total Other Income Net Interest and Other Income Non-Interest Expenses Salaries Staff beneﬁts Premises and equipment expenses, including depreciation Other expenses Provincial capital taxes Total Non-Interest Expenses Net Income before Provision for Income Taxes Provision for income taxes Net Income Average number of common shares outstanding Net income per common share basic fully diluted 1997 1996 $ 123,374 $ 122,394 7,305 1,238 131,917 10,215 790 133,399 84,314 2,189 86,503 45,414 4,000 41,414 6,423 1,614 1,113 609 911 850 11,520 52,934 16,590 2,421 6,348 9,388 1,934 36,681 16,253 416 91,413 1,255 92,668 40,731 4,073 36,658 6,241 1,377 686 736 824 602 10,466 47,124 15,100 2,254 5,748 8,680 1,389 33,171 13,953 1,131 $ 15,837 $ 12,822 9,322,214 8,116,147 $ $ 1.70 1.55 $ $ 1.58 1.45 (Note 4) (Note 10) (Note 1(k)) 44 Financial Statements C O N S O L I D AT E D S TAT E M E N T O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y For the year ended October 31 ($ thousands) Capital Stock Balance at beginning of year Common shares issued Balance at end of year Retained Earnings Balance at beginning of year Net income Dividends Redemption of debenture Expenses of common share issue Impaired loan adjustment Balance at end of year Total Shareholders’ Equity $ (Note 9) (Note 8) (Note 17) 1997 1996 75,136 13,921 89,057 27,418 15,837 (2,316) (1,126) (337) – 39,476 $ 74,987 149 75,136 17,312 12,822 (1,217) (899) – (600) 27,418 $ 128,533 $ 102,554 C O N S O L I D AT E D S TAT E M E N T O F C H A N G E S I N F I N A N C I A L P O S I T I O N For the year ended October 31 ($ thousands) Cash Flows from Operating Activities Net income Adjustments to determine net cash provided by operating activities: Provision for credit losses Depreciation and amortization Deferred income taxes, net Gain on sale of securities Changes in accrued interest receivable and payable, net Other items, net Cash Flows from Financing Activities Deposits Common shares issued, net of issue costs Subordinated debentures, net Dividends Cash Flows Used in Investing Activities Loans, net Securities, net Interest bearing deposits with regulated ﬁnancial institutions, net Amalgamation with B.C. Bancorp Land, buildings and equipment, net Receivable from Aetna Canada Holdings Limited Acquisition of Canadian Western Trust Company Purchase of debenture Increase in Cash Resources Cash Resources at Beginning of Year Cash Resources at End of Year * * Represented by: Cash resources per Consolidated Balance Sheet Less interest bearing deposits with regulated ﬁnancial institutions Cash Resources at End of Year 1997 1996 $ 15,837 $ 12,822 4,000 1,855 (531) (911) (1,687) 564 19,127 4,073 1,910 (33) (824) (4,774) (6,084) 7,090 231,657 118,300 13,584 9,990 (2,316) 149 17,101 (1,217) 252,915 134,333 (235,912) 45,940 (52,374) (13,586) (2,962) – – – (258,894) 13,148 18,336 31,484 $ $ 129,163 97,679 31,484 $ (103,132) (27,734) (10,092) – (1,297) 33,654 (16,136) (6,000) (130,737) 10,686 7,650 18,336 63,405 45,069 18,336 $ $ $ (Note 9) (Note 8) (Note 17) (Note 18) (Note 18) (Note 18) 45 Notes to Consolidated Financial Statements October 31, 1997 (tabular amounts in thousands of dollars unless otherwise indicated) .    These consolidated ﬁnancial statements have been prepared in accordance with subsection 308 (4) of the Bank Act which states that, except as otherwise speciﬁed by the Superintendent of Financial Institutions Canada, the ﬁnancial statements are to be prepared in accordance with generally accepted accounting principles. The accounting principles followed by the Bank conform in all material respects with generally accepted accounting principles in Canada, including the accounting requirements of the Superintendent of Financial Institutions Canada. The signiﬁcant accounting policies and practices followed by the Bank are: (a) Basis of Consolidation The consolidated ﬁnancial statements include the assets, liabilities and results of operations, after the elimination of intercompany transactions and balances, of the Bank and all of its subsidiaries. Subsidiaries are deﬁned as corporations whose operations are controlled by the Bank and are generally corporations in which the Bank owns more than 50 percent of the voting shares. See Note 19 for details of the subsidiaries. (b) Securities Securities are held in either the investment account or the trading account. Investment account securities are purchased with the original intention to hold the securities to maturity or until market conditions render alternative investments more attractive. Equity securities are stated at cost or, if the value is permanently impaired, at net realizable value and debt securities at amortized cost. Gains and losses on disposal of securities and adjustments to record any permanent impairment in value are included in other income in the period of realization. Amortization of premiums and discounts are reported in interest income from securities in the Consolidated Statement of Income. Trading account securities, which are purchased for resale over a short period of time, are carried at estimated current market value. Gains and losses realized on disposal and adjustments to market value are reported in other income in the Consolidated Statement of Income in the period during which they occur. (c) Loans Loans are stated net of unearned income and an allowance for credit losses (Note 1(d)). Interest income is recorded on the accrual basis except for loans classiﬁed as impaired. Loans are determined to be impaired when interest is contractually past due 90 days, or where the Bank has taken realization proceedings, or where the Bank’s management is of the opinion that the loan should be regarded as impaired. An exception may be made where management determines that the loan is well secured and in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to a current status within 180 days from the date the payment went in arrears. All loans are classiﬁed as impaired when a payment is 180 days in arrears other than loans guaranteed or insured for both principal and interest by the Canadian government, the provinces or a Canadian government agency. These loans are classiﬁed as impaired when payment is 365 days in arrears. Impairment is measured as the difference between the carrying value of the loan at the time it is classiﬁed as impaired and the present value of the expected cash ﬂows (estimated realizable amount), using the interest rate inherent in the loan at the date the loan is classiﬁed as impaired. When the amounts and timing of future cash ﬂows cannot be reliably estimated, either the fair value of the security underlying the loan, net of any expected realization costs, or the current market price for the loan may be used to measure the estimated realizable amount. At the time a loan is classiﬁed as impaired, interest income will cease to be recognized in accordance with the loan agreement, and any uncollected but accrued interest will be added to the carrying value of the loan together with any unamortized premiums, discounts or loan fees. Subsequent payments received on an impaired loan are recorded as a reduction of the recorded investment in the loan. Interest income is only recognized after any individual allowance for impairment has been extinguished. (d) Allowance for Credit Losses The Bank maintains an allowance for credit losses, the purpose of which is to keep an adequate balance sufﬁcient to absorb all credit related losses in its loan portfolio. The allowance for credit losses is deducted from the related asset category. The balance in the account consists of speciﬁc provisions and the general allowance for credit losses. Speciﬁc provisions include all the accumulated provisions for losses on particular impaired loans required to reduce the carrying value of those loans to their estimated realizable amount. The general allowance for credit losses includes those provisions which are prudential in nature and cannot be determined on a loan by loan basis. Actual write-offs, net of recoveries, are deducted from the allowance for credit losses. The provision for credit losses in the Consolidated Statement of Income is charged with an amount sufﬁcient to keep the balance in the allowance for credit losses adequate to absorb all credit related losses. (e) Land, Buildings and Equipment Land is carried at cost. Buildings, equipment and furniture, and leasehold improvements are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated primarily using the straight-line method over the estimated useful life of the asset. Gains and losses on disposal are recorded in other income in the Consolidated Statement of Income in the year of disposal. (f) Deferred Acquisition and Financing Costs Costs of corporate acquisitions and major ﬁnancings are deferred and amortized monthly on a straight-line basis to other expenses or interest expense, as appropriate, in the Consolidated Statement of Income over various periods not exceeding ten years. (g) Translation of Foreign Currencies Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the date of the ﬁnancial statements. Revenues and expenses in foreign currencies are translated at the average exchange rates prevailing during the year. Realized and unrealized gains and losses on foreign currency positions are included in other income in the Consolidated Statement of Income. 46 Notes to Consolidated Financial Statements (h) Loan Fees Loan fees, net of directly related costs, are amortized to interest income over the expected term of the loan when such fees are considered to be an integral part of the return earned on the particular loan. Loans are stated net of the unamortized fees. (i) Income Taxes The Bank follows the tax allocation method of accounting for income taxes whereby income taxes are based on transactions recognized for accounting purposes regardless of when they are recognized for tax purposes. The cumulative timing differences between tax calculated on this basis and taxes currently payable result in deferred income taxes which are recorded in other assets. Total income taxes include the provision for income taxes in the Consolidated Statement of Income and income taxes applicable to items charged or credited directly to retained earnings. (j) Interest Rate and Foreign Exchange Contracts Interest rate and foreign exchange contracts such as futures, options and swaps are entered into to hedge interest rate and foreign currency exposures. These contracts are accounted for on the accrual basis and net accrued interest receivable/payable and deferred gains/losses are recorded in other assets or other liabilities, as appropriate. Interest income/expense and gains/losses are recognized as interest income or interest expense, as appropriate, over the hedged period. (k) Net Income per Common Share Basic net income per common share is calculated based on the average number of common shares outstanding during the year. Fully diluted net income per share includes the effect of all potential dilutive factors on earnings per common share. .  The analysis of securities, at carrying value, by type and maturity is as follows: Maturities Within 1 Year Over 1 to 3 Years Over 3 to 5 Years Over 5 Years 1997 Total Book Value 1996 Total Book Value Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Corporate debt Equity Securities Total (1) $ 70,346 $ 10,612 $ 2,008 – 6,490 – 4,264 – – – 21,048 17,942 $ 4,640 3,350 $ 106,646 $ 130,073 27,564 26,809 – – – 1,000 – 1,020 (2) 10,010 1,000 6,490 1,020 1,000 25,578 749 $ 142,720 $ 184,209 $ 78,844 $ 14,876 $ 38,990 $ (1) All securities are held in the investment account. (2) These securities have no speciﬁc maturity. The analysis of unrealized gains and losses on investment securities is as follows: 1997 1996 Gross Gross Estimated Gross Gross Estimated Book Value Unrealized Unrealized Gains Losses Market Value Book Value Unrealized Unrealized Gains Losses Market Value Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Corporate debt Equity Securities Total $ 106,646 $ 27,564 $ 383 277 1,000 6,490 1,020 – – – 31 – – 1 – $ 106,998 $ 130,073 $ 27,841 26,809 $ 945 568 1,000 6,489 1,020 1,000 25,578 749 – 3 – $142,720 $ 660 $ 32 $ 143,348 $ 184,209 $ 1,516 $ 1 – – – – 1 $ 131,017 27,377 1,000 25,581 749 $ 185,724 47 Notes to Consolidated Financial Statements .   Impaired loans and the related allowance for credit losses are as follows: Consumer and personal Real estate Industrial Other Total (2) $ Gross Amount 3,798 7,587 3,270 6,879 $ 21,534 Allowance Speciﬁc 476 825 1,431 2,179 4,911 $ $ General (1) 1,022 $ 1,945 1,657 2,852 7,476 $ 1997 Carrying Amount $ $ 2,300 4,817 182 1,848 9,147 $ 1996 Carrying Amount 1,912 9,119 610 2,974 $ 14,615 (1) For presentation purposes the general allowance for credit losses has been allocated to impaired loans based on a relative weighting of net impaired loans. However, this allowance is available for the total loan portfolio. (2) Impaired loans include foreclosed real estate assets held for sale with a gross carrying value of $194,000 (1996 - $1,448,000) and a related speciﬁc allowance of $34,000 (1996 - $600,000). At October 31, 1997 other past due loans totalled $309,000 (1996 - $722,000). Other past due loans are loans where payment of interest or principal is contractually 90 - 180 days in arrears but are not classiﬁed as impaired because they are both well secured and in the process of collection. During the year interest recognized as income on impaired loans totalled $732,000 (1996 - $915,000). .     The following table shows the allocation of the allowance for credit losses to speciﬁc provisions by category of impaired loans and to the general allowance for credit losses and the respective changes during the year. Speciﬁc Provisions Consumer and personal Real estate Industrial Other General Allowance Total (1) Recoveries in 1997 totalled $11,000 (1996 - $103,000). $ 1996 Ending Balance 577 2,638 1,070 2,644 6,012 Write-offs, Net of Recoveries (1) Provision for Credit Losses $ $ 647 2,537 96 1,274 – 546 724 457 809 1,464 4,000 $ 1997 Ending Balance 476 825 1,431 2,179 7,476 $ 12,387 $ 12,941 $ 4,554 $ The Bank has virtually no loans booked outside of Canada and therefore has no country risk provisions. . ,    Accumulated 1997 Depreciation and Net Book 1996 Net Book Land Buildings Equipment and furniture Leasehold improvements Total $ Cost 2,753 3,022 10,686 3,672 Amortization $ – $ 1,210 6,630 1,725 9,565 Value 2,753 1,812 4,056 1,947 Value 2,649 1,607 3,167 1,966 9,389 $ $ $ 20,133 $ $ 10,568 Depreciation and amortization in respect of the above buildings, equipment and furniture, and leasehold improvements for the year amounted to $1,784,000 (1996 - $1,412,000). 48 Notes to Consolidated Financial Statements .   Deferred income 1997 tax asset (Note 10) $ 11,252 $ 9,189 5,535 1,757 745 593 1,422 Accrued interest receivable Prepaid expenses Deferred acquisition and ﬁnancing costs, net of accumulated amortization of $769 (1996 - $495) Income taxes recoverable Goodwill, net of accumulated amortization of $133 (1996 - $60) Other Total .  $ 30,493 $ 18,677 .   Accrued interest payable $ 33,948 $ 35,008 1997 1996 Accounts payable Deferred revenue Other Total 3,870 1,374 598 2,694 1,645 316 $ 39,790 $ 39,663 1996 150 8,562 3,800 1,805 2,246 666 1,448 Each of the following qualiﬁes as a bank debenture under the Bank Act and is subordinate in right of payment to all deposit liabilities. All redemptions are subject to the approval of the Superintendent of Financial Institutions Canada. The convertible debentures are ﬁnancial instruments which have both debt and equity components. The CICA Handbook requirement to account for these components separately was considered but the value assignable to the conversion option at the date of issue was deemed to be immaterial in each case. Interest Rate Maturity Date 1997 1996 Conventional (1) The Province of Alberta CIC Industrial Interests Inc. 6.660% March 31, 2007 $ 5,000 $ (an agency of the Province of Saskatchewan) Crown Life Insurance Company 6.590% June 30, 2007 6.415% July 31, 2007 Convertible 6.75% convertible debentures (2) Crown Life Insurance Company (3) CIC Industrial Interests Inc. (4) (an agency of the Province of Saskatchewan) Total 6.750% April 15, 2006 9.000% July 31, 2004 3,126 5,000 13,126 19,990 4,000 – 23,990 37,116 $ – – – – 20,000 4,000 2,000 26,000 26,000 $ (1) Each of the conventional debentures has a ten year term with a ﬁxed interest rate for the ﬁrst ﬁve years. Thereafter, if not redeemed by the Bank, interest will be payable at a rate equal to the Canadian Dollar CDOR 90 day Bankers Acceptance Rate plus 1%. (2) These debentures are convertible into common shares at the option of the holder at any time prior to maturity, or the date speciﬁed for conversion by the Bank, whichever is earlier, at a conversion price of $12.50 per share. The debentures are not convertible by the Bank prior to April 15, 1999. From April 15, 1999 to April 14, 2001, provided certain market conditions exist, the debentures are convertible by the Bank. After April 14, 2001 the debentures are convertible by the Bank at any time. In 1997, $10,000 of the debentures were converted (1996 - $0). (3) This debenture is convertible into common shares, at the option of the holder, until it matures. The Bank may redeem the debenture after July 31, 1999. The number of shares issued at conversion will be determined based on an $11 per share conversion price. (4) On March 1, 1993 a provincial Crown corporation invested in a $2,000,000 debenture of the Bank. The debenture was convertible into common shares of the Bank, at the option of the holder, at a conversion price based on book value. On June 27, 1997 the Bank completed negotiations with the holder for the redemption of the debenture and the related conversion option (equity component) for aggregate consideration of $3,126,000, based upon the current market value of the underlying common shares. The excess of the total consideration paid over the face value of the debenture has been attributed to the conversion option and charged to retained earnings. 49 Notes to Consolidated Financial Statements .   Authorized: An unlimited number of common shares without nominal or par value 33,964,324 Class A shares without nominal or par value 25,000,000 First Preferred shares without nominal or par value, issuable in series Issued and fully paid: Common shares Outstanding at beginning of year Issued on amalgamation with B.C. Bancorp (Note 17) Issued on exercise of options, and conversion of debentures (1) 1997 1996 Number of Shares 8,131,782 1,118,996 129,200 Amount $ 75,136 12,790 1,131 Number of Shares Amount 8,114,732 $ 74,987 – 17,050 – 149 Outstanding at End of Year 9,379,978 $ 89,057 8,131,782 $ 75,136 (1) In 1997, 128,400 (1996 - 17,050) options were exercised, at an exercise price of $8.73 (1996 - $8.73) and $10,000 (1996 - $0) of the 6.75% debentures were converted into 800 shares. The Bank has subordinated debentures which are convertible to common shares of the Bank as more fully described in Note 8. The Bank also has authorized 1,004,550 common shares (1996 - 732,950) for issuance under option plans. Of the amount authorized, options exercisable into 894,965 shares are issued and outstanding (1996 - 729,425) and all expire within ten years of date of grant. The details of and changes in the issued and outstanding options follow: Dates Exercisable Currently 1998 1999 2000 2001 2002 2003 and thereafter Total $ 8.73 $ 10.25 $ 12.93 $ Option Price 118,786 28,311 37,748 – – – – 184,845 – – 28,839 57,678 96,137 96,137 105,779 384,570 – – 140,000 – 140,000 – – 280,000 Number of Shares Under Option Issued and Outstanding 118,786 28,311 215,927 62,418 251,009 104,039 114,475 894,965 13.32 (1) – – 9,340 4,740 14,872 7,902 8,696 45,550 (1) Represents a weighted average of option prices on dates of grants. (Number of options) Balance at beginning of year Issued Exercised Forfeited Balance at End of Year 1997 729,425 319,500 (128,400) (25,560) 894,965 1996 735,925 10,550 (17,050) – 729,425 50 Notes to Consolidated Financial Statements .  The provision for income taxes consists of the following: Current Deferred Total 1997 1,823 (1,407) 416 $ $ 1996 1,164 (33) 1,131 $ $ As outlined in Note 17, on the amalgamation of the Bank and B.C. Bancorp, the Bank acquired a deferred income tax asset relating to tax loss carryforwards and unclaimed tax deductions which together totalled $98,000,000. Approximately $7,995,000 (1996 - $7,100,000) of tax loss carryforwards and $9,000,000 of acquired tax loss carryforwards were used to eliminate income taxes otherwise payable by the Bank for the year ended October 31, 1997. The current tax provision represents income tax of the subsidiary of $599,000 (1996 - $890,000), consolidated large corporations tax of $348,000 (1996 - $274,000) and amortization of $876,000 of the deferred tax asset acquired. Deferred income taxes arise from current year timing differences related to claiming deductions for income tax purposes on a basis different from accounting and relate mainly to the provision for credit losses. The deferred income tax asset, included in other assets, primarily represents the net unamortized balance of the deferred income tax asset acquired plus current year timing differences. At October 31, 1997, the Bank has approximately $6,000,000 of tax loss carryforwards which expire in 2003 and approximately $83,000,000 of unclaimed deductions which are available to reduce future years’ income for tax purposes. In addition, the subsidiary has approximately $2,647,000 in tax loss carryforwards which are available to reduce future years’ income for tax purposes and expire up to 2004. In addition, $3,934,000 of net capital losses are available to apply against future capital gains and have no expiry date. The tax beneﬁt of these losses has not been recognized in income. .     a) Off-balance Sheet Instruments In the normal course of business, the Bank enters into various commitments and has contingent liabilities which are not reﬂected in the Consolidated Balance Sheet. These items are reported below and are expressed in terms of the contractual amount of the related commitment. 1997 1996 Credit Instruments Guarantees and standby letters of credit $ 24,279 $ 18,479 Commitments to extend credit Total 233,842 $ 258,121 185,096 $ 203,575 Guarantees and standby letters of credit are issued on behalf of clients to third party beneﬁciaries as part of normal business operations. In the event of a call on any of these instruments, the Bank has recourse against its client. Issuance of guarantees and standby letters of credit is generally subject to the same credit assessment, approval, monitoring and control procedures as the extension of direct loans. Losses, if any, resulting from these transactions are not expected to be material. Commitments to extend credit to customers also arise in the normal course of business and include recently authorized credit facilities not yet drawn down or credit facilities available on a revolving basis. In the majority of instances, availability of undrawn commercial commitments is subject to the borrower meeting speciﬁed ﬁnancial tests or other covenants regarding completion or satisfaction of certain conditions precedent. It is also usual practice to include the right to review and withhold funding in the event of a material adverse change in the ﬁnancial condition of the borrower. Given that undrawn credit authorizations arise out of approvals granted through the normal credit assessment process, such commitments bear virtually the same credit risk as fully advanced loan assets. From a liquidity perspective, undrawn credit authorizations will be funded over time with draws in many cases extending over a period of months. In some instances authorizations are never advanced or may be reduced because of changing requirements. The balance of commitments to extend credit shown in the table above does not account for principal drawdowns or paybacks that occur in the normal course of operations. Revolving credit authorizations are subject to repayment which on a pooled basis also decreases liquidity risk. b) Lease Commitments The Bank has obligations under long-term non-cancellable leases for the rental of premises and ofﬁce equipment. Minimum future lease commitments for each of the ﬁve succeeding years and thereafter are as follows: 1998 1999 2000 2001 2002 2003 and thereafter Total $ 2,141 2,124 1,965 1,969 1,749 4,772 $ 14,720 .     Trust assets under administration of $395,486,000 (1996 - $371,798,000) represent assets held for personal and corporate clients, administered by Canadian Western Trust Company, and are kept separate from the trust company’s own assets. Trust assets under administration are not reﬂected on the Consolidated Balance Sheet. .    The Bank makes loans, primarily residential mortgages, to its ofﬁcers and employees at various preferred rates and terms. The total amounts outstanding for these type of loans are $12,796,000 (1996 - $10,990,000). 51 Notes to Consolidated Financial Statements .     Fair value represents the estimated consideration that would be agreed upon in a current transaction between knowledgeable, willing parties who are under no compulsion to act. The best evidence of fair value is a quoted market price. However, many of the Bank’s ﬁnancial instruments lack an available trading market. Therefore, instruments have been valued on a going concern basis using present value or other suitable techniques and are not necessarily representative of the amounts realizable in an immediate settlement of the instrument. Changes in interest rates are the main cause of changes in the fair value of the Bank’s ﬁnancial instruments. The carrying value of the majority of the ﬁnancial instruments is not adjusted to reﬂect increases or decreases in fair value due to interest rate changes as the Bank’s intention is to realize their value over time by holding them to maturity. The carrying value of ﬁnancial instruments held for trading purposes would be continually adjusted to reﬂect fair value. At October 31, 1996 and 1997 there were no ﬁnancial instruments held for trading purposes. The table below sets out the fair values of on-balance sheet ﬁnancial instruments and derivative instruments using the valuation methods and assumptions referred to below the table. 1997 1996 Fair Value Over Fair Value Over Book Value Fair Value Book Value Book Value Fair Value Book Value $ 129,163 $ 129,163 $ – $ 63,405 $ 63,405 $ Assets Cash resources Securities (Note 2) Loans Other assets (1) Liabilities Deposits 142,720 1,710,007 18,648 143,348 1,726,335 18,648 1,817,512 1,845,767 Other liabilities Subordinated debentures 39,790 37,116 39,790 39,387 Off-balance Sheet Derivative Financial Instruments Net asset (Note 15) 628 16,328 – 28,255 – 2,271 184,209 1,478,392 17,861 185,724 1,509,150 17,861 1,585,855 1,615,972 39,663 26,000 39,663 27,998 – 1,515 30,758 – 30,117 – 1,998 $ 484 $ 1,077 The table does not include assets and liabilities that are not considered ﬁnancial instruments, such as land, buildings and equipment. (1) Other assets exclude goodwill and deferred income taxes which are not ﬁnancial instruments. (2) For further commentary on interest rates associated with ﬁnancial assets and liabilities, including off-balance sheet instruments, refer to the Market Risk section of Management’s Analysis of Operations and Financial Condition which includes the asset liability gap position and effective interest rates. The methods and assumptions used to estimate the fair values of on-balance sheet ﬁnancial instruments are as follows: • • • • cash resources, other assets and other liabilities are assumed to approximate their carrying values, due to their short-term nature; securities are assumed to be equal to the estimated market value of securities provided in Note 2. These values are based on quoted market prices, if available. Where a quoted market price is not readily available, other valuation techniques are used to estimate fair value; loans reﬂect changes in the general level of interest rates which have occurred since the loans were originated and are net of the allowance for credit losses. For ﬂoating rate loans, fair value is assumed to be equal to book value as the interest rates on these loans automatically reprice to market. For all other loans, fair value is estimated by discounting the expected future cash ﬂows of these loans at current market rates for loans with similar terms and risks; deposits with no stated maturity are assumed to be equal to their carrying values. The estimated fair values of ﬁxed rate deposits are determined by discounting the contractual cash ﬂows at current market rates for deposits of similar original terms; and • the fair values of subordinated debentures and liabilities of subsidiaries, other than deposits included in other liabilities are determined by reference to current market prices for debt with similar terms and risks. Fair values are based on management’s best estimates based on market conditions and pricing policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgement and as such may not be reﬂective of future fair values. .      -     Interest rate swaps and interest rate ﬂoors (or caps) are used as hedging devices to control interest rate risk. The Bank only enters into these interest rate derivative instruments for its own account and does not act as an intermediary in this market. The credit risk is limited to the amount of any adverse change in interest rates applied on the notional contract amount should the counterparty default. The principal amount is not exchanged and hence is not at risk. Approved counterparties and maximum notional limits are established and monitored by the Asset Liability Committee of the Bank. 52 Notes to Consolidated Financial Statements At the present time it is policy to undertake foreign exchange transactions only for the purposes of meeting needs of clients and of day to day business. Foreign exchange markets are not speculated in by taking a trading position in currencies. Maximum exposure limits are established and monitored by the Asset Liability Committee and are deﬁned by allowable unhedged amounts. The position is managed within the allowable target range by spot and forward transactions or other hedging techniques. Exposure to foreign exchange risk is not material to the Bank’s overall position. The following table summarizes the off-balance sheet ﬁnancial instrument portfolio and the related credit risk. The replacement cost represents the cost of replacing, at current market rates, all contracts with a positive fair value. The future credit exposure represents the potential for future changes in value and is based on a formula prescribed by the Ofﬁce of the Superintendent of Financial Institutions (“OSFI”). The credit risk equivalent is the sum of the future credit exposure and the replacement cost. The risk-weighted balance represents the credit risk equivalent weighted according to the credit worthiness of the counterparty as prescribed by OSFI. Replace- ment 1997 Future Credit Credit Risk- Replace- Risk weighted Notional ment 1996 Future Credit Credit Risk- Risk weighted Cost Exposure Equivalent Balance Amount Cost Exposure Equivalent Balance Notional Amount $ 107,000 $ 485 $ 0 $ 485 $ 97 $ 60,000 $ 1,080 $ 75 $ 1,155 $ 231 5,489 0 $ 112,489 $ 485 $ 55 55 55 11 1,341 0 $ 540 $ 108 $ 61,341 $ 1,080 $ 13 88 13 3 $ 1,168 $ 234 Interest Rate Contracts Interest rate swaps Foreign Exchange Contracts Forward exchange contracts Total The following table shows the off-balance sheet ﬁnancial instruments split between those contracts that have a positive fair value (favourable contracts) and those that have a negative fair value (unfavourable contracts). 1997 1996 Favourable Contracts Unfavourable Contracts Favourable Contracts Unfavourable Contracts (Assets) (Liabilities) (Assets) (Liabilities) Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Interest Rate Contracts Interest rate swaps $ 107,000 $ 485 $ – $ – $ 60,000 $ 1,080 $ – $ – Foreign Exchange Contracts Forward exchange contracts Total – $107,000 $ – 485 5,489 5,489 $ $ 1 1 – – $ 60,000 $ 1,080 $ 1,341 1,341 $ 3 3 The aggregate contractual or notional amount of the off-balance sheet ﬁnancial instruments on hand, the extent to which instruments are favourable or unfavourable and, thus, the aggregate fair values of these ﬁnancial assets and liabilities can ﬂuctuate signiﬁcantly from time to time. The average fair values of the off-balance sheet ﬁnancial instruments on hand during the year are set out in the following table. Favourable off-balance sheet ﬁnancial instruments (assets) Unfavourable off-balance sheet ﬁnancial instruments (liabilities) 1997 1996 $ $ 686 6 $ $ 1,030 17 53 Notes to Consolidated Financial Statements The following table summarizes maturities of off-balance sheet ﬁnancial instruments and weighted average interest rates paid and received on interest rate contracts. 1997 Maturity 1 year or less (1) 1996 Maturity 1 year or less Over 1 to 5 years Notional Amount Contractual Interest Rate (2) Notional Amount Contractual Interest Rate (2) Notional Amount Contractual Interest Rate (2) $ 107,000 4.54% $ 45,000 5.50% $ 15,000 6.98% 3,237 2,252 5,489 1,341 – 1,341 – – Interest rate contracts Interest rate (ﬁxed/ﬂoating) swaps Receive ﬁxed amounts (3) Foreign exchange contracts Deliver Canadian dollars in exchange for United States dollars Deliver United States dollars in exchange for Canadian dollars Total $ 112,489 $ 46,341 $ 15,000 (1) There are no instruments with maturities over one year. (2) Not applicable for foreign exchange contracts. (3) The Bank pays (ﬂoating) interest amounts based on the one month (30 day) Canadian bankers’ acceptance rate. .  As part of the Bank’s risk management practices, the risks that are signiﬁcant to our business are identiﬁed, monitored and controlled. These include credit risk, liquidity risk, market risk, and operational risk. Descriptions of the nature of these risks and how they are managed is provided in the commentary on pages 26 to 36 of Management’s Analysis of Operations and Financial Condition. Information on speciﬁc measures of risk included in the consolidated ﬁnancial statements is included in these notes for the allowance for credit losses, derivative ﬁnancial instruments and fair value of ﬁnancial instruments. Additional information on interest rate sensitivity and the effective interest rates on ﬁnancial instruments is provided on pages 33 to 36 of Management’s Analysis of Operations and Financial Condition. .  ..  The Bank and B.C. Bancorp (“BCB”) were issued letters patent of amalgamation by the Secretary of State (International Financial Institutions) Finance on behalf of the Minister of Finance, amalgamating and continuing the banks as one bank under the name of Canadian Western Bank (“CWB”), effective November 1, 1996. The amalgamation was accounted for using the purchase method. The results for 1997 reﬂect the operations of the two institutions since November 1, 1996 while the comparative ﬁgures are for the Bank prior to the amalgamation. Total consideration received by the shareholders of BCB was $13,586,000. At the date of amalgamation, BCB had assets and liabilities of: Assets Acquired Cash and securities Deferred income tax asset Other assets Liabilities Assumed Accounts payable and accrued liabilities Net Assets Acquired $ 3,691 10,294 34 14,019 433 $ 13,586 The deferred income tax asset represents the allocation of the consideration paid by the Bank to tax loss carryforwards and unclaimed tax deductions, totalling $98,000,000, approximately $83,000,000 of which is available to the amalgamated Bank to be claimed to reduce future years’ taxable income without any time limitation. This asset is included in other assets on the Consolidated Balance Sheet. On amalgamation, the shareholders of BCB were deemed to receive Class A shares of the amalgamated Bank in exchange for their common shares of BCB on a one for one basis. Each holder of the Class A shares had the option of retracting their shares for cash of $0.40 per share or converting their shares into the equivalent amount of CWB common shares which was .035 common share of CWB for each 1 Class A share. After December 4, 1996, any BCB shareholder who had failed to notify Montreal Trust (the transfer agent for the amalgamation) of their choice was deemed to have elected to receive CWB common shares. Any entitlement to fractional shares was paid in cash. Cash of $796,000 was paid for retracted shares and approximately 1,119,000 CWB common shares with a value of $12,790,000 were issued on conversion with effect as of November 1, 1996. Costs attributed to the issue of the shares were charged to retained earnings and costs associated with the amalgamation are included in other assets on the Consolidated Balance Sheet. These costs will be amortized over the period that the beneﬁt of the deferred income tax asset is realized. 54 Notes to Consolidated Financial Statements Goodwill arising from the transaction is amortized on a straight-line basis to non-interest expenses in the Consolidated Statement of Income over a period of ten years commencing January 1, 1996. To assist in ﬁnancing the acquisition, the Bank raised $20,000,000 in additional capital through a 6.75% convertible debenture offering. The ten year debentures were issued April 15, 1996. .       On April 15, 1996 the Bank acquired all of the outstanding shares of Canadian Western Trust Company (formerly Aetna Trust Company), a Vancouver based trust company, in exchange for cash of $16,100,000. The Bank also purchased a $6,000,000 subordinated note, previously issued by Aetna Trust Company to an afﬁliate, for further cash consideration of $6,000,000. The acquisition was effective January 1, 1996 and was accounted for using the purchase method. The results of operations of the acquired business are included in the Consolidated Statement of Income since that date. At the effective date of the acquisition there were assets and liabilities of: Assets Acquired Cash resources Securities Receivable from Aetna Canada Holdings Limited Loans Other assets Liabilities Assumed Deposits Subordinated note Other liabilities Net Assets Acquired Purchase Price Goodwill . $ $ 3,801 19,808 33,654 244,760 5,555 307,578 274,892 6,000 11,276 292,168 15,410 16,136 726 Canadian Western Bank Subsidiaries (annexed in accordance with subsection 308 (3) of the Bank Act) October 31, 1997 (in dollars) Address of Head Ofﬁce Canadian Western Trust Company 666 Burrard Street Vancouver, British Columbia CWB Canadian Western Financial Ltd. 10303 Jasper Avenue Edmonton, Alberta Book Value of Percentage of Issued and Voting Shares Owned Outstanding Voting by the Bank 11,440,000 1 $ $ Shares Owned by the Bank 100 % 100 % .  .   As a result of a new reporting requirement of the Superintendent of Financial Institutions Canada, which was effective for ﬁscal 1997, all gains and losses realized on the sale of securities are now reported in other income. Previously they were reported in interest income from securities. Comparative amounts have been reclassiﬁed to conform with the current presentation. The Bank has announced that, subject to regulatory and other required approvals, it intends to take a controlling interest in Majendie Charlton Securities Ltd. for an approximate cost of $3,000,000. This transaction is expected to close in the ﬁrst quarter of ﬁscal 1998. 55 CHAIRMAN Jack C. Donald OFFICE OF THE CHIEF EXECUTIVE OFFICER Larry M. Pollock President and Chief Executive Ofﬁcer Douglas R. Dalgetty Executive Vice President CREDIT RISK MANAGEMENT Lawrence W. Hanson Senior Vice President Donald C. Kemp Vice President Dennis M. Crough Assistant Vice President, Retail Credit Chris H. Fowler Assistant Vice President Ed E. Rudzitis Assistant Vice President Wally N. Streit Assistant Vice President CORPORATE AND STRATEGIC OPERATIONS William J. Addington Senior Vice President Erwin Granson Assistant Vice President, Asset Management TREASURY AND CORPORATE DEVELOPMENT Allister J. McPherson Senior Vice President, Treasury and Operations M. Wayne Bond Assistant Vice President, Corporate Administration Ricki L. Moffat Assistant Vice President, Treasury and Agent Administration Roger J. Pogue Assistant Vice President, Operations Michael Vos Assistant Vice President, Systems CANADIAN WESTERN BANK & TRUST Charles R. Allard 2,3 President WIC Premium Television Ltd. Edmonton, Alberta Albrecht W. A. Bellstedt 3,4 Partner Milner Fenerty Calgary, Alberta Douglas R. Dalgetty 2 Executive Vice President Canadian Western Bank Vancouver, British Columbia Jack C. Donald 2,4 President Parkland Industries Ltd. Red Deer, Alberta Executive Ofﬁcers FINANCE Tracey C. Ball, C.A. Vice President and Chief Financial Ofﬁcer Diane M. Davies, C.A. Assistant Vice President Diane L. Kerley, C.M.A. Assistant Vice President HUMAN RESOURCES Uve Knaak Assistant Vice President INTERNAL AUDIT David R. Gillespie Vice President and Chief Inspector Lars K. Christensen Assistant Vice President MARKETING AND PRODUCT DEVELOPMENT R. Graham J. Gilbert Vice President COMMERCIAL BANKING PRAIRIE REGION S. Wayne Bamford Vice President and Regional Manager Gus W. Itzek Senior Assistant Vice President, Energy Lending Calgary Robert H. Bean Assistant Vice President Winnipeg Michael N. Halliwell Assistant Vice President Calgary Ken R. MacDonald Assistant Vice President Regina Donald J. Odell Assistant Vice President Red Deer Dean F. Rhoden Assistant Vice President Saskatoon Al Steingart Assistant Vice President Chinook Station, Calgary COMMERCIAL BANKING NORTHERN ALBERTA REGION Jack C. Wright Vice President and Regional Manager William A. Book Senior Assistant Vice President Edmonton David M. Castell Assistant Vice President Edmonton Keith F. Garbutt Assistant Vice President Southside, Edmonton Gary R. Mitchell Assistant Vice President Industrial Lending 103rd Street, Edmonton Jake G. Muntain Assistant Vice President 103rd Street, Edmonton Garnett J. Way Assistant Vice President Real Estate Lending Edmonton COMMERCIAL BANKING BRITISH COLUMBIA REGION Rod W. Sorbo Senior Assistant Vice President Vancouver Robert G.P. Berzins Assistant Vice President Granville & 13th, Vancouver Barry T. Butler Assistant Vice President Nanaimo Ian G. Graham Assistant Vice President Kelowna Gerald W. Laliberte Assistant Vice President Victoria Craig Martin Assistant Vice President Guildford, Surrey Board of Directors Jordan L. Golding 1 Corporate Director and Consultant Retired Partner KPMG Peat Marwick Boston, Massachusetts, USA Allan W. Jackson 2,3,4 President ARCI Ltd. Calgary, Alberta Robert A. Manning 1,2,4 President Cathton Holdings Ltd. Edmonton, Alberta Gerald A.B. McGavin 1,2 President McGavin Properties Ltd. Vancouver, British Columbia Howard E. Pechet 2,4 President Mayﬁeld Consulting Inc. Del Mar, California, USA Larry M. Pollock 2 President and Chief Executive Ofﬁcer Canadian Western Bank Edmonton, Alberta Alan M. Rowe, C.A. 1 Senior Vice President and Chief Financial Ofﬁcer Crown Life Insurance Company Regina, Saskatchewan Arnold J. Shell *1,2,3 President Arnold J. Shell Consulting Inc. Calgary, Alberta REAL ESTATE LENDING VANCOUVER Raymond L. Young Vice President Jack B. Harms Assistant Vice President Robert E. Wigmore Assistant Vice President INDUSTRIAL LENDING AND LEASING Donald C. Watson Vice President Ron S. Baker Assistant Vice President Edmonton James O. Burke Assistant Vice President Chinook Station, Calgary Dean G. Cudmore Assistant Vice President Guildford, Surrey James S. Kitchin Assistant Vice President Kelowna David B. Subject Assistant Vice President Nanaimo CANADIAN WESTERN TRUST COMPANY - VANCOUVER Richard R.Mackin Vice President, Administration Paul W. Trapp Vice President, Marketing Kenneth C. Tabor Vice President, Mortgage Lending William A. Pearce Senior Assistant Vice President Mario V. Furlan Assistant Vice President, Real Estate Lending Patrick F. Rennison Assistant Vice President, Real Estate Lending OMBUDSMAN Paul R. Lefaivre Hidefumi Urasawa 3 Chief Representative The Hokkaido Takushoku Bank, Ltd. Vancouver, British Columbia 1 Audit Committee Member 2 Loans Committee Member 3 Conduct Review Committee Member 4 Corporate Governance and Human Resources Committee Member * on Board of Canadian Western Trust Company only DIRECTORS EMERITUS John Goldberg Arthur G. Hiller Peter M.S. Longcroft Dr. Maurice W. Nicholson Alma M. McConnell Eugene I. Pechet Dr. Maurice M. Pechet Gordon V. Rasmussen Fred Sparrow Robert J. Turnbull 56 We are continuing to meet the banking needs of Westerners in a personalized, innovative way. We are sustaining the balanced, responsible growth strategy that has contributed to the Bank’s success. We are rewarding our employees for their dedicated customer service by providing them with security, advancement and personal development opportunities. We are continuing to conduct our business in the West with due respect for our citizens and environment. Corporate Directory Corporate Office Suite 2300, 10303 - Jasper Avenue Edmonton, Alberta T5J 3X6 Telecopier (403) 423-8897 Telephone (403) 423-8888 Website: www.cwbank.com Stock Exchange Listings The Toronto Stock Exchange The Alberta Stock Exchange The Vancouver Stock Exchange Share Symbol - CWB Convertible Debenture Symbol - CWB.DB Registrar And Transfer Agent Montreal Trust Concourse Level 10050 Jasper Avenue Edmonton, Alberta T5J 1V7 Telephone (403) 448-7598 Corporate Secretary Charles R. Allard WIC Premium Television Ltd. Edmonton, Alberta Inquiries From Shareholders Any notification regarding change of address or change in registration of shares should be directed to the Transfer Agent. Any inquiries other than change of address or change in registration may be directed to the President and Chief Executive Officer. Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held on March 12, 1998 at the Crowne Plaza Chateau Lacombe, 10111 Bellamy Hill, Edmonton, Alberta at 2:00 p.m. (MST). A L B E RTA Edmonton Corporate Office Suite 2300, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 (403) 423-8888 Agent Processing Centre/ RSP Administration Suite 2200, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 (403) 423-8888 Branch Manager – Winnie Lee Edmonton Main 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 (403) 424-4846 Branch Manager – Bill Book 103rd Street Main Floor, 10303 Jasper Avenue Edmonton, Alberta T5J 3N6 (403) 423-8801 Branch Manager – Jake Muntain Southside 7933 - 104 Street Edmonton, Alberta T6E 4C9 (403) 433-4286 Branch Manager – Heinz Kleist Plaza 170 10015 - 170 Street Edmonton, Alberta T5P 4R5 (403) 484-7407 Branch Manager – Trent Stolz Calgary Calgary Main 441 - 5th Avenue S.W. Calgary, Alberta T2P 2V1 (403) 262-8700 Branch Manager – Michael Halliwell Chinook Station 6606 MacLeod Trail S.W. Calgary, Alberta T2H 0K6 (403) 252-2299 Branch Manager – Al Steingart Banking Offices Camrose 4895 - 50th Street Camrose, Alberta T4V 1P6 (403) 672-7769 Branch Manager – Bill Wachko Red Deer 5013 - 49 Avenue Red Deer, Alberta T4N 3X1 (403) 341-4000 Branch Manager – Don Odell Lethbridge 744 - 4th Avenue South Lethbridge, Alberta T1J 0N8 (403) 328-9199 Branch Manager – Donald Grummett Grande Prairie Industrial Lending Centre 5th Floor, 214 Place 9909 - 102 Street Grande Prairie, Alberta T8V 2V4 (403) 831-1888 Branch Manager – Kevin MacMillen B R I T I S H C O L U M B I A Vancouver Regional and Business Lending Office Suite 900, Two Bentall Centre 555 Burrard Street Vancouver, B.C. V7X 1M8 (604) 669-0081 Agent Processing Centre/ RSP Administration Suite 1035, Two Bentall Centre 555 Burrard Street Vancouver, B.C. V7X 1M8 (604) 669-2610 1-800-663-1000 Branch Manager – Huguette Holmes Dunsmuir 888 Dunsmuir Street Vancouver, B.C. V6C 3K4 (604) 688-8711 Branch Manager – John Cedervall Granville & 13th 2899 Granville Street Vancouver, B.C. V6H 3J4 (604) 730-8818 Branch Manager – Rob Berzins Courtenay 470 Puntledge Road Courtenay, B.C. V9N 3R1 (250) 334-8888 Branch Manager – Bill Lineham Kamloops Industrial Lending Centre 200 - 124 Seymour Street Kamloops, B.C. V2C 2E1 (250) 314-9642 Manager – Harold Lavack Kelowna 387 Bernard Avenue Kelowna, B.C. V1Y 6N6 (250) 862-8008 Branch Manager – Ian Graham Nanaimo #101, 6475 Metral Drive Nanaimo, B.C. V9T 2L9 (250) 390-0088 Branch Manager – Barry Butler Victoria 1201 Douglas Street Victoria, B.C. V8W 2E6 (250) 383-1206 Branch Manager – Gerry Laliberte Guildford Industrial Lending Centre 401, 15127 - 100 Avenue Surrey, B.C. V3R 0N9 (604) 583-7500 Branch Manager – Dean Cudmore S A S K AT C H E WA N Regina 1881 Scarth Street McCallum Hill Centre II Regina, Saskatchewan S4P 4K9 (306) 757-8888 Branch Manager – Ken MacDonald Saskatoon 244 - 2nd Avenue S. Saskatoon, Saskatchewan S7K 1K9 (306) 477-8888 Branch Manager – Dean Rhoden Yorkton #45, 277 Broadway Street E. Yorkton, Saskatchewan S3N 3G7 (306) 782-1002 Branch Manager – Barb Apps M A N I T O B A Winnipeg 234 Portage Avenue Winnipeg, Manitoba R3C 0B1 (204) 956-4669 Branch Manager – Robert Bean C A N A D I A N W E S T E R N T R U S T C O M PA N Y Suite 2230, 666 Burrard Street Vancouver, B.C. V6C 2Y8 (604) 685-1208 Vice President – Richard Mackin Designed by: Vision Design Communications Inc. C A N A D I A N W E S T E R N B A N K A N N U A L R E P O R T 1 9 9 7 S U I T E 2 3 0 0 1 0 3 0 3 J A S P E R AV E N U E E D M O N T O N , A L B E RTA T 5 J 3 X 6 Achieving our goals Printed in Canada

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