Canadian Western Bank
Annual Report 2000

Plain-text annual report

a n a n n u a l re p o r t f ro m t h e p e o p l e o f c a n a d i a n w e s t e r n b a n k 2 0 0 0 Table of Contents 1 3 7 Financial Summary Highlights The Canadian Western Bank Edge 23 Message to Shareholders 27 Management’s Analysis of Operations and Financial Condition 47 Financial Statements 53 Notes to Consolidated Financial Statements 64 Corporate Governance 69 Executive Officers 71 Board of Directors and Shareholder Information 72 Banking Offices F I N A N C I A L S U M M A R Y F I V E Y E A R F I N A N C I A L S U M M A RY ($ thousands, except per share amounts) Results of Operations Total interest income Net interest income Provision for credit losses Other income Net income from continuing operations Net income Return on common shareholders’ equity Return on average total assets Per Common Share Average common shares outstanding (thousands) Earnings per share, continuing operations basic fully diluted Earnings per share basic fully diluted Dividends 1 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 2 Net impaired loans as a percentage of total loans Efficiency ratio 3 Number of full time equivalent staff 4 Number of branches 2000 1999 1998 1997 1996 $ 210,282 $ 177,013 $ 157,966 $ 131,917 $ 133,399 73,367 5,100 15,255 29,994 26,949 61,729 3,750 13,017 22,754 19,853 55,751 4,150 12,165 20,616 19,012 45,414 4,000 11,520 15,837 15,837 40,731 4,073 10,466 12,822 12,822 14.98 % 0.96 % 12.82 % 0.81 % 13.97 % 0.87 % 13.12 % 0.85 % 13.27 % 0.81 % 11,134 10,153 9,421 9,322 8,116 $ $ 2.69 2.49 2.42 2.26 0.34 17.40 24.00 16.25 23.00 $ $ 2.24 2.00 1.96 1.79 0.48 15.68 24.25 17.30 17.60 $ $ 2.02 1.77 2.02 1.77 0.30 15.39 27.00 14.75 17.15 $ $ 1.70 1.55 1.70 1.55 0.25 13.70 22.10 12.20 20.25 $ $ 1.58 1.45 1.58 1.45 0.15 12.61 13.00 9.25 12.80 $ 3,055,603 $ 2,692,382 $ 2,386,478 $ 2,022,951 $ 1,754,072 446,351 2,560,092 2,727,809 67,126 195,195 741,181 375,182 2,253,598 2,371,075 78,691 159,550 559,978 320,405 1,989,656 2,059,545 87,091 145,268 453,058 271,883 1,710,007 1,817,512 37,116 128,533 395,486 247,614 1,478,392 1,585,855 26,000 102,554 371,798 8.1 % 11.6 % 2.64 % 0.2 % 54.3 % 509 25 7.4 % 11.8 % 2.57 % 0.5 % 59.8 % 555 24 7.8 % 11.9 % 2.58 % 0.7 % 60.7 % 522 23 8.4 % 11.0 % 2.48 % 0.5 % 64.4 % 388 22 8.1 % 10.2 % 2.59 % 1.0 % 64.8 % 359 20 1 2 3 4 The dividend policy was amended to be semi-annual instead of annual during the third quarter of fiscal 1999. The dividend rate for fiscal 1999 appears unusally high as it includes the last annual dividend of $0.32 per share paid in the first quarter and the first semi-annual dividend of $0.16 paid in the third quarter. Net interest income divided by average assets. Non-interest expenses expressed as a percentage of net interest income and other income. Reflects sale of subsidiary (74 employees) in first quarter 2000. 1 4,000 3,000 2,000 1,000 0 TO TAL ASSETS ($ m illions) NET INCOME ($ thousands) 2000 Target $3,069 Million 2000 Target $23.5 Million 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000 Total assets increased to $3,056 million or 13.5% year over year virtually meeting our target. T O T A L A S S E T S 2001 Our target is for total asset growth of 14%. 2000 Net income at $26.9 million exceeded our target of $23.5 million and was up 36% over N E T I N C O M E fiscal 1999. 2001 Our target for fiscal 2001 is to grow net income by 10%, notwithstanding that the remaining tax deduction pools are expected to be fully utilized within the year and the Bank will become fully taxable. 2 F I N A N C I A L H I G H L I G H T S • surpassed the $3 billion milestone in total assets, up 13.5% over last year • achieved a 36% increase in net income over last year to $26.9 million and on a continuing operations basis it increased $7.2 million, or 32% • significantly improved our efficiency ratio (expenses to revenues) which at 54.3% is one of the best in the Canadian banking industry • increased return on equity to 14.98% and return on assets to 0.96% • increased assets under administration 32% to $741 million • on November 30, 1999 the remaining $11.7 million of 6.75% convertible debentures converted to 925,200 shares, which strengthened our Tier 1 capital ratio and reduced the dilution of earnings per share going forward • will benefit from the elimination of capital taxes on financial institutions in Alberta during 2001 • will also benefit from announced reductions in corporate income tax rates federally and in Alberta O P E R A T I O N A L H I G H L I G H T S • the Bank’s stock was added to the TSE 300 index, a composite index of Canadian equities • as a result of the restructuring of Canada’s capital markets, the Bank’s securities are now listed only on the Toronto Stock Exchange (“TSE”) as it became the sole market for senior equities • opened the new Foothills branch in southeast Calgary • replaced our banking system hardware and operating environment with a new highly flexible platform which will accommodate our ongoing initiatives toward enhanced customer service and e-business developments • expanded the corporate trust product line at Canadian Western Trust to include share purchase plan and stock option plan administration • announced an alliance between Canadian Western Trust and Pacific Corporate Trust, a recognized leader in security transfer services to companies trading on the Canadian Venture Exchange • extended sales of mutual funds to British Columbia branches • sold our brokerage subsidiary, Canadian Western Capital Limited, in February 2000 to Goepel McDermid Inc. of Vancouver 3 RETURN ON AS SETS 2000 Target 0.90% 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% L A R RY P O L L O C K President and Chief Executive Officer Eleven years with Canadian Western Bank Growth If your primary financial goal is growth, you’ve got to set the bar high… It’s been a few years since our last major acquisition, so in 2000 we put a high priority on sustaining our rate of internal growth. Our goal was asset growth of 14 percent and we came close, at 13.5 percent. This growth came with the bonus of pushing us past the $3 billion milestone in total assets. Increasingly, we’ve been providing banking services for larger companies with higher borrowing needs, and this should continue. This expands our capacity for growth – in human resources as well as capital - so, we’ll aim for 14 percent internal growth again this year. In 2000, one of our main objectives was to ensure an adequate return on assets. Our target was a 0.90 percent ROA and we achieved 0.96 percent. Again, we’ll keep the standard high, with 0.90 percent ROA as our target for 2001. Last year, we also set out to strengthen our position in the marketplace by strengthening our identity.“Think Western” is our new brand. It captures the commitment our employees have to delivering a common-sense, friendly banking environment. Our brand speaks to the style of both our people and our customers. It is in this style that we will continue to grow, delivering positive results to every stakeholder. 4 T R A C E Y B A L L , C . A . Senior Vice President and Chief Financial Officer Fourteen years with Canadian Western Bank Progress As a bank we face many of the same financial challenges as our customers… Chiefly, as Larry says, we need to grow. And growth, if managed correctly, produces economies of scale… In the banking business one measure of success is often judged through your efficiency ratio (expenses expressed as a percentage of revenues). At the beginning of the year, we said we’d come in under 55 percent, well below the current Canadian banking average of 63.5 percent. We made it, with a final ratio of 54.3 percent, for the year. We congratulate all our staff on the dedication and teamwork that made this possible. Next year we plan to keep this ratio below 55 percent, even though we have planned branch openings and expansions that will add to our expenses. 65% 60% 55% 0% EF FIC IENCY RATIO ( e x p e n s e s t o re v e n u e s ) 2000 Target below 55% 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 5 CREDIT RISK TOTAL REVENUES ($ thousands) 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% 2000 Target below 0.25% 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2000 Target $82.5 Million 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Total revenues... that’s net interest income and other income combined... reached $88.6 million this year. We were very pleased... the growth represented an increase of 18 percent over last year and was much higher than our target for 2000. For 2001, total revenue is targeted for a minimum of 15 percent growth. Another challenge we face as a business is dealing with risk. In banking, the biggest single threat is typically credit losses. For 2000, we experienced losses (expressed as a percentage of average loans) of 0.21 percent, bettering our target of being under 0.25 percent. The credit goes to the people managing our loan portfolios for not only making good decisions initially, but also for managing risk over the life of a loan. We’re targeting to be under 0.25 percent again this year. It will keep us among the leaders in our industry. 6 edgethe Canadian Western Bank Thinking Western gives CWB the edge. And just what is western thinking? It’s hard to pin down because it looks different on every person at CWB. But you know it when you see it… There’s no mistaking it. It’s the attitude that sets us apart… the attitude that says pioneers can not only exist, but flourish, in the 21st century; that employees are people who have more to contribute than just hours; and that organizations are organic and so need care to grow. You’ll see, because we let them all speak for themselves… 7 . . . O N W H A T ’ S I M P O R T A N T W H E R E Y O U W O R K Sometimes it must seem like the bank is my whole life. It’s not… I just think it’s important to like where you work… T H E R E S A H O W A R D I used to work at CWB in Calgary. When we Next week I’m off for training with a group Retail Banking Manager, Langley Branch, Three and a half years with Canadian Western Bank moved to the west coast, I transferred with of my peers from across the bank. I’m the bank, but the commute from Langley to excited about it and I’d like to see more Vancouver was really tedious, so I decided to formal training for myself, as well as my work elsewhere to be closer to home… Until staff. We like to promote from within and a couple of years ago… Then one day I I can see solid opportunities for a number noticed the developer’s sign for the bank’s of them… I want them to have the same new Langley branch. I called that afternoon chances I’ve had. and I was on staff the day we opened. They didn’t have any positions for someone with my experience when I applied, so I took the one they offered, as a CSR*. I remembered When the whole organization is small and growing, there’s room to get to know the people… not just the jobs they do. Some of my colleagues have from my days in Calgary how they treat the become my friends and I often see my people in this bank with a definite western neighbours in here doing their banking. It’s flair. They invest in you, when you invest a great environment… and very productive. in them. 8 *Customer Service Representative Keeping our people happy is essential in turning out a good product. And it’s not entirely what you pay them… they want to feel like part of the family… especially for us, because we have such a specialized work force. Obviously, communication is the key. I deal directly with staff whenever I can. The door is always open and no one here is shy about coming through it… It’s just horse sense… you need good dialogue to get things done. That also holds true for customers, business associates and bankers… Craig, from CWB in Langley came through my door three years ago, and we haven’t looked back. He was direct, compelling, and persuasive. I have an excellent rapport with him and the others at the branch… They delivered everything they promised. I’m moving my personal accounts over now… R O G E R M I L L E R President/General Manager, Custom Plastics Langley, British Columbia Three years as customer at Canadian Western Bank 9 … O N W H A T S P E C I A LT Y S E R V I C E R E A L LY M E A N S When I came from Northwest Trust in ’95, I also study the economy and keep in touch I went directly into real estate and I’ve been here ever since (At the main branch, corporate lending is split three ways: industrial, commercial and real estate). It’s great. I like being able to specialize. You can’t normally do that as an account manager in a big bank. Almost 75 percent of the lending I do is for construction and development of projects like condos and multi-family dwellings and servicing raw land. I look at value and how much income the property generates. Then, I lend against it. There’s a certain simplicity to it… because the values don’t change too quickly. with the building and real estate trades, so I know what’s going on... The oil giants are making big investments right now in northern Alberta, creating good conditions for growth. Today we’re looking at two to three years of solid growth… Our team helps western companies take advantage of the opportunities we anticipate in the marketplace… Radhe Gupta, an Edmonton developer, is an excellent example of someone who knows how to make the most of an opportunity. Our branch has been working with him since ’94. We have many letters on file from owners of his units praising him for the quality of his work. He was exceptional from the beginning… We appreciate his way of doing business so much that we brought him in when we needed someone to finish and sell a property. Excellent results… G A R N E T W AY Assistant Vice President, Real Estate Lending Edmonton Main Branch Five years with Canadian Western Bank 10 I know how important it is to tailor the product to each customer. I recognize when I get that kind of service from a bank and I very much appreciate it. We are specialty builders. Most of our projects are designed for two age groups: young professionals… singles and young couples who don’t need that much space but want a high end appearance… and the 45-plus group, who wants to live in an adult community. The best part of my relationship with CWB is that I can approach senior people without hesitation… from the account managers to the vice presidents… I work mostly with Garnet. He’s very knowledgeable and gives me useful, impartial advice. In the realm of banking, I find the situation quite unique, really… R A D H E G U P TA Owner, Rohit Holdings Edmonton, Alberta Over five years as customer at Canadian Western Bank 11 … O N B E I N G S M A L L A N D G E T T I N G B I G G E R C H R I S T I N A J O N E S Retail Banking Manager, Calgary Main Branch Winner of Chairman’s Award, 1998 Nine years with Canadian Western Bank People usually come into the bank for two rates. We also have a freedom that you reasons: their mother or their brother-in-law don’t get in other banks to do things our suggested it, or, they saw our deposit rates own way. in the paper. (We’re usually higher by as much as one percent.) Either way, we’re happy to see them. As a smaller bank, we’re always looking to build our client base. And, it follows we don’t have branches on every street corner, so overhead is low and we can afford to offer the higher deposit For example, I think some banking still has to be done face-to-face. And when some clients can’t come in, I make house calls… surprisingly often, really. I have one customer who had hip surgery… She can’t exactly get out to do her banking… so I visit her on occasion and we have a few minutes to catch up. There’s satisfaction in being able to provide what the client needs and wants. 12 I’m a small business man. I have four people on staff and that’s the way I like it – small. Right now, I have two companies: oil and gas production… and publishing. I’ve been in oil and gas for years (we’ve been very active recently… doubled production), but the publishing is relatively new… it started with my paleontology hobby… dinosaur books for kids... five so far, a new contract for distribution and we’re waiting on a deal with a Japanese publisher. When things get crazy, Christina or one of the others calls me… or now, they usually just send the paperwork right over to jog my memory. It’s unbelievable service. So, I keep recommending them to every new small business that I come across. I think if they keep the people they have that they’ll be able to keep their small western bank attitude intact as they grow… E R I C F E L B E R Owner, Troodon Energy and Troodon Publications Nine years as customer at Canadian Western Bank 13 … O N B E I N G S M A L L A N D G E T T I N G B I G G E R C H R I S T I N A J O N E S There’s no doubt the bank and the trust will continue to grow and offer more and more products. For one thing, we work well with the people So, naturally our roles will continue to develop which is a good thing since the people here genuinely want to grow at other branches... We don’t compete with each other. So they’re as anxious to help my customer as I am. themselves. Then there’s the ABM cards. Clients can even I started as a CSR* and now I have eleven use them internationally. people on my staff. I wouldn’t have stayed We also upgraded the telephone banking nine years without the chance to go forward. system. Customers really appreciate the Today, I’m excited about the trust division. quick responses they’re getting. I see a lot of opportunity… both in terms of And, this year we started to offer what I can offer customers and where I can MasterCard® and Visa® receipt deposit service go in my career. This is the kind of place you never hear to merchants. They love the service; now they can do all their banking in one place. anyone say “that’s not my department.” Next year it’ll only get better with internet We’re all game to take on whatever needs banking… to be done. And we don’t have a problem just because we don’t have as many branches. 14 *Customer Service Representative Back in the fall of ‘97 we were over a year old… We had a good balance sheet and were profitable, but the good bottom line numbers had really just started to roll in. We were acquiring our fifth and sixth aircrafts, had no debt and wanted to put leverage into the company. CWB approached us… We get that from banks all the time but they’re not usually serious… CWB was. They took the time to look at us and our past performance. Their financing gave us the kickstart we needed. Then, in ’98, they went beyond their typical comfort zone to finance planes eight and nine. They have again stepped up to the plate and are currently financing a 16 million dollar flight simulator to train our pilots to use the new 737 – 700s we’ve ordered. The biggest pay off goes to average Canadians. Our concept of a ‘budget airline’ has made air travel accessible to anyone and everyone travelling in Canada. We’re pioneers in this field. And, we like the synergy of working with a bank that understands what that’s like... 15 S A N D Y C A M P B E L L , C . G . A . Senior Vice President and Chief Financial Officer, WestJet Calgary, Alberta Four years as customer at Canadian Western Bank … O N S E R V I C E A T T H E P E R S O N A L L E V E L Out of all the clients that walk in that door, I bet I know 90 percent of them by name… and their spouses’ names, and sometimes I enjoy the people I work with and the even their pets too. I’ve been on the front line at the Calgary Northeast Branch for about a year and a half. I’m a customer service representative and a loan administrator. I like it. I was a environment… we have a small crew… and we cover off for each other when we need to… So, we can understand other peoples’ positions, their frustrations and their accomplishments… I’m learning so much. bookkeeper for years before this so I was on There’s a lot of talking and laughing in here the other side of the counter, a lot. And I some days. We have a good time and clients never came across a bank like this one. recognize that. A couple of months ago, a client brought the whole front line flowers just to say thanks for what she called exceptional everyday service. It was so nice to be appreciated like that. Its not just numbers. It’s a great way to spend your day. I get to know people because I want to. And it fits with what I think our bank stands for… acknowledging people as individuals and working with them on an individual basis. It’s huge. People like to deal with people they know, especially when it comes to money. People are sensitive about money and they need to be comfortable. This is where I think we break the mold… In a regular bank its click, click, click, stamp, stamp, stamp… everybody shuffles through. Well, we don’t make people stand in a line up like little toy soldiers… We take a western approach. I do all that I can to make sure people get what they need... Sometimes it’s an RSP or a car loan. Sometimes it’s advice on how to keep up to date on your chequing account. Clients think of us as their personal bankers. That’s the edge. F R A N C E S B E N B O W Customer service representative Calgary Northeast Branch One and a half years with Canadian Western Bank 16 At the risk of sounding like a TV ad, I should tell you I’ve been singing Frances’ praises, well, it’s really the whole branch, to everyone I know who is having a difficult time with their bank… and there sure are a lot of them. The travel business runs on referrals and you don’t get referrals if you don’t do a good job… I’m across the street from CWB in Northeast Calgary at Farebuster Travel. I met Frances when I started doing the company banking there after the branch opened. I found the service so extraordinary, I moved all my personal business over too… I had always had a difficult time juggling our personal accounts because my husband doesn’t keep very good records… or any records at all, really. Frances suggested a change that lets me keep track of what he’s doing. I’m always up to date now. It’s made my life so much simpler. D A R L E N E M U N R O E Supervisor and travel consultant Farebuster Travel Calgary, Alberta Two and a half years as customer at Canadian Western Bank 17 . . . O N T H E D I F F E R E N C E B E T W E E N B U S I N E S S A S U S U A L A N D B U S I N E S S T H A T I S O P E N , D Y N A M I C A N D F L E X I B L E The biggest risk in commercial banking is losing a potential client by not investigating thoroughly enough to find a way to make the relationship work… T H O R T H O R G R I M S S O N Senior Manager, Commercial Banking Park Place Branch, Vancouver Five years with Canadian Western Bank Basically, our business is to structure credit Sometimes the solution is simple. Pacific facilities… Or you might call it lending Blasting is a case in point. Recently they money. There are two ways we do it: entered a joint venture with a competitor in through operating loans (usually to finance the downtown excavation business. The deal accounts receivable) or term loans (for would work only if we could set up new equipment, real estate, et cetera). lines of credit – IMMEDIATELY – to Either we match the term of a loan to the life of the asset being financed, or, we make it shorter… The desire to pay it off is a function of the debt habits of the client and the company’s cash flow... If a business is growing, it needs money to fund growth. If it pays a loan off too fast, it could starve. The right term on a loan allows a company to free up cash for business and reap the benefits of a new piece of equipment while paying for it. On the operating side, we might find a way to finance more of a company’s inventory than another bank. We look for the places where there’s a perception of greater risk. Then we find ways to mitigate the risk… accommodate the needs of both companies during a rapid transition. So, we simply made it a priority and responded quickly. As I say, loans are facilities. I don’t think of them as products… Our product is not something we manufacture… It is the relationship between us and our clients… it is our willingness to take a closer look and find the logical solution. Sounds universal, but it’s not. Maybe one day… But for right now it remains uniquely western thinking. 18 We moved from Granville Island to Coal Harbour so we could stand apart from the competition. We are the Western Canadian dealer for a French yacht manufacturer, Beneteau, and many of our potential customers live in the high rises around Coal Harbour. Now, they can see our products from their homes. They can also see them on the internet. We were one of the first to go on-line and now we do $500,000 of business a year selling to internet customers. We also hold the largest Beneteau owners rendezvous in the world. Our bankers are innovative too. I had never heard of a buy back arrangement until they suggested it... turned out to be the perfect way to minimize risk for both us and the bank. It lets us operate with a high level of confidence. J . P. C A R D I N A L Certified Yacht Broker, Westerly Yacht Sales Coal Harbour, Vancouver, British Columbia Five years as customer at Canadian Western Bank 19 … O N P E O P L E Y O U C A N T A L K T O The investment world is changing, almost daily. For one thing, conventional GICs just don’t cut it anymore. People want to diversify… hold a wide As you know, we have a clear western focus. range of investments… As a trust company, we’d be foolish if we didn’t change to facilitate diversified portfolios and other needs of the Western planners and agents come to us because we know this marketplace, their marketplace, like the back of our hand and we have a better grasp than anyone else… increasingly sophisticated modern investor… And although our competitors offer the Our clients are financial planners and all the new breeds of investment professionals. Believe me, they are an extremely savvy and demanding group of people. When they refer clients to us, they expect us to handle them the way they would… so the clients’ needs take precedence over the convenience or limitations of the organization. Frankly, most of the big trust companies don’t even come close same kinds of products we do, they’re hard pressed to beat our service. Last year, to augment our service focus we completed a number of on-line automation projects like: One: we moved from monthly to daily on- line market pricing on our increasingly popular CWeb which also features an RRSP loan application process; and Two: we enhanced our delivery system by upgrading the personal trust system and by our participation in the industry mutual anymore. There is such a void out there… fund clearing system, FundSERV© (CSS). and CWT is filling that gap in western Canada where planners often have to run on an eastern clock. We are taking market share from others and the biggest advantage we have is our staff’s commitment to deliver excellence in service. C AT H Y P H I L L I P S Senior Manager, Trust Operations Vancouver, British Columbia Winner of Award of Excellence, 2000 Eight years with Canadian Western Trust 20 My clients are sophisticated, intelligent people. They’re serious about money and fee conscious. They expect service. I deal with many trust services suppliers. It doesn’t matter how fast I work, I can’t deliver if I can’t get the people at the trust on the phone. I always seem to be asking my suppliers ‘Who are you working for?’ I can tell by the speed of the service that it’s not me. If I don’t provide prompt service, my clients will go to someone else. That’s why I prefer to work with CWT. It’s so refreshing to work with Cathy and her people. Now we’re talkin’ speed. And direct contact… I have a list with every name and number I need, and I always get an answer. I get solutions and immediate action… For example, we had a question about fees. They listened. Now there’s a new lower fee for limited purpose plans… and that’s good news for us, because, we know who we work for. T R I S H C U L L E N Director, All Canadian Investment Corp. Vancouver, British Columbia Three years as client of Canadian Western Trust 21 … O N S H A R I N G T H E W E A LT H M A R L E N E S A R A F I N C H A N Greeter and The Voice of Edmonton Main Branch Winner of President’s Award, 1998 Six years with Canadian Western Bank I come from a real big family; I’m one of 16 In the early 90’s I took three years to help kids. I learned early that if you give, my husband start his landscaping company. (It’s really rolling now.) He even does the landscaping and maintenance at the branch here. He also does some of his banking here. Everything is connected. At the branch I like to get involved in the daffodil drive for the Cancer Society, the MS fundraising stuff, the United Way raffle (that one’s really fun) and the Christmas Bureau… Christmas is for kids and I think every one of them should be able to enjoy it. Doing things like helping Betty Gaumont get the Christmas Bureau hampers ready, collecting United Way donations and running our community message board also help me stay connected to the people I work with… in the branch and in the community… and that’s a great feeling… That’s how I like to run my life. you shall receive. And I live by it… at home, in the community, at work… it holds true where ever you are. I was talking about my daughter Michelle with one of our corporate clients, Eugene Aube of Blackstar Corporation. She was checking out classes at the colleges and the technical schools, but Mr. Aube said to check into the Aboriginal Youth Funding Association. They have a program for Metis students… she loves it. You see, somehow everything is connected… and whatever you share with in the world comes back to you ten- fold. Helping out makes you feel good too. 22 Message to Shareholders This is our ninth consecutive year of record profits. Net earnings for the year are up 36% at almost $27 million or $2.26 per share fully diluted ($2.42 basic), compared to $20 million or $1.79 per share fully diluted ($1.96 basic) in 1999. These results serve to reinforce the positive impact of concentrating our resources this year on what we do best – banking and trust services. Breaking through the $3 billion dollar mark in total assets was a highlight of the strong growth behind this record profit performance with loan growth of 14% as the primary element of this increase. We remain focused on providing individuals and small to medium-sized businesses in western Canada with the banking and trust services they need to succeed. We are pleased our increasing size and capital base have allowed us to progress along with our existing clients and also to look at additional opportunities, including lending to a broad range of publicly traded entities. Included in our financial reporting are a number of other sources of particular pride. We have had for many years, and continue to maintain, one of the lowest loan loss ratios in the industry; our five year loan loss ratio is 0.23% of average loans. Secondly, we are a low cost producer and with our growth we have been able to achieve improving economies of scale. Our efficiency ratio (expenses to revenues) of 54.3% for fiscal 2000 is the best in the Canadian banking industry. We pay close attention to these areas – it is essential they remain well-managed so that our strong asset growth translates into sustained and growing earnings. Our product and service offerings were expanded this year, and further enhancements are under ongoing review. New additions to the corporate trust capacity were a particular highlight of the year. Our goal is to continue to provide our brand of specialty service to both our existing and our new niche markets primarily within our current geographic focus. This year we added a branch in Calgary, and we have two more in the Vancouver Lower Mainland on our project list for the 2001 fiscal year. 23 Message to Shareholders We are sometimes asked how we differentiate ourselves from One person who has been setting this example from early on is our competitors. We hope the comments that some of our staff our Executive Vice President, Doug Dalgetty, who is retiring and clients have provided in the front section of this report after fifteen years of service. Through his key executive role, give you some insight. Our culture is one of personal service Doug has been instrumental in building the banking and trust and knowing our customers. It relates quite naturally to the operations from the beginning. He has also been a strong and common sense, friendly and neighbourly manner long associated with western Canadians. In fact we have captured how our staff respond to their customers with a new catch phrase – “Think Western”. Thinking Western is prompt and thoughtful response to customer needs. It is the acceptance of a creative contributing member of the Board of Directors for eight years. While we will miss his input in guiding and developing the Bank, he has certainly earned our thanks and the relaxation associated with retirement. A strong and dedicated executive management team remains on board to build upon the success that he helped create. Looking forward, we expect economic conditions to continue approach when required, rather than the application of “by to provide a favorable environment for the further growth of the book” responses. It includes respect, smiles, being helpful, our business. Some or all of the legislative changes to the participating actively in the community, and remembering that regulatory environment, which were introduced during 2000, the customer comes first. Everyone within the Bank is may be re-introduced in the coming year. These changes may encouraged to embody the “Think Western” spirit, whether alter the regulatory landscape we operate in, but will not they are interacting with customers, other staff or shareholders. affect the distinctive style of service we offer. We are all proud This culture has been fundamental in creating a successful to have been part of developing this successful western-based bank, and we recognize that. Our strong, “leading by banking model that can be simply translated into our example” work ethic preserves this culture by instinctively employees knowing their customers and being responsive to passing it along to our new employees. their needs. Our increasing customer base and resulting growth attests to the fact that when they think of banking, more and more people “Think Western”… Canadian Western Bank. 24 ”Jack C. Donald“ ”Larry M. Pollock“ Jack C. Donald Larry M. Pollock Chairman President and Chief Executive Officer financial report 25 27 Management’s Analysis of Operations and Financial Condition 27 Overview of 2000 27 Quarterly Information 28 Net Interest Income 29 Other Income 29 Non-interest Expenses 31 32 Taxes Loans 33 Deposits 34 Capital Funds and Adequacy 36 Risk Management 36 Overview 37 Credit Risk 40 Liquidity Risk 42 Market Risk 45 Operational Risk 46 Off-Balance Sheet Financial Instruments Including Derivatives 47 Financial Statements 47 Management’s Report 48 Auditors’ Report 49 Consolidated Balance Sheet 50 Consolidated Statement of Income 51 Consolidated Statement of Changes in Shareholders’ Equity 52 Consolidated Statement of Cash Flow 53 Notes to Consolidated Financial Statements 64 Corporate Governance 64 Introduction 64 The Board and Board Committees 66 Audit Committee 66 Conduct Review Committee 67 Corporate Governance & Human Resources Committee 68 Loans Committee 68 Other Areas of Consideration 68 Conclusion From time to time we make written and verbal forward-looking statements about the objectives and strategies, operations and financial results of Canadian Western Bank. These may be included in the Annual Report, filings with regulators, reports to shareholders and other communications. These forward-looking statements are inherently subject to risks and uncertainties beyond the Bank’s control, including, but not limited to, fluctuations in interest rates and currency values, changes in economic and political conditions, legislative or regulatory developments, technological developments and competition. These and other factors may cause the Bank’s actual performance to differ materially from that contemplated by forward-looking statements and the reader is therefore cautioned not to place undue reliance on these statements. Management’s Analysis of Operations and Financial Condition K E Y P E R F O R M A N C E I N D I C ATO R S Net income from continuing operations ($ thousands) Net income ($ thousands) Earnings per share, continuing operations basic fully diluted Earnings per share basic fully diluted Efficiency ratio (expenses to revenues) Return on common shareholders’ equity Return on average total assets Overview of 2000 Consolidated net income for the year ended October 31, 2000 was $26.9 million, an increase of 36% from $19.9 million reported in 1999. Fully diluted earnings per share were $2.26 compared to $1.79. Return on shareholders’ equity and return on assets for the year ended October 31, 2000 were 14.98% and 0.96% respectively, compared to 12.82% and 0.81% last year. The average number of shares outstanding increased by 981,000 during the year, primarily because the remaining 6.75% debentures were converted to common shares (discussed in the Capital Funds and Adequacy section). Net income from continuing operations was $30.0 million, an increase of $7.2 million, or 32% from the $22.8 million earned in 1999. Fully diluted earnings per share from continuing operations were $2.49 compared to $2.00 last year, an increase of 25%. Return on shareholders’ equity and return on $ $ $ $ $ $ 2000 29,994 26,949 2.69 2.49 2.42 2.26 54.26 % 14.98 % 0.96 % $ $ $ $ $ $ 1999 22,754 19,853 2.24 2.00 1.96 1.79 59.84 % 12.82 % 0.81 % 2000/1999 Increase (decrease ) % Change 32% 36% 20% 25% 23% 26% $ $ $ $ $ $ 7,240 7,096 0.45 0.49 0.46 0.47 (5.58 )% 2.16 )% 0.15 )% assets for continuing operations were 16.67% and 1.06% respectively. Net income from continuing operations excludes the operations and sale of Canadian Western Capital (“CWC”) discussed below. Total assets increased by over 13% from one year ago to reach $3,056 million. Loans increased by $306 million, providing 84% of the total asset growth. The total capital adequacy ratio at October 31, 2000 was 11.6% (1999 - 11.8%) with a Tier 1 component of 8.1% (1999 - 7.4%). On December 21, 1999, the Bank announced that it would sell CWC to Goepel McDermid Inc. of Vancouver. The sale closed February 16, 2000 and was reflected in the Bank’s financial statements for the quarter ended January 31, 2000. An after tax loss of $3.0 million was charged to discontinued operations. The comparative loss from CWC’s operations in 1999 totalled $2.9 million. Total assets surpassed the $3 billion milestone and were up more than 13% over 1999. Q U A R T E R L Y I N F O R M A T I O N ($ thousands, except per share data) Total interest income Net interest income Other income Net income from continuing operations Net income Earnings per share, continuing operations basic fully diluted Earnings per share basic fully diluted 2000 1999 Q3 $54,812 19,069 4,086 8,150 8,150 $ 0.73 0.67 0.73 0.67 Q2 $49,610 17,426 3,735 7,115 7,115 $ 0.64 0.59 0.64 0.59 Q1 $48,330 16,731 3,485 6,505 3,460 $ 0.59 0.55 0.31 0.31 Q4 $46,422 15,856 3,398 5,638 4,706 $ 0.55 0.49 0.47 0.43 Q3 $44,620 15,518 3,229 5,774 5,229 $ 0.57 0.52 0.51 0.48 Q2 $42,951 15,134 3,191 5,535 4,883 $ 0.53 0.47 0.47 0.42 Q1 $43,020 15,221 3,199 5,807 5,035 $ 0.59 0.52 0.51 0.46 Q4 $57,530 20,141 3,949 8,224 8,224 $ 0.74 0.68 0.74 0.68 27 Net Interest Income TA B L E 1 – N E T I N T E R E S T I N C O M E ($ thousands) Assets Securities and deposits with 2000 1999 Average Balance Mix Interest Rate Interest Average Balance Mix Interest Interest Rate regulated financial institutions $ 332,191 12 % $ 18,276 5.50 % $ 256,706 11 % $ 12,578 4.90 % Loans Securities purchased under resale agreements 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 29,647 261,214 2,104,729 2,395,590 2,727,781 48,936 1 9 76 86 98 2 1,581 18,002 172,423 192,006 210,282 – 5.33 6.89 8.19 8.01 7.71 0.00 28,645 272,868 1,795,917 2,097,430 2,354,136 44,166 1 11 75 87 98 2 1,377 18,618 144,440 164,435 177,013 – 4.81 6.82 8.04 7.84 7.52 0.00 $2,776,717 100 % $ 210,282 7.57 % $2,398,302 100 % $ 177,013 7.38 % $ 48,132 2 % $ – 0.00 % $ 35,447 1 % $ – 0.00 % 246,364 2,175,228 2,469,724 57,763 67,126 182,104 $2,776,717 $2,776,717 9 78 89 2 2 7 8,437 124,514 132,951 – 3,964 – 3.42 5.72 5.38 0.00 5.91 0.00 192,634 1,882,795 2,110,876 50,311 79,332 157,783 8 79 88 2 3 7 4,676 105,720 110,396 – 4,888 – 2.43 5.61 5.23 0.00 6.16 0.00 100 % $ 136,915 $ 73,367 4.93 % 2.64 % $2,398,302 $2,398,302 100 % $ 115,284 $ 61,729 4.81 % 2.57 % 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. • an increased yield on securities due to higher short term investment rates and a diversification of our risk mix from treasury bills to other higher yielding government debt; and • strong growth in both the higher yielding commercial loan portfolios and the lower cost demand and notice deposits. As discussed in the Interest Rate Risk section, the portfolio has a positive gap with maturing In 2000, net interest income increased by assets exceeding maturing liabilities during the $11.6 million, or 19%, primarily due to: one year time frame. If market rates increase this • an increase of $374 million (16%) in average would have a positive impact on spreads. interest bearing assets; and • an increase in net interest spread to 2.64% from 2.57%. In 2001 we expect: • • interest rates will remain relatively stable; and the yields on securities and net interest spread The increased spread was primarily the result of: will be comparable to 2000. • an increase in average prime, from 6.49% to 7.05% year over year, which has a positive impact due to the composition of our loan and deposit portfolios; 28 Other Income TA B L E 2 – OT H E R I N C O M E ($ thousands) Credit related Retail services Trust services Other (1) Total Other Income 2000/1999 Increase (decrease) $ 2000 9,540 2,949 1,644 1,122 $ 1999 7,805 2,476 1,485 1,251 $ $ 1,735 473 159 (129 ) $ 15,255 $ 13,017 $ 2,238 % 22 % 19 11 (10 ) 17 % (1) Other includes net gains on securities sales, loan administration fees, gains/losses on equipment disposals, foreign exchange service fees and other miscellaneous non-interest revenues. Other income, which includes all revenues not • increased trust services fees in Canadian Western classified as net interest income, was $15.3 million, an increase of $2.2 million or 17% over 1999. Trust (“CWT”) due to substantial growth (27%) in the number of self-directed RRSP (registered As shown in table 2, almost all categories of other retirement savings plan) and RRIF (registered income showed solid growth in 2000. Notable retirement income fund) accounts. changes include: Other income as a percentage of total revenue • an increase of $2.2 million in credit and retail (net interest income and other income) was 17% fees due to loan and deposit growth and in 2000, the same as in 1999. In 2001 total other increased activity in the retail branches; and income is expected to show broad based growth with a focus on increasing other income as a percentage of total revenue. Non-interest Expenses Non-interest expenses increased 7.5% to $48.1 million in 2000. The increase is primarily due to: • increased salaries and employee benefits from The efficiency ratio improved to 54.3% from 59.8% expense growth (which in 1999 as revenue growth of 18.6% exceeded expense growth of 7.5%. Non-interest expenses as a percentage of average assets was 1.73% in 2000, an improvement from 1.86% in 1999. an increase in full time staff complement to In 2001 we anticipate: accommodate growth; offset by • the full time staff complement will increase by • a significant reduction in deposit insurance approximately 5% to accommodate growth in premiums as a result of the new premium rates volumes and new branch initiatives; which affected only the last half of fiscal 1999; • other increases in non-interest expenses will be and primarily attributable to volume increases from • reduced provincial capital taxes (see Taxes growth; and section). • reduced capital taxes due to the elimination of Alberta’s capital tax during 2001 (see Taxes section). In 2000, efficiency improved significantly, with the efficiency ratio reduced substantially from 59.8% to 54.3% as revenue growth (18.6%) exceeded was held at 7.5%). Similarly, non-interest expenses were 1.73% of average assets in 2000, an improvement from 1.86% in 1999. 29 TA B L E 3 – N O N - I N T E R E S T E X P E N S E S A N D E F F I C I E N C Y R AT I O ($ 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 Communications Marketing and business development Postage and stationery Banking charges Travel Other Total Total Non-interest Expenses Efficiency Ratio Net interest income Other income Total revenues 2000/1999 Increase (decrease) 2000 1999 $ 23,750 $ 20,549 $ 3,457 27,207 3,145 23,694 3,854 822 770 5,446 1,934 1,444 3,378 2,405 801 2,067 494 1,340 1,318 934 791 1,906 12,056 48,087 73,367 15,255 88,622 $ $ $ 3,711 891 689 5,291 1,503 1,337 2,840 2,972 1,695 2,214 522 1,104 1,235 788 767 1,604 12,901 44,726 61,729 13,017 74,746 $ $ $ $ $ $ $ 3,201 312 3,513 143 (69 ) 81 155 431 107 538 (567 ) (894 ) (147 ) (28 ) 236 83 146 24 302 (845 ) 3,361 11,638 2,238 13,876 % 15.6 % 9.9 14.8 3.9 (7.7 ) 11.8 2.9 28.7 8.0 18.9 (19.1 ) (52.7 ) (6.6 ) (5.4 ) 21.4 6.7 18.5 3.1 18.8 (6.5 ) 7.5 % 18.9 % 17.2 18.6 % Efficiency Ratio (expenses as a percentage of total revenues) 54.3 % 59.8 % Capital expenditures of $1.4 million are budgeted harmonize Canadian standards with those for 2001 and will be funded from general operating already existing in the United States (“U.S.”). Efficiency Ratio (expenses to revenues) revenues. At year end there were no specific Generally, any substantive commitment to provide commitments relating to these capital expenditures. post-employment or post-retirement benefits The Bank will be required to adopt the Canadian Institute of Chartered Accountants (“CICA”) new accounting standard for employee future benefits in fiscal 2001. The standard will essentially to employees must be accrued as employees earn the benefit entitlement. The adoption of this new standard is not expected to have a material impact on the Consolidated Financial Statements. 65 60 55 0 % 8 . 4 6 % 4 . 4 6 % 7 . 0 6 % 8 . 9 5 % 3 . 4 5 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 30 Taxes The current income tax provision represents amortization of unclaimed deductions and tax loss carryforwards of $4.2 million (1999 - $2.7 million), income tax in a subsidiary of $606,000 (1999 - nil) and large corporations tax of $604,000 (1999 - $552,000). 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 Income taxes otherwise payable by the Bank for the year ended October 31, 2000 were eliminated by utilizing approximately $30.3 million (1999 - $24.8 million) of unclaimed deductions and tax loss carryforwards. At October 31, 2000, the Bank has approximately $14.8 million of unclaimed deductions which are available to reduce future years’ income for tax purposes. In addition, $6.9 million (1999 - $7.0 million) of capital losses are available to apply against future capital gains and have no expiry date. The tax benefit of these unclaimed deductions and losses has not been recognized. for credit losses. The Bank has reasonable During the year ending October 31, 2001 it is assurance that its net deferred income tax asset likely that the Bank will have utilized all of the will be realized through future reversals of timing differences. unclaimed deductions and will become fully taxable. To affect this transaction smoothly the estimated effective annual income tax rate will be used to record income tax expense on a quarterly basis. For the year ended October 31, 2000 the Bank’s effective tax rate was approximately 15% and we expect this rate will be in the 32 - 37% range in 2001. In 2001 the Bank will benefit from the elimination of provincial capital tax in Alberta TA B L E 4 – C A P I TA L TA X E S ($ thousands) British Columbia Alberta Saskatchewan Manitoba Total Capital Taxes Capital Tax Rate Capital Allocation (1) 1.00 % 0.70 % 0.70 % 3.00 % 39 % $ 53 % 5 % 3 % 2000 888 1,078 82 198 $ 1999 787 1,558 305 172 $ $ 2,246 $ 2,822 $ 2000/1999 Increase (decrease) $ 101 (480 ) (223 ) 26 (576 ) % 12.8 % (30.8 ) (73.1 ) 15.1 (20.4 )% (1) These capital allocation percentages are for the Bank only although total capital tax includes capital taxes paid in British Columbia by subsidiaries. Capital taxes for 2000 totalled $2.2 million In Alberta the capital tax base was harmonized compared to $2.8 million in 1999. The decrease with the federal capital base and the tax rate is attributable to: dropped from 2.0% to 0.7% on the first • changes to the capital tax base and reduced tax $400 million of capital. The lower rate replaced rates in Alberta and Saskatchewan; offset by the relief previously provided in the form of • increased capital due to the retention of a remission calculation for financial institutions earnings. headquartered in Alberta. In Saskatchewan the rate was lowered from 3.25% to 0.7% for financial institutions with capital of $400 million or less. 31 The goods and services tax (GST) carries with it In 2001 capital taxes will again decrease as a significant cost to the Bank, as it does to all Alberta is eliminating the capital tax on financial financial institutions, to the extent that GST paid institutions during the year. is not recoverable through increased service charges, increased loan costs or reduced deposit rates. This cost is incurred 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 2000 was $940,000 compared to $848,000 in 1999. As of November 1, 2000, the Bank will be required to adopt the CICA’s new accounting standard relating to future income taxes. This standard will essentially harmonize Canadian corporate income tax accounting with that in the U.S. Under the new standard, the liability method will be used to measure future income tax assets and liabilities at the enacted tax rates expected to apply when the asset is ultimately realized or the liability settled. The adoption of this new standard is not expected to have a material impact on the Consolidated Financial Statements. Loans TA B L E 5 – O U T S TA N D I N G L OA N S B Y P O RT F O L I O T Y P E A N D B Y P R OV I N C I A L L O C AT I O N O F B R A N C H ($ millions) October 31, 2000 Loans to Individuals Residential mortgages Other Total Loans to Businesses Securities purchased under resale agreements Commercial Construction and real estate (2) Industrial Energy Total Total Loans Composition % October 31, 1999 Loans to Individuals Residential mortgages Other Total Loans to Businesses Securities purchased under resale agreements Commercial Construction and real estate (2) Industrial Energy Total Total Loans Composition % Alberta Saskatchewan Manitoba Total (1) Composition % $ $ British Columbia 170 33 203 – 251 494 182 – 927 $ 1,130 $ 88 49 137 85 326 414 220 60 1,105 1,242 $ $ 17 11 28 – 23 45 20 – 88 $ 116 $ 2 4 6 – 30 50 13 – 93 99 44 % 48 % 4 % 4 % $ $ 162 39 201 – 295 469 162 – 926 $ 1,127 $ 91 49 140 41 243 279 201 48 812 952 $ $ 16 11 27 – 13 44 17 – 74 3 4 7 – 13 65 15 – 93 50 % 42 % 4 % 4 % 100 % $ 101 $ 100 $ $ $ $ 277 97 374 85 630 1,003 435 60 2,213 2,587 100 % 272 103 375 41 564 857 395 48 1,905 2,280 11 % 4 15 3 24 39 17 2 85 100 % 12 % 4 16 2 25 38 17 2 84 100 % (1) This table does not include an allocation of the allowance for credit losses and deferred revenue and discounts. (2) Includes term mortgages, project (interim) mortgages and multi-unit residential mortgages. 32 Loans by Portfolio Commercial 24% Securities Purchased under Resale Agreements 3% Real Estate Project Mortgages 13% Personal 15% Industrial 17% Multi-unit Residential Mortgages 6% Energy 2% Real Estate Term Mortgages 20% Loans, as reported on the consolidated balance sheet, totalled $2,560 million at the end of 2000 compared to $2,254 million at the end of 1999, an increase of 14%. Highlights of the year-over-year changes are: Portfolio • commercial loans increased $66 million (12%) and comprise 24% of the portfolio compared to 25% one year ago; • construction and real estate loans grew $146 million (12%) and represent 39% of the portfolio versus 38% a year earlier; • • the industrial portfolio increased $40 million (10%); the energy portfolio, a specialty in our Calgary market, grew $12 million (25%); and • loans to individuals represent 15% of the total portfolio, down from 16% in 1999. Location • loan growth of $261 million (23%) in the prairie provinces (primarily in Alberta); and • loans held at Alberta branches increased from 42% of the total portfolio at October 31, 1999 to 48% at October 31, 2000 due to strong economic growth in the province with a corresponding decrease in the British Columbia loan portfolio from 50% to 44%. In 2001 the business plan focuses on continued growth in all portfolios. Although the market remains competitive, continued strong loan growth is planned for 2001 as the Bank expands its activities and adds to its branch network. Deposits TA B L E 6 – D E P O S I T S ($ 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) Total Deposits In 2001, the Bank will add to its branch network and expand its activities to foster growth in all portfolios. The Bank is in a good position to take advantage of the current strength in the western economy. 2000 1999 Amount % of Total Amount % of Total $ 117,215 238,579 4.3 % $ 86,933 8.7 172,734 1,481,227 364,441 514,321 2,715,783 12,026 54.3 13.4 18.9 99.6 0.4 1,289,839 312,203 498,384 2,360,093 10,982 3.7 % 7.3 54.4 13.1 21.0 99.5 0.5 $ 2,727,809 100.0 % $ 2,371,075 100.0 % 33 Deposits by Source ($ millions) 4,000 3,000 2,000 1,000 0 Branches Agent Wholesale 1,345 | 1,311 | 72 1,108 | 1,176 | 87 958 | 1,007 | 95 828 | 859 | 131 703 | 786 | 97 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Capital Funds and Adequacy TA B L E 7 – C A P I TA L S T RU C T U R E A N D R E G U L ATO RY R AT I O S AT Y E A R E N D ($ thousands) Tier 1 Capital Retained earnings Common shares Non-controlling interest in subsidiary Less unamortized goodwill Total Tier 2 Capital (gross) General allowance for credit losses (Tier A) (1) Subordinated debentures (Tier B) Total 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 (2) Growth of 15% in deposits was achieved this year which was consistent with last year. Of note, is that the lower cost business and personal deposits grew faster than total deposits while the mix of fixed term deposit types remained much the same as in the prior year. The focus on increasing lower cost deposits will continue to be an ongoing priority. The source of deposits is broken down as follows: • branches – 49% (1999 - 47%) • deposit agents – 48% (1999 - 49%) • wholesale clients – 3% (1999 - 4%) CWT deposits are included in the foregoing numbers. The Bank’s branch network generated $43.1 million of CWT’s deposits (a 39% increase from last year), and the remainder are received through deposit agents, as CWT has no retail branches. Retail branch deposits are generally considered to be more stable and it is an ongoing objective to strive for further growth in this area. Agent deposits are slightly more expensive because a commission is paid, but this added cost is countered by a reduced need for a more extensive branch network. 2000 $ 83,853 $ 111,342 – (194 ) 1999 61,066 98,484 234 (448 ) 2000/1999 Increase (decrease ) $ 22,787 12,858 (234 ) 254 195,001 159,336 35,665 17,911 67,126 85,037 15,996 78,691 94,687 1,915 (11,565 ) (9,650 ) $ 280,038 $ 254,023 $ 26,015 8.1 % 3.5 % 11.6 % 11.1 7.4 % 4.4 % 11.8 % 10.8 0.7 % (0.9 )% (0.2 )% 0.3 (1) Banks are allowed to include their general allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2A capital. The Bank has been granted an inclusion rate of 0.75% of risk-weighted assets. (2) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by total regulatory capital. 34 TA B L E 8 – R I S K - W E I G H T E D A S S E T S ($ 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 Equity contracts Total Total Risk-weighted Assets 2000 Risk- weighted Balance 42,695 30,274 2,255,509 46,141 1999 Risk- weighted Balance 33,685 40,287 2,001,990 54,709 Balance $ 169,990 $ 205,192 2,253,598 63,602 Balance $ 214,935 $ 231,416 2,560,092 49,160 $ 3,055,603 2,374,619 $ 2,692,382 2,130,671 $ $ 42,489 1,844 44,333 $ 269,000 3,535 $ 272,535 29,366 922 30,288 $ $ 27,479 843 28,322 136 164 300 $ 269,000 2,200 $ 271,200 17,659 422 18,081 84 35 119 $ 2,405,207 $ 2,148,871 See Note 11 to the Consolidated Financial Statements for further details. (1) (2) Greater than one year only. (3) See Note 15 to the Consolidated Financial Statements for further details. The Office of the Superintendent 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 inclusion of the general allowance in Tier 2A capital at up to 75 basis points (0.75%) of risk- weighted assets. Capital funds are managed in accordance with The Bank is well 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 be considered well capitalized, to protect weighting of 0% to 100% is assigned. Published customer deposits and to provide capacity for regulatory guidelines require banks to maintain internally generated growth and strategic a minimum ratio of capital to risk-weighted assets opportunities that do not otherwise require and off-balance sheet items of 8%, of which 4% accessing the public capital markets. The capital must be core capital (Tier 1) and the remainder mix is managed to improve the return on equity. supplementary capital (Tier 2). However, in order to be considered well capitalized, OSFI has stated that Canadian banks need 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 based on risk-weighted assets. OSFI has authorized the At October 31, 2000 the total capital adequacy ratio was 11.6% (1999 - 11.8%) of which 8.1% (1999 - 7.4%) was Tier 1 capital. Total regulatory capital increased $26.0 million over 1999 as a result of: • earnings, net of dividends, of $23.2 million; • share capital of $1.3 million issued upon the exercise of 119,026 stock options; • increase in the inclusion of the general allowance for credit losses of $1.9 million due to higher risk-weighted assets; offset by • a charge to retained earnings of $383,000 for share issue costs related to the conversion of Tier 2 debentures. capitalized with a total capital adequacy ratio of 11.6% of which 8.1% is Tier 1 capital 35 Subordinated debentures include both convertible Thus the total dividend rate of $0.48 for fiscal 1999 ($54.0 million) and conventional ($13.1 million) appears unusually high because in January 1999 the debentures. Note 8 to the Consolidated Financial final annual dividend of $0.32 per share was paid Statements details the terms of the debentures. and in July 1999 the first semi-annual dividend of On November 30, 1999 the remaining $11.6 million $0.16 was paid. of the 6.75% convertible debentures were converted by debentureholders into 925,000 shares at $12.50 per share which resulted in a transfer from Tier 2 to Tier 1 capital. 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 In each of January and July 2000, semi-annual shareholder wealth. Note 9 to the Consolidated dividends of $0.17 were paid. During the third Financial Statements details the number of shares quarter of 1999, the Bank’s dividend policy was under option outstanding, the weighted average amended to be semi-annual instead of annual. exercise price and the amounts exercisable at year-end. Risk Management O V E R V I E W The 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 within which financial institutions operate. 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, liquidity, market and operational. Senior management are responsible for establishing the framework for identifying risks and developing 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 monitoring 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 an Executive Vice President with the President and Chief Executive Officer (“CEO”) and other senior executives as members and is responsible for: • the establishment and maintenance of policies and programs for liquidity management and control, funding sources, investments, foreign exchange risk, interest rate risk and derivatives; and • regular meetings to review compliance and discuss strategy in this area. Asset liability management policies are approved and reviewed at least annually by the Board with quarterly status reporting provided to the Board. The Operations Committee meets regularly and is made up of supervisory and management personnel 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 department performs inspections in all areas of the Bank, including CWT, and reports the results directly to senior management, the President and CEO and the Audit Committee. Senior management put decades of experience to work managing the four basic types of risks that the Bank is exposed to: credit liquidity market operational 36 C R E D I T R I S K • independent annual reviews of credit valuation, Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to discharge its contractual commitment or 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. To diversify the risk, the exposure to a single borrower or associated borrowers is limited to $18 million. In certain circumstances, exposure can be increased to an amount not exceeding 10% of regulatory capital. 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 for 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; risk classification and credit management procedures by the internal audit group which includes 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 possible, 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 • delegated lending authorities which are clearly upon quarterly to the Board. Account management is more about relationships than just about anything else. It’s important to know your customer’s business and you can’t do that unless you know them by name and feel comfortable getting to know them as people. 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 of the Board; • 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 standardized 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 and immediate implementation of steps to protect the safety of Bank funds; 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 financial return on the level of risk is fundamental. Impaired Loans Gross impaired loans decreased $7.1 million in 2000 reflecting a general improvement in the loan portfolio. As shown in Table 9, gross impaired loans total $31.1 million representing 1.21% (1999 - 1.69%) of total outstanding loans. Net Impaired Loans as a Percentage of Net Loans Outstanding 1.00 0.75 0.50 0.25 0.00 % 9 9 . 0 % 8 6 . 0 % 3 5 . 0 % 4 5 . 0 % 7 1 . 0 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 37 TA B L E 9 – C H A N G E I N G R O S S I M PA I R E D L OA N S ($ thousands) Gross impaired loans, beginning of year Net (reductions) additions Write-offs Total Gross Impaired Loans as a Percentage of Total Loans $ 2000 38,189 (2,612 ) (4,480 ) $ 1999 26,345 14,158 (2,314 ) 2000/1999 Increase (decrease ) $ 11,844 (16,770 ) 2,166 $ 31,097 $ 38,189 $ (7,092 ) 1.21 % 1.69 % (0.48 )% Net impaired loans were 0.17% of total loans at October 31, 2000, compared to 0.54% one year ago. Impaired loans net of the allowance for credit Table 10 shows the year over year change to the losses have decreased over the past year and allocation of the allowance for credit losses to represent 0.17% (1999 - 0.54%) of net loans specific provisions by category of impaired loans outstanding. The impaired loan outlook going and to the general allowance for credit risk. forward into 2001 is expected to be stable as economic conditions are trending positively. TA B L E 1 0 – A L L OWA N C E F O R C R E D I T L O S S E S ($ thousands) Specific Provisions Consumer and personal Real estate Industrial Other General Allowance (2) Total 1999 Ending Balance 348 2,526 1,238 1,060 20,848 26,020 $ $ Write-offs, Net of Recoveries (1) Provision for Credit Losses $ $ 265 2,395 481 1,117 – $ 227 1,633 1,521 1,652 67 $ 4,258 $ 5,100 $ 2000 Ending Balance 310 1,764 2,278 1,595 20,915 26,862 (1) Recoveries in 2000 totalled $222 (1999 - $48). (2) In 1999, in accordance with guidance provided by OSFI, the Bank increased its general allowance for credit risk by $11.7 million. Accordingly, retained earnings was reduced by $6.5 million representing the increase in the general allowance, net of deferred income taxes of $5.2 million. Allowance for Credit Losses as a Percentage of Gross Impaired Loans 100 75 50 25 0 % 4 . 6 8 % 1 . 8 6 % 5 . 7 %5 7 . 8 4 % 0 . 7 4 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 Allowance For Credit Losses The allowance for credit losses consists of a progressive (increasing with higher risk) loss ratio $5.9 million in specific provisions and $20.9 million range against groups of loans of a common risk in the general allowance for credit risk with rating is utilized to test the general allowance the latter now representing 0.82% of gross adequacy. The general allowance would be outstandings and 0.92% of risk-weighted credit expected to increase in strong economic times and assets. This compares favorably with the Bank’s decrease in weaker economic times as provisions five year loan loss average of 0.23% which is based are allocated to specific credits. on the annual charges to the income statement. The five year loan loss average based only on net new specific provisions (i.e. excluding the annual increase or decrease in the general allowance for credit risk) is 0.18%. 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 five year loan loss average. In addition, a method of applying In October 1998 OSFI began providing guidance to all deposit-taking institutions on establishing general allowances for credit risk (unallocated loan loss provisions) in their ongoing program to strengthen general allowances and related methodologies. While OSFI did not believe that there was a systemic problem of asset quality in the Canadian system, they felt the need for higher general allowances was supported by, amongst other things, the current position in 38 Geographical Distribution of Loans periods. Consequently, an amount of $6.5 million, Alberta 46% Other 3% Manitoba 4% Saskatchewan 6% British Columbia 41% representing the $11.7 million adjustment less deferred income taxes of $5.2 million, was charged to retained earnings. In response to OSFI’s ongoing guidance the Bank is furthering the development of policies governing the measurement and minimum threshold of the general allowance as well as action to be taken in the event of a material drawdown of the general allowance. Provision for Credit Losses For the year ended October 31, 2000, the provision for credit losses represented 0.21% of average the economic cycle, growing potential off-balance loans. As reflected in the graph below, the sheet activity and associated credit risk, and the provision for credit losses remains below the current levels of allowances of a number of five year average of 0.23% reflecting the strong Canadian institutions in relation to historical levels credit quality of the portfolio. and compared to institutions in other jurisdictions. Diversification of Portfolio Provision for Credit Losses as a Percentage of Average Loans Outstanding (5 year average 0.23%) % 0 3 . 0 % 5 2 . %0 2 2 . %0 8 1 . 0 % 1 2 . 0 0.40 0.30 0.20 0.10 0.00 OSFI’s revised general allowance criteria were effective Total Advances Based on Location of Borrower 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 for 1999. In accordance with the guidance provided (also see Table 5) by OSFI, $11.7 million was added to the general allowance at April 30, 1999 and was charged to retained earnings with no restatement of prior The following table illustrates the diversification in our lending operations by industry sector. TA B L E 1 1 – TOTA L A DVA N C E S BA S E D O N I N D U S T RY S E C TO R (%) October 31 Construction Real estate operations Consumer loans and residential mortgages Transportation and storage Hotel/motel Other services Manufacturing Logging/forestry Finance and insurance Oil and gas (production) Wholesale trade Government guaranteed Other Total Management of the loan portfolio includes the set up within branches or as stand alone operations, strategy of avoiding high concentrations in one while oil and gas lending is conducted by specialists geographic area or industry sector. The Bank’s in our Calgary market. In addition to these areas, portfolio is well diversified with a mix of corporate the Bank also has real estate divisions established and personal business. Industrial lending units are in the major centres in which it operates. 2000 22.7 % 22.2 13.8 1999 20.4 % 24.5 16.5 7.1 4.4 4.2 4.0 3.3 3.2 2.7 2.6 0.9 8.9 6.9 4.0 2.7 4.1 3.0 3.0 2.5 2.5 1.1 8.8 100.0 % 100.0 % 39 L I Q U I D I T Y R I S K Liquidity risk is the risk that the Bank will not have sufficient cash to meet its obligations as they become due. This risk arises from fluctuations in cash flows from lending, deposit taking, investing and other activities. Effective liquidity management ensures that adequate cash is available to honour all cash outflow obligations. Maintenance of a prudent liquidity base also provides flexibility to fund loan growth and to react to other market opportunities. The Bank’s 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. A schedule outlining the consolidated securities portfolio at October 31, 2000 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. TA B L E 1 2 – L I Q U I D A S S E T S ($ thousands) Cash Deposits with regulated financial institutions Cheques in transit Total Cash Resources Securities purchased under resale agreements Government of Canada treasury bills Government of Canada and provincial bonds term to maturity 1 year or less Government of Canada and provincial bonds term to maturity over 1 year Other marketable securities Total Securities Purchased Under Resale Agreements 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 40 $ 2000 1,460 168,652 44,823 214,935 84,932 15,826 123,844 61,477 28,921 315,000 $ 1999 1,562 136,456 31,972 169,990 41,017 63,928 52,248 48,729 38,938 244,860 2000/1999 Increase (decrease ) $ (102 ) 32,196 12,851 44,945 43,915 (48,102 ) 71,596 12,748 (10,017 ) 70,140 $ 529,935 $ 414,850 $ 115,085 $ 3,055,603 $ 2,692,382 $ 363,221 17.3 % 15.4 % 1.9 % $ 2,727,809 $ 2,371,075 $ 356,734 19.4 % 17.5 % 1.9 % As shown in Table 12, liquid assets comprised Also included in liquid assets are securities of cash, interbank deposits, items in transit, purchased under resale agreements. These are securities purchased under resale agreements short term advances, typically no more than a few and marketable securities, totalled $530 million at days in duration, to securities dealers and require October 31, 2000, an increase of $115 million from the dealer to repurchase the securities comprised October 31, 1999. Liquid assets represented 17.3% of treasury bills or other high quality liquid (1999 - 15.4%) of total assets and 19.4% (1999 - securities. 17.5%) of total deposit liabilities at that date. Short term credit facilities have been arranged Highlights of the composition of liquid assets at with a number of financial institutions. October 31, 2000 follow: The expansion of such facilities will continue • maturities within one year total 86% of liquid to be pursued as an additional liquidity safeguard. assets or $455 million; The government insured/guaranteed mortgage • Government of Canada treasury bills made up and loan portfolios also represent a potential 3% of the liquid assets with other Government source of liquidity. of Canada and provincial debt securities accounting for 35% of liquid assets; and • deposits with regulated financial institutions including bankers acceptances were 32% of liquid assets. The primary source of new funding is the issuance of deposit instruments. A summary of the deposits by maturity is presented in Tables 13 and 14. Our retail and commercial customers remain the prime target for growth in deposits. In 2001, the Bank will continue to pursue these customers aggressively to increase the number and size of deposits made through CWB’s 25 branches. TA B L E 1 3 – D E P O S I T M AT U R I T I E S W I T H I N O N E Y E A R ($ millions) October 31, 2000 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 1999 Total TA B L E 1 4 – TOTA L D E P O S I T M AT U R I T I E S ($ millions) October 31, 2000 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 1999 Total Within 1 Year 72 293 1,432 1,797 1,479 $ $ $ 1 to 2 Years – – 372 372 353 $ $ $ Within 1 Month 1 to 3 Months 3 Months Cumulative to 1 Year Within 1 Year $ $ $ $ $ $ 72 293 343 708 521 2 to 3 Years – – 261 261 229 $ $ $ $ $ $ – – 177 177 152 3 to 4 Years – – 186 186 158 $ $ $ $ $ $ – – 912 912 806 4 to 5 Years – – 112 112 152 $ $ $ $ $ $ 72 293 1,432 1,797 1,479 Total 72 293 2,363 2,728 2,371 41 A breakdown of deposits by source is provided Interest Rate Risk under the heading Deposits. Target limits by source Interest rate risk or sensitivity can be defined as have been established as part of the Bank’s overall the impact on net interest income, both current liquidity policy and are monitored to ensure an and future, resulting from a change in market acceptable level of diversification in sources of interest rates. This risk and potential variability funding is maintained. The Bank continues to in earnings arises primarily when cash flows aggressively pursue retail deposits generated associated with interest sensitive assets and through its branch network as a core funding liabilities have different repricing dates. source. However, the total dollar value of agent The differentials, or interest rate gaps, arise as generated deposits will likely continue to increase a result of the financial intermediation process When the Bank’s even though the goal is to decrease funding from and reflect differences in term preferences on interest-sensitive assets exceed interest- sensitive liabilities (over a specific period), it creates a positive interest rate gap, which often leads to an increase in net interest income when market interest rates rise (since assets reprice earlier than liabilities). this source as a percentage of total deposit the part of borrowers and depositors. liabilities. CWT continues to raise essentially all of its deposits through agents. CWT’s deposit products are also raised through the Bank’s branch network and at October 31, 2000, $43.1 million (1999 - $30.9 million) of CWT deposits had been raised in this manner. 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 M A R K E T R I S K of a positive gap. 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, 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. arbitrage or proprietary trading. Therefore, Exposure to interest rate risk is controlled by the Bank’s material market risks are confined managing the size of the static gap positions to interest rates and foreign exchange as between interest sensitive assets and interest discussed below. 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 at least monthly. Table 15 shows the consolidated gap position at October 31, 2000 for selected time intervals. Comparative summary figures are given at October 31, 1999. Figures in brackets represent an excess of liabilities over assets or a negative gap position. 42 TA B L E 1 5 – A S S E T L I A B I L I T Y G A P P O S I T I O N S ($ millions) October 31, 2000 Assets Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Non- interest Sensitive 95 50 1,220 – – 1,365 708 – – – 272 980 385 385 11.6 % 1,082 814 268 268 $ $ $ $ $ $ 15 35 127 – 35 212 177 – – – – 177 35 420 12.6 % 164 152 12 280 $ $ $ $ $ $ 54 70 385 – 170 679 912 – – – – 912 (233 ) 187 5.6 % 623 806 (183 ) 97 $ $ $ $ $ $ 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 October 31, 1999 Total assets Total liabilities and equity Interest Rate Sensitive Gap Cumulative Gap Cumulative Gap as a Percentage of Total Assets $ $ $ $ $ Total Within 1 Year 164 155 1,732 – 205 2,256 1,797 – – – 272 2,069 187 187 5.6 % 1,869 1,772 97 97 $ $ $ $ $ $ 3 66 856 – 68 993 931 – 67 – – 998 (5 ) 182 5.5 % 995 959 36 133 $ $ $ $ $ $ – 10 – – – 10 – – – – – – 10 192 5.8 % 9 – 9 142 $ $ $ $ $ $ Total 215 231 2,560 49 273 3,328 2,728 66 67 195 272 3,328 – – – 2,963 2,963 – – – $ $ $ $ $ $ 48 – (28 ) 49 – 69 – 66 – 195 – 261 (192 ) – – 90 232 (142 ) – – 9.0 % 9.4 % 3.3 % 3.3 % 4.5 % 4.8 % Notes: 1. 2. Accrued interest is excluded in calculating interest sensitive assets and liabilities. Potential prepayments of fixed rate loans and early redemption of redeemable fixed term deposits have not been estimated. Redemptions of fixed term deposits where depositors have this option are not expected to be material. Deposits with a redemption option totalled approximately $8 million as at October 31, 2000. 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 Of the $1,430 million in fixed term deposit liabilities measurement of interest rate sensitive gaps at maturing within one year from October 31, 2000, a specific time. These gaps can change significantly approximately $121 million (4.4% of total deposit in a short period of time. The impact of changes liabilities) are fixed term registered retirement in market interest rates on earnings will depend product deposits maturing between December 1, upon the magnitude and rate of change in interest 2000 and April 30, 2001. The term in which these rates as well as the size and maturity structure of deposits and other maturing deposits are retained the cumulative interest rate gap position and will have an impact on the future asset liability management of those positions over time. structure and hence interest rate sensitivity. During the year: The effective interest rates for each class of • the one year and under cumulative gap financial asset and liability, including off-balance increased from 3.3% to 5.6%; and sheet instruments, are shown in Table 16. • the one month and under gap increased from 9.0% to 11.6%. 43 TA B L E 1 6 – W E I G H T E D AV E R AG E E F F E C T I V E I N T E R E S T R AT E S (%) October 31, 2000 Assets Cash resources Securities Loans Off-Balance sheet swaps Total Liabilities Deposits Debentures Off-Balance sheet swaps Total Interest Rate Sensitive Gap October 31, 1999 Total assets Total liabilities Interest Rate Sensitive Gap Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year Total Within 1 Year 1 Year to 5 Years Over 5 Years Total 5.7 % 5.9 % 6.0 % 5.8 % 6.0 % – % 5.8 % 5.7 8.2 – 8.0 4.2 – 5.8 4.7 3.3 % 6.9 % 3.8 3.1 % 5.6 7.5 5.8 6.8 5.6 – – 5.6 1.2 % 6.2 % 5.1 1.1 % 6.0 8.1 6.1 7.2 5.9 – – 5.9 1.3 % 6.6 % 5.5 1.1 % 5.8 8.2 6.0 7.6 5.2 – 5.8 5.3 5.8 7.9 5.8 7.7 5.9 5.7 – 5.9 5.6 – – 5.6 – – – – 5.8 8.1 6.0 7.6 5.5 5.7 5.8 5.5 2.3 % 1.8 % 5.6 % 2.1 % 6.8 % 4.7 2.1 % 7.5 % 5.7 1.8 % 5.5 % – 5.5 % 7.0 % 5.0 2.0 % The estimated sensitivity of net interest income to • interest rate changes affect interest sensitive a change in interest rates is presented in Table 17. assets and liabilities by the same amount and The amounts represent the estimated change in are applied at the appropriate repricing dates; net interest income over the time period shown and resulting from a one percentage point change in • no early redemptions. 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 and factors, which include: • a constant structure in the asset liability portfolio; 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 within policy guidelines. TA B L E 1 7 – E S T I M AT E D S E N S I T I V I T Y O F N E T I N T E R E S T I N C O M E A S A R E S U LT O F A O N E P E R C E N TAG E P O I N T C H A N G E I N I N T E R E S T R AT E S $ 2000 948 3,654 $ 1999 601 1,938 4.8 % 3.3 % ($ thousands) Period 90 days 1 year 1 year percentage change 44 It is management’s intention to continue to manage O P E R A T I O N A L R I S K 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 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. exception of debentures, as outlined in Note 8 to The financial measure of operational risk is actual the Consolidated Financial Statements, such items losses incurred. No material losses occurred in 2000 were not material as at October 31, 2000. or 1999. Foreign Exchange Risk These risks can never be completely eliminated but In providing financial services to its customers, the Bank’s strategy to minimize operational risk the Bank has assets and liabilities denominated includes: in U.S. dollars. At October 31, 2000, assets • a knowledgeable and experienced management denominated in U.S. dollars were 0.4% of total team that is committed to the risk management assets and U.S. dollar liabilities were 0.4% of total liabilities. The percentages are unchanged from policies; regular meetings of the Operations Committee, • October 31, 1999. Currencies other than U.S. dollars a management committee made up of are not bought or sold other than to meet specific supervisory and management personnel from Operations Committee... is responsible for the development and recommendation customer needs and therefore, the Bank has all operational areas and chaired by a member of policies and procedures regarding day-to-day operations. virtually no exposure to currencies other than of senior management, which is responsible for 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. 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 and contingency plans 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. 45 Off-Balance Sheet Financial Instruments Including Derivatives TA B L E 1 8 – O F F - BA L A N C E S H E E T F I N A N C I A L I N S T RU M E N T S ($ 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) Equity contracts (4) Total Assets Under Administration 2000 1999 $ 42,489 $ 27,479 442,667 366,229 $ 485,156 $ 393,708 $ 269,000 $ 269,000 3,535 2,200 $ 272,535 $ 271,200 $ 741,181 $ 559,978 Letters of credit and guarantees are issued on behalf of clients to third party beneficiaries as part of normal business operations. (1) (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 $183 million (1999 - $150 million) and (3) (4) recently authorized but unfunded loan commitments of $260 million (1999 - $216 million). Interest rate swaps are used as hedging devices to control interest rate risk. The outstanding swaps mature between December 2000 and July 2004. The total gross positive replacement cost of interest rate swaps was a positive $359 (1999 - $227). This market value represents an unrealized gain, or the payment the Bank would receive if these contracts were unwound and settled at that date. Equity contracts are used to offset the return paid to depositors on certain deposit products where the return is linked to a stock index. The outstanding contracts mature between March 2004 and February 2005. The total gross positive replacement cost is $538 (1999 - $17). (5) 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, 2000 and 1999 there were no forward foreign exchange contracts More detailed information on the nature of the annual review. Policies regarding the use of off- Bank’s off-balance sheet financial instruments is balance sheet financial instruments are approved, shown in Notes 11, 12 and 15 to the Consolidated reviewed, and monitored on a regular basis by Financial Statements. ALCO and reviewed and approved by the Board of Continued use of interest rate swaps or other Directors at least annually. off-balance sheet hedging instruments is expected Trust assets under administration, administered in the future for the purpose of asset liability by CWT, totalled approximately $741 million at structuring and management of interest rate risk. October 31, 2000 (1999 - $560 million). These assets The Bank only enters into these off-balance sheet are primarily in self-directed RRSPs and RRIFs. derivative financial instruments for its own account Trust assets under administration are held in 11,468 and does not act as an intermediary in this market. accounts (1999 - 9,007), an increase of 27% from Transactions are entered into on the basis of one year ago. Assets under administration, industry standard contracts with approved and the related fee income, are expected to counterparties subject to periodic and at least increase in 2001. outstanding. Number of Self-directed Accounts 12,000 10,500 9,000 7,500 6,000 8 6 4 , 1 1 7 0 0 , 9 7 4 8 , 6 5 3 3 , 6 2 5 2 , 6 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 46 Financial Statements Management’s Report The consolidated financial statements of Canadian Western Bank and related financial information presented in this annual report have been prepared by management, who are responsible for the integrity, objectivity and reliability of the data presented. The consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles, other than the accounting for the general allowance for credit risk at October 31, 1999, which is in accordance with the accounting requirements of the Superintendent of Financial Institutions Canada under the Bank Act, as described in Note 1. The consolidated financial statements and related financial information reflect amounts which must, of necessity, be based on informed estimates and judgements of management with appropriate consideration to materiality. 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 department 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 external 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 external 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 external 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“ Larry M. Pollock ”Tracey C. Ball, C.A.“ Tracey C. Ball, C.A. President and Chief Executive Officer Senior Vice President and Chief Financial Officer December 1, 2000 47 Auditors’ Report To The Shareholders of Canadian Western Bank We have audited the Consolidated Balance Sheet of Canadian Western Bank as at October 31, 2000 and 1999 and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Cash Flow 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 Canadian 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, 2000 and 1999 and the results of its operations and its cash flow for the years then ended in accordance with Canadian generally accepted accounting principles, other than the accounting for the general allowance for credit risk at October 31, 1999 which is in accordance with the accounting requirements of the Superintendent of Financial Institutions Canada under the Bank Act, as described in Note 1. ”Deloitte & Touche LLP“ Deloitte & Touche LLP Chartered Accountants Edmonton, Alberta December 1, 2000 48 Consolidated Balance Sheet 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 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 $ 2000 1,460 168,652 44,823 214,935 103,227 97,920 30,269 231,416 84,932 273,104 2,202,056 2,560,092 14,750 34,410 49,160 $ 1999 1,562 136,456 31,972 169,990 112,826 52,079 40,287 205,192 41,017 272,428 1,940,153 2,253,598 13,218 50,384 63,602 $ 3,055,603 $ 2,692,382 $ 71,572 293,370 2,362,867 2,727,809 $ 45,043 221,456 2,104,576 2,371,075 65,473 13,126 54,000 67,126 111,342 83,853 195,195 83,066 13,126 65,565 78,691 98,484 61,066 159,550 (Note 2) (Notes 3 & 4) (Note 5) (Note 6) (Note 7) (Note 8) (Note 9) Total Liabilities and Shareholders’ Equity $ 3,055,603 $ 2,692,382 ”Jack C. Donald“ Jack C. Donald Chairman ”Larry M. Pollock“ Larry M. Pollock President and Chief Executive Officer 49 Consolidated Statement of Income For the year ended October 31 ($ thousands, except per share amounts) Interest Income Loans Securities Deposits with regulated financial institutions Interest Expense Deposits Debentures Net Interest Income Provision for credit losses Net Interest Income after Provision for Credit Losses Other Income Credit related Retail services Trust services Other 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 from Continuing Operations Loss from discontinued operations Net Income Average number of common shares outstanding Average number of fully diluted common shares Earnings per common share, continuing operations basic fully diluted Earnings per common share basic fully diluted 50 2000 1999 $ 192,006 $ 164,435 12,363 5,913 210,282 132,951 3,964 136,915 73,367 5,100 68,267 9,540 2,949 1,644 1,122 15,255 83,522 27,207 8,824 9,810 2,246 48,087 35,435 5,441 29,994 3,045 26,949 11,133,880 13,649,587 2.69 2.49 2.42 2.26 $ $ $ $ $ 9,543 3,035 177,013 110,396 4,888 115,284 61,729 3,750 57,979 7,805 2,476 1,485 1,251 13,017 70,996 23,694 8,131 10,079 2,822 44,726 26,270 3,516 22,754 2,901 19,853 10,153,378 13,516,000 2.24 2.00 1.96 1.79 $ $ $ $ $ (Note 4) (Note 10) (Note 17) (Note 1(k)) (Note 1(k)) Consolidated Statement of Changes in Shareholders’ Equity For the year ended October 31 ($ thousands) Capital Stock Balance at beginning of year Common shares issued Common shares purchased for cancellation Balance at end of year Retained Earnings Balance at beginning of year Net income Dividends Share issue costs, net of income taxes of $175 Adjustment to general allowance for credit risk, net of income taxes of $5,185 Redemption of debenture Balance at end of year Total Shareholders’ Equity 2000 98,484 12,858 – 111,342 61,066 26,949 (3,779 ) (383 ) – – $ 1999 89,595 9,069 (180 ) 98,484 55,673 19,853 (4,860 ) – (6,509 ) (3,091 ) $ (Note 9) (Note 9) (Note 4) (Note 8) 83,853 195,195 $ 61,066 159,550 $ 51 Consolidated Statement of Cash Flow For the year ended October 31 ($ thousands) Cash Flows from Operating Activities Net income from continuing operations Adjustments to determine net cash flows: 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 provided from continuing operations Cash (used in) provided from discontinued operations Loss from discontinued operations Changes in non-cash net asset balances Cash Flows from Financing Activities Deposits, net Dividends Common shares issued, net of issue costs Redemption of subordinated debentures Issue of subordinated debentures Common shares purchased for cancellation Cash Flows Used in Investing Activities Loans, net Interest bearing deposits with regulated financial institutions, net Securities, net Land, buildings and equipment, net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year * * Represented by: Cash resources per Consolidated Balance Sheet Less non-operating, interest bearing deposits with regulated financial institutions Cash and Cash Equivalents at End of Year Supplemental Disclosure of Cash Flow Information Amount of interest paid in the year Amount of income taxes paid in the year 52 (Note 9) (Note 8) (Note 8) (Note 9) 2000 1999 $ 29,994 $ 22,754 5,100 3,006 1,839 (49 ) 7,753 3,371 51,014 (3,045 ) (13,780 ) 34,189 356,734 (3,779 ) 910 – – – 3,750 2,753 2,964 (261 ) 5,714 (3,060 ) 34,614 (2,901 ) 1,407 33,120 311,530 (4,860 ) 669 (7,091 ) 4,000 (180 ) 353,865 304,068 (311,594 ) (44,194 ) (26,176 ) (5,339 ) (387,303 ) 751 47,269 48,020 214,935 166,915 48,020 126,728 1,514 $ $ $ $ $ (279,386 ) 8,212 (43,531 ) (2,510 ) (317,215 ) 19,973 27,296 47,269 169,990 122,721 47,269 108,919 751 $ $ $ $ $ Notes to Consolidated Financial Statements October 31, 2000 ($ thousands, unless otherwise stated) 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 Office of the Superintendent of Financial Institutions Canada (“OSFI”), the financial statements are to be prepared in accordance with generally accepted accounting principles. The significant accounting policies used in the preparation of these financial statements, including the accounting requirements of OSFI, are summarized below. 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. OSFI has specified an accounting treatment for the general allowance for credit risk at October 31, 1999 which does not conform to generally accepted accounting principles. The accounting policies for all other financial statement items conform, in all material respects, to Canadian generally accepted accounting principles. a ) B a s i s o f C o n s o l i d a t i o n 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 20 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 ) S e c u r i t i e s 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. Debt securities are stated at amortized cost and equity securities are stated at cost or, if the value is permanently impaired, at net realizable value. Gains and losses on disposal of securities and adjustments to record any permanent impairment in value are included in other income in the period of realization. Amortization of premiums and discounts are reported in interest income from securities in the Consolidated Statement of Income. Trading account securities, which are purchased for resale over a short period of time, are carried at estimated current market value. Gains and losses realized on disposal and adjustments to market value are reported in other income in the Consolidated Statement of Income in the period during which they occur. c ) L o a n s 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 payments are 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. 53 d ) A l l o w a n c e f o r C re d i t L o s s e s g ) Tr a n s l a t i o n o f F o re i g n C u r re n c i e s The Bank maintains an allowance for credit losses, which in management’s opinion, is adequate to absorb credit related losses in its loan portfolio. The allowance for credit losses is deducted from the loan balance on the Consolidated Balance Sheet. The allowance for credit losses consists of specific provisions and the general allowance for credit risk. 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. In October 1998, OSFI provided guidance to all deposit-taking institutions on establishing general allowances for credit risk. The general allowance for credit risk includes provisions for future losses inherent in the portfolio that are not presently identifiable by management of the Bank on an account by account basis. The general allowance for credit risk is established by taking into consideration historical trends in the loss experience during economic cycles, the current portfolio profile, estimated losses for the current phase of the economic cycle and historical experience in the industry. In compliance with the guidance provided by OSFI at that time, any significant adjustment to the general allowance for credit risk, net of income taxes, was treated as a one-time charge to retained earnings, with no adjustment to opening retained earnings (Note 19). Actual write-offs, net of recoveries, are deducted from the allowance for credit losses. The provision for credit losses in the Consolidated Statement of Income is charged with an amount sufficient to keep the balance in the allowance for credit losses adequate to absorb all credit related losses. e ) S e c u r i t i e s P u rc h a s e d U n d e r R e s a l e A g re e m e n t s Securities purchased under resale agreements are secured loans as they represent a purchase of Government of Canada securities by the Bank effected with a simultaneous agreement to sell them back at a specified price on a future date, which is generally short term. Securities purchased under resale agreements are carried at cost. The difference between the cost of the purchase and the predetermined proceeds to be received on a resale agreement is recorded as loan interest income in the Consolidated Statement of Income. f ) 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 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. Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the balance sheet date. Revenues and expenses in foreign currencies are translated at the average exchange rates prevailing during the year. Realized and unrealized gains and losses on foreign currency positions are included in other income in the Consolidated Statement of Income. h ) L o a n F e e s 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. i ) I n c o m e Ta x e s The Bank follows the tax allocation method of accounting for income taxes whereby income taxes are based on transactions recognized for accounting purposes regardless of when they are recognized for tax purposes. The cumulative timing differences between tax calculated on this basis and taxes currently payable result in deferred income taxes which are recorded in other assets. Total income taxes include the provision for income taxes in the Consolidated Statement of Income and income taxes applicable to items charged or credited directly to retained earnings. j ) D e r i v a t i v e F i n a n c i a l I n s t r u m e n t s Interest rate, foreign exchange and equity contracts such as futures, options and swaps are entered into for asset liability management purposes. These contracts are designated and function as hedges and are accounted for on the accrual basis. Net accrued interest receivable/payable and deferred gains/losses are recorded in other assets or other liabilities, as appropriate. Interest income/expense and gains/losses are recognized as interest income or interest expense, as appropriate, over the hedged period. k ) E a r n i n g s P e r C o m m o n S h a re 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. l ) S t o c k O p t i o n P l a n s The Bank has stock option plans which are described in Note 9. No expense is recognized for these plans when the stock options are issued to the employees. Any consideration paid by employees on exercise of stock options is credited to share capital. 54 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: Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Other debt Equity Securities Total (1) (1) All securities are held in the investment account. These securities have no specific maturity. (2) Maturities Within 1 Year Over 1 to 3 Years Over 3 to 5 Years Over 5 Years 2000 Total 1999 Total Book Value Book Value $ 78,747 60,923 $ 20,599 15,769 $ 3,881 21,228 $ – – $ 103,227 $ 112,826 97,920 52,079 – 15,468 – – 4,486 – – – – 1,000 – 9,315 (2) 1,000 19,954 9,315 1,000 29,969 9,318 $ 155,138 $ 40,854 $ 25,109 $ 10,315 $ 231,416 $ 205,192 The analysis of unrealized gains and losses on investment securities is as follows: 2000 1999 Book Value Unrealized Unrealized Gains Losses Estimated Market Value Book Value Unrealized Unrealized Gains Losses Estimated Market Value Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Other debt Equity Securities $ 103,227 $ 97,920 1,000 19,954 9,315 Total $ 231,416 $ 5 38 – 5 72 120 $ $ 69 189 – 27 731 1,016 $ 103,163 $ 112,826 $ 97,769 52,079 1,000 19,932 8,656 1,000 29,969 9,318 $ 230,520 $ 205,192 $ 1 8 – – 106 115 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 General allowance for credit risk (1) Total (2) $ $ Gross Amount 2,683 15,218 7,495 5,701 31,097 – $ 31,097 $ Specific Provisions 310 1,764 2,278 1,595 5,947 20,915 26,862 $ $ $ 207 399 $ 112,620 51,688 – 1 410 1,017 1,000 29,968 9,014 $ 204,290 2000 Carrying Amount 2,373 13,454 5,217 4,106 25,150 (20,915 ) $ 1999 Carrying Amount 2,861 20,336 6,735 3,085 33,017 (20,848 ) $ 4,235 $ 12,169 (1) (2) The general allowance for credit risk is available for the total loan portfolio. Impaired loans include foreclosed real estate assets held for sale with a gross carrying value of $1,561 (1999 - $6,866 ) and a related specific allowance of $171 (1999 - $1,606). At October 31, 2000 other past due loans totalled $1,828 (1999 - $249). 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 well secured and considered fully collectible. During the year interest recognized as income on impaired loans totalled $714 (1999 - $579). 55 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 changes in the allowance for credit losses during the year. 2000 General 1999 General Specific Allowance Specific Allowance Provisions for Credit Risk Total Provisions for Credit Risk Total Balance at beginning of year Provision for credit losses Write-offs Recoveries Adjustment to general allowance for credit risk (1) $ 5,172 5,033 (4,480 ) 222 – $ 20,848 $ 26,020 $ 67 – – – 5,100 (4,480 ) 222 – 3,517 3,921 (2,314 ) 48 – Balance at end of year $ 5,947 $ 20,915 $ 26,862 $ 5,172 $ $ 9,325 $ 12,842 (171 ) – – 11,694 20,848 3,750 (2,314 ) 48 11,694 26,020 $ (1) In 1999, in accordance with the guidance provided by OSFI as described in Note 1(d), the Bank increased its general allowance for credit risk by $11,694. Accordingly, retained earnings was reduced by $6,509, representing the increase in the general allowance, net of deferred income taxes of $5,185. The Bank has virtually no loans booked outside of Canada and therefore has no country risk provisions. 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 Land Buildings Equipment and furniture Leasehold improvements Total Accumulated Depreciation and Amortization $ – $ 1,758 7,676 2,742 2000 Net Book 1999 Net Book Value 2,753 1,375 6,651 3,971 $ Value 2,753 1,528 5,183 3,754 $ Cost 2,753 3,133 14,327 6,713 $ 26,926 $ 12,176 $ 14,750 $ 13,218 Depreciation and amortization for the year amounted to $2,752 (1999 - $2,680). 6 O T H E R A S S E T S Accrued interest receivable Deferred income tax asset (Note 10) Prepaid expenses Deferred financing costs (1) Goodwill and other identifiable intangibles (2) Other Due from clients and brokers Total $ $ 2000 13,256 10,496 5,839 1,211 273 3,335 – $ 34,410 $ 1999 10,822 12,335 5,817 1,933 731 4,076 14,670 50,384 (1) Amortization of deferred financing costs included in other expenses in the Consolidated Statement of Income is $163 (1999 - $250) and share issue expenses charged to retained earnings in the Consolidated Statement of Shareholders’ Equity are $559 (1999 - $0). (2) Amortization of goodwill and other identifiable intangibles included in other expenses in the Consolidated Statement of Income is $458 (1999 - $493). 7 O T H E R L I A B I L I T I E S Accrued interest payable Accounts payable Deferred revenue Other Due to clients and brokers Total 56 2000 57,617 $ 1999 $ 47,430 5,336 601 1,919 – $ 65,473 $ 4,961 628 977 29,070 83,066 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 OSFI. 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. Convertible 5.50% convertible debentures (2) Crown Life Insurance Company (3) 6.75% convertible debentures (4) Total Interest Rate 6.660% 6.590% 6.415% 5.500% 5.700% 6.750% Maturity Date March 31, 2007 $ June 30, 2007 July 31, 2007 March 31, 2008 July 31, 2009 April 15, 2006 $ 2000 5,000 3,126 5,000 13,126 50,000 4,000 – 54,000 67,126 1999 5,000 3,126 5,000 13,126 50,000 4,000 11,565 65,565 78,691 $ $ (1) (2) 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%. 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 (1,639,344 shares). At any time after March 31, 2003 the debentures are convertible by the Bank. (3) On July 6, 1994 the Bank issued a $4,000 subordinated debenture to Crown Life Insurance Company. The debenture was convertible into common shares of the Bank at the option of the holder, at a conversion price of $11.00 per share. On July 28, 1999 the Bank completed negotiations with the holder for the redemption of the debenture and the related conversion option for aggregate consideration of $7,091 based upon the current market value of the underlying common shares. The excess of the total consideration paid over the face value of the debenture was attributed to the conversion option and charged to retained earnings. There was no income tax effect. On July 28, 1999 the Bank issued a subordinated debenture to Crown Life Insurance Company for $4,000. 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, 2004. The number of shares issued at conversion will be determined based on a $25.00 per share conversion price (160,000 shares). (4) On October 29, 1999 the Bank provided notice of its intention to convert all of the outstanding 6.75% convertible debentures to common shares on December 1, 1999. As a result of the notice the remaining $11,565 (1999 - $8,400) of the original $20,000 issued were converted by debentureholders on November 30, 1999 at a conversion price of $12.50 per share. 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 conversion of debentures and exercise of options (1) Shares purchased for cancellation Outstanding at End of Year Number of Shares 10,172,196 $ 1,044,226 – 2000 Amount 98,484 12,858 – Number of Shares 1999 Amount 9,441,519 $ 89,595 740,977 (10,300 ) 9,069 (180 ) 11,216,422 $ 111,342 10,172,196 $ 98,484 (1) In 2000, $11,565 (1999 - $8,400) of the 6.75% debentures were converted into 925,200 (1999 - 672,000) shares and 119,026 (1999 - 68,977) options were exercised, at a weighted average exercise price of $10.86 (1999 - $9.70). 57 9 C A P I TA L S T O C K – C o n t i n u e d The Bank has subordinated debentures which are convertible to common shares of the Bank as more fully described in Note 8. On November 30, 1999 the debenture holders converted all of the outstanding 6.75% convertible debentures, which totalled $11,565, to common shares resulting in the issuance of 925,200 common shares and a charge to retained earnings of $383 for share issue expenses, net of deferred income taxes. The Bank also has authorized 1,107,805 common shares (1999 - 1,226,831) for issuance under option plans. Of the amount authorized, options exercisable into 1,039,870 shares are issued and outstanding (1999 - 1,177,096) and all expire within ten years of date of grant. The options are exercisable at a fixed price equal to the average of the market price on the day of and the four days preceding the grant. Outstanding options have exercise prices ranging from $8.73 to $20.44. Their weighted average remaining contractual life is 4.9 years and they expire on dates ranging from June 2001 to December 2007. The details of and changes in the issued and outstanding options follow: 2000 1999 Options Balance at beginning of year Granted Exercised Forfeited Balance at end of year Exercisable at end of year 10 I N C O M E TA X E S The provision for income taxes consists of the following: Current Deferred Total A reconciliation of the Bank’s statutory tax rates and income tax that would be payable at these rates to the effective income tax rates and provision for income taxes that is reported in the Consolidated Statement of Income is as follows: Weighted Average Exercise Price 13.96 19.72 10.86 17.62 14.28 13.45 $ $ $ Number of Options 1,177,096 19,000 (119,026) (37,200) 1,039,870 427,581 Weighted Average Exercise Price 13.02 18.83 9.70 16.29 13.96 12.60 1999 3,260 256 3,516 $ $ $ $ $ Number of Options 1,101,723 158,050 (68,977) (13,700) 1,177,096 279,105 2000 5,368 73 5,441 $ $ Combined Canadian federal and provincial income taxes and statutory tax rate $ 16,017 45.2 % $ 11,874 45.2% 2000 1999 (Decrease) increase resulting from: Utilization of previously unclaimed deductions Amortization of deferred income tax asset Large corporations tax Utilization of loss carryforward Other (15,303) 4,156 604 – (33) (43.2 ) 11.7 1.7 – 0.0 (10,750 ) 2,708 552 (430 ) (438 ) Provision for income taxes and effective tax rate $ 5,441 15.4 % $ 3,516 (40.9) 10.3 2.1 (1.6) (1.7) 13.4% The deferred income tax asset, included in other assets, primarily represents the net unamortized balance of the acquired unclaimed deductions plus accumulated timing differences relating to claiming deductions for income tax purposes on a basis different from accounting and relate mainly to the provision for credit losses. The Bank has reasonable assurance that its net deferred income tax asset will be realized through future operations and reversals of timing differences. At October 31, 2000, the Bank has approximately $14,763 (1999 - $44,733) of unclaimed deductions which are available to reduce future years’ income for tax purposes. In addition, $6,916 (1999 - $6,966) of capital losses are available to apply against future capital gains and have no expiry date. The tax benefit of these unclaimed deductions and losses has not been recognized in income. 58 11 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 ) O ff - B a l a n c e S h e e t I n s t r u m e n t s 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 b ) L e a s e C o m m i t m e n t s 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: 2001 2002 2003 2004 2005 2006 and thereafter Total 12 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 $741,181 (1999 - $559,978) 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. 13 R E L AT E D PA RT 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 $17,577 (1999 - $17,429). 2000 1999 $ 42,489 $ 27,479 442,667 366,229 $ 485,156 $ 393,708 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. $ $ 3,988 4,078 4,063 3,777 3,345 12,078 31,329 59 14 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, 2000 and 1999 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. 2000 Fair Value Over (Under) 1999 Fair Value Over (Under) 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) Book Value Fair Value Book Value Book Value Fair Value Book Value $ 214,935 $ 214,935 $ – $ 169,990 $ 169,990 $ – 231,416 2,560,092 23,720 230,520 2,545,864 23,720 2,727,809 2,732,003 65,473 67,126 65,473 66,620 (896 ) (14,228 ) – 4,194 – (506 ) 205,192 2,253,598 37,601 204,290 2,232,876 37,601 2,371,075 2,353,937 83,066 78,691 83,066 77,548 (902 ) (20,722 ) – (17,138 ) – (1,143 ) $ 455 $ (569 ) 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 tax assets 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. 60 15 D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S The Bank enters into derivative financial instruments for risk management purposes. 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. Equity contracts are used to offset the return paid to depositors on certain deposit products where the return is linked to a stock index. The credit risk is limited to the average return on an equity index applied on the notional contract amount should the counterparty default. The principal amounts are not exchanged and hence are not at risk. Approved counterparties and maximum notional limits are established and monitored by the Asset Liability Committee of the Bank. 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. Notional amounts represent the amount to which a rate or price is applied in order to calculate the exchange of cash flows. The notional amounts are not recorded on the Consolidated Balance Sheet. They represent the volume of outstanding transactions and do not represent the potential gain or loss associated with the market risk or credit risk of such instruments. The replacement cost represents the cost of replacing, at current market rates, all contracts with a positive fair value. The future credit exposure represents the potential for future changes in value and is based on a formula prescribed by OSFI. The credit risk equivalent is the sum of the future credit exposure and the replacement cost. The risk-weighted balance represents the credit risk equivalent weighted according to the credit worthiness of the counterparty as prescribed by OSFI. Notional Amount Replace- ment Cost 2000 Future Credit Credit Risk- Risk weighted Exposure Equivalent Balance Notional Amount Replace- ment Cost 1999 Future Credit Credit Risk- Risk weighted Exposure Equivalent Balance Interest Rate Contracts Interest rate swaps $ 269,000 Equity Contracts Total 3,535 $ 272,535 $ $ 359 538 897 $ $ 320 283 603 $ $ 679 821 1,500 $ $ 136 164 300 $ 269,000 2,200 $ 271,200 $ $ 227 17 244 $ $ 170 176 346 $ $ 397 193 590 $ $ 84 35 119 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). 2000 1999 Favourable Contracts Unfavourable Contracts Favourable Contracts Unfavourable Contracts (Assets) (Liabilities) (Assets) (Liabilities) Notional Amount Interest Rate Contracts Interest rate swaps $ 170,000 Equity Contracts Total 3,410 $ 173,410 $ $ Fair Value 359 538 897 Notional Amount $ $ 99,000 125 99,125 $ $ Fair Value 440 2 442 Notional Amount $ 155,000 1,200 $ 156,200 $ $ Fair Value 227 17 244 Notional Amount $ 114,000 1,000 $ 115,000 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) 2000 842 748 $ $ Fair Value 735 78 813 1999 299 338 $ $ $ $ 61 15 D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S – C o n t i n u e d The following table summarizes maturities of off-balance sheet financial instruments and weighted average interest rates paid and received on interest rate contracts. 2000 Maturity 1999 Maturity 1 year or less Over 1 to 5 years 1 year or less Over 1 to 5 years Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Interest Rate Contracts Interest rate swaps – receive fixed amounts (1) $ 205,000 6.02 % $ 64,000 5.90 % $ 230,000 5.27 % $ 39,000 5.67 % Equity Contracts (1) (2) – Total $ 205,000 3,535 $ 67,535 – $ 230,000 2,200 $ 41,200 (1) (2) The Bank pays (floating) interest amounts based on the one month (30 day) Canadian bankers’ acceptance rate. The contractual interest rate is not meaningful for equity contracts. The Bank receives amounts based on the increase in an equity index. 16 R I S K M A N A G E M E N T 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 36 to 45 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. 17 D I S C O N T I N U E D O P E R AT I O N S On December 21, 1999 the Bank announced that it would sell its brokerage subsidiary, Canadian Western Capital Limited (“CWC”), to Goepel McDermid Inc. of Vancouver. The sale closed February 16, 2000 for cash proceeds of $1.9 million and was reflected in the Bank’s financial statements for the quarter ended January 31, 2000. An after tax loss of $3,045 was charged to discontinued operations in the first quarter. For reporting purposes the results of operations of CWC and the loss on disposal are disclosed separately from continuing operations and the comparative balances have been restated. The results of discontinued operations are as follows: Operating loss Estimated loss on disposal net of income taxes of $2,074 Total Selected information regarding discontinued operations is as follows: Underwriting fees and commissions on security transactions Cash resources and securities Other assets Other liabilities $ $ $ 2000 1,071 1,974 3,045 2000 1,821 – – – $ $ $ 1999 2,901 – 2,901 1999 6,788 14,601 16,911 30,707 62 18 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. Previously the Bank’s financial results were reported on the basis of two industry segments but the operations of the subsidiary offering wealth management services were discontinued in 2000 (Note 17). Personal and commercial banking includes the operations of the Bank and its trust subsidiary which provides a wide range of banking and trust services to retail and personal clients and small to medium-size commercial business clients primarily in western Canada. 19 D I F F E R E N C E F R O M G E N E R A L LY A C C E P T E D A C C O U N T I N G P R I N C I P L E S The consolidated financial statements of the Bank are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”), other than the accounting for the general allowance for credit risk at October 31, 1999 which is in accordance with the accounting requirements of OSFI. In fiscal 1999 the Bank increased its general allowance for credit risk. In accordance with the guidance provided by OSFI, this one-time adjustment was charged to retained earnings. The adjustment does not comply with GAAP. However, had the Bank not departed from GAAP to conform to the guidance provided by OSFI in 1999, loans would have increased by $11,694, deferred income taxes included in “Other assets” would have declined by $5,185 and retained earnings would have increased by $6,509. There was no other impact on the consolidated financial statements of the Bank. 20 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, 2000 Canadian Western Trust Company CWB Canadian Western Financial Ltd. Address of Head Office 666 Burrard Street Vancouver, British Columbia 10303 Jasper Avenue Edmonton, Alberta (1) The carrying value of voting shares is stated at the Bank’s equity in the investments. Carrying Value of Percentage of Issued and Voting Shares Owned Outstanding Voting by the Bank (1) Shares Owned by the Bank $ $ 19,213 – 100% 100% 21 C O M PA R AT I V E F I G U R E S Certain comparative figures have been reclassified to conform with the current year presentation. 63 Corporate Governance Introduction The Board of Directors and management of the Bank are committed to govern and manage the Bank’s operations effectively and efficiently, within its regulatory environment. The Corporate Governance & Human Resources Committee (a subcommittee of the Board) provides direction to the Board, monitors compliance and deals with governance issues in a manner that will enhance corporate performance. The Board and Board Committees The Bank is a federally regulated Schedule I bank. result of this review, the Board has determined Pursuant to the current Bank Act (the “Act”), that two of the directors are affiliated (the no one shareholder, or shareholders acting in President and CEO and an Executive Vice concert, can own more than ten percent of any President); they are also the only inside directors. class of shares of a Schedule I bank. Therefore, All other directors are “unrelated”. the Bank has no shareholders holding more than ten percent of common shares. Legislative changes were tabled in June 2000 which would allow the elimination of the current ownership restriction for small banks such as our Bank. However, the status of the legislation is uncertain at this time as it was not passed prior to the November 2000 federal election. 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 The Board is currently comprised of twelve Board. The Board expects all significant risks and members. The number of directors reflects the internal controls to be identified and reported desire to have the members represent the upon by senior management to the Board and/or geographical jurisdictions in which the Bank its committees. 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 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. “affiliated” (as defined by the affiliation rules set The Board of Directors as a whole has expressly forth in the Act) or “unrelated”, as defined in the assumed responsibility for developing the Bank’s TSE guidelines on corporate governance. As a approach to governance issues although the The Corporate Governance & Human Resources Committee plays a key role in developing the Bank’s approach to governance issues. 64 Corporate Governance & Human Resources The areas of real estate appraisals and credit risk Committee plays a key role by recommending management have been delegated to the Loans and reporting on governance issues to the Board. Committee of the Board. In addition, certain governance issues have been delegated to other committees of the Board. The mandate of the Board also specifically includes other matters which are not necessarily stated in The Act contains several sections dealing with the Act or in the CDIC standards and they are the governance of a bank through its board of summarized as follows: directors. These sections prescribe matters such as • approve the annual statement and specified limitations on the number of directors who can be returns, prior to release to the public or affiliated or non-resident, certain powers that must submission to OSFI; be transacted by the full Board, and requirements • review and approve the annual strategic to establish both an audit committee and a business plan and accompanying capital plan conduct review committee. The Act also prescribes and financial operating budget, including certain minimum benchmarks for board and capital expenditures; committee membership, quorums and the • declare dividends; transaction of business by the Board. The three • outline the content and frequency of encompassing duties in the Act that form the basis management reports on financial operations; for the Board’s mandate are: • review and ratify the employment, • to manage or supervise the management of the appointment, grade levels and compensation of business and affairs of the Bank; the top five executive employees and approve • to act honestly and in good faith with a view all senior officer appointments; to the best interests of the Bank and exercise the care, diligence and skill that a reasonably • • review succession plans; review any recommendations from regulators prudent person would exercise in similar or external auditors respecting their assessment circumstances; and of the effectiveness of the internal controls • to comply with the Act, the regulations, the that come to their attention in the conduct Bank’s incorporating instrument and its by-laws. of their work; The Board’s mandate complies with all requirements of the Bank Act, CDIC standards and TSE guidelines. • 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. 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. CDIC is in the process of modernizing the standards in consultation with Canadian Bankers Association. Generally speaking, the current 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 controls; real estate appraisals; and credit risk management. 65 Audit Committee Audit Committee Jordan L. Golding This committee is comprised of four outside • review the interim unaudited statements, directors and its mandate is summarized as follows: as well as other related public information, • review the annual statement and report thereon before public disclosure; Robert A. Manning, Chair to the directors before approval is given; • review a report from the Loans Committee of Gerald A.B. McGavin • review such returns as required by OSFI and the Board, including recommendations on the Alan M. Rowe report thereon to the directors before approval adequacy of loan loss provisions and write-offs; is given; • review the CDIC Standards Assessment and • require management to implement and Reporting Program (SARP) annually and report maintain appropriate internal control thereon to the directors before approval procedures. Review, evaluate and approve those is given; procedures; • review the terms of the external auditors’ • review such investments and transactions of the engagement, their level of compensation, Bank, that could adversely affect its well-being, the audit plan, any proposed changes in as are brought to the committee’s attention by accounting policies, their presentation and the auditors, or an officer of the Bank or other input concerning significant risks and key estimates and judgements of management; and • meet regularly with the internal and external auditors without management present. committee of the Board; • review the annual statement and any specified return or other transactions with the Bank’s auditors, ensuring any items of concern are duly considered; • annually review the mandate of the internal audit department. Discuss the adequacy/ effectiveness of the internal control procedures with the Vice President and Chief Inspector and review any significant findings with senior management; Conduct Review Committee This committee is comprised of four outside • review the conduct policy on an annual basis to Conduct Review directors and its mandate is summarized as follows: ensure relevance and completeness in regard to Committee Charles R. Allard • establish procedures to ensure disclosure of legislative requirements; transactions with specified related parties of • monitor procedures for conflicts of interest, Albrecht W.A. Bellstedt, the Bank and, further, to review any such confidential information, disclosure of Chair Allan W. Jackson Arnold J. Shell transactions to ensure compliance with the Act, information and handling of customer either approving or declining the transactions, complaints, and be satisfied that the procedures as required; are being adhered to; • review and approve internal policies for credit • ensure every employee, officer and Board arrangements and financial services available to member agrees to comply, in writing, with employees of the Bank under the regulations annual acknowledgement, with the Bank’s concerning officers and associated parties; conduct policy; and • monitor aggregate transactions of the Bank • after each meeting provide a report to the with directors as well as officers and their directors on all transactions and other matters interests to ensure continued compliance with reviewed by the committee. the Act with excesses brought to the Board for consideration; 66 Corporate Governance & Human Resources Committee This committee is comprised of five outside • establish, amend and, where appropriate, directors and its mandate is summarized as follows: terminate: • recommend to the Board appropriate structure - programs and other personal benefits granted and process required to address governance to executive employees; issues and maintain compliance with all - incentive compensation plans and other bonus corporate governance guidelines; arrangements, to administer such plans and • review and monitor compliance with corporate to make appropriate interpretations and governance guidelines and follow any issues determinations as required; noted by the members or as reported to them - share incentive plans and similar Corporate Governance & Human Resources by management or other directors from time arrangements involving the grant of share Committee to time; options, or other benefits to employees Albrecht W.A. Bellstedt, • no less than annually, report to the Board on attendant upon the issuance of securities, and, Chair corporate governance issues and any instances in addition, to make grants of options under Jack C. Donald of non-compliance, together with appropriate any share incentive plan and generally to Allan W. Jackson recommendations; administer such plans, subject to necessary Robert A. Manning • hire appropriate consultants, or request regulatory and shareholder approval; and Howard E. Pechet management to perform studies and to furnish other information as required; to review such - annuity, pension, and retirement programs for executive employees; information and take such actions based • review the human resource succession plan as thereon as appropriate; prepared by senior management for all officers • review and recommend to the Board the and any other senior position considered critical employment and appointment of the top five to operations; executive employees, to establish their grade • seek and recommend individuals to be levels and compensation, as well as to considered for Board membership, as required determine promotions and to make changes by the Board, and forward their in the level of compensation and grade of recommendations with written rationale, incumbent executive employees and officers; compared against published terms of reference, • review the position descriptions for the top to the Board for their consideration; five executive employees, ensuring they rema • review, monitor, and make recommendations in current and accurate and, further, to also regarding new director orientation and the ensure position descriptions are in place for ongoing development of existing Board all other executive officers; members; • establish an executive compensation structure • evaluate, at least bi-annually, Board to compensate all levels of executive employees membership (including composition and size) and, within such compensation structure as may and the involvement/performance of the at that time be in effect, to make adjustments membership with concerns recorded, and and annual revisions as necessary; brought to the attention of the committee • ensure an annual performance appraisal is chair, who, in conjunction with the committee, completed for the President and CEO and that determines if further action is required; it is reviewed with him by the Chairman of the • review and recommend to the Board the fees Board; and other benefits to be paid to directors; and • make recommendations to the Board regarding revisions or additions to the Board of Directors Manual. 67 Loans Committee Other Areas of Consideration This committee is comprised of eight directors, The Bank has not adopted a formalized process of six of whom are unrelated. The President and CEO orientation for new Board members although all and an Executive Vice President, who are affiliated, directors are provided with a Directors’ Manual, inside directors, are also members. Its mandate is outlining key governance information and summarized as follows: reference material. It is worthy of note that seven • establish and approve a lending limit for the of the ten outside directors have served on the Bank and the President and CEO within the Board for eleven years or more. There is also limits established by the Board and review such a Board and member review and assessment limits at least annually; program whereby every second year, directors • review, approve and/or decline all credit complete a formal assessment of the operations applications for amounts in excess of delegated and effectiveness of the Board and its committees. limits up to the limit established, not to exceed Every second year, directors may complete a formal ten percent of regulatory capital; assessment on individual directors’ effectiveness. • recommend for approval of the full Board, In the current year a formal assessment of the any loan proposals in excess of the Bank’s limit; operations and effectiveness of the Board and its • recommend for approval of the full Board loan committees was undertaken and the results are 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 management’s recommendations for loan loss provisions and loan write-offs and recommend acceptance to the Audit Committee for their presentation to the Board; and • provide direction with respect to the identification criteria, procedure and action currently being compiled. 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 prior to each board meeting which includes the agenda, minutes of previous meetings and supporting documentation for specific agenda items. The Board has also put in place a policy providing for individual directors to engage outside advisors if the circumstances are warranted. required on loans reported by management The Bank is also committed to ensuring quality and to be less than satisfactory. timely information is available to all shareholders. Loans Committee Charles R. Allard Douglas R. Dalgetty Jack C. Donald Allan W. Jackson, Chair Gerald A.B. McGavin Howard E. Pechet Larry M. Pollock Arnold J. Shell (Robert A. Manning, alternate) 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. The Bank has engaged an independent Ombudsman to receive complaints from banking clients who are unable to obtain satisfaction from the internal complaint handling process. Conclusion The Bank’s corporate governance approach is in compliance with the TSE guidelines. It will continue to develop over time with the Corporate Governance & Human Resources Committee playing a key role in monitoring, developing and recommending to the Board on governance issues as warranted. 68 TREASURY & OPERATIONS Ricki L. Moffat Senior Assistant Vice President, Treasury and Agent Administration MARKETING & PRODUCT DEVELOPMENT R. Graham J. Gilbert Vice President COMMERCIAL BANKING NORTHERN ALBERTA REGION Jack C. Wright Vice President and Regional Manager Executive Officers C H A I R M A N Jack C. Donald OFFICE OF THE CHIEF EXECUTIVE OFFICER Larry M. Pollock President and Chief Executive Officer Douglas R. Dalgetty Executive Vice President Allister J. McPherson Executive Vice President CREDIT RISK MANAGEMENT Donald C. Kemp Vice President Chris H. Fowler Senior Assistant Vice President Wally N. Streit Senior Assistant Vice President Dennis M. Crough Assistant Vice President A. Wayne MacInnes Assistant Vice President Ken W. Stewart Assistant Vice President Michael Vos Senior Assistant Vice President, Systems M. Wayne Bond Assistant Vice President, Corporate Administration Roger J. Pogue Assistant Vice President, Operations FINANCE Tracey C. Ball, C.A. Senior Vice President and Chief Financial Officer Diane M. Davies, C.A. Senior Assistant Vice President and Chief Accountant Carolyn J. Graham, C.A. Assistant Vice President HUMAN RESOURCES Uve Knaak Senior Assistant Vice President CORPORATE & STRATEGIC OPERATIONS William J. Addington Senior Vice President INTERNAL AUDIT David R. Gillespie Vice President and Chief Inspector William A. Book Vice President Main Branch, Edmonton Ron S. Baker Assistant Vice President West Point, Edmonton David M. Castell Assistant Vice President Main Branch, Edmonton Wayne C. Dosman Assistant Vice President, Personal Banking Main Branch, 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 COMMERCIAL BANKING PRAIRIE REGION S. Wayne Bamford Vice President and Regional Manager Michael N. Halliwell Senior Assistant Vice President Main Branch, Calgary Gus W. Itzek Senior Assistant Vice President, Energy Lending Main Branch, Calgary Robert H. Bean Assistant Vice President Winnipeg Richard Brodeur Assistant Vice President Calgary Northeast Doug A. Finnie Assistant Vice President Saskatoon Ken R. MacDonald Assistant Vice President Regina Donald J. Odell Assistant Vice President Red Deer Dean F. Rhoden Erwin Granson Assistant Vice President, Asset Management Ed E. Rudzitis Assistant Vice President, Corporate Lending Lars K. Christensen Assistant Vice President Assistant Vice President Saskatoon Al Steingart Assistant Vice President Chinook Station, Calgary 69 Executive Officers continued COMMERCIAL BANKING BRITISH COLUMBIA REGION REAL ESTATE LENDING VANCOUVER INDUSTRIAL LENDING AND LEASING CANADIAN WESTERN TRUST COMPANY – VANCOUVER Rod W. Sorbo Vice President and Regional Manager Serge Biln Senior Assistant Vice President Park Place, Vancouver Robert G.P. Berzins Assistant Vice President Granville & 13th, Vancouver Raymond L. Young Vice President Donald C. Watson Vice President Adrian M. Baker Vice President and General Manager Robert E. Wigmore James O. Burke Senior Assistant Vice President Assistant Vice President Mario V. Furlan W. Bruce Gibbard Assistant Vice President and District Manager Assistant Vice President, Foothills Branch, Calgary Real Estate Lending Jack B. Harms Assistant Vice President Assistant Vice President, Assistant Vice President Guildford, Surrey Real Estate Lending Dean G. Cudmore Patrick F. Rennison Russ M. Burke Assistant Vice President Nanaimo Ian G. Graham Assistant Vice President Kelowna Gerald W. Laliberte Assistant Vice President Victoria Craig Martin Assistant Vice President Langley James S. Kitchin Assistant Vice President Kelowna Industrial Centre OMBUDSMAN W. Paul Lefaivre Keith C. MacLellan Assistant Vice President Grande Prairie David B. Subject Assistant Vice President Nanaimo John Van Boeyen Assistant Vice President Langley 70 Board of Directors CANADIAN WESTERN BANK & TRUST Charles R. Allard 2,3 President Rosedale Meadows Development Inc. Edmonton, Alberta Albrecht W. A. Bellstedt, Q.C. 3,4 Executive Vice President, Law and General Counsel TransCanada Pipelines Calgary, Alberta Douglas R. Dalgetty 2 Executive Vice President Canadian Western Bank Vancouver, British Columbia Jack C. Donald 2,4 President Parkland Industries Ltd. Red Deer, Alberta Jordan L. Golding 1 Corporate Director and Consultant Retired Partner KPMG Boston, Massachusetts, USA Larry M. Pollock 2 President and Chief Executive Officer DIRECTORS EMERITUS John Goldberg Arthur G. Hiller Canadian Western Bank Peter M.S. Longcroft Edmonton, Alberta Dr. Maurice W. Nicholson Alan M. Rowe, C.A. 1 Alma M. McConnell Eugene I. Pechet Allan W. Jackson 2,3,4 Senior Vice President, Dr. Maurice M. Pechet President ARCI Ltd. Chief Financial Officer and Fred Sparrow Corporate Secretary Calgary, Alberta Crown Life Insurance Company Canadian Western Bank would Regina, Saskatchewan like to thank Douglas R. Dalgetty Robert A. Manning 1,2,4 President Arnold J. Shell 2,3 Cathton Holdings Ltd. President for his years of dedicated service. Mr. Dalgetty will be retiring in March 2001 after fifteen years Edmonton, Alberta Arnold J. Shell Consulting Inc. as Executive Vice President Gerald A.B. McGavin, F.C.A., C.M. 1,2 President McGavin Properties Ltd. Vancouver, British Columbia Calgary, Alberta 1 2 3 4 Audit Committee Member Loans Committee Member Conduct Review Committee Member Corporate Governance & Human Resources Committee Member and eight years on the Board of Directors. Howard E. Pechet 2,4 President Mayfield Consulting Inc. La Jolla, California, USA Shareholder Information HEAD OFFICE Suite 2300, STOCK EXCHANGE LISTING CORPORATE SECRETARY ANNUAL MEETING Canadian Western Bank Place Share Symbol: CWB Rosedale Meadows 10303 Jasper Avenue Convertible Debenture Symbol: Development Inc. The Toronto Stock Exchange Charles R. Allard The annual meeting of the common shareholders of Canadian Western Bank Edmonton, Alberta T5J 3X6 CWB.DB.A Edmonton, Alberta will be held on March 8, 2001 Telephone: (780) 423-8888 Fax: (780) 423-8897 Website: www.cwbank.com TRANSFER AGENT AND REGISTRAR MAILING ADDRESS SUBSIDIARY HEAD OFFICE Computershare Investor Services 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 (formerly Montreal Trust Company of Canada) Suite 970, Canadian Western Bank Place 10303 Jasper Avenue Edmonton, Alberta T5J 3N6 Telephone: (780) 448-7598 Fax: (780) 426-4032 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. at The Westin (Manitoba Room), 10135 - 100th Street, Edmonton, Alberta at 2:00 p.m. (MST). INVESTOR RELATIONS For further financial information call Jon W. Kieran at Hume, Kieran Inc. (416) 868-1079, or fax (416) 868-6198, or visit our website at www.cwbank.com/investor_info. 71 Banking Offices Alberta EDMONTON Edmonton Main Branch 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 Telephone: (780) 424-4846 Branch Manager – Bill Book 103rd Street Branch Canadian Western Bank Place 10303 Jasper Avenue Edmonton, Alberta T5J 3N6 Telephone: (780) 423-8801 Branch Manager – Jake Muntain Southside Branch 7933 - 104 Street Edmonton, Alberta T6E 4C9 Telephone: (780) 433-4286 Branch Manager – Heinz Kleist West Point Branch 17603 - 100 Avenue Edmonton, Alberta T5S 2M1 Telephone: (780) 484-7407 Branch Manager – Ron Baker RSP Administration/ Agent Processing Centre Suite 2200, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Telephone: (780) 423-8888 Branch Manager – Lina Langford CALGARY Calgary Main Branch 606 - 4th Street S.W. Calgary, Alberta T2P 1T1 Telephone: (403) 262-8700 Branch Manager – Michael Halliwell Calgary Northeast Branch 2810 - 32nd Avenue N.E. Calgary, Alberta T1Y 5J4 Telephone: (403) 250-8838 Branch Manager – Richard Brodeur Chinook Station 6606 Macleod Trail S.W. Calgary, Alberta T2H 0K6 Telephone: (403) 252-2299 Branch Manager – Al Steingart Foothills Branch 6127 Barlow Trail S.E. Calgary, Alberta T2C 4W8 Telephone: (403) 269-9882 Branch Manager – Rick Ferris CAMROSE 4895 - 50th Street Camrose, Alberta T4V 1P6 Telephone: (780) 672-7769 Branch Manager – Kevin MacMillen RED DEER 5013 - 49 Avenue Red Deer, Alberta T4N 3X1 Telephone: (403) 341- 4000 Branch Manager – Don Odell LETHBRIDGE 744 - 4th Avenue South Lethbridge, Alberta T1J 0N8 Telephone: (403) 328-9199 Branch Manager – Donald Grummett GRANDE PRAIRIE INDUSTRIAL LENDING CENTRE 5th Floor, 214 Place 9909 - 102 Street Grande Prairie, Alberta T8V 2V4 Telephone: (780) 831-1888 Branch Manager – Keith MacLellan British Columbia VANCOUVER Regional Office 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 669-0081 Granville & 13th Branch 2899 Granville Street Vancouver, B.C. V6H 3J4 Telephone: (604) 730-8818 Branch Manager – Rob Berzins Park Place Branch 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 688-8711 Branch Manager – Serge Biln RSP Administration/ Agent Processing Centre 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 443-5175 Toll free: 1-800-663-1000 Branch Manager – Huguette Holmes COURTENAY 470 Puntledge Road Courtenay, B.C. V9N 3R1 Telephone: (250) 334-8888 Branch Manager – Alan Dafoe KELOWNA Kelowna 1674 Bertram Street Kelowna, B.C. V1Y 9G4 Telephone: (250) 862-8008 Branch Manager – Ian Graham Kelowna Industrial Centre (Opening February 2001) #101 - 1505 Harvey Avenue Kelowna, B.C. V1Y 6G1 Telephone: (250) 860-0088 Branch Manager – James Kitchin LANGLEY 19915 - 64th Avenue Langley, B.C. V2Y 1G9 Telephone: (604) 539-5088 Branch Manager – Craig Martin Saskatchewan REGINA 1881 Scarth Street Mccallum Hill Centre II Regina, Saskatchewan S4P 4K9 Telephone: (306) 757-8888 Branch Manager – Ken Macdonald SASKATOON 244 - 2nd Avenue S. Saskatoon, Saskatchewan S7K 1K9 Telephone: (306) 477-8888 Acting Branch Manager – Doug Finnie YORKTON #45, 277 Broadway Street E. Yorkton, Saskatchewan S3N 3G7 Telephone: (306) 782-1002 Branch Manager – Barb Apps Manitoba NANAIMO 6475 Metral Drive Nanaimo, B.C. V9T 2L9 Telephone: (250) 390-0088 Branch Manager – Russ Burke WINNIPEG 234 Portage Avenue Winnipeg, Manitoba R3C 0B1 Telephone: (204) 956-4669 Branch Manager – Robert Bean Canadian Western Trust HEAD OFFICE 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 669-0081 ALBERTA 2810 - 32nd Avenue N.E. Calgary, Alberta T1Y 5J4 Telephone: (403) 250-8838 VICTORIA 1201 Douglas Street Victoria, B.C. V8W 2E6 Telephone: (250) 383-1206 Branch Manager – Gerry Laliberte SURREY Guildford Industrial Lending Centre 401, 15127 - 100 Avenue Surrey, B.C. V3R 0N9 Telephone: (604) 583-7500 Branch Manager – Dean Cudmore Strawberry Hill Branch (Opening March 2001) 7538 - 120 Street Surrey, B.C. V3W 3N1 Telephone: (604) 591-1898 Branch Manager – Bob Bonenfant 72 Designed and produced by Vision Design Communications. www.visiondc.com Photography by Tina Chang Printed in Canada. Canadian Western Bank Place Suite 2300, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 

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