Canadian Western Bank Annual Report 1998

Plain-text annual report

8 9 9 1 T R O P E R L A U N N A Measuring our growth 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 RT 1 9 9 8 C A N A D I A N W E S T E R N B A N K P L A C E 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 R TA T 5 J 3 X 6 P R I N T E D I N C A N A D A TABLE OF CONTENTS HIGHLIGHTS LETTER TO SHAREHOLDERS CORPORATE OVERVIEW MANAGEMENT’S ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION C O R P O R A T E G O V E R N A N C E F I N A N C I A L S T A T E M E N T S 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 E X E C U T I V E O F F I C E R S B O A R D O F D I R E C T O R S A N D S H A R E H O L D E R I N F O R M A T I O N B A N K I N G O F F I C E S 2 6 10 26 48 53 59 70 71 72 Every year for ﬁfteen years we have measured our growth by the success of the businesses we have supported, the achievements of the individuals we have advised and the joys experienced by families who have realized their dreams with our help. We will continue to measure our success by the degree we are able to help our customers achieve theirs. 1 highlights FINANCIAL HIGHLIGHTS achieved record net earnings of $19 million, up 20% over last year increased total assets by 18% to $2.4 billion issued $50 million of 5.50% convertible subordinated debentures increased general allowance for credit losses to $9.3 million; kept loss expense down to 0.22% of average loans increased return on equity to 13.97% maintained a consistent and slightly improved return on assets ratio of 0.87% OPERATING HIGHLIGHTS purchased a majority interest in Canadian Western Capital Limited, a western based investment dealer opened a new branch in northeast Calgary relocated Calgary Main and west Edmonton branches to larger and upgraded locations consolidated the Vancouver Regional ofﬁce and Canadian Western Trust Company ofﬁce in a single location provided a new PC based account access program for business under the trade name CWB Direct® announced the naming of the premier 30 storey ofﬁce tower housing our Head Ofﬁce as Canadian Western Bank Place Financial Summary Five Year Financial Summary ($ thousands, except per share amounts) Results of Operations Net interest income Other income Net income Return on common shareholders’ equity Return on average total assets Per Common Share Average common shares outstanding (thousands) Earnings per share basic fully diluted Annual dividend Book value Market Price High Low Closing market value Balance Sheet and Off-Balance Sheet Summary Assets Cash resources and securities Loans Deposits Debentures Shareholders’ equity Assets under administration 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 1998 1997 1996 1995 1994 $ $ $ $ 55,855 10,450 19,012 13.97 % 0.87 % 9,421 2.02 1.77 0.30 15.39 27.00 14.75 17.15 2,386,478 320,405 1,989,656 2,059,545 87,091 145,268 453,058 7.8 % 11.9 % 2.59 % 0.7 % 62.1 % 522 23 $ $ $ $ 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 2,022,951 271,883 1,710,007 1,817,512 37,116 128,533 395,486 8.4 % 11.0 % 2.48 % 0.5 % 64.4 % 388 22 $ $ $ $ 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 1,754,072 247,614 1,478,392 1,585,855 26,000 102,554 371,798 8.1 % 10.2 % 2.59 % 1.0 % 64.8 % 359 20 $ $ $ $ 33,973 6,876 10,808 13.36 % 0.88 % 7,420 1.46 1.33 0.10 11.37 11.38 9.13 10.13 1,330,596 174,670 1,135,173 1,192,663 8,000 92,299 – 10.3 % 11.1 % 2.78 % 1.8 % 64.4 % 314 20 $ $ $ $ 18,744 4,420 4,967 10.74 % 0.78 % 3,944 1.26 1.14 0.07 12.39 10.00 6.13 9.50 705,709 95,006 599,881 634,379 8,000 48,870 – 8.6 % 9.9 % 3.07 % 1.6 % 68.3 % 182 13 * Net interest income divided by average assets ** Non-interest expenses expressed as a percentage of net interest income and other income T O TA L A S S E T S ( $ M I L L I O N S ) E A R N I N G S * P E R C O M M O N S H A R E 1998 1997 1996 1995 1994 2,386 2,023 1,754 1,331 706 1998 1997 1996 1995 1994 $2.02 $1.70 $1.58 $1.46 $1.26 * b a s i c 3 1988 Western & Paciﬁc and Bank of Alberta amalgamated as Canadian Western Bank 1993 Several former Metropolitan Trust branches acquired 1994 Canadian Western Bank and North West Trust Company amalgamated as Canadian Western Bank 1995 Aetna Trust Company was purchased and renamed Canadian Western Trust Company 1998 Majority interest in Majendie Charlton Securities Limited acquired; company renamed Canadian Western Capital Limited 1984 Bank of Alberta chartered 1982 Western & Paciﬁc Bank of Canada chartered brief history Profile Canadian Western Bank is the only federally chartered, Schedule I bank based in the West. The Bank serves Canada’s four western provinces through a net- work of twenty-three branches stretching from Victoria to Winnipeg. The Bank provides sound ﬁnancial services, innovative and mortgage lending services, with western Canada and well-priced loan arrangements, and highly as its primary market. The Bank also holds controlling competitive rates and features on deposit products. interest in Canadian Western Capital Limited, a full Its trust arm, Canadian Western Trust Company, service investment dealer. specializes in the administration of self-directed retirement products in addition to offering deposit 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. 5 Measuring our growth To our Shareholders As we celebrate our 15th anniversary, we can point to several exciting ﬁnancial successes for the ﬁscal year just past. Proﬁts and assets have both reached record levels, and as you review the information in this report you will discover other areas where we have set new benchmarks and will see that we compare favourably within the industry. Earnings per share rose 19% to $2.02 from $1.70 last have structured ourselves to keep genuine personal year and on a fully diluted basis were $1.77 compared service and attentiveness to the needs of the business to $1.55, an increase of 14%. Overall, proﬁt rose to and retail community as our highest priorities. $19.0 million compared to $15.8 million last year, representing an increase of 20% while return on equity increased to 13.97% from 13.12%. Total assets stood at $2.4 billion at year end, up from $2.0 billion last year, representing growth of 18%. The Bank’s shares also reached record trading levels and volumes. Our actual loan losses as a percentage of average loans stand at 0.22%, a very low level, and compare well with the best in the industry. Our productivity ratio, at 62.1% has improved over last year’s 64.4%. There has been more than normal activity in the banking industry this year. About a year ago the Canadian Bankers Association, which represents all banks in Canada, launched a public affairs campaign aimed at bringing about a better understanding between the banks and the general public. While we as a bank endorsed the effort as worthy, we actually see Two of Canada’s largest banks surprised most of the country by announcing their intent to amalgamate. Shortly thereafter another two announced their similar intention. We saw very quickly that, despite the eventual veto of these proposed mergers, many businesses and individuals are looking about for viable banking alternatives. Due in part to this, we are being presented with opportunities to form valuable new relationships with a signiﬁcant number of customers. M A R K E T P R I C E P E R S H A R E 1998 1997 1996 1995 1994 $17.15 $20.25 $12.80 $10.13 $9.50 ourselves as being closer to the public’s expectations O c t o b e r 3 1 c l o s e than most banks. This is because, from day one, we 7 To our Shareholders Q How will Canadian Western Capital ﬁt into your strategy? A It is a very important element. Our other income lags far behind the competitive environment and we are conﬁdent in our ability to thrive as industry. We can, and will, build their business – speciﬁcally wealth one of the competitors. management – to contribute to and signiﬁcantly enhance our earnings per share. And to do so we will deploy relatively little capital, I might add. Larry M. Pollock, President & CEO As we watched these events unfold we were reminded again of the need to gear up to take advantage of We cater to a select number of niches, none of which opportunity when it knocks – as we expect it will. are offshore. This has speciﬁc appeal to many and has This year we accessed the capital markets at a time also sheltered us from the economic problems in Asia when conditions were very favourable. We were and elsewhere. There are a large number of potential successful in increasing our Tier II capital by $50 customers in western Canada to allow the Bank’s million in the form of publicly traded subordinated continued proﬁtable growth and we expect their debt. With this capital secured, we are prepared to interest in us as a credible regional domestic player to support our increasing internally generated growth, grow in the period following the decision on mergers. and are poised to take advantage of broad strategic The debate on mergers overshadowed the release of the opportunities as they evolve. Review of the Financial Services Industry (generally One such opportunity is taking shape now. As you saw known as the MacKay Report). We are pleased with in reports earlier this year, we became the majority most of the various recommendations contained in it. shareholder in the investment dealer now known We support in particular the criticism directed at the as Canadian Western Capital Limited. We have high level of capital taxation in our industry. Capital is subsequently set about making the changes we expect the essential element of a ﬁnancial institution’s will serve successful western businesses in their quest structure, which provides the safeguard for depositors’ for new capital and will contribute to our objective of funds and the foundation for growth. Yet governments increasing fee-based income. It is our aim to become a have seen ﬁt to discourage it on one hand through taxation while encouraging it on Q How do you expect your bank to stack up against potential the other through prudent regulation. foreign competition? We also support the fostering of a healthy A Very well as long as we have a level playing ﬁeld on taxation, regulatory, and capital requirement issues. In our markets, we are equipped to compete with everyone. Larry M. Pollock, President & CEO 8 To our Shareholders Q Are you still staying with the “Service First” philosophy? A Absolutely. We will always be able to add value through our style of delivering our expertise. We have that in the form of banking services through CWB, wealth management advice in the case of CWC, and specialized products through CWT. The market niches, products, and customer base are all there, but it won’t work without people – our people – delivering service in a friendly, personable way. Larry M. Pollock, President & CEO Some concern is being expressed that the economies in western Canada, particularly British Columbia, may soften this year. We see some signs of this, but our loan portfolio remains in very good condition. Our track record in our marketplace – the four western provinces – bears out our ability premier player in western Canada in all facets of to lend prudently in such markets and retain the investment banking. As our plans are implemented conﬁdence and respect of our borrowers. we expect this entity to become a signiﬁcant contributor to our proﬁtability. We also have plans to broaden the scope of Canadian Western Trust Company in order to expand its proﬁt contribution. Our service culture is impossible without good people and we wish to take this opportunity to salute them. We continue to enjoy one of the best records in our industry for the absence of customer complaints, and Meanwhile, the expansion of our core business we receive testimonials from customers on a regular continued. We added a branch in Calgary, and basis that are the envy of any business. Our staff are relocated both our Calgary Main and west Edmonton justiﬁably proud of their accomplishments, and as we branches into larger and newer premises. We also grow this will in turn make you proud as a shareholder, began the steps necessary to see some branches offer and reassured with your investment decision. mutual funds early in the new ﬁscal year, in addition to making other improvements to our product lines, such as a PC based banking system for business and a capital markets index-linked GIC deposit. Equity markets may continue their current instability over the next short while. This is the primary reason for Jack C. Donald(signed) Larry M. Pollock(signed) our recent announcement of a normal course issuer bid, Chairman enabled by our strong capital position. Our objective is to maintain, support, and improve shareholder value. President and Chief Executive Ofﬁcer 9 in focus Niche Marketing To succeed in any business, including banking, a company must ﬁnd its unique strength and stick with it. We are proud to have retained our unswerving dedication to the Bank’s original focus: to meet the needs of Westerners in a personalized, innovative way. One of those needs is a bank that will ﬁnance thriving these are the areas that will ensure us long-term western companies whose borrowing needs range up success and prosperity. to $15 million and more. 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. Why have we had such success with the small to medium sized businesses? Because we ourselves are a young, enthusiastic and relatively small western business. As such, we understand the frustrations, challenges, and excitement experienced by other We are molding the capacities of our trust and growing western companies better than most players investment ﬁrms to respond to perceived opportunity in the ﬁnancial industry. in wealth management needs of Westerners. We will continue to enhance our considerable expertise in these and other speciﬁc niche markets as we believe “I AM ATTRACTED BY THE OPPORTUNITY AFFORDED THROUGH BEING AFFILIATED WITH A YOUNG AND STRONG BANK THAT KNOWS WHERE IT INTENDS TO GO. WEALTH MANAGEMENT IN THE WEST, FOR INSTANCE, HOLDS HUGE POTENTIAL.” BRIAN BASSETT, NEWLY APPOINTED PRESIDENT & CEO OF CANADIAN WESTERN CAPITAL, VANCOUVER 1 1 deposit options in balance Depositors want the best available return on their savings at the lowest possible risk. Borrowers want to use these savings with the fewest possible conditions. We must balance, and meet, the needs of each. lending services Deposit Options Today’s banking customers expect and demand services, options, beneﬁts and technological conveniences not even dreamed of as little as a decade ago. Canadian Western Bank meets those expectations. But we also recognize that customers who are investing their savings appreciate the level of comfort they experience when they’re invited to sit down and talk about it. In fact, personal customers wishing to access any of interest bearing instruments, again because of the rate our wide range of chequing and savings accounts are we offer, but also because the people managing their offered the choice of counter or sit-down service. accounts take the time to listen to their needs and And then we make them even more comfortable concerns. In addition, hundreds of deposit agents by providing competitive rates and features on across Canada, in centres large and small, make it personal deposits. We also offer a number of convenient transaction options including regular teller service, InTouch® possible for their clients to take advantage of the attractive rates and features of our term deposit instruments and retirement products. Telephone Banking (which allows customers to conduct Our business customers have the choice of placing a wide range of transactions, including bill payments deposits into regular current accounts, interest bearing and account transfers, by phone), plus free access to accounts, or ﬁxed term deposits. These deposit over 15,000 banking machines through membership in products are made available in all 23 branches across the Interac® and Exchange® networks of instant tellers. western Canada. Customers can use their Apex® card to ‘pay direct’ at over 250,000 retail stores. 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 1 4 Lending Services About 75 percent of our lending is to small and medium sized companies. We service this business level particularly well, because our own focus and expertise are in the same market as our borrowers. The remainder of our lending is to individuals for mortgages and for such personal requirements as renovations, cars, consolidation and vacations. We’ve targeted certain lending segments where we can • energy lending is offered primarily through our offer the expertise of our people and in the process carve a niche for ourselves: Calgary ofﬁces and is a market segment in which our experts have been players for years. • our core strength is commercial lending. These loans are typically arranged to ﬁnance assets, such as buildings, or to provide day-to-day operating capital; We also offer residential mortgages, personal loans, lines of credit to individuals, and the associated services on a fully competitive basis. • industrial loans usually ﬁnance the purchase or lease of 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; and “SENIOR MANAGEMENT VISITS OUR BRANCH REGULARLY. THE PEOPLE RUNNING THE BANK WANT TO KNOW WHAT WE HEAR AT THE BRANCH FROM A CUSTOMER VIEWPOINT” GLADYS COCHRANE, LOAN ADMIN OFFICER, CALARY CHINOOK 1 5 on course Strategy Four of the large Canadian banks announced merger aspirations with the stated objective of furthering the Canadian presence in the global market- place. We see this rapidly evolving environment as ultimately providing many opportunities in the regional and domestic market we remain committed to serving. This is just another example of how we use our size to our operations until we have assessed its possible our advantage. As a Schedule I bank, we bring strength beneﬁts for our customers and for the Bank itself. and stability to a banking relationship, and because we Only when we are convinced that a new product, are much smaller than the ‘big six’ banks, we are in a method or modiﬁcation will be advantageous and/or better position to really understand the businesses in proﬁtable, will we implement it. Our small size and the West. We conduct our operations and make our resultant agility allow us to move quickly. decisions in the same environment as our customers, giving us much in common with them. We believe that our steady, enviable growth pattern is the result of our ability to recognize good opportunities, We are aware of the inevitability of constant change anticipate our customers needs, think innovatively, and brought about by new technologies. Our people act responsively. constantly seek out and investigate any developments that may affect the way people do their banking. We do not, however, incorporate each innovation into Q Why did you announce you would buy your own shares back? A When our shares were trading at $14.75 we would have enhanced shareholder value by repurchasing our own stock. We have adequate capital, and would initiate action if the trading price were to return to a low level. Larry M. Pollock, President & CEO 1 7 with a smile Service From the moment we opened our doors ﬁfteen years ago, we have been known for our warm, personable service and understanding attitude toward customers – traits which some people think are out of character for a bank. Although it’s true we’ve never quite ﬁt the mold that’s through a series of branches, at Canadian Western expected of a bank, we believe our service is, in fact, Bank we tend to hire well-trained, experienced people our greatest strength and is the chief reason we’ve been and place them in permanent positions that are a able to grow and ﬂourish in a market that has long perfect ﬁt. So when a customer forms a bond of mutual been dominated by the ‘big six’ Canadian banks. trust with the personnel in a particular branch, they’ll Our customers tell us they enjoy all the extra care and be able to continue that relationship for years to come. attention we give them. They like the fact they can choose either counter service or sit-down service, and they appreciate the fact that we look after their transactional banking needs capably and efﬁciently. We also provide our customers with continuity in their banking relationships. While most banks train personnel by moving them from position to position Our customers tell us we’re strong on service, and we intend to build on that strength. “I WAS THE BANK’S FIRST EMPLOYEE! OVER THE PAST FIFTEEN YEARS I HAVE WATCHED OUR STAFF GROW TO OVER FIVE HUNDRED AND I AM PROUD TO BE PART OF THE EVOLUTION OF THE BANK TO WHERE IT IS TODAY.” ESTHER EDWARDS, THE BANK’S FIRST EMPLOYEE, CORPORATE OFFICE, EDMONTON 1 9 in sync Partnerships and Community A truly successful business understands the importance of working in harmony with both industry and the community. PARTNERSHIPS COMMUNITY Canadian Western Bank continues to form valuable Our Bank is committed to supporting worthy alliances and afﬁliations across the country and beyond. charitable, educational and artistic programs Our subsidiary, Canadian Western Trust Company, enables us to offer our customers experience and expertise in the administration of self-directed retirement funds. Our interest in Canadian Western Capital Limited provides us with access to the investment industry and equity markets for our clients. An afﬁliation with Crown Life of Regina provides us with access to expertise in the insurance industry. throughout western Canada. Many of the activities our people have chosen to become involved with are less visible than sponsorship of a major sporting event or similar affair. The Bank and its employees prefer to go out into the community, get involved, and work to make the quality of life better for everyone. The Bank believes in retaining employees in a branch or department on a long-term basis, so our people tend to be less mobile than bankers of the past. You will see our staff members participating in many worthwhile community activities. They are the faceless scout and Our interest in Bank Northwest of Bellingham will guide leaders, the soccer coaches, the music parent help us to explore future expansion prospects in the volunteers and door-to-door canvassers – truly an United States. integral part of our community. “THIS IS DIFFERENT FROM A BIG BANK. YOU CAN SEE WHERE OPPORTUNITIES WILL OPEN UP QUICKLY.” JAY CAMPBELL, MANAGEMENT TRAINEE GRADUATE, CALGARY NORTHEAST 2 1 insight Future “Western Canada continues to offer superb prospects for innovative businesses. We’re here to back them and to thrive along with them,” says President & CEO Larry Pollock. “When they succeed, we succeed.” It is our intent to sustain the balanced, responsible YEAR 2000 PROGRAM growth strategy that has contributed to the Bank’s success. This means an ongoing commitment to serving the needs of our niche market which is retail and commercial business. We intend to do this by continuing our successful market penetration of the western provinces through well-researched opportunities and expansion of our branch network. We have recognized that the arrival of the year 2000 is a signiﬁcant event that will affect most computer systems including the Bank’s internal systems, the software and systems provided by third parties, data exchange interfaces and many other computer systems that we rely on directly and indirectly in other aspects of our operations. We have adopted the “Year 2000 We will continue to reward our employees for their Project – Best Practices” issued by the Ofﬁce of the dedicated customer service by providing them with Superintendent of Financial Institutions. We are security, advancement and personal development targeting to have all internal systems tested and opportunities. We will proceed with our objective to conduct business in the West with due respect for its citizens and the environment. Year 2000 ready by December 31, 1998. We are also encouraging third party providers, other suppliers, and especially our customers to meet the same target date. Q What will Banking reform do for Canadian Western Bank? A Many of the MacKay report recommendations are positive for banks. The most encouraging areas are in the areas of recommended reductions in capital taxes, and changes to the methods of accounting for business combinations. Larry M. Pollock, President & CEO 2 3 Employee Achievements Since 1990 the Bank has given special recognition in the form of Chairman’s Awards and President’s Awards to a select number of employees. Employees below the executive level are nominated by their peers based on above average contribution and commitment to the Bank. These awards are accompanied by cheques in the Another way of rewarding good amounts of $1,000 and $250 respectively. This year’s employees is through our staff suggestion plan – SPICE – Staff Participating In Creating Excellence. Three examples from a large number of winners are: Shelly Campbell and Jennifer Cyr (Vancouver), who suggested improvements to accounting for interest on late loan payments Bev Foord (Regina), who suggested a more efﬁcient number of cheques in a standard order Stan Plasier (Treasury Department), who suggested a proﬁt improvement opportunity in the foreign exchange area award recipients are: CHAIRMAN’S AWARDS Gillian Hardman Edmonton 103rd Street Branch Tracy Keller Mortgage Administration, Canadian Western Trust Shelley Murray Finance Department, Corporate Ofﬁce PRESIDENT’S AWARDS Wendy Funk Finance Department, Corporate Ofﬁce Dianne Popadinac Real Estate Loans, Vancouver Branch Anita Rosdahl Courtenay Branch Marlene Saraﬁnchan Edmonton Main Branch Sharon Thompson Calgary Chinook Branch Terri Todd Administration, Corporate Ofﬁce 2 4 Financial Report 26 MANAGEMENT’S ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 26 OVERVIEW OF 1998 27 NET INTEREST INCOME 28 OTHER INCOME 28 NON-INTEREST EXPENSES 30 TAXES 31 LOANS 32 DEPOSITS 33 CAPITAL FUNDS AND ADEQUACY CORPORATE GOVERNANCE 48 48 INTRODUCTION 48 THE BOARD AND BOARD COMMITTEES 35 RISK MANAGEMENT 50 AUDIT COMMITTEE 50 CONDUCT REVIEW COMMITTEE 51 CORPORATE GOVERNANCE & HUMAN RESOURCES COMMITTEE 52 LOANS COMMITTEE 47 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS INCLUDING DERIVATIVES 52 OTHER AREAS OF CONSIDERATION 53 FINANCIAL STATEMENTS 52 CONCLUSION 53 MANAGEMENT’S REPORT 54 AUDITORS’ REPORT 55 CONSOLIDATED BALANCE SHEET 56 CONSOLIDATED STATEMENT OF INCOME 57 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY 58 CONSOLIDATED STATEMENT OF CHANGES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59 IN FINANCIAL POSITION Management’s Analysis of Operations and Financial Condition Key Performance Indicators Net income ($ thousands) Earnings 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 $ $ 1998 19,012 2.02 1.77 62.11 % 13.97 % 0.87 % $ $ 1997 15,837 1.70 1.55 64.43 % 13.12 % 0.85 % $ $ 1998/1997 Increase ( decrease ) 3,175 0.32 0.22 ( 2.32 )% 0.85 % 0.02 % O V E R V I E W O F 1 9 9 8 Consolidated net income for the year ended October 31, 1998 was $19.0 million, an increase of 20% from $15.8 million reported in 1997. Basic earnings per share of $2.02 and fully diluted earnings per share of $1.77 increased 19% and 14% respectively over the previous year. The return on common shareholders’ equity improved to 13.97% from 13.12% in 1997 while the return on assets rose to .87% compared with .85% last year. The improvement in results was attributable to increased net interest income of $10.4 million or 17% due to growth in average interest bearing assets and an increased net interest margin. In achieving this growth non-interest expenses were contained to an increase of $4.5 million or 12%. Total assets increased by 18% from one year ago to reach $2.39 billion. Cash resources and securities increased by $48 million, providing 13% of the total asset growth while loans provided 77%, increasing by $280 million to $1.99 billion. Shareholders’ equity and subordinated debentures increased by $67 million to $232 million. This growth includes a $50 million, 10 year, 5.50% subordinated debenture, issued on March 31, 1998. The total capital adequacy ratio at October 31, 1998 was 11.9% (1997 – 11.0%) with a Tier 1 component of 7.8% (1997 – 8.4%). Net income for 1998 includes a loss of $1.6 million related to Canadian Western Capital Limited (“CWC”), the Bank’s investment dealer subsidiary, which is undergoing major restructuring. Excluding this loss, growth in net income would have been 30% as earnings per share would have been $0.17 greater and return on equity and return on assets would have been 15.09% and 0.95% respectively. Subsequent to the completion of the restructuring, expected early in 1999, a signiﬁcant improvement in results is anticipated which will contribute to the Bank’s strategic objective of expanding fee-based revenue. See also Note 17 to the Consolidated Financial Statements. 2 6 Management’s Analysis of Operations and Financial Condition N E T I N T E R E S T I N C O M E 1998 1997 Average Balance Mix Interest Interest Rate Average Balance Mix Interest Interest Rate Table 1 – Net Interest Income ($ thousands) Assets Securities and deposits with regulated ﬁnancial institutions $ 240,009 11 % $ 10,841 4.52 % $ 196,976 11 % $ 8,543 4.34 % Loans Securities purchased under resale agreements and 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 Total Assets/Net Interest Income 24,895 265,857 1,569,589 1,860,341 2,100,350 60,225 1 12 73 86 97 3 1,177 17,997 127,951 147,125 157,966 – 4.73 6.77 8.15 7.91 7.52 0.00 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 $2,160,575 100 % $ 157,966 7.31 % $1,827,833 100 % $ 131,917 7.22 % $ 33,066 186,386 1,662,809 1,882,261 76,697 66,406 135,211 $2,160,575 $2,160,575 2 % $ – 0.00 % $ 25,842 1 % $ – 0.00 % 9 76 87 4 3 6 4,433 93,342 97,775 – 4,336 – 2.38 5.61 5.19 0.00 6.53 0.00 151,698 1,460,738 1,638,278 38,140 30,644 120,771 8 80 89 2 2 7 1,803 82,511 84,314 – 2,189 – 100 % $ 102,111 4.73 % $1,827,833 100 % $ 86,503 $ 55,855 2.59 % $1,827,833 $ 45,414 1.19 5.65 5.15 0.00 7.14 0.00 4.73 % 2.48 % 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 1998, net interest income increased by $10.4 million, or 23%, due to: • increased average interest bearing assets of $312 million (17%); and • increased net interest spread to 2.59% from 2.48%. The increased spread was primarily the result of: • an increase in average prime, from 4.80% to 6.44% year over year, which has a positive impact due to the composition of our loan and deposit portfolios; and • an increase in the higher yielding commercial borrowing component of our loan portfolio. In 1999 we expect: • interest rates will decrease with a downward movement in prime rate; and • the yields on securities and net interest spread will be comparable to 1998. As discussed in the Interest Rate Risk section, the portfolio has a positive gap with maturing assets exceeding maturing liabilities during the one year time frame. If market rates increase this would have a positive impact on spreads. 2 7 Table 2 – Other Income ($ thousands) Credit related Retail services Trust services Loan administration and other (1) Net gains on securities sales Total Management’s Analysis of Operations and Financial Condition 1998/1997 Increase ( decrease ) $ 1998 6,729 1,964 1,165 526 66 $ 1997 6,423 1,614 1,113 1,459 911 $ $ 306 350 52 ( 933 ) ( 845 ) $ 10,450 $ 11,520 $ ( 1,070 ) % 5 % 22 5 ( 64 ) ( 93 ) ( 9 )% (1) Other includes gains and losses on capital asset disposals, the Bank’s share of CWC’s fee-based income, foreign exchange services and other miscellaneous non-interest revenues. The productivity ratio improved to 62.1% as the rate of growth of revenues exceeded that of non-interest expenses. Non-interest expenses as a percentage of average assets was 1.88% in 1998, a signiﬁcant improvement over the 1.98% recorded in 1997. This means overhead costs grew at a slower rate than growth in assets. In 1999 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 • some improvement (i.e. decrease) in the productivity ratio. Capital expenditures of $1.3 million are budgeted for 1999 and will be funded from general operating revenues. Approximately 40% of this total relates to proposed expenditures on computer hardware and software and another 40% relates to leasehold and building improvements. A new banking system, originally budgeted for in 1998, has not yet been purchased. The estimated cost for this is $3.0 million although it is not included in the 1999 capital budget due to uncertainty of the purchase date. At year end there were speciﬁc commitments for approximately $100,000 of these capital expenditures. O T H E R I N C O M E Other income, which includes all revenues not classiﬁed as net interest income, decreased $1.1 million in 1998 to $10.5 million. Notable changes include: • increased credit and retail fees of $656,000 due to loan and deposit growth and increased activity in the retail branches; • increased loan administration fees, due to a $750,000 one-time contingency fee earned on the collection of an administered loan; • a decrease in other due to the Bank’s share of CWC’s loss, which totalled $1.6 million; and • decreased gains on securities sales due to rising interest rate markets. Other income as a percentage of total revenue was 6% in 1998 compared to 8% in 1997. In 1999 total other income is expected to improve as the restructuring of CWC is expected to make a positive impact. N O N - I N T E R E S T E X P E N S E S Non-interest expenses increased $4.5 million to $41.2 million in 1998 due to: • increased salaries and employee beneﬁts primarily from an increase in full time staff complement to accommodate growth; • higher volumes of activity as a result of continued growth; and • increased rental of premises costs of $577,000 from new and expanded branches and some resulting overlap of lease terms. 2 8 Table 3 – Non-Interest Expenses ($ thousands) Salaries and Employee Beneﬁts Salaries Employee beneﬁts Total Premises Rent Depreciation Other Total Equipment and Furniture Depreciation Other Total General Capital and business taxes Deposit insurance premiums Professional fees and services Postage and stationery Marketing and business development Travel Banking charges Communications Other Total Total Non-Interest Expenses Productivity Ratio Net interest income Other income Total revenue Management’s Analysis of Operations and Financial Condition 1998/1997 Increase ( decrease) 1998 18,624 2,772 21,396 3,263 682 645 4,590 1,404 1,308 2,712 2,469 2,452 2,085 1,117 1,020 709 686 513 1,436 12,487 41,185 55,855 10,450 66,305 $ $ $ $ 1997 16,590 2,421 19,011 2,686 623 750 4,059 1,162 1,127 2,289 2,088 2,254 1,879 1,059 984 623 641 484 1,310 11,322 36,681 45,414 11,520 56,934 $ $ $ $ $ 2,034 351 2,385 577 59 ( 105 ) 531 242 181 423 381 198 206 58 36 86 45 29 126 1,165 4,504 10,441 ( 1,070 ) 9,371 $ $ $ $ % 12.3 % 14.5 12.5 21.5 9.5 ( 14.0 ) 13.1 20.8 16.1 18.5 18.2 8.8 11.0 5.5 3.7 13.8 7.0 6.0 9.6 10.3 12.3 % 23.0 % ( 9.3 ) 16.5 % Productivity Ratio (expenses as a percentage of total revenue) 62.1 % 64.4 % P R O D U C T I V I T Y R AT I O 1998 1997 1996 1995 1994 62.1% 64.4% 64.8% 64.4% 68.3% 2 9 Management’s Analysis of Operations and Financial Condition TA X E S As a result of the amalgamation with B.C. Bancorp (“BCB”), in the prior year, 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 is being 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 $3.0 million (1997 - $1.8 million) offset by deferred tax credits of $1.1 million (1997 - $1.4 million). The current tax provision represents the amortization of a portion of the deferred tax asset acquired of $2.3 million (1997 - $876,000), large corporations tax of $454,000 (1997 - $320,000) and income tax of $317,000 (1997 - $757,000) relating to subsidiaries. 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. The Bank has reasonable assurance that its net deferred income tax asset will be realized through future reversals of timing differences. Income taxes otherwise payable by the Bank for the year ended October 31, 1998 were eliminated by utilizing approximately $7.4 million (1997 - $9.0 million) of acquired tax loss carryforwards, $14.6 million (1997 - $nil) of unclaimed deductions and $nil (1997 - $8.0 million) of tax loss carryforwards. At October 31, 1998, the Bank has approximately $68.4 million of unclaimed deductions which are available to reduce future years’ income for tax purposes. The Bank’s subsidiaries have $5.9 million of tax loss carryforwards, which expire up to 2005. The tax beneﬁt of these losses has not been recognized in income. Table 4 – Capital Taxes ($ thousands) British Columbia Alberta Saskatchewan Manitoba Total Capital Taxes Capital Tax Rate Capital Allocation (2) 1.00 % 2.00 % (1) 3.25 % 3.00 % 40 % 52 % 5 % 3 % $ $ 1998 700 1,192 296 143 2,331 1997 661 949 193 131 1,934 $ $ (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 $140 million at October 31, 1998 (1997 - $118 million). (2) These capital allocation percentages are for the Bank only although total capital tax includes capital taxes paid in British Columbia by a subsidiary. Capital tax for 1998 totalled $2.3 million compared to $1.9 million in 1997. The increase is primarily attributable to: • increased capital due to the retention of earnings; • increased proﬁtability, which increased the Alberta capital tax; • a legislative change in Saskatchewan which added debentures to the capital tax base; and • a reduction of $108,000 (1997 – $70,000) in the remission amount respecting Alberta capital tax. In 1999 capital taxes are expected to increase due to: • increased retained earnings; and • increased capital tax in Alberta as proﬁtability is expected to be greater and total capital will increase further over the $100 million threshold level, thus reducing the remission. The goods and services tax (GST) carries with it a signiﬁcant cost to the Bank as it does to all ﬁnancial 3 0 Management’s Analysis of Operations and Financial Condition 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, loan administration and trust services, 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 1998 was $872,000 compared to $694,000 in 1997. Table 5 – Outstanding Loans by Portfolio Type and by Provincial Location of Branch ($ millions) L O A N S October 31, 1998 Loans to Individuals Residential mortgages Other Total Loans to Businesses Securities purchased under resale agreements and call loans Commercial Construction and real estate Industrial Energy Total Total Loans Composition % October 31, 1997 Loans to Individuals Residential mortgages Other Total Loans to Businesses Securities purchased under resale agreements and call loans Commercial Construction and real estate Industrial Energy Total Total Loans Composition % British Columbia $ 161 35 196 – 257 408 151 – 816 $ 1,012 51 % $ $ 118 34 152 – 233 361 146 – 740 892 Alberta Saskatchewan Manitoba Total (1) Composition % $ $ $ $ 89 53 142 29 191 219 175 61 675 817 41 % 104 45 149 24 122 203 131 42 522 671 $ $ $ $ 24 10 34 – 8 26 22 – 56 90 4 % 31 5 36 – 6 27 20 – 53 89 $ $ $ $ 3 4 7 – 15 49 16 – 80 87 $ 277 102 379 29 471 702 364 61 1,627 2,006 $ 4 % 100 % 4 3 7 – 13 39 12 – 64 71 $ 257 87 344 24 374 630 309 42 1,379 1,723 $ 14 % 5 19 1 24 35 18 3 81 100 % 15 % 5 20 1 22 37 18 2 80 100 % 52 % 39 % 5 % 4 % 100 % (1) This table does not include an allocation of the allowance for credit losses and deferred revenue and discounts. 3 1 Management’s Analysis of Operations and Financial Condition Loans, as reported on the consolidated balance sheet, totalled $1.99 billion at the end of 1998 compared to $1.71 billion at the end of 1997, an increase of 16%. Highlights of the year over year changes are: P O R T F O L I O • growth in commercial loans of $97 million (26%) which represents 24% of the portfolio versus 22% one year ago; • growth in construction and real estate loans of $72 million (11%) which represents 35% of the portfolio versus 37% a year earlier; • an increased industrial portfolio of $55 million (18%); • growth in the energy portfolio, a specialty in our Calgary market, of $19 million (45%); and • growth in loans to individuals of $35 million (10%) which represents 19% of the portfolio versus 20% a year ago. L O C AT I O N • loan growth of $120 million (13%) in British Columbia and $163 million (20%) in the prairie provinces; and • a relatively constant overall percentage distribution by province. In 1999 the Bank’s business plan focuses on continued growth in all portfolios. Although the market remains competitive, especially in this low rate environment, signiﬁcant overall loan growth is planned for 1999 as the Bank expands its activities. L O A N S B Y P O R T F O L I O Construction and real estate 35% Securities purchased under resale agreements and call loans 1% Personal 19% Commercial 24% Energy 3% Industrial 18% Table 6 – Deposits ($ thousands) Canadian Currency Personal chequing and savings Business demand and savings Fixed term: Under $100,000 $100,000 and over Registered retirement products Total Foreign Currency (Canadian equivalent) Banks Others Total Total Deposits D E P O S I T S 1998 1997 Amount % of Total Amount % of Total $ 82,740 168,270 4.0 % 8.2 $ 78,798 141,873 1,120,740 260,499 417,792 2,050,041 – 9,504 9,504 54.4 12.6 20.3 99.5 – 0.5 0.5 929,712 250,393 401,831 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 $ 2,059,545 100.0 % $ 1,817,512 100.0 % 3 2 Management’s Analysis of Operations and Financial Condition Deposits grew to $2.06 billion, an increase of 13%. The analysis of these deposits is presented in Table 6. Highlights of the year include: • continued increases in balances in the business component of demand and savings accounts which contributes to our continuing effort to lower our overall cost of funds; and • increased total deposits raised in our retail branches of almost 16%. The mix of deposits by source remained relatively consistent with last year: • branches – 45% (1997 – 45%) • deposit agents – 50% (1997 – 48%) • wholesale clients – 5% (1997 – 7%) Canadian Western Trust Company (“CWT”), whose portfolio mix is included in the above numbers, 1998 1997 1996 1995 1994 does not have retail branches and so gathers most of its deposits through deposit agents, although $20.7 million of CWT’s portfolio was generated through the Bank’s retail branches. Retail branch deposits are generally considered to be more stable and our ongoing objective is to focus growth strategies on this source. 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. D E P O S I T S B Y S O U R C E ( $ M I L L I O N S ) 938 1,027 95 817 703 627 303 870 131 786 475 262 97 91 69 Branches Agent Wholesale Table 7 – Capital Structure and Regulatory Ratios at Year End ($ thousands) C A P I TA L F U N D S A N D A D E Q U A C Y Tier 1 Capital Retained earnings Common shares Less unamortized goodwill Total Tier 2 Capital (gross) General allowance for credit losses (1) Subordinated debentures Total Total Less regulatory limitation on inclusion of debentures (2) Total Regulatory Capital Regulatory Capital to Risk-weighted Assets Tier 1 capital Tier 2 capital Total Regulatory Capital Adequacy Ratio Assets to Regulatory Capital Multiple (3) 1998 1997 $ 55,673 89,595 ( 520 ) 144,748 2,767 87,091 89,858 234,606 ( 14,716 ) $ 39,476 89,057 ( 593 ) 127,940 2,282 37,116 39,398 167,338 – 1998/1997 Increase ( decrease ) $ 16,197 538 73 16,808 485 49,975 50,460 67,268 ( 14,716 ) $ 219,890 $ 167,338 $ 52,552 7.8 % 4.1 % 11.9 % 11.0 8.4 % 2.6 % 11.0 % 12.2 ( 0.6 )% 1.5 % 0.9 % ( 1.2 ) (1) Banks are allowed to include their general allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2 capital. The Bank has been granted an inclusion rate of .15% of risk-weighted assets. (2) The maximum amount of subordinated debentures that can be included in Tier 2 capital for regulatory purposes is 50% of Tier 1 capital. Thus, gross Tier 2 capital is reduced by $14,716 resulting in regulatory Tier 2 capital of $75,142. (3) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by total regulatory capital. 3 3 Management’s Analysis of Operations and Financial Condition Balance 159,538 160,867 1,989,656 76,417 2,386,478 21,457 638 22,095 130,000 – 130,000 $ $ $ $ $ $ 1998 Risk-weighted Balance $ $ $ $ $ $ $ 31,459 28,208 1,713,087 56,063 1,828,817 18,231 319 18,550 112 – 112 1,847,479 Balance 129,163 142,720 1,710,007 41,061 2,022,951 24,279 1,800 26,079 107,000 5,489 112,489 $ $ $ $ $ $ 1997 Risk-weighted Balance $ $ $ $ $ $ $ 25,662 8,510 1,425,868 38,460 1,498,500 21,307 1,080 22,387 97 11 108 1,520,995 Table 8 – Risk-weighted Assets ($ thousands) Balance Sheet Assets Cash resources Securities Loans Other assets Total Credit Instruments (1) (contract amounts) Guarantees and standby letters of credit Commitments to extend credit (2) Total Derivative Financial Instruments (3) (notional amounts) Interest rate contracts Foreign exchange contracts Total Total Risk-weighted Assets (1) See Note 11 to the Consolidated Financial Statements for further details. (2) Greater than one year only. (3) See Note 15 to the Consolidated Financial Statements for further details. The Ofﬁce of the Superintendant of Financial Institutions (“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 strongly encourages Canadian banks to maintain a minimum total capital adequacy ratio of 10% with a 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 (to the regulatory maximum amount of 50% of Tier 1 capital) 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. The goal is to maintain adequate regulatory capital to provide enough support for internally 3 4 generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, while still improving the return on equity through the most efﬁcient capital mix. At October 31, 1998 the total regulatory capital ratio coverage was 11.9% (1997 – 11.0%) of which 7.8% (1997 – 8.4%) was Tier 1 capital. Total regulatory capital increased $52.6 million over 1997 as a result of: • earnings, net of dividends, of $16.2 million; • a new convertible debt issue totalling $50.0 million, net of $14.7 million that is temporarily restricted from inclusion in Tier 2 capital until Tier 1 capital increases; and • share capital of $538,000 issued upon the exercise of 58,742 stock options and conversion of $25,000 of the 6.75% debentures. Subordinated debentures include both convertible ($74.0 million) and conventional ($13.1 million) debentures. Note 8 to the Consolidated Financial Statements details the terms of the debentures. Management’s Analysis of Operations and Financial Condition 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. On November 4, 1998 the Bank implemented a normal course issuer bid for a twelve-month period which allows the Bank to purchase for cancellation up to 472,036 common shares, or 5% of its outstanding common shares. The bid was implemented because management considered the shares to be undervalued and viewed a repurchase program as an appropriate use of the Bank’s funds. R I S K M A N A G E M E N T O V E R V I E W The Bank’s risk management policies continue to evolve and improve 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; and • 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. The Loans Committee of the Board, which maintains a close working relationship with the credit risk management group, is responsible for: • the review and approval of credit risk management 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 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 procedures, including internal controls, respecting day-to-day, routine operations. The internal audit group performs inspections in all areas of the Bank, including CWT and CWC, and reports the results directly to senior management, the President and CEO and the Audit Committee. 3 5 Management’s Analysis of Operations and Financial Condition 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 $15 million excepting government risk. The Bank employs and is committed to a number of important principles to manage credit exposures which include: • a Loans Committee of the Board whose duties 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 not 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. 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. 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. 3 6 Management’s Analysis of Operations and Financial Condition Table 9 – Change in Gross Impaired Loans ($ thousands) Gross impaired loans, beginning of year Net additions (reductions in impaired loans) Write-offs Total Gross Impaired Loans as a Percentage of Total Loans Impaired Loans Gross impaired loans increased $4.8 million in 1998. A specialist is engaged to focus exclusively on selected impaired loans. As shown in Table 9 gross impaired loans total $26.3 million representing 1.32% (1997 – 1.26%) of total outstanding loans. Impaired loans net of the allowance for credit losses have increased marginally over the past year and represent a very satisfactory .68% (1997 - .53%) of net loans outstanding. The Bank expects the impaired loan trend looking forward into 1999 to be comparable with 1998. Table 10 shows the year over year change to the allocation of the allowance for credit losses to speciﬁc provisions by category of impaired loans and to the general allowance for credit losses. Table 10 – Allowance for Credit Losses ($ thousands) Speciﬁc Provisions Consumer and personal Real estate Industrial Other General Allowance Total (1) Recoveries in 1998 totalled $334,000 (1997 - $11,000) $ 1997 Ending Balance 476 825 1,431 2,179 7,476 $ 12,387 3 7 $ $ 1998 21,534 8,841 ( 4,030 ) 26,345 1.32 % $ $ 1997 27,556 ( 1,457 ) ( 4,565 ) 21,534 1.26 % 1998/1997 Increase ( decrease ) ( 6,022 ) 10,298 535 4,811 0.06 % $ $ N E T I M PA I R E D L O A N S A S A P E R C E N TA G E O F N E T L O A N S O U T S TA N D I N G 1998 1997 1996 1995 1994 0.68% 0.53% 0.99% 1.83% 1.58% Write-offs, net of Recoveries (1) Provision for Credit Losses ( 162 ) $ $ $ ( 6 ) 563 1,371 1,767 – 3,695 $ $ 1,325 105 1,033 1,849 4,150 1998 Ending Balance 320 1,587 165 1,445 9,325 $ 12,842 Management’s Analysis of Operations and Financial Condition A L L O WA N C E F O R C R E D I T L O S S E S A S A P E R C E N TA G E O F G R O S S I M PA I R E D L O A N S P R O V I S I O N F O R C R E D I T L O S S E S A S A P E R C E N TA G E O F AV E R A G E L O A N S O U T S TA N D I N G 1998 1997 1996 1995 1994 48.7% 57.5% 47.0% 32.8% 29.7% 1998 1997 1996 1995 1994 0.22% 0.25% 0.30% 0.32% 0.41% Allowance for Credit Losses The allowance for credit losses consists of $3.5 million in speciﬁc provisions and $9.3 million in the general allowance for credit losses with the latter now representing 0.47% of gross outstandings and 0.54% of risk-weighted credit assets. This compares favorably with the Bank’s ﬁve year loan loss average of 0.30%. 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 (increasing with higher risk) loss ratio range against groups of loans of a common risk rating is utilized to test the general allowance adequacy. The general allowance would be expected to increase in strong economic times (as currently exists) and decrease in weaker economic times as provisions are identiﬁed on speciﬁc credits. OSFI will formally introduce its general allowance criteria in 1999 with application to general allowance balances for the 1999 year end and following periods. In the interim, they have encouraged federally regulated ﬁnancial institutions to continue to strengthen capital and allowance levels. Provision for Credit Losses The trend of improving credit quality in the portfolio is reﬂected in the above graph. For the year ended October 31, 1998, the provision for credit losses represented 0.22% 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 1999. Diversiﬁcation of Portfolio Total Advances Based on Location (also see Table 5) G E O G R A P H I C A L D I S T R I B U T I O N O F L O A N S British Columbia 46% Saskatchewan 6% Manitoba 4% Other 1% Alberta 43% 3 8 Management’s Analysis of Operations and Financial Condition The following table illustrates the diversiﬁcation in our lending operations by industry sector. Table 11 – Total Advances Based on Industry Sector (%) October 31 Construction Consumer loans and residential mortgages Real estate operations Transportation and storage Manufacturing Hotel/motel Oil and gas (production) Logging/forestry Other services Wholesale trade Finance and insurance Government guaranteed Other Total 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. 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. 1998 23.0 % 17.6 14.6 6.5 4.9 4.3 4.1 3.6 3.4 3.3 3.2 2.6 8.9 1997 18.2 % 19.4 22.3 5.5 4.5 3.8 3.3 2.7 2.6 2.4 2.8 3.7 8.8 100.0 % 100.0 % 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 from retail and commercial customers; • limits on single deposits and sources of deposits; • diversiﬁcation of funding sources; and • an approved contingency plan. Key features of liquidity management are: • daily monitoring of expected cash inﬂows and outﬂows and tracking and forecasting 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 • separate management of the liquidity position of the Bank and CWT to ensure compliance with related party and other regulatory tests. 3 9 Management’s Analysis of Operations and Financial Condition A schedule outlining the consolidated securities portfolio at October 31, 1998 is provided in Note 2 to the Consolidated Financial Statements. A conservative policy is maintained in this area with: • virtually all investments limited to high quality debt securities and short term money market instruments to meet objectives of liquidity management and to provide an appropriate return; • 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 and annual review and approval by the Board of Directors; and • quarterly reporting to the Board of Directors on the securities portfolio. Table 12 – Liquid Assets ($ thousands) Cash Deposits with regulated ﬁnancial institutions Cheques in transit Total Cash Resources Securities purchased under resale agreements and call loans 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 Securities Purchased Under Resale Agreements/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 $ $ $ $ 1998 2,246 133,888 23,404 159,538 28,493 58,896 32,574 41,189 27,937 189,089 348,627 2,386,478 14.6 % 2,059,545 16.9 % $ $ $ $ 1997 854 109,845 18,464 129,163 24,000 63,538 10,736 59,936 7,490 165,700 294,863 2,022,951 14.6 % 1,817,512 16.2 % 1998/1997 Increase ( decrease ) 1,392 24,043 4,940 30,375 4,493 ( 4,642 ) 21,838 ( 18,747 ) 20,447 23,389 53,764 363,527 0.0 % 242,033 0.7 % $ $ $ $ As shown in Table 12, liquid assets comprised of cash, interbank deposits, items in transit, securities purchased under resale agreements/call loans and marketable securities, totalled $349 million at October 31, 1998, an increase of $54 million from October 31, 1997. Liquid assets represented 14.6% (1997 – 14.6%) of total assets and 16.9% (1997 – 16.2%) of total deposit liabilities at that date. Highlights of the composition of liquid assets at October 31, 1998 follow: • maturities within one year total 87% or $304 million; • Government of Canada treasury bills made up 17% of the book value with other Government of Canada and provincial debt securities accounting for 21% of liquid assets; • highly rated short term commercial paper totalling $26 million is included in other marketable securities; and • deposits with regulated ﬁnancial institutions including bankers acceptances were 38% of liquid assets. Also included in liquid assets are securities purchased under resale agreements and call loans. These are short term advances, typically no more than several days in duration, to securities dealers and either require the dealer to repurchase the securities or are secured by treasury bills or other high quality liquid securities. 4 0 Management’s Analysis of Operations and Financial Condition During the year, deposits with ﬁnancial institutions increased while holdings of treasury bills decreased in order to take advantage of the higher yielding bank paper. The amount invested in government bonds with maturities over one year was reduced in view of the ﬂattening of the yield curve which occurred over the year. Short term credit facilities have been arranged with a number of ﬁnancial institutions. The expansion of such facilities will continue to be pursued as an additional liquidity safeguard. The government insured/guaranteed mortgage and loan portfolios also represent a potential source of liquidity. The primary source of new funding is the issuance of deposit instruments. A summary of the deposits by maturity is presented in Tables 13 and 14. Table 13 – Deposit Maturities Within One Year ($ millions) At October 31, 1998 Demand deposits Notice deposits Deposits payable on a ﬁxed date Total At October 31, 1997 Total Table 14 – Total Deposit Maturities ($ millions) At October 31, 1998 Demand deposits Notice deposits Deposits payable on a ﬁxed date Total At October 31, 1997 Total $ $ $ Within 1 Year 49 209 1,027 1,285 1,135 $ $ $ 1 - 2 Years – – 256 256 211 $ $ $ $ $ $ Within 1 Month 1 - 3 Months 3 Months - 1 Year Cumulative Within 1 Year 49 209 285 543 507 2 - 3 Years – – 257 257 192 $ $ $ – – 179 179 167 $ $ $ – – 563 563 461 $ $ $ 49 209 1,027 1,285 1,135 3 - 4 Years – – 125 125 166 $ $ $ 4 - 5 Years Non-interest Sensitive $ $ $ – – 137 137 108 $ $ $ – – – – 6 Total 49 209 1,802 2,060 1,818 $ $ $ 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 continues to raise essentially all of its deposits through agents. The Bank distributes CWT’s deposit products through the Bank’s branch network and at October 31, 1998, $20.7 million (1997 - $11.2 million) of CWT deposits had been raised in this manner. 4 1 Management’s Analysis of Operations and Financial Condition To manage interest rate risk arising as a result of the ﬁnancial intermediation process, 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 approved and reviewed at least annually by the Board of Directors with quarterly reporting provided to the Board as to the gap position. Exposure to interest rate risk is controlled by managing the size of the static gap positions between interest sensitive assets and interest sensitive liabilities for future periods. 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 15 shows the consolidated gap position at October 31, 1998 for selected time intervals. Comparative summary ﬁgures are given at October 31, 1997. Figures in brackets represent an excess of liabilities over assets or a negative gap position. 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 itself does not undertake trading activities and, therefore, does not have risks related to such activities as market making, arbitrage or proprietary trading. The capital company does take trading positions primarily in ﬁxed income and money market securities. The market risks related to this activity are not considered to be material for the Bank at this time. Therefore, the Bank’s material 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. 4 2 Management’s Analysis of Operations and Financial Condition Table 15 – Asset Liability Gap Positions ($ millions) At October 31, 1998 Assets Cash resources Securities Loans Other assets Off-balance sheet swaps Total Liabilities and Equity Deposits Other liabilities Debentures Shareholders’ equity Off-balance sheet swaps Total Interest Rate Sensitive Gap Cumulative Gap Cumulative Gap as a Percentage of Total Assets At October 31, 1997 Total assets Total liabilities and equity Interest Rate Sensitive Gap Cumulative Gap Cumulative Gap as a Percentage of Total Assets Notes: Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year $ $ $ $ $ $ 79 26 816 – 20 941 543 5 – – 130 678 263 263 10.5 % 796 614 182 182 $ $ $ $ $ $ 33 35 73 – 20 161 179 – – – – 179 ( 18 ) 245 9.7 % 124 167 ( 43 ) 139 $ $ $ $ $ $ 21 57 281 – 65 424 563 – 24 – – 587 ( 163 ) 82 3.3 % 395 461 ( 66 ) 73 $ $ $ $ $ $ Total Within 1 Year 133 118 1,170 – 105 1,526 1,285 5 24 – 130 1,444 82 82 3.3 % 1,315 1,242 73 73 $ $ $ $ $ $ 1 Year to 5 Years Over 5 Years Non- interest Sensitive 1 41 832 – 25 899 775 – 63 – – 838 61 143 5.7 % 738 709 29 102 $ $ $ $ $ $ – 1 1 – – 2 – – – – – – 2 145 5.8 % 9 4 5 107 $ $ $ $ $ $ $ 26 1 ( 14 ) 76 – 89 – 89 – 145 – 234 ( 145 ) – ( 5.8 )% 68 175 ( 107 ) – $ $ $ $ $ 8.5 % 6.5 % 3.4 % 3.4 % 4.8 % 5.0 % ( 5.0 )% Total 160 161 1,989 76 130 2,516 2,060 94 87 145 130 2,516 – – – 2,130 2,130 – – – 1. Accrued interest is excluded in calculating interest sensitive assets and liabilities. 2. 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 $47 million as at October 31, 1998. The majority of ﬁxed rate loans, mortgages and leases are either closed or carry prepayment penalties. The gap analysis in Table 15 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 management of those positions over time. During the year: • the one year and under cumulative gap decreased from 3.4% of assets to 3.3%; • the one month and under gap increased from 8.5% to 10.5%; and • the ﬁve year and under cumulative gap increased from 4.8% to 5.7%. Of the $1.03 billion in ﬁxed term deposit liabilities maturing within one year from October 31, 1998, approximately $112 million (5.4% of total deposit liabilities) 4 3 Management’s Analysis of Operations and Financial Condition are ﬁxed term registered retirement savings plan (RRSP) deposits maturing between December 1, 1998 and April 30, 1999. The term in which these deposits and other maturing 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 reductions in the prime lending rate, modest Table 16 – Weighted Average Effective Interest Rates (%) demand from borrowers wishing to ﬁx loan rates for longer terms out to ﬁve years is expected. The effective interest rates for each class of ﬁnancial asset and liability, including off-balance sheet instruments, are shown in Table 16. 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, 1998 Assets Cash resources Securities Loans Off-balance sheet swaps Total Liabilities Deposits Debentures Off-balance sheet swaps Total Interest Rate Sensitive Gap At October 31, 1997 Total assets Total liabilities Interest Rate Sensitive Gap 4.6 % 5.5 % 5.2 % 4.9 % 5.3 % – % 4.9 % 5.2 8.0 4.6 7.6 3.8 – 5.4 4.1 3.5 % 6.3 % 3.0 3.3 % 5.2 7.8 5.1 6.4 5.0 – – 5.0 1.4 % 6.0 % 4.5 1.5 % 5.1 7.8 5.3 7.0 5.4 7.1 – 5.5 5.2 8.0 5.1 7.3 4.7 7.1 5.4 4.8 5.4 7.9 5.5 7.7 6.0 5.7 – 6.0 5.8 8.2 – 7.0 – – – – 5.2 7.9 5.2 7.4 5.2 6.1 5.4 5.2 1.5 % 2.5 % 1.7 % 7.0 % 2.2 % 6.6 % 5.0 1.6 % 6.4 % 3.9 2.5 % 8.0 % 6.3 1.7 % 5.3 % 9.0 ( 3.7 )% 7.0 % 4.8 2.2 % The estimated sensitivity of net interest income to a change in interest rates is presented in Table 17. The amounts represent the estimated change in net interest income over the time period shown resulting from a one percentage point change in interest rates. If rates increase, the effect would be an increase in net interest income while the opposite would occur if rates decrease. The estimates are based on a number of assumptions/factors, which include: • a constant structure in the asset liability portfolio; • interest rate changes affect interest sensitive assets and liabilities by the same amount and are applied at the appropriate repricing dates; and • no early redemptions. The interest sensitivity of the portfolio increased in both absolute dollar terms and as a percentage of estimated future net interest income during the year, but remained well within policy guidelines. 4 4 Management’s Analysis of Operations and Financial Condition Table 17 – Estimated Sensitivity of Net Interest Income as a Result of a One Percentage Point Change in Interest Rates ($ thousands) Period 90 days 1 year 1 year percentage change 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 as at October 31, 1998. Foreign Exchange Risk In providing ﬁnancial services to its customers, the Bank has assets and liabilities denominated in United States (U.S.) dollars. At October 31, 1998, assets denominated in U.S. dollars were 0.4% of total assets and U.S. dollar liabilities were 0.4% of total liabilities. The comparable percentages at October 31, 1997 were 0.6% and 0.8% for assets and 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. Policy is established setting a limit 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. Policy respecting foreign exchange exposure is reviewed and approved at least annually by the Board of Directors, and deviations from policy are reported to the Board and ALCO. $ 1998 585 2,152 3.5 % $ 1997 384 1,478 3.0 % 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 external 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. 4 5 Management’s Analysis of Operations and Financial Condition Y E A R 2 0 0 0 U P D AT E The “Year 2000 issue” is a general term used to refer to certain business implications of the arrival of the new millenium. These implications arise primarily because it has been normal practice for computer hardware and software to use only two digits rather than four to record the year in date ﬁelds. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in possible errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. Potential problems may affect not only hardware and software used to process business information but also the embedded chips that control such things as ofﬁce equipment, elevators and building climate and security systems. The Bank has adopted the Ofﬁce of the Superintendent of Financial Institutions Canada Year 2000 Project – Best Practices guideline as the basis for managing the Year 2000 issue. This process is summarized in ﬁve key phases as follows: • scope and recognition of the project; • assessment; • development and acceptance testing phase; • implementation phase; and • contingency planning. A Year 2000 project team was established in 1997 to manage the overall process and includes representatives from the trust and capital companies. A standard methodology has been adopted by all companies within the Bank’s corporate family. The Bank also participates in the Canadian Bankers Association Year 2000 Interbank Working Group. Awareness of the Year 2000 issue is high within the Bank. Quarterly reporting is provided by management to the Board and internal audit presents an independent report to the Audit Committee quarterly on the status of the project. The Bank has also engaged an independent party to review the Bank’s progress toward becoming Year 2000 ready. During the assessment phase the Bank: • compiled a comprehensive inventory of hardware and software; • developed priorities and timelines to direct the progress of the project; • contacted customers, third party providers and other suppliers to determine their progress towards becoming Year 2000 ready; and • continued to monitor the progress of the external parties. The Bank is now well into the development and acceptance testing phase of the project and is on target for all critical internal systems to be tested and Year 2000 ready by December 31, 1998. With internal testing in its ﬁnal stages, plans are well underway for the implementation and testing of the remaining critical systems/applications that are Year 2000 ready. We are working closely with the suppliers of the two critical external systems and are conﬁdent they will be able to deliver the necessary ﬁxes within the committed time frames. Nothing signiﬁcant has been identiﬁed to date to indicate that the Bank will not be ready for the turn of the century. Work has also commenced on the contingency planning phase. The Bank is revisiting its existing business interruption contingency plans to address internal and external issues speciﬁc to the Year 2000 issue. Such revisions are expected to be completed by April 1999. These plans, which are intended to enable the Bank to continue to operate and serve its customers, may include: • performing certain processes manually; • obtaining alternative systems; • changing suppliers; and • reducing operations to only critical services. Due to the widespread nature of the Year 2000 issue the contingency planning phase will be an ongoing one which may require further modiﬁcations as the Bank obtains additional information, through the testing and implementation phases, and on the status of third party Year 2000 readiness. The Bank expects the Year 2000 project to be completed on a timely basis. The ﬁnancial impact of this project for the Bank has not been and is not anticipated to be material to its ﬁnancial position or results of operations. The majority of Year 2000 related costs are not incremental costs, but rather represent a redeployment of existing resources and are expensed as incurred. This redeployment of resources is also not expected to have a signiﬁcant impact on the day-to-day operations of the Bank. Other anticipated costs represent investment in upgraded systems and will be capitalized according to existing policies. 4 6 Management’s Analysis of Operations and Financial Condition Despite the Bank’s best efforts there can be no assurance that the services provided by third parties on which the Bank relies will be Year 2000 ready on a timely basis or that any such compliance failure would not have an adverse effect on the Bank’s operations or its ﬁnancial results. The Bank relies on third party providers for critical services such as communications, access to the payments system, automated banking machine networks and point of sales systems. The failure to correct a material Year 2000 problem could result in an interruption to, or a failure in, certain normal business activities or operations. Due to the general uncertainty inherent in the Year 2000 problem, the Bank is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Bank’s results of operations, liquidity or ﬁnancial position. The Year 2000 project will signiﬁcantly reduce the uncertainty regarding factors within the Bank’s control and with the implementation and completion of the project as scheduled, the possibility of signiﬁcant interruptions of normal operations should be greatly reduced. 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 18 – 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 amounts) Interest rate contracts (3) Foreign exchange contracts (4) Purchases Sales Total Assets Under Administration 1998 1997 $ $ $ $ $ 21,457 282,150 303,607 130,000 – – 130,000 453,058 $ $ $ $ $ 24,279 233,842 258,121 107,000 3,237 2,252 112,489 395,486 (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 undrawn availability authorized under lines of credit and commercial operating loans of $121 million (1997 - $109 million) and recently authorized but unfunded loan commitments of $161 million (1997 - $125 million). (3) Interest rate swaps are used as hedging devices to control interest rate risk. The outstanding swaps mature between November, 1998 and April, 2003. The total gross positive replacement cost of interest rate swaps was a positive $437,000 (1997 - $485,000). 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 from time to time to manage the difference between U.S. dollar assets and liabilities. At October 31, 1998 there were no forward foreign exchange contracts outstanding. 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 or other off-balance sheet hedging instruments is expected in the future for the purpose of asset liability structuring and management of 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 of Directors at least annually. Trust assets under administration, administered by a subsidiary, totalled approximately $453 million at October 31, 1998 (1997 - $395 million). These assets are primarily in self- administered RRSPs and RRIFs (registered retirement income fund). These assets, and the fees earned for their administration, are expected to increase in 1999. 4 7 Corporate Governance I N T R O D U C T I O N 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 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. The Corporate Governance & Human Resources Committee provides direction, monitors compliance and makes recommendations to the Board on the optimum approach to governance issues to enhance corporate performance. The initiatives undertaken in the year to enhance the governance framework were as follows: • a requirement for an annual review of the Board and committee mandates; • addition of the Year 2000 issue to the agenda for each regularly scheduled Board meeting; • quarterly report to the Audit Committee, from the internal audit department, on its independent review of management’s progress on the Year 2000 issue; • approval of a process for legislative compliance management including receipt of an annual report on compliance with legislative issues; • a practice of having a time for all non-management directors to meet at each regularly scheduled meeting; • approval of a policy for minimum shareholdings by directors; and • conducted a Board and member review and assessment, which is to be repeated every two years. 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” (as deﬁned by the afﬁliation rules set forth in the Act) or “unrelated”, as deﬁned in the TSE guidelines on corporate governance. As a result of this review, the Board has determined that two of the directors are afﬁliated (the President and 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 holds four regular meetings each year, as well as additional meetings as required. Most committees meet quarterly and all meet annually at a minimum. A meeting agenda matrix is issued to ensure meetings of the Board and its committees are efﬁcient and complete. The Board of Directors as a whole has expressly assumed responsibility for developing the Bank’s approach to governance issues although the Corporate Governance 4 8 Corporate Governance The areas of real estate appraisals and credit risk management have been delegated to the Loans Committee of the Board. 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 succession plans; • 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. & 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 the 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. 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 at least annually to approve the policies and review the management programs associated with: • interest rate risk management; • securities portfolio management; • liquidity and funding management; • foreign exchange risk management; • capital management; • internal organizational and procedural controls; • real estate appraisals; and • credit risk management. 4 9 Corporate Governance A U D I T C O M M I T T E E 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 and its mandate is summarized as follows: • review the annual statement and report thereon to the directors before approval is given; • review such returns as required by OSFI and report thereon to the directors before approval is given; • require management to implement and maintain appropriate internal control procedures and review, evaluate and approve those procedures; • review such investments and transactions of the Bank, that could adversely affect its well-being, as are brought to the committee’s attention by the auditors, or an ofﬁcer of the Bank or other committee of the Board; • review the annual statement and any speciﬁed return or other transactions with the Bank’s shareholders’ auditors, ensuring any items of concern are duly considered; • discuss the adequacy/effectiveness of the internal control procedures with the Vice President and Chief Inspector and review any signiﬁcant ﬁndings with senior management; • review the interim unaudited statements, as well as other related public information, before public disclosure; • review a report from the Loans Committee of the Board, including recommendations on the adequacy of loan loss provisions and write-offs; • review the CDIC Standards Assessment and Reporting Program (SARP) annually and report thereon to the directors before approval is given; • review the terms of the shareholders’ auditors’ engagement, their level of compensation, the audit plan, any proposed changes in accounting policies, their presentation and input concerning signiﬁcant risks and key estimates and judgements of management; and • meet regularly with the internal and shareholders’ auditors without management present. 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 speciﬁed related parties of the Bank and, further, to review any such transactions to ensure compliance with the Act, either approving or declining the transactions, as required; • review and approve internal policies for credit arrangements and ﬁnancial services available to employees of the Bank under the regulations concerning ofﬁcers and associated parties; • monitor aggregate transactions of the Bank with directors as well as ofﬁcers and their interests to ensure continued compliance with the Act with excesses brought to the Board for consideration; • review the conduct policy on an annual basis to ensure relevance and completeness in regard to legislative requirements; • 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; • ensure every employee, ofﬁcer and Board member agrees to comply, in writing, with annual acknowledgement, with the Bank’s conduct policy; and • after each meeting provide a report to the directors on all transactions and other matters reviewed by the committee. 5 0 Corporate Governance 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; • 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 - - 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 Board of Directors Manual. 5 1 Corporate Governance prior to each board meeting which includes the agenda, minutes of previous meetings and supporting documentation for speciﬁc agenda items. The Bank is also committed to ensuring quality and timely information is available to all shareholders. Inquiries and requests for information from shareholders and potential investors receive prompt attention from an appropriate ofﬁcer. The President and CEO and other members of senior management also meet periodically with ﬁnancial analysts and institutional investors. 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 goverance issues as warranted. 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 and approve a lending limit for the Bank and the President and CEO within the limits established by the Board and review such limits at least annually; • 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; • recommend for approval of the full Board loan proposals to directors, related entities and Bank subsidiaries; • 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, prudent and in accordance with CDIC standards; • review and recommend acceptance of management’s recommendations for loan 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. There is also a Board and member review and assessment program whereby every second year directors complete a formal assessment of the operations and effectiveness of the Board and its committees. Every other year, directors complete a formal assessment on individual directors’ effectiveness. In order to carry out its responsibilities the Board must have timely access to information which is available via discussions with the Bank’s senior management and through a comprehensive information package sent out 5 2 Financial Statements M A N A G E M E N T ’ S R E P O R T The 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 the integrity, objectivity and reliability of the data presented, including the many amounts which must, of necessity, be based on estimates and judgements. 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, that assets are safeguarded and that the Bank is in compliance with all regulatory requirements. These supporting procedures include the careful selection and training of qualiﬁed staff, deﬁned division of responsibilities and accountability for performance, and the written communication of policies and guidelines of business conduct and risk management throughout 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 LLP, 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(signed) President and Chief Executive Ofﬁcer Tracey C. Ball, C.A.(signed) Vice President and Chief Financial Ofﬁcer December 4, 1998 5 3 Financial Statements A U D I T O R S ’ R E P O R T To The Shareholders of Canadian Western Bank We have audited the Consolidated Balance Sheet of Canadian Western Bank as at October 31, 1998 and 1997 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. In our opinion, these consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Bank as at October 31, 1998 and 1997 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 LLP(signed) Edmonton, Alberta December 4, 1998 5 4 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 As at October 31 ($ thousands) Assets Cash Resources Cash Deposits with regulated ﬁnancial institutions Cheques and other items in transit, net Securities Issued or guaranteed by Canada Issued or guaranteed by a province Other securities Loans (net of allowance for credit losses) Securities purchased under resale agreements and call loans Residential mortgages Other Other Land, buildings and equipment Other assets Total Assets Liabilities and Shareholders’ Equity Deposits Payable on demand Payable after notice Payable on a ﬁxed date Other Other liabilities Subordinated Debentures Conventional Convertible Shareholders’ Equity Capital stock Retained earnings 1998 1997 $ 2,246 133,888 23,404 159,538 98,481 34,178 28,208 160,867 28,493 277,415 1,683,748 1,989,656 12,760 63,657 76,417 $ 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 $ 2,386,478 $ 2,022,951 $ 49,325 208,551 1,801,669 2,059,545 $ 40,742 184,912 1,591,858 1,817,512 94,574 13,126 73,965 87,091 89,595 55,673 145,268 39,790 13,126 23,990 37,116 89,057 39,476 128,533 (Note 2) (Notes 3 & 4) (Note 5) (Note 6) (Note 7) (Note 8) (Note 9) Total Liabilities and Shareholders’ Equity $ 2,386,478 $ 2,022,951 Jack C. Donald (signed) Larry M. Pollock (signed) Chairman President and Chief Executive Ofﬁcer 5 5 For the year ended October 31 ($ thousands, except per share amounts) Interest Income Loans Securities Deposits with regulated ﬁnancial institutions Interest Expense Deposits Debentures 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 and other Net gains on securities sales Net Interest and Other Income Non-Interest Expenses Salaries and employee beneﬁts Premises and equipment Other expenses Provincial capital taxes Net Income before Provision for Income Taxes Provision for income taxes Net Income Average number of common shares outstanding Earnings per common share basic fully diluted 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 1998 1997 $ 147,125 $ 123,374 7,718 3,123 157,966 97,775 4,336 102,111 55,855 4,150 51,705 6,729 1,964 1,165 526 66 10,450 62,155 21,396 7,302 10,156 2,331 41,185 20,970 1,958 19,012 9,421,196 2.02 1.77 7,305 1,238 131,917 84,314 2,189 86,503 45,414 4,000 41,414 6,423 1,614 1,113 1,459 911 11,520 52,934 19,011 6,348 9,388 1,934 36,681 16,253 416 15,837 9,322,214 1.70 1.55 $ $ $ (Note 4) (Note 10) (Note 1(j)) $ $ $ 5 6 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 Balance at end of year Total Shareholders’ Equity (Note 9) 1998 $ 89,057 $ 538 89,595 39,476 19,012 ( 2,815 ) – – 1997 75,136 13,921 89,057 27,418 15,837 ( 2,316 ) ( 1,126 ) ( 337 ) 55,673 145,268 $ 39,476 128,533 $ 5 7 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 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, net Change in accrued interest receivable and payable, net Other items, net Cash Flows from Financing Activities Deposits, net Subordinated debentures, net Common shares issued, net of issue costs Dividends Cash Flows Used in Investing Activities Loans, net Securities, net Interest bearing deposits with regulated ﬁnancial institutions, net Acquisition of controlling interest in Canadian Western Capital Limited Land, buildings and equipment, net Amalgamation with B.C. Bancorp (Decrease) 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 1998 1997 $ 19,012 $ 15,837 4,150 2,357 1,425 ( 66 ) 6,135 2,990 36,003 242,033 49,975 538 ( 2,815 ) 289,731 ( 283,799 ) ( 14,044 ) ( 22,740 ) ( 5,600 ) ( 3,739 ) – ( 329,922 ) ( 4,188 ) 31,484 27,296 159,538 132,242 27,296 $ $ $ 4,000 1,855 ( 531 ) ( 911 ) ( 1,687 ) 564 19,127 231,657 9,990 13,584 ( 2,316 ) 252,915 ( 235,912 ) 45,940 ( 52,374 ) – ( 2,962 ) ( 13,586 ) ( 258,894 ) 13,148 18,336 31,484 129,163 97,679 31,484 $ $ $ (Note 8) (Note 9) (Note 17) (Note 18) 5 8 Notes to Consolidated Financial Statements October 31, 1998 (tabular amounts in thousands of dollars unless otherwise indicated) 1 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S 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. Of necessity, management must make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the ﬁnancial statements and income and expenses during the year. Actual results could differ from those estimates. 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 of the Bank and all of its subsidiaries, after the elimination of intercompany transactions and balances. Subsidiaries are deﬁned as corporations whose operations are controlled by the Bank and are corporations in which the Bank owns more than 50 percent of the voting shares. See Note 19 for details of the subsidiaries. Business acquisitions are accounted for using the purchase method. The difference between the acquisition cost of an investment and the fair value of the net identiﬁable assets acquired represents goodwill or other identiﬁable intangibles. This excess amount is deferred and amortized to income over the anticipated period of beneﬁt, not to exceed 20 years. The unamortized balance is recorded in other assets. The carrying value of goodwill and other identiﬁable intangibles is evaluated regularly by reviewing the expected cash ﬂows generated by the acquired subsidiary or asset. Any permanent impairment in value is written off to the Consolidated Statement of Income. 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. 5 9 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. Impaired loans are returned to performing status when the timely collection of both principal and interest is reasonably assured and all delinquent principal and interest payments are brought current and all charges for loan impairment have been reversed. 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 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. Notes to Consolidated Financial Statements e) Land, Buildings and Equipment h) Income Taxes 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 as follows: buildings – 20 years, equipment and furniture – 3 to 5 years, and leasehold improvements – term of lease. Gains and losses on disposal are recorded in other income in the Consolidated Statement of Income in the year of disposal. f) 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. g) 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 unamortized fees. 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. i) 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. j) Earnings per Common Share Basic earnings per common share is calculated based on the average number of common shares outstanding during the year. Fully diluted earnings per share includes the effect of all potential dilutive factors on earnings per common share. 2 . S E C U R I T I E S 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 1998 Total Book Value 1997 Total Book Value $ 81,326 10,144 $ 8,852 11,873 $ 8,303 12,161 $ – – $ 98,481 34,178 $ 106,646 27,564 – 25,905 – – – – – – – $ 117,375 $ 20,725 $ 20,464 $ 1,000 – 1,303 (2) 2,303 1,000 25,905 1,303 1,000 6,490 1,020 $ 160,867 $ 142,720 Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Corporate debt Equity Securities Total (1) (1) All securities are held in the investment account. (2) These securities have no speciﬁc maturity. 6 0 Notes to Consolidated Financial Statements The analysis of unrealized gains and losses on investment securities is as follows: Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Corporate debt Equity Securities Total 1998 1997 Book Value Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Book Value Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value $ 98,481 $ 34,178 1,000 25,905 1,303 $ 160,867 $ 290 315 – 1 39 645 $ $ 3 3 – 1 – 7 $ 98,768 $ 106,646 $ 34,490 27,564 $ 383 277 31 – $ 106,998 27,841 1,000 25,905 1,342 1,000 6,490 1,020 – – – – 1 – 1,000 6,489 1,020 $ 161,505 $ 142,720 $ 660 $ 32 $ 143,348 3 . I M PA I R E D L O A N S Impaired loans and the related allowance for credit losses are as follows: Consumer and personal Real estate Industrial Other Total (2) Gross Amount 2,711 13,979 2,204 7,451 26,345 $ $ Allowance Speciﬁc General (1) $ $ 320 1,587 165 1,445 3,517 $ $ 905 4,577 609 3,234 9,325 $ $ 1998 Carrying Amount 1,486 7,815 1,430 2,772 13,503 1997 Carrying Amount 2,300 4,817 182 1,848 9,147 $ $ (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 $5,257,000 (1997 - $194,000) and a related speciﬁc allowance of $1,577,000 (1997 - $34,000). At October 31, 1998 other past due loans totalled $nil (1997 - $309,000). 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. 4 . A L L O WA N C E F O R C R E D I T L O S S E S 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. During the year interest recognized as income on impaired loans totalled $341,000 (1997 - $732,000). Speciﬁc Provisions Consumer and personal Real estate Industrial Other General Allowance Total $ 1997 Ending Balance 476 825 1,431 2,179 7,476 $ 12,387 (1) Recoveries in 1998 totalled $334,000 (1997 - $11,000). The Bank has virtually no loans booked outside of Canada and therefore has no country risk provisions. 6 1 Write-offs, Net of Recoveries (1) Provision for Credit Losses ( 162 ) $ $ $ ( 6 ) 563 1,371 1,767 – 3,695 $ $ 1,325 105 1,033 1,849 4,150 1998 Ending Balance 320 1,587 165 1,445 9,325 $ 12,842 5 . L A N D , B U I L D I N G S A N D E Q U I P M E N T Notes to Consolidated Financial Statements Land Buildings Equipment and furniture Leasehold improvements Total Cost 2,753 3,078 13,722 5,771 25,324 $ $ Accumulated Depreciation and Amortization $ $ – 1,389 8,788 2,387 12,564 1998 Net Book Value 2,753 1,689 4,934 3,384 12,760 $ $ 1997 Net Book Value 2,753 1,812 4,056 1,947 10,568 $ $ Depreciation and amortization for the year, in respect of the above buildings, equipment and furniture, and leasehold improvements amounted to $2,284,000 (1997 - $1,784,000). 6 . O T H E R A S S E T S Due from clients and brokers Accrued interest receivable Deferred income tax asset Prepaid expenses Goodwill and other identiﬁable intangibles (1) Deferred ﬁnancing costs (2) Income taxes recoverable Other Total $ (Note 10) $ 1998 31,943 10,170 9,827 5,199 2,584 2,111 380 1,443 $ 63,657 $ (1) Amortization of goodwill and other identiﬁable intangibles included in other expenses in the Consolidated Statement of Income is $397,000 (1997 - $352,000). (2) Amortization of deferred ﬁnancing costs included in other expenses in the Consolidated Statement of Income is $182,000 (1997 - $87,000). 7 . O T H E R L I A B I L I T I E S Due to clients and brokers Accrued interest payable Accounts payable Deferred revenue Non-controlling interest in subsidiary Other Total 1998 44,656 41,064 6,034 1,119 331 1,370 94,574 $ $ 6 2 1997 – 9,189 11,252 5,535 1,618 732 745 1,422 30,493 1997 – 33,948 3,870 1,374 – 598 $ $ 39,790 Notes to Consolidated Financial Statements 8 . S U B O R D I N AT E D D E B E N T U R E S 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 recommendation issued by the Canadian Institute of Chartered Accountants 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. Conventional (1) The Province of Alberta CIC Industrial Interests Inc.(an agency of the Province of Saskatchewan) CLIC Investments (Canada) Inc. (2) Convertible 5.50% convertible debentures (3) 6.75% convertible debentures (4) Crown Life Insurance Company (5) Total Interest Rate Maturity Date 6.660 % 6.590 % 6.415 % 5.500 % 6.750 % 9.000 % March 31, 2007 $ June 30, 2007 July 31, 2007 March 31, 2008 April 15, 2006 July 31, 2004 $ 1998 5,000 3,126 5,000 13,126 50,000 19,965 4,000 73,965 87,091 1997 5,000 3,126 5,000 13,126 – 19,990 4,000 23,990 37,116 $ $ (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) Ownership of this debenture was transferred from Crown Life Insurance Company to CLIC Investments (Canada) Inc. during the year. (3) 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 $30.50 per share. At any time after March 31, 2003 the debentures are convertible by the Bank. (4) 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 1998, $25,000 of the debentures were converted (1997 - $10,000) by holders. (5) This debenture is convertible into common shares, at the option of the holder, at any time prior to maturity. 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. 9 . C A P I TA L S T O C K 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 exercise of options and conversion of debentures (1) Issued on amalgamation with B.C. Bancorp (Note 18) Outstanding at End of Year 1998 1997 Number of Shares 9,379,978 60,742 – 9,440,720 Amount 89,057 538 – 89,595 $ $ Number of Shares 8,131,782 129,200 1,118,996 9,379,978 Amount 75,136 1,131 12,790 89,057 $ $ (1) In 1998, 58,742 (1997 – 128,400) options were exercised, at an exercise price of $8.73 (1997 - $8.73) and $25,000 (1997 - $10,000) of the 6.75% debentures were converted into 2,000 (1997 – 800) shares. 6 3 Notes to Consolidated Financial Statements 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 1,145,808 common shares (1997 – 1,004,550) for issuance under option plans. Of the amount authorized, options exercisable into 1,101,723 shares are issued and outstanding (1997 – 894,965) and all expire within ten years of date of grant. The details of and changes in the issued and outstanding options follow: Dates Exercisable (1) Currently $ 8.73 126,103 $ 1999 2000 2001 2002 Total – – – – 126,103 10.25 28,839 – 153,815 – 201,916 384,570 $ Option Price 12.93 – 140,000 – 140,000 – 280,000 $ 13.32 (2) 2,370 $ 6,970 12,642 4,470 19,098 45,550 (1) During the year the Corporate Governance & Human Resources Committee approved changes to the exercisable dates for several groupings of previously granted options. (2) Represents a weighted average of option prices on dates of grants. Number of Shares Under Option Issued and Outstanding 157,312 192,720 253,457 231,470 266,764 1,101,723 1997 729,425 319,500 ( 128,400 ) ( 25,560 ) 894,965 19.11 – 45,750 87,000 87,000 45,750 265,500 1998 894,965 268,200 ( 58,742 ) ( 2,700 ) 1,101,723 Number of Options Balance at beginning of year Issued Exercised Forfeited Balance at End of Year 1 0 . I N C O M E TA X E S The provision for income taxes consists of the following: Current Deferred Total As outlined in Note 18, 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. Income taxes otherwise payable by the Bank for the year were eliminated by utilizing approximately $7,400,000 (1997 - $9,000,000) of acquired tax loss carryforwards, $14,623,000 (1997 - $nil) of unclaimed deductions and $nil (1997 - $7,995,000) of tax loss carryforwards. The current tax provision represents amortization of $2,312,000 (1997 - $876,000) of the deferred tax asset acquired, large corporations tax of $454,000 (1997 - $320,000) and income tax of $317,000 (1997 - $757,000) relating to subsidiaries. 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. 6 4 1998 3,027 ( 1,069 ) 1,958 $ $ 1997 1,823 ( 1,407 ) 416 $ $ At October 31, 1998, the Bank has approximately $68,400,000 of unclaimed deductions which are available to reduce future years’ income for tax purposes. The Bank’s subsidiaries have approximately $5,895,000 in tax loss carryforwards which are available to reduce future years’ income for tax purposes and expire up to 2005. The deferred income tax asset, included in other assets, primarily represents the net unamortized balance of the deferred income tax asset acquired plus timing differences. The Bank has reasonable assurance that its net deferred income tax asset will be realized through future reversals of timing differences. In addition, $3,781,000 (1997 - $3,781,000) 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. Notes to Consolidated Financial Statements 1 1 . C O N T I N G E N T L I A B I L I T I E S A N D C O M M I T M E N T S 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. Credit Instruments Guarantees and standby letters of credit Commitments to extend credit Total 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 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. 1998 1997 $ $ 21,457 282,150 303,607 $ $ 24,279 233,842 258,121 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: 1999 2000 2001 2002 2003 2004 and thereafter Total $ $ 3,100 2,965 2,994 2,783 2,235 10,252 24,329 c) Uncertainty Due to the Year 2000 Issue The Year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and ﬁnancial reporting may range from minor errors to signiﬁcant systems failure which could affect an entity’s ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 issue affecting the entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 1 2 . T R U S T A S S E T S U N D E R A D M I N I S T R AT I O N Trust assets under administration of $453,058,000 (1997 - $395,486,000) represent assets held for personal and corporate clients, administered by a subsidiary, and are kept separate from the subsidiary’s own assets. Trust assets under administration are not reﬂected in the Consolidated Balance Sheet. 1 3 . R E L AT E D PA R T Y T R A N S A C T I O N S 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 $15,401,000 (1997 - $12,796,000). 6 5 Notes to Consolidated Financial Statements 1 4 . FA I R VA L U E O F F I N A N C I A L I N S T R U M E N T S 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, most of the Bank’s ﬁnancial instruments lack an available trading market as they are not typically exchanged. Therefore, these instruments have been valued assuming they will not be sold, using present value or other suitable techniques, and are not necessarily representative of the amounts realizable in an immediate settlement of the instrument. Changes in interest rates are the main cause of changes in the fair value of 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, 1998 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. 1998 1997 Book Value Fair Value Fair Value Over Book Value Book Value Fair Value Fair Value Over Book Value 159,538 160,867 1,989,656 52,677 2,059,545 94,574 87,091 $ 159,538 161,505 1,992,486 52,677 2,087,722 94,574 88,737 $ – 638 2,830 – 28,177 – 1,646 $ 129,163 142,720 1,710,007 18,648 1,817,512 39,790 37,116 $ 129,163 143,348 1,726,335 18,648 1,845,767 39,790 39,387 $ – 628 16,328 – 28,255 – 2,271 $ 333 $ 484 Assets Cash resources $ Securities (Note 2) Loans Other assets (1) Liabilities Deposits Other liabilities Subordinated debentures Off-balance Sheet Derivative Financial Instruments Net asset (Note 15) 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. 1 5 . I N T E R E S T R AT E A N D F O R E I G N E X C H A N G E 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 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. 6 6 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. Interest Rate Contracts Interest rate swaps Foreign Exchange Contracts Forward exchange contracts Total 1998 1997 Notional Amount Replace- ment Cost Future Credit Credit Risk Exposure Equivalent Risk- weighted Balance Notional Amount Replace- ment Cost Future Credit Credit Risk Exposure Equivalent Risk- weighted Balance $130,000 $ 437 $ 125 $ 562 $ 112 $107,000 $ 485 $ 0 $ 485 $ 97 – – – – – 5,489 0 $130,000 $ 437 $ 125 $ 562 $ 112 $112,489 $ 485 $ 55 55 55 $ 540 $ 11 108 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). 1998 1997 Favourable Contracts (Assets) Unfavourable Contracts (Liabilities) Favourable Contracts (Assets) Unfavourable Contracts (Liabilities) Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value $ 85,000 – $ 85,000 $ $ 437 $ 45,000 – 437 – $ 45,000 $ $ 104 $ 107,000 – – 104 $ 107,000 $ $ 485 – 485 $ $ – 5,489 5,489 $ $ – 1 1 Interest Rate Contracts Interest rate swaps Foreign Exchange Contracts Forward exchange contracts Total 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) 1998 131 267 $ $ 1997 686 6 $ $ 6 7 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. 1998 Maturity 1 year or less Over 1 to 5 years Notional Amount Contractual Interest Rate (1) Notional Amount Contractual Interest Rate (1) 1997 Maturity 1 year or less (2) Notional Amount Contractual Interest Rate (1) $ 105,000 5.18 % $ 25,000 5.50 % $ 107,000 4.54 % 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 – – – – – – 3,237 2,252 5,489 $ 112,489 Total $ 105,000 $ 25,000 (1) Not applicable for foreign exchange contracts. (2) There were no instruments with maturities over one year. (3) The Bank pays (ﬂoating) interest amounts based on the one month (30 day) Canadian bankers’ acceptance rate. 1 6 . R I S K M A N A G E M E N T 1 7 . A C Q U I S I T I O N O F C A N A D I A N W E S T E R N C A P I TA L L I M I T E D As part of the Bank’s risk management practices, the risks that are signiﬁcant to our business are identiﬁed, monitored and controlled. These risks 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 35 to 47 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 42 to 45 of Management’s Analysis of Operations and Financial Condition. On January 16, 1998 the Bank invested an additional $3,000,000 to acquire a 73% interest in the common shares of Canadian Western Capital Limited (formerly Majendie Charlton Securities Ltd.) for a total cash investment of $3,724,000. The acquisition was accounted for using the purchase method. The results of operations of the acquired business are included in the Consolidated Statement of Income from that date to September 30, 1998, its ﬁscal year end. At the effective date of acquisition there were assets and liabilities of: Assets Acquired Cash and securities Other assets Liabilities Assumed Other liabilities Net Assets Less non-controlling interest Net Assets Acquired $ $ $ 13,985 25,022 39,007 34,375 4,632 908 3,724 Included in other assets is an allocation of $1,301,000 of the total cash investment which represents values assigned to regulatory licenses and tax loss carryforwards at the time of acquisition. On October 30, 1998 the Bank invested an additional $2,600,000 as a result of a further recapitalization of the company and now holds an 80% interest. 6 8 Notes to Consolidated Financial Statements 1 8 . A M A L G A M AT I O N W I T H B . C . B A N C O R P 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. Total consideration received by the shareholders of BCB was $13,586,000 and 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 represented 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, net of accumulated amortization, is included in other assets in 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. 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. 1 9 . S U B S I D I A R I E S Canadian Western Bank Subsidiaries (annexed in accordance with subsection 308 (3) of the Bank Act) October 31, 1998 Canadian Western Trust Company CWB Canadian Western Financial Ltd. Canadian Western Capital Limited Address of Head Ofﬁce 666 Burrard Street Vancouver, British Columbia 10303 Jasper Avenue Edmonton, Alberta 666 Burrard Street Vancouver, British Columbia (1) The carrying value of voting shares is stated at the Bank’s equity in the investments. 2 0 . S E G M E N T E D I N F O R M AT I O N The Bank operates principally in personal and commercial banking in Canada. Carrying Value of Voting Shares Owned by the Bank (1) 17,563 $ $ $ 11 4,720 Percentage of Issued and Outstanding Voting Shares Owned by the Bank 100 % 100 % 80 % 6 9 Executive Ofﬁcers C H A I R M A N Jack C. Donald F I N A N C E Tracey C. Ball, C.A. Vice President and Chief Financial Ofﬁcer O F F I C E O F T H E C H I E F E X E C U T I V E O F F I C E R Larry M. Pollock President and Chief Executive Ofﬁcer Douglas R. Dalgetty Executive Vice President C R E D I T R I S K M A N A G E M E N T Lawrence W. Hanson Senior Vice President Donald C. Kemp Vice President Diane M. Davies, C.A. Assistant Vice President Diane L. Kerley, C.M.A. Assistant Vice President H U M A N R E S O U R C E S Uve Knaak Senior Assistant Vice President I N T E R N A L A U D I T David R. Gillespie Vice President and Chief Inspector Dennis M. Crough Assistant Vice President, Retail Credit Lars K. Christensen Assistant Vice President Chris H. Fowler Assistant Vice President A. Wayne MacInnes Assistant Vice President Wally N. Streit Assistant Vice President C O R P O R AT E A N D S T R AT E G I C O P E R AT I O N S William J. Addington Senior Vice President Erwin Granson Assistant Vice President, Asset Management Ed E. Rudzitis Assistant Vice President TREASURY AND OPERATIONS Allister J. McPherson Senior Vice President, Treasury & Operations Ricki L. Moffat Senior Assistant Vice President, Treasury & Agent Administration Michael Vos Senior Assistant Vice President, Systems M. Wayne Bond Assistant Vice President, Corporate Administration Roger J. Pogue Assistant Vice President, Operations M A R K E T I N G A N D P R O D U C T D E V E L O P M E N T R. Graham J. Gilbert Vice President C O M M E R C I A L B A N K I N G P R A I R I E R E G I O N S. Wayne Bamford Vice President and Regional Manager Gus W. Itzek Senior Assistant Vice President, Energy Lending Main Branch, Calgary Robert H. Bean Assistant Vice President Winnipeg Michael N. Halliwell Assistant Vice President Main Branch, 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 C O M M E R C I A L B A N K I N G N O R T H E R N A L B E R TA R E G I O N Jack C. Wright Vice President and Regional Manager R E A L E S TAT E L E N D I N G VA N C O U V E R Raymond L. Young Vice President William A. Book Senior Assistant Vice President Main Branch, Edmonton Ron S. Baker Assistant Vice President West Point, Edmonton David M. Castell Assistant Vice President Main Branch, Edmonton Keith F. Garbutt Assistant Vice President Southside, Edmonton Gary R. Mitchell Assistant Vice President 103rd Street, Edmonton Jake G. Muntain Assistant Vice President 103rd Street, Edmonton Garnett J. Way Assistant Vice President Real Estate Lending Main Branch, Edmonton C O M M E R C I A L B A N K I N G B R I T I S H C O L U M B I A R E G I O N Rod W. Sorbo Senior Assistant Vice President Regional Ofﬁce, 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 7 0 Jack B. Harms Assistant Vice President Robert E. Wigmore Assistant Vice President I N D U S T R I A L L E N D I N G A N D L E A S I N G Donald C. Watson Vice President 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 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 – VA N C O U V E R Richard R. Mackin Vice President, Administration Paul W. Trapp Vice President, Marketing Kenneth C. Tabor Vice President, Mortgage Lending William Pearce Senior Assistant Vice President, Trust Division Mario V. Furlan Assistant Vice President, Real Estate Lending Patrick F. Rennison Assistant Vice President, Real Estate Lending O M B U D S M A N W. Paul Lefaivre D I R E C T O R S E M E R I T U S 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 Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held on March 11, 1999 at The Westin (Manitoba Room), 10135 - 100th Street, Edmonton, Alberta at 2:00 p.m. (MST). Board of Directors C A N A D I A N W E S T E R N B A N K & T R U S T Charles R. Allard2,3 President WIC Premium Television Ltd. Edmonton, Alberta Albrecht W. A. Bellstedt3,4 Partner Fraser Milner Calgary, Alberta Douglas R. Dalgetty2 Executive Vice President Canadian Western Bank Vancouver, British Columbia Jack C. Donald2,4 President Parkland Industries Ltd. Red Deer, Alberta Jordan L. Golding1 Corporate Director and Consultant Retired Partner KPMG Peat Marwick Boston, Massachusetts, USA Allan W. Jackson2,3,4 President ARCI Ltd. Calgary, Alberta Robert A. Manning1,2,4 President Cathton Holdings Ltd. Edmonton, Alberta Gerald A.B. McGavin1,2 President McGavin Properties Ltd. Vancouver, British Columbia Howard E. Pechet2,4 President Mayﬁeld Consulting Inc. La Jolla, California, USA Larry M. Pollock2 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. Shell1,3 President Arnold J. Shell Consulting Inc. Calgary, Alberta 1 Audit Committee Member 2 Loans Committee Member 3 Conduct Review Committee Member 4 Corporate Governance & Human Resources Committee Member Shareholder Information Head Ofﬁce Suite 2300, Canadian Western Bank Place 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Telephone: (780) 423-8888 Fax: (780) 423-8897 Website: www.cwbank.com Subsidiary Head Ofﬁces Canadian Western Trust Company 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 669-0081 Fax: (604) 685-9997 Website: www.cwt.ca Canadian Western Capital Limited 33rd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 682-6446 Fax: (604) 662-8594 Stock Exchange Listings Share Symbol: CWB Convertible Debenture Symbols: CWB.DB CWB.DB.A Common Shares Listed on The Toronto Stock Exchange The Alberta Stock Exchange The Vancouver Stock Exchange Transfer Agent and Registrar Mailing Address Montreal Trust Concourse Level 10050 Jasper Avenue Edmonton, Alberta T5J 1V7 Telephone: (780) 448-7598 Fax: (780) 426-4032 Corporate Secretary Charles R. Allard WIC Premium Television Ltd. Edmonton, Alberta Normal Course Issuer Bid The Bank implemented a normal course issuer bid for a twelve month period ending November 3, 1999. Any shareholder wishing to obtain a copy of the Notice of Intention to make a Normal Course Issuer Bid, at no charge, should contact the Head Ofﬁce of the Bank directly. See the Capital Funds and Adequacy section of Management’s Analysis of Operations and Financial Condition included in this Annual Report for more information. 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. 7 1 A L B E R TA Edmonton Edmonton Main Branch 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 (780) 424-4846 Branch Manager – Bill Book 103rd Street Branch Canadian Western Bank Place 10303 Jasper Avenue Edmonton, Alberta T5J 3N6 (780) 423-8801 Branch Manager – Jake Muntain Southside Branch 7933 - 104 Street Edmonton, Alberta T6E 4C9 (780) 433-4286 Branch Manager – Heinz Kleist West Point Branch 17603 - 100 Avenue Edmonton, Alberta T5S 2M1 (780) 484-7407 Branch Manager – Ron Baker RSP Administration/ Agent Processing Centre Suite 2200, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 (780) 423-8888 Branch Manager – Lina Langford Banking Ofﬁces Calgary Calgary Main Branch 606 - 4th Street S.W. Calgary, Alberta T2P 1T1 (403) 262-8700 Branch Manager – Michael Halliwell Calgary Northeast Branch 2810 – 32nd Avenue N.E. Calgary, Alberta T1Y 5J4 (403) 250-8838 Branch Manager – Richard Brodeur Chinook Station 6606 MacLeod Trail S.W. Calgary, Alberta T2H 0K6 (403) 252-2299 Branch Manager – Al Steingart Camrose 4895 - 50th Street Camrose, Alberta T4V 1P6 (780) 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 (780) 831-1888 Branch Manager – Kevin MacMillen B R I T I S H C O L U M B I A Vancouver Regional Ofﬁce and Business Lending Ofﬁce 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 (604) 669-0081 Dunsmuir Branch 888 Dunsmuir Street Vancouver, B.C. V6C 3K4 (604) 688-8711 Branch Manager – John Cedervall Granville & 13th Branch 2899 Granville Street Vancouver, B.C. V6H 3J4 (604) 730-8818 Branch Manager – Rob Berzins RSP Administration/ Agent Processing Centre Suite 1035, Two Bentall Centre 555 Burrard Street Vancouver, B.C. V7X 1M8 (604) 685-6306 1-800-663-1000 Branch Manager – Huguette Holmes Courtenay 470 Puntledge Road Courtenay, B.C. V9N 3R1 (250) 334-8888 Branch Manager – Alan Dafoe Kamloops Industrial Lending Centre 2155 Westsyde Road Kamloops, B.C. V2B 7C3 (250) 554-8030 Account 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 7 2 Victoria 1201 Douglas Street Victoria, B.C. V8W 2E6 (250) 383-1206 Branch Manager – Gerry Laliberte Guildford Industrial Lending Centre, Surrey 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 S N O I T A C I N U M M O C N G I S E D N O I S I V Y B D E N G I S E D C A N A D I A N W E S T E R N B A N K P L A C E 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 R TA T 5 J 3 X 6 P R I N T E D I N C A N A D A

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