Canadian Western Bank
Annual Report 2001

Plain-text annual report

C a n a d i a n W e s t e r n B a n k A n n u a l R e p o r t 2 0 0 1 b a n k i n g o n p e o p l e “ Try squeezing even a bit of loyalty or compassion out of a computer. See how much dedication, good will or good cheer you can extract banking [on people] from a faceless organization. Or, try asking a standard loan application to generate ideas or build relationships… Sound impossible? We think it is. So instead, we bank on people… a typical western sentiment… Sure, we have our fair share of computers and forms, but we never ask them to do the thinking, or the talking… We don’t like to undermine the brilliance of our employees or customers. So we let them speak for themselves… ” Canadian Western Bank Place Suite 2300, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Canadian Western Bank Annual Report 2001 [ great progress] “ For Canadian Western Bank and its people, 2001 was a very good year. We stuck to the program: well-managed, controlled growth, and, for the ninth consecutive year, posted record profits. This is what happens when excellence becomes your corporate philosophy. ” table of contents five year financial summary highlights for 2001 performance targets western people western bank message to shareholders management’s analysis of operations and financial condition financial statements notes to consolidated financial statements corporate governance executive officers board of directors and shareholder information branch offices 1 2 3 5 16 28 31 51 57 70 75 77 78 Designed and produced by Vision Design Communications. www.visiondc.com Photography by Bluefish Studios Printed by Speedfast Color Press Inc. Printed in Canada. 1 1 0 0 2 b w c FIVE YEAR FINANCIAL SUMMARY (see note below) ($ thousands, except per share amounts) Results of Operations Total interest income Net interest income Provision for credit losses Other income Net income before taxes Net income from continuing operations Net income from operations(1) Net income Return on common shareholders’ equity(1) Return on common shareholders’ equity Return on average total assets(1) Return on average total assets Per Common Share Average common shares outstanding (thousands) Basic earnings per share Net income from continuing operations Net income from operations(1) Net income Fully diluted earnings per share Net income from continuing operations Net income from operations(1) Net income Dividends(2) 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(3) Net impaired loans as a percentage of total loans Efficiency ratio(4) Number of full time equivalent staff Number of branches 2001 2000 1999 1998 1997 $ 233,893 $ 210,282 $ 177,013 $ 157,966 $ 131,917 85,501 6,096 19,758 46,582 30,145 31,395 30,145 13.95 % 13.48 % 0.97 % 0.93 % 73,367 5,100 15,255 35,435 29,394 26,949 26,349 14.98 % 14.68 % 0.95 % 0.93 % 61,729 3,750 13,017 26,270 22,754 19,853 19,853 12.82 % 12.82 % 0.81 % 0.81 % 55,751 4,150 12,165 22,574 20,616 19,012 19,012 13.97 % 13.97 % 0.87 % 0.87 % 45,414 4,000 11,520 16,253 15,837 15,837 15,837 13.12 % 13.12 % 0.85 % 0.85 % 12,001 11,134 10,153 9,421 9,322 $ $ $ $ 2.51 2.62 2.51 2.31 2.40 2.31 0.36 20.08 30.50 22.30 26.27 $ $ 2.65 2.42 2.37 2.44 2.26 2.21 0.34 17.35 24.00 16.25 23.00 2.24 1.96 1.96 2.00 1.79 1.79 0.48 15.68 24.25 17.30 17.60 $ $ $ $ 2.19 2.02 2.02 1.89 1.77 1.77 0.30 15.39 27.00 14.75 17.15 1.70 1.70 1.70 1.55 1.55 1.55 0.25 13.70 22.10 12.20 20.25 $ 3,439,568 $ 3,059,540 $2,707,595 $ 2,409,632 $ 2,050,152 501,228 2,882,636 3,042,307 67,126 252,262 873,538 446,351 2,560,092 2,727,809 67,126 194,595 741,181 375,182 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 9.3 % 12.5 % 2.69 % 0.3 % 50.0 % 548 27 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 NOTE: Prior year balances have been restated to reflect the retroactive implementation of the new accounting policy on income taxes. (1) Excludes non-cash tax expense of $1,250 recorded in 2001 and $600 recorded in 2000 to reflect the write-down of future income tax assets due to income tax rate reductions. Management evaluates the Bank’s performance on this basis (i.e. excluding unusual items) as well as on a reported basis (i.e. as reported in our financial statements). Management views unusual items as transactions that are not part of core business operations or which are unusual in nature. Net income on a reported basis is presented on the income statement on page 54. (2) 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 unusually 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. (3) Net interest income divided by average assets. (4) Non-interest expenses expressed as a percentage of net interest income and other income. 2 1 0 0 2 b w c [ highlights for 2001] financial > > > achieved a 31% increase in net income before taxes over last year. This double digit earnings growth largely offset the impact of an increase in the effective income tax rate in fiscal 2001 to 33% from 15% last year achieved record net income of $30.1 million for our 9th consecutive year of record profits, and an increase of more than 14% over last year significantly improved our efficiency ratio (expenses to revenues) which at 50.0% is the best in the Canadian banking industry > maintained low credit losses (based on annual charges to income statement) at 0.23% of average assets with a five year average of 0.22% > total revenues (net interest income and other income) increased 19% over last year operating > rolled out our “Think Western” brand early in the year and it has been enthusiastically embraced by customers and staff.The accompanying in-house specialty service training has further enhanced the success of the brand awareness > acquired from Laurentian Bank most of the assets ($48 million) and deposit liabilities ($36 million) of the branches in Kelowna, British Columbia and Regina, Saskatchewan in October. The staff from both branches also joined our Canadian Western Bank team > acquired a loan portfolio totalling approximately $48 million from Westcoast Capital in August. This portfolio includes term loans and leases to energy-related and general commercial borrowers based primarily in western Canada > opened our 5th branch in Vancouver’s Lower Mainland (Strawberry Hill Branch in Surrey), a 2nd branch in Kelowna (Kelowna Industrial Centre) and announced the opening > > > closed a successful equity financing April 3, 2001 and issued 1.1 million common shares, at a price of $26.75 per share, for proceeds of $29.4 million increased assets under administration 18% to $874 million share price reached $30.50 during the year and closed up 14% from prior year end > benefited from the elimination of capital taxes in Alberta during 2001 > will benefit from future corporate tax rate reductions announced federally and in Alberta and British Columbia of our 5th branch in Edmonton (South Edmonton Common – opened November 2001) > relocated the Guildford Industrial Centre to a new, highly visible full service location in Coquitlam, British Columbia and renovated and expanded our Victoria, British Columbia branch > announced an alliance between Canadian Western Trust and Qtrade Investor, a Vancouver-based company, which provides access to on-line brokerage service for independent financial advisors and their clients who use our services > enhanced our PC banking product with an internet delivery platform and expanded it to serve personal banking customers > extended sale of mutual funds to Saskatchewan branches [ performance targets] 3 1 0 0 2 b w c 2001 target $101.9 million 2001 target $29.0 million 2001 target 0.90 % total revenues (net interest income and other income) 2001 Total revenues were $105.3 million, an increase of 19% year over year which surpassed our target of 15% growth. Excluding gains on securities sales, total revenues increased 16%. 2002 Our target for 2002 is for total revenue growth of 12%, excluding the impact of gains on securities sales. net income 2001 Net income, excluding the impact of enacted tax rate reductions on future income tax assets, increased over 16% from fiscal 2000. Reported net income at $30.1 million increased 14% over fiscal 2000 exceeding our target of 10%. Net income before income taxes increased 31% over fiscal 2000. 2002 Our target for fiscal 2002 is to grow net income by 5% which reflects that the Bank will be fully taxable for the entire year in 2002. Net income before income taxes is targeted to grow by 12% over fiscal 2001. return on assets 2001 ROA at 0.93% (0.97% excluding unusual, non-cash tax expense) exceeded our target of maintaining an ROA above 0.90%. 2002 Our target is to maintain an ROA above 0.90%. ($ thousands) 120,000 100,000 80,000 60,000 40,000 20,000 0 ($ thousands) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 (%) 1.20 1.00 0.80 0.60 0.40 0.20 0.00 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 4 1 0 0 2 b w c efficiency ratio (expenses to revenues) 2001 The efficiency ratio was 50.0%, which easily beat our target of being below 55.0% and is significantly better than the Canadian banking industry average of 61.9%. 2002 Our targeted efficiency ratio is 50.0% or less for fiscal 2002. total loans 2001 Total loans increased to $2,883 million or 12.6% year over year which was just shy of our target of 14%. Total assets grew 12.4% 2002 Our target is for total loan growth of 14% and total asset growth of 12%. credit risk 2001 The provision for credit losses as a percentage of average loans was 0.23%, achieving our goal of being below 0.25%. 2002 Our target is to keep this ratio at 0.25% or lower. 5 1 0 0 2 b w c [ thinking western] People in the west have their own ideas. They march to their own tune. They live life on their own terms. And we encourage them. It’s great for business. CWB is a bank that understands that there is more to wealth than money. The western ways and ideas that are at the root of our business put us at the forefront of our industry. We offer a taste of our inspiration in the following western viewpoints… banking thinking western. [on western value] 6 6 1 1 0 0 0 0 2 2 b b w w c c western community. 7 1 0 0 2 b w c “ Because of its proximity to the east, it is sometimes a challenge to think of Winnipeg as western… Well, until I take a late summer drive with my daughter Sarah down any Manitoba highway. We plan our camping trips as the highway cuts a thin line through perfectly flat and seemingly endless fields of feathery wheat and fiery yellow canola. And I know I’m in the west when I stand at Portage and Main. They say it’s the windiest spot in Winnipeg. I believe it. I work about half a block down on Main Street. It might be the windiest place in the world. But there’s more than wind and wheat in the west. The people here share an attitude with people right out to the west coast. Of course we care about getting the job done, but we also care about the people around us… I’m living proof. Sarah is my life’s greatest passion, our family is close-knit, and we spend a lot of time together in our community… Sarah and I do Brownies and soccer. We love camping… the zoo and The Forks (Winnipeg’s outdoor market and park). western spirit. There are so many favourite places and faces on our list… Our circle gets wider, but it stays tight. My entire family would be here in a heartbeat if I needed help. The feeling is mutual. I’d do anything for them. Couldn’t imagine it any other way. You can accomplish a lot when you have that kind of support. ” > HEATHER JAMES Soccer mom, prairie girl, community volunteer Manager, Personal Banking Winnipeg Branch, Winnipeg 3 years with Canadian Western Bank 8 1 0 0 2 b w c “ Business is people. Never was that made clearer to me than on September 11th. On September 8th, before my guys flew home from New York, they posed for a photo with a great group of NYC firefighters and a fire truck outfitted with our suspension system. Three days later, those men and that truck were among the first on the scene and all we have to remember them by is that photo. It hit us all pretty hard, I realized that the people I work with, who were already like friends, have become that much closer. We’ve been through a lot together… at the heart Our flagship product, the Air Link Suspension, should have rocketed us to success. But, finding the right market and getting into it was difficult. The big rig builders like Mack and Peterbilt wouldn’t take the chance. But we didn’t give up… With a viable product and people who never quit,niche marketing will help you pinpoint your target. So, we narrowed our focus and went places we never thought possible. You’ll find Air Link on military trucks in Kazakhstan and rigs hauling Disney equipment in Florida. Eventually current Air Link users will tire of buying big rigs and retrofitting them with Air Link and I am looking ahead to that day. We all are. Victory will be complete if we’re still the same team when we reach that day, when Mack comes calling, inquiring about Air Link.Did I mention that we hold the patent? ” > RAY ENGLISH Local man on global mission Chief Executive Officer Raydan Manufacturing, Edmonton 3 years banking at Canadian Western Bank 9 1 0 0 2 b w c of business. 10 1 0 0 2 b w c feasting 11 1 0 0 2 b w c “ I started cooking during university in a frathouse with six Aggies. Because I was the cook, I got to eat whatever I wanted. These days, the dinner party is very much a part of my natural habitat…invariably involving delicious conversation, copious amounts of wine and the chance to sample world-class fare. on life. Vancouver is all about food. You won’t find better cuisine or restaurants with higher value anywhere. Sometimes Lynda, my wife, and I will be at Vij’s or Hermitage and we’ll get inspired by a beautiful chutney or a simple sauce… I taste ancho chilies, Lynda is sure there’s cumin and we go home and try to recreate it. I love to experiment. But if I take a chance on a new dish at a dinner party, I need to minimize the risk. I depend on past experience and nail down every possible variable with careful planning and shopping, and taking all the time in the kitchen that I need. The most important ingredient? The right guests. Dinner companions with blunted palates can’t really appreciate your true genius. Food is literally the stuff of life. And we all want the most out of life. So, I make sure I sample a lot and cook as much as I can. The secret with both, is in learning how to do it. If you know how to cook, you always get to eat what you want. If you know how to live, there’s a good chance you’ll get what you want out of life. ” > BOB WIGMORE Seasoned gourmet with adventurous palate Senior Assistant Vice President, Real Estate Lending Regional Office, Vancouver 7.5 years with Canadian Western Bank 12 1 0 0 2 b w c “ Until recently I really struggled for balance. But I’ve reached a new phase…My daughters, Doleen and Karishma, have grown into independent young women. I’m a newlywed again and I’m working in a job I love with people who are like family. You hear that all the time. But, with 10 brothers and sisters, I know exactly what family feels like. I guess the reason we all get along so well is mutual respect which is, in itself, an entirely balanced notion. sowing seeds In Vancouver I see another kind of balance… among ideas, values, traditions… There is a place for everyone and you can speak your mind in your own language… whatever it is. It’s not like we don’t notice the differences, it’s just that we’re not afraid or angry about them. It’s about as close as you can come to true harmony. It strengthens my soul. The only other element I need for good balance is a creative way to express myself… So, I have my sewing… And, now that I think about it, I guess the garments that I design and sew have similar qualities to the people I sew for... I like warm colours, feminine shapes, simple lines and rich textures. And I couldn’t think of a more fitting way to spend a Saturday than at my kitchen table with my daughters fussing over the cut of a new dress. Maybe it’s not the most adventurous pastime, but it’s pretty balanced and at this stage, that’s exactly what makes me happy. ” > ANEETA GOUNDAR Newlywed with great balance Sales & Service Representative III Strawberry Hill Branch, Surrey 4.5 years with Canadian Western Bank of respect. 14 1 0 0 2 b w c small league. 15 1 0 0 2 b w c “ “It’s amazing what can be accomplished when no one cares who gets the credit.” Clare Drake, renowned coach of the University of Alberta Golden Bears hockey team, said that years ago and I have watched it come true again and again. The sense of team commitment I developed in all those years of junior and university hockey has served me well in school, at work and at home. Part of it was that we all played for free… for the love of the game… No haggling over salaries or picking loyalties by bank balance. You played for your school… your team. big game. In the NHL they play more than 80 games a year. With the Golden Bears, we played 28…not much room for error. Lose two or three in a row and you’re done. Competition is so stiff … makes for great hockey… better than the major leagues if you ask me. Sometimes there are advantages to being small. I’m not one to dwell in the past. I’m 31 now. That kind of hockey is a distant memory. These days I’m just as likely to lace up skates on my kids as put them on myself. And I like it that way. Family is my priority now… but that sense of commitment stays constant… I need it to reach my goals… to grow and to help my family grow. Hockey was a great beginning, but just a beginning. I grew up working in my Dad’s tire store. I watched it grow and prosper alongside our family. I know the hard work involved in growth and I’m up for it. ” > WARD FLEMING Team player with big goals and many assists Senior Account Manager, Commercial Banking 103rd Street Branch, Edmonton 4 years with Canadian Western Bank 16 1 0 0 2 b w c [ “think western” banking] 17 17 1 1 0 0 0 0 2 2 b b w w c c Now that you’ve heard stories from some of our typical western thinkers, read ahead for the story of their bank – your bank – Canadian Western Bank. It’s no coincidence. You’ll find the same values and the same spirit in our business as you find in our people because it is on the foundation of these rock-solid values and lively spirit that this successful enterprise is built. 18 1 0 0 2 b w c CWB is people – like Heather James (page 7) – and we’re just as interested in who she is as how she the last year, the Edmonton employees alone contributed over $22,000 to the United Way. performs as a manager of personal banking. For Heather, as for most of our 500-plus employees, it is important to support the community that supports them. So, we let their compassionate actions influence many of our community investment Other significant donations during the year included individual branch efforts for the Cancer Society, the Christmas Bureau and dozens of other local and national causes. Also this year, CWB became a lead sponsor of the Alberta Foundation for Diabetes Research for decisions. When staff are involved in a charitable project, fundraising endeavours, for the next five years. the Bank usually falls in behind with a donation. Every year CWB and its people donate hundreds of hours and thousands of dollars to community projects involving everything from caregiving and giving blood to education and the arts. For example, over CWB also made a substantial five-year financial commitment to NAIT (the Northern Alberta Institute of Technology). Each year, half the money is retained in a scholarship endowment fund and the other half becomes a scholarship for a NAIT Business Student 19 1 0 0 2 b w c caring [with experience & goodwill] who is experiencing both academic success and corporate customers care for their employees through financial need. trust vehicles like share option plans and group RRSPs. We never forget that staff and customers are part of our community too. So we treat them with care and give employees the opportunity to participate in SPICE (Staff Participating in Creating Excellence), a CWB program that allows employees to help chart the destiny Our compassion is not a marketing strategy or an ad campaign; it is a consciously-cultivated and pervasive quality. This bank has always seen its people as assets. Never, ever as liabilities – even during mergers, acquisitions and amalgamations CWB has never of the organization (and in doing so, the ability to affect undertaken a layoff program – or even considered it. their own) by contributing ideas and suggestions about Bank operations and activities. Kindness and respect are still standard equipment these days. And, we will work hard to ensure For customers, we offer products and services that will that these qualities continue to play an essential role in make a difference in their lives. For example, we help our corporate culture. 20 1 0 0 2 b w c targeting [with precision & sensitivity] It’s all in the name: Canadian Western Bank. CWB is the only Schedule I chartered bank with headquarters and principal operations in western Canada. And it makes all the difference. While large eastern-based banks try to be everything to everyone, CWB and our trust arm, Canadian Western Trust (CWT), focus clearly and unapologetically on the west. We are westerners ourselves, so we know how to provide competitive, full-service commercial and consumer banking to western Canadians in a way they appreciate. Virtually the entire CWB loan portfolio is here, in the market segments we know best. Given our size and recent economic conditions, this continues to prove a sound strategy, contributing to record profits in 2001, for the ninth consecutive year. Expanding rapidly outside the west could be viewed as a desire to compete directly with the big six. But that is not our goal, and at this stage of development, it is an unrealistic and unproductive strategy. We have a strong foothold in a previously unsatisfied and rapidly growing market segment: those who want the credibility and dependability of an established financial institution, as well as personal attention from people who respect them. We share a philosophy with Ray English at Raydan Manufacturing (page 8) that says the most logical introduction into large markets is through experience and momentum gained from thoroughly satisfying smaller niche markets. But we do not see our local market as a stepping stone. As a regional bank, we would 21 1 0 0 2 b w c miss our own point if regional service suffered at the CWT (one of few suppliers who provide trust services in expense of expansion in other areas (see Risking, page 22). western Canada) serves a different element of the CWB Usually, the greatest opportunity is in our own back yard. Fully half of all western Canada’s jobs are in small business.* Not surprisingly, over 95% of CWB’s commercial clients are small to medium sized western businesses. In 2001, we worked at exceeding service expectations for some of the most financially active segments of that market, and as a dividend, gained further experience in market, while offering the same individual service. And, as with bank customers, western financial planners come to CWT because of our extensive marketplace knowledge and our accessibility. In the future, we will continue to Think Western, providing an attractive alternative to big banking, and demonstrating that we do things differently… because these sectors: commercial real estate, industrial and energy. it’s good for our employees and customers, which in turn, Our policy is simple – build long term relationships with customers who want to grow with us. Evidence of success is seen in the way CWB and CWT markets frequently overlap. is great for business and provides our shareholders with a sound return on their investment. * From A Portrait of Small Business Growth and Employment in Western Canada, by Edward J. Chambers and Nataliya L. Rylska 22 1 0 0 2 b w c In banking, the biggest single threat is credit losses. continually broadening our lending experience In 2001, CWB experienced losses of 0.23%, bettering our CWB has become a spirited and competent addition target of being under 0.25% and making for one of the lowest loan loss rates in the country. Risk is also an immutable factor in growth, one that must be used judiciously. So, CWB offers loans and other lending facilities in specific markets that offer (and produce) appropriate return at acceptable risk, helping grow both to the commercial lending landscape in western Canada. We generally offer commercial loan facilities in the $250,000 to $20,000,000 range. And, we’ve gained a reputation for clear, straightforward business practices, which bolsters customer confidence as well as our own morale. community and economy. targeting precisely To ensure CWB continues to experience this kind of success, we mitigate risk by: Through niche marketing (see targeting, page 20) CWB has progressively added to its client base, expanding in existing markets and cautiously entering new ones. As a result, we now have business partnerships with over 7,500 business clients. 23 1 0 0 2 b w c risking [with experience & goodwill] using size to advantage Most credit decisions are made by branch people who Because we are a markedly smaller institution, and have been hand picked for their experience with the we are here in the west, we know the value of personal community, as well as their abilities to make good decisions judgement in a business transaction. The vast majority and manage risk over the life of the loan. Senior Assistant of our commercial customers are relatively smaller and Vice President of Real Estate Lending, Bob Wigmore (page often regionally concentrated in western Canada – 11), makes these decisions every day. just as we are. We do not make decisions based strictly on numerical formulas. We never fail to factor in the human aspect of the equation. This is one factor contributing to our productivity ratio, the best in Canada. Our style of operation has enabled us to make one dollar for every 50 cents spent. exploring syndications Each new stage of growth brings new opportunities. Since 1999, we have been invited to join in shared corporate lending opportunities with larger financial institutions. We participate well within our comfort zone, enabling us to hone our expertise and grow this area. 24 1 0 0 2 b w c connecting [with clients & business partners] If the bank is people, then it follows that relationships where conducting business is a pleasure. And it works. are its most important currency. That is why we put so much emphasis on face-to-face banking and developing mutually-beneficial relationships among staff and with customers. Our primary target is ‘saver-investors’… people with accumulated capital who seek to maximize growth safely. And we know most of them by name. Neither computers nor mathematical formulas (used to decide if a person is To accomplish this, we rely on the CWB service philosophy, entitled to a service) can even come close to doing that. which is at the root of the organization. It allows for a culture that both accounts for and embraces the personal variations of staff and clients. Basically, we encourage people to connect, to get to know each other on a personal level… to find comfort and common ground To ensure this will always be the case, we make a point of finding the right person for the right job so they can be in it long enough to build meaningful relationships with clients and colleagues. Aneeta Goundar (page 12), Sales & Service Representative III at Strawberry 25 1 0 0 2 b w c Hill in Surrey, is a great example. After four and a half years, So, we don’t make people stand in line and they have the positive and dynamic atmosphere of her workplace continues to inspire her to do her best work and make genuine connections. We deliberately choose employees with a strong sense of community commitment like Aneeta because good connections are easier to make when you’re a part of the community (see Caring, page 18). And, we encourage staff to engage their diverse and colourful personalities, as well as their skills, abilities and commitment when doing their jobs. the choice of counter or sit-down service. We offer a basic, but well-rounded service for retail customers – simple account packages and sound investment options. And, we are well known for providing some of the best deposit rates in the industry. In addition, our smaller size allows us to make quick and flexible decisions, so any concerns are promptly resolved. And, we get creative when required… We’ve even been known to make house calls. 26 1 0 0 2 b w c growing [profits & perspective] It’s a relatively unique position: Big Company (almost $3.5 billion in assets) and yet, a Small Bank (in Canada). And, with the application of uniquely western thinking, CWB has made this position as enviable as it is unique. The goal from the beginning has been to sustain balanced, responsible growth. While most major banks go increasingly global, we stay focused on the markets in which we have the most experience and greatest confidence, expanding cautiously, but deliberately, in areas of clear opportunity for a healthy regional bank. Our strong capital base gives us flexibility to choose how big and how fast to grow. So far, the success of this strategy has been excellent. Fiscal 2001 was the ninth consecutive year of record profits for CWB. Today, CWB could be seen as a young Wayne Gretzky, or an early Ward Fleming (page 15) with a successful 27 1 0 0 2 b w c and well-managed future ahead. There will be many more goals and more milestones. Currently, we have the core services and capabilities our customers need but we will continue to provide a broader range as our goals evolve and our customers’ needs expand. refining our processes and using the competency we have developed for seamless integration of assets. By 2004, we plan to grow assets to more than $5 billion – through organic growth (of about 13 to 15% annually), as well as opportune acquisitions In 2001, we brought Internet Banking (CWB Direct) on (as targets are located). stream. Canadian Western Trust will continue to reach into new markets and broaden its product offerings. And, we will build on our reputation as ‘acquirer of choice’, further Clear goals. Logical strategies. Healthy growth… not rocket science, we simply call it... thinking western. 28 28 1 1 0 0 0 0 2 2 b b w w c c [ message to shareholders] Your Bank has just completed its ninth consecutive year of record earnings (54 consecutive quarters of profitability) and has surpassed almost all of its performance targets for 2001. Canadian Western Bank generated net income for the year ended October 31, 2001 of $30.1 million compared to $26.3 million last year, an increase of over 14% which exceeded our target of 10% earnings growth. Fully diluted earnings per share were $2.31 compared to $2.21 in 2000. Excluding unusual items (i.e. the tax expense related to write-down of future tax assets due to future tax rate reductions), net income was $31.4 million for 2001 compared to $26.9 million in 2000 with fully diluted earnings per share of $2.40 and $2.26 respectively. Net income before the provision for income taxes increased 31% over 2000. This double digit growth in earnings largely offset the significant increase in the effective income tax rate to approximately 33% in fiscal 2001 from 15% last year. The remaining unclaimed tax deductions were fully utilized during fiscal 2001 and the Bank is now fully taxable. A highlight of the year was our successful equity financing in April. We issued 1.1 million common shares for gross cash proceeds of $29.4 million which provided capital for growth as well as greater flexibility to respond to new strategic opportunities. This addition to capital also boosted our Tier 1 and total capital ratios which remained strong at year end at 9.3% and 12.5% respectively. In addition to strong internal growth we completed two portfolio acquisitions during the year which were both consistent with our growth strategy and complemented the Bank’s existing operations, markets and credit quality. In August we purchased a $48 million loan portfolio from Westcoast Capital which included both term loans and leases to energy related and general commercial borrowers based primarily in western Canada. In October we acquired most of the assets ($48 million) and deposit liabilities ($36 million) of Laurentian Bank of Canada’s branches in Regina, Saskatchewan and Kelowna, British Columbia. We remain active in looking for additional opportunities that can arise from institutions which may be refocusing their strategies. We are particularly proud of our continued ability to grow our business in a cost effective manner. We achieved growth in total revenues of 19% over fiscal 2000 while non-interest expenses increased only 9% in the same period.This resulted in a significant improvement in our efficiency ratio (expenses to revenues) which was 50.0% in 2001 compared to 54.3% last year. Our industry leading ratio means it cost us 50 cents to earn each dollar of revenue, significantly better than the 62 cents averaged by the other Canadian Schedule I banks this year. Another key factor in ensuring that our asset growth translates into improved earnings is our consistent low loan loss experience. In 2001 our loan loss ratio was 0.23% of average loans. Based only on net new specific provisions (i.e. excluding the annual increase/decrease in the general allowance for credit risk) our loss ratio was 0.21% which compares very favourably to the other Canadian Schedule I banks’ average of 0.64% for fiscal 2001. Indications are that other banks will continue at or above this level for 2002. Looking forward into 2002 we expect that some sectoral concerns may arise in our loan portfolio but we do not anticipate a significant deterioration in the overall credit quality in the markets we serve. Our strong credit discipline ensures we are well prepared to deal with changes in the underlying economies that affect our customers. These are two fundamental and critical success factors – low cost operations and effective credit risk management – 29 1 0 0 2 b w c and our record and continued focus on these factors ensures that strong asset growth continues to produce profitable earnings. We saw growth and upgrading in our branch network this year. We opened new branches in Surrey, British Columbia (Strawberry Hill), Kelowna, British Columbia (Kelowna Industrial Centre) and Edmonton, Alberta (South Edmonton Common). Our Guildford Industrial branch in Surrey relocated to larger, highly visible premises in Coquitlam and now offers the full range of our products and services. The Victoria branch underwent a major expansion/renovation which was very well received by both customers and staff. Canadian Western Trust also expanded its operations this year. In addition to opening an office in Calgary, Alberta the trust company introduced on-line brokerage services to its financial planner client base through an alliance with Qtrade Investor Inc. Corporate and group trust services were expanded to include registered pension plan custody and executive compensation plans in addition to the share purchase plan and stock option plan administration products introduced in 2000. The long awaited legislation to reform the policy framework for Canada’s financial services sector came into force this fall. The legislation, which broadens ownership rules and introduces the holding company format, will provide greater flexibility in structuring strategic initiatives. The Canadian financial services industry has been focused on other priorities since the slowdown of North American economies and the events of September 11 and as a result the implications of the new legislation have not yet been fully manifested. In our communications this year we have discussed our financial performance and explained the economics of why we continue to be successful. It is important for us to remember that banking isn’t just numbers. Banking is people. We succeed because our employees bring a special brand of western friendliness and creativity to banking relationships. We call it “Thinking Western” and it shows in our interactions with customers, shareholders and other employees. Our “Think Western” attitude has been embraced by employees and our customers frequently provide feedback as to how much they appreciate our special brand of service. Our staff’s dedication to the delivery of exceptional customer service, as well as their commitment to the daily operations of the Bank and projects such as acquisitions and efficiency task forces, are what allows your Bank to perform so well year after year. We congratulate our people, for their experience and expertise allows us to achieve profitable results and to continue to grow. Looking forward into 2002 we are planning for “business as usual” while being prepared for any challenges that may arise from changes in the economies that affect our customers. We expect that our ongoing focus on cost efficiency, successful risk management and a targeted portfolio mix will enable us to translate continued growth into increasing earnings. Our 2002 performance targets will continue to motivate us to ensure that our customers and shareholders are provided with the services and value that they have come to expect from your Bank. The people of Canadian Western Bank remain committed to our goals of strong, steady and profitable growth. “Jack C. Donald” Jack C. Donald Chairman “Larry M. Pollock” Larry M. Pollock President and Chief Executive Officer > The Bank was deeply saddened this year by the untimely passing of Robert J. Sharpe, C.A., partner with Deloitte & Touche LLP. Bob was a leader of the external audit team from the inception of the Bank and provided invaluable knowledge and counsel. We lost not only an advisor but a friend. 30 1 0 0 2 b w c [ financials] 31 MANAGEMENT’S ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 31 32 33 34 34 36 37 38 39 41 50 overview of 2001 quarterly information net interest income other income non-interest expenses taxes loans deposits capital funds and adequacy risk management 41 overview 41 credit risk management 45 liquidity risk 47 market risk 49 operational risk off-balance sheet financial instruments including derivatives auditors’ report management’s report consolidated balance sheet 51 FINANCIAL STATEMENTS 51 52 53 54 55 56 57 notes to consolidated financial statements consolidated statement of cash flow consolidated statement of income consolidated statement of changes in shareholders’ equity introduction audit committee the board and board committees 70 CORPORATE GOVERNANCE 70 70 72 72 73 74 74 74 other areas of consideration conduct review committee loans committee conclusion corporate governance & human resources committee 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. 31 1 0 0 2 b w c MANAGEMENT ’S ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Key Performance Indicators (These results reflect net income adjusted to exclude unusual items as described below) Net income before provision for income taxes ($ thousands) Net income from operations(1) ($ thousands) Earnings per share basic fully diluted Efficiency ratio(2) (expenses to revenues) Return on common shareholders' equity Return on average total assets (1) Fiscal 2000 included a $3.05 million loss from discontinued operations. (2) A decrease in the ratio reflects improved efficiency. Overview of 2001 In evaluating the Bank’s performance, management reviews reported net income (i.e. as reported in the Consolidated Statement of Income on page 54) as well as net income from operations which is adjusted to exclude unusual items. Unusual items that may include non-cash items are viewed by management as transactions that are not part of the core business operations or which are somehow unusual in nature. A comparison of earnings at this level provides a more meaningful year-over-year comparison. Net income from operations in 2001 excludes non-cash tax expense of $1.25 million (2000 – $600,000) related to the write-down of future income tax assets due to future federal and provincial tax rate reductions. Net income from operations for the year ended October 31, 2001 was $31.40 million, an increase of 16% from $26.95 million in 2000. Fully diluted earnings per share based on net income from operations were $2.40 compared to $2.26 last year. Return on shareholders’ equity and return on assets were 13.95% and 0.97% for 2001 compared to 14.98% and 0.95% respectively for 2000. The average number of shares outstanding increased by 867,000 during the year, primarily due to an equity issue in April (discussed in the Capital Funds and Adequacy section). $ $ $ $ 2001 46,582 31,395 2.62 2.40 50.0 % 13.95 % 0.97 % $ $ $ $ 2000 35,435 26,949 2.42 2.26 54.3 % 14.98 % 0.95 % 2001/2000 Increase (decrease ) % Change 31 % 16 % 8 % 6 % $ $ $ $ 11,147 4,446 0.20 0.14 (4.3 )% (1.03 )% 0.02 % Reported net income for fiscal 2001 was $30.15 million compared to $26.35 million last year, an increase of $3.80 million or over 14%. The related fully diluted earnings per share were $2.31 in 2001 compared to $2.21 a year ago. Return on shareholders’ equity and return on assets were 13.48% and 0.93% respectively compared to 14.68% and 0.93% last year. Net income before provision for income taxes for the year ended October 31, 2001 was $46.58 million, an increase of 31% from $35.44 million reported in 2000. The provision for income taxes (excluding unusual item) increased significantly to $15.19 million compared to $5.44 million last year as the effective annual income tax rate more than doubled to approximately 33% from 15% last year as all remaining tax deductions were fully utilized during 2001. The efficiency ratio at 50.0%, improved 4.3 percentage points in the last year and continues to be the best in the Canadian banking industry. Total assets increased by over 12% from one year ago to reach $3,440 million. Loans increased by $323 million, or almost 13%. The total capital adequacy ratio at October 31, 2001 was 12.5% (2000 – 11.6%) with a Tier 1 component of 9.3% (2000 – 8.1%). 32 1 0 0 2 b w c Quarterly Information ($ thousands, except per share data) Total interest income Net interest income Other income Net income before taxes 2001 2000 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 $ 57,865 $ 58,466 $57,821 $59,741 $57,530 $ 54,812 $ 49,610 $ 48,330 22,295 5,391 12,718 21,563 5,242 12,119 8,484 250 8,234 – 20,487 4,698 10,547 7,083 – 7,083 – 21,156 4,427 11,198 7,522 1,000 6,522 – 20,141 19,069 17,426 16,731 3,949 9,927 8,224 – 8,224 – 4,086 9,659 8,150 – 8,150 – 3,735 8,324 7,115 600 6,515 – 3,485 7,525 6,505 – 6,505 3,045 Net income excluding unusual item and loss from discontinued operations 8,306 Unusual item – income tax rate changes – Net income from continuing operations 8,306 Loss from discontinued operations – Net income $ 8,306 $ 8,234 $ 7,083 $ 6,522 $ 8,224 $ 8,150 $ 6,515 $ 3,460 Basic earnings per common share Continuing operations $ 0.66 $ 0.66 $ 0.61 $ 0.58 $ 0.74 $ 0.73 $ 0.59 $ 0.59 Loss from discontinued operations Net income Add back unusual item – income tax rate changes Net income from operations Fully diluted earnings per common share Continuing operations Net income Net income from operations – 0.66 – 0.66 0.61 0.61 0.61 $ $ $ $ – 0.66 0.02 0.68 0.60 0.60 0.62 $ $ $ $ – 0.61 – 0.61 0.56 0.56 0.56 $ $ $ $ – 0.58 0.09 0.67 0.53 0.53 0.61 $ $ $ $ – 0.74 – 0.74 0.68 0.68 0.68 $ $ $ $ – 0.73 – 0.73 0.67 0.67 0.67 $ $ $ $ – 0.59 0.05 0.64 0.54 0.54 0.59 $ $ $ $ Efficiency ratio (expenses to revenues) Return on common shareholders’ equity(1) Return on average total assets(1) 48.6 % 13.19 % 0.97 % 49.1 % 13.91 % 1.03 % 52.1 % 13.64 % 0.91 % 50.3 % 15.06 % 0.97 % 53.2 % 17.15 % 1.10 % 52.5 % 17.72 % 1.12 % 55.7 % 16.44 % 1.05 % (0.28 ) 0.31 – 0.31 0.55 0.31 0.31 56.1 % 8.12 % 0.51 % $ $ $ $ (1) Excludes non-cash income tax expense relating to the write-down of future income tax assets as a result of future tax rate reductions which is considered an unusual item. Results are presented on this basis in order to provide a more meaningful comparison between periods. 33 1 0 0 2 b w c Net Interest Income Table 1 – Net Interest Income ($ thousands) Assets Securities and deposits with 2001 2000(1) Average Balance Mix Interest Interest Rate Average Balance Mix Interest Interest Rate regulated financial institutions $ 440,558 14 % $ 23,225 5.27 % $ 332,191 12 % $ 18,276 5.50 % 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 $ 3,175,605 Total Assets/Net Interest Income $ 3,175,605 225,613 37,781 518,713 2,127,070 2,683,564 3,124,122 51,483 1 16 67 84 98 2 1,719 36,992 171,957 210,668 233,893 – 4.55 7.13 8.08 7.85 7.49 0.00 29,647 425,376 1,940,567 2,395,590 2,727,781 48,936 1 15 70 86 98 2 1,581 30,500 159,925 192,006 210,282 – 5.33 7.17 8.24 8.01 7.71 0.00 $ 3,175,605 100 % $ 233,893 7.36 % $ 2,776,717 100 % $ 210,282 7.57 % $ 59,261 2 % $ – 0.00 % $ 48,132 2 % $ – 0.00 % 294,030 2,455,504 2,808,795 74,071 67,126 9 78 89 2 2 7 8,722 135,682 144,404 – 3,988 – 2.97 5.53 5.14 0.00 5.94 0.00 246,364 2,175,228 2,469,724 57,763 67,126 182,104 9 78 89 2 2 7 8,437 124,514 132,951 – 3,964 – 100 % $ 148,392 4.67 % $ 2,776,717 100 % $ 136,915 $ 85,501 2.69 % $ 2,776,717 $ 73,367 3.42 5.72 5.38 0.00 5.91 0.00 4.93 % 2.64 % (1) Residential mortgages and other loans as well as the related interest income for 2000 have been reclassified to conform with the current year’s balance sheet presentation. Net interest income is the difference between interest and dividends earned on assets and interest expensed on deposits and other liabilities, including debentures. Net interest spread, or margin, is net interest income as a percentage of average total assets. In 2001, net interest income increased by $12.1 million, or 17%, primarily due to: • • an increase of $396 million (14%) in average interest bearing assets; and an increase in net interest spread to 2.69% from 2.64%. The Bank achieved a relatively consistent spread despite the average prime rate declining from 7.05% to 6.55%, primarily due to: • • strong growth in higher yielding commercial loan portfolios; a shift in the securities portfolio to investments with slightly higher risk and return as well as longer duration; and • reduced cost of funds on deposits due to continued growth in demand and notice deposits as well as the positive impact of interest rate swaps. As discussed in the Interest Rate Risk section, the portfolio has a positive gap with maturing assets exceeding maturing liabilities during the one year time frame. If short term market rates increase this would have a positive impact on spreads. In 2002 we expect net interest spread for the entire year will be comparable to 2001 on the expectation that interest rates will rise in the second half of the year. However, the lower interest rate environment currently existing and expected to continue for the first two quarters will keep downward pressure on spread for that time period, due to the repricing of maturing fixed income securities and the Bank’s positive gap position in its asset and liability portfolio. 34 1 0 0 2 b w c Other Income Table 2 – Other Income ($ thousands) Credit related Retail services Trust services Gains on security sales, net Other (1) Total Other Income 2001 10,262 $ $ 3,397 2,252 2,328 1,519 2001/2000 Increase (decrease) 2000 9,540 2,949 1,644 49 1,073 $ $ 722 448 608 2,279 446 % 8 % 15 37 nm 42 $ 19,758 $ 15,255 $ 4,503 30 % (1) Other includes gains/losses on equipment disposals, foreign exchange service fees and other miscellaneous non-interest revenues. nm not meaningful Other income, which includes all revenues not classified as net interest income, was $19.8 million, an increase of $4.5 million or 30% over 2000. As shown in Table 2, all categories of other income grew in 2001. Notable changes include: • gains on security sales increased $2.3 million as gains were realized in the fixed income securities portfolio that arose as market prices increased when interest rates fell; an increase of $1.2 million in credit and retail fees due to loan and deposit growth and increased activity; and • • increased trust services fees in Canadian Western Trust (“CWT”) due to continued growth (12%) in the number of self-directed RRSP (registered retirement savings plan) and RRIF (registered retirement income fund) accounts and an increased offering of products available. Other income as a percentage of total revenue (net interest income and other income) was 19% in 2001, up from 17% in 2000. In 2002 total other income is expected to show broad based growth with a continued focus on increasing other income as a percentage of total revenue. The realization of security gains on the sale of fixed income investments is expected to occur during periods of declining interest rates. Non-interest Expenses Non-interest expenses increased 9% to $52.6 million in 2001. The increase is primarily due to: • • salaries from an increase in full time staff complement to accommodate growth; employee benefits due to enhanced benefit plans and increased group plan premiums as well as the increase in staff complement; and • premises and equipment expenses due to new branch initiatives; offset by reduced provincial capital taxes (see Taxes section). • The efficiency ratio improved to 50.0% from 54.3% in 2000 as revenue growth of 19% exceeded expense growth of 9%. This efficiency ratio compares very positively to the other Canadian Schedule I banks which averaged 61.9%. Non-interest expenses as a percentage of average assets was 1.63% in 2001, an improvement from 1.70% in 2000. 35 1 0 0 2 b w c 2001/2000 Increase (decrease) % 10 % 27 12 15 18 26 17 10 12 10 (16 ) (8 ) 14 (2 ) 6 11 6 1 9 0 9 % 17 % 30 19 % Table 3 – Non-interest Expenses and Efficiency Ratio ($ thousands) 2001 2000 $ Salaries and Employee Benefits Salaries Employee benefits Total Premises Rent Depreciation Other Total Equipment and Furniture Depreciation Other Total General Capital and business taxes Professional fees and services Marketing and business development Postage and stationery Banking charges Deposit insurance premiums Travel Communications Other Total Total Non-interest Expenses Efficiency Ratio Net interest income Other income Total revenues $ 26,073 $ 23,750 $ 2,323 4,396 30,469 3,457 27,207 939 3,262 4,415 968 972 6,355 2,118 1,611 3,729 2,032 1,899 1,521 1,288 990 886 839 497 2,076 12,028 52,581 85,501 19,758 $ $ $ 105,259 3,854 822 770 5,446 1,934 1,444 3,378 2,405 2,067 1,340 1,318 934 801 791 494 1,906 12,056 48,087 73,367 15,255 88,622 $ $ $ 561 146 202 909 184 167 351 (373 ) (168 ) 181 (30 ) 56 85 48 3 170 (28 ) 4,494 12,134 4,503 16,637 $ $ $ Efficiency Ratio (expenses as a percentage of total revenues) 50.0 % 54.3 % During 2001, the Bank adopted the new accounting standard relating to employee future benefits. There was no material change to the Consolidated Financial Statements as a result of this change. In 2002 we anticipate: • • the full time staff complement will increase by approximately 8% to accommodate growth in volumes and new branch initiatives; and increases in other non-interest expenses will be primarily attributable to volume increases from growth. Capital expenditures of $1.8 million are budgeted for 2002 and will be funded from general operating revenues. At year end there were specific commitments of approximately $207,000 for these capital expenditures. 80 60 40 20 0 Efficiency Ratio(1) (expenses to revenues) % 4 . 4 6 % 7 . 0 6 % 8 . 9 5 % 3 . 4 5 % 0 . 0 5 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 (1) A decrease in the ratio reflects improved efficiency 36 1 0 0 2 b w c Taxes The provision for income taxes, including tax expense from future income tax rate changes, was $16.4 million in 2001, up substantially from $6.0 million in the prior year as available unclaimed deductions and tax loss carryforwards were depleted during 2001 and the Bank became fully taxable. Income taxes otherwise payable by the Bank for the year ended October 31, 2001 were partially eliminated by utilizing approximately $15.7 million (2000 - $30.3 million) of unclaimed deductions and tax loss carry forwards. At October 31, 2001, there are no unclaimed deductions or tax loss carry forwards available to reduce future years’ income for tax purposes. Capital losses of $11.8 million (2000 - $11.8 million) are available to apply against future capital gains and have no expiry date. The tax benefit of these capital losses has not been recognized. For the year ended October 31, 2001 the effective tax rate was approximately 33% (excluding tax expense from future tax rate changes). This rate is expected to increase to the 37 - 40% range in 2002 as the Bank will be fully taxable for the complete fiscal year. As discussed in Note 2 of the Consolidated Financial Statements effective November 1, 2000, the new accounting standard relating to income taxes was adopted retroactively with restatement of prior periods. Under the new standard, future tax assets and liabilities represent the cumulative amount of tax applicable to temporary differences between the carrying amount of the assets and liabilities and their values for tax purposes.The Bank’s significant future income tax asset relates primarily to the general allowance for credit losses. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in future income taxes related to a change in tax rates are recognized in income in the period of the tax rate change. Income tax expense for 2001 includes $1.25 million (2000 - $600,000) relating to federal and provincial (British Columbia and Alberta) income tax rate reductions enacted during the year. As discussed in the Overview section on page 31, this non-cash component of tax expense has been treated as an unusual item in the evaluation of core business operations. Capital taxes for 2001 totalled $1.9 million compared to $2.2 million in 2000. The decrease is attributable to: • • elimination of capital tax in Alberta during the year; offset by taxes exigible on increased capital due to the share capital issued on the equity offering and retention of earnings. In 2002 capital taxes are expected to decrease again as the Alberta capital tax elimination will be realized for a complete year. The goods and services tax (GST) carries with it a significant cost to the Bank, as it does to all financial institutions, to the extent that GST paid is not recoverable through increased service charges, increased loan costs or reduced deposit rates. This cost is incurred because the majority of the Bank’s activities, except leasing and trust services, are exempt under GST legislation and thus GST cannot be charged and collected from customers as occurs in the majority of Canadian businesses. As a result, the ability to recover the GST paid on most purchased goods and services is lost. Table 4 – Capital Taxes ($ thousands) British Columbia Alberta Saskatchewan Manitoba Total Capital Taxes 2001/2000 Increase (decrease) Capital Tax Rate Capital Allocation (1) 1.00 % 0.00 %(2) 0.70 % 3.00 % 39 % $ 53 % 5 % 3 % 2001 1,008 $ 539 92 239 2000 888 1,078 82 198 $ $ 120 (539 ) 10 41 $ 1,878 $ 2,246 $ (368 ) % 14 % (50 ) 12 21 (16 )% (1) The capital allocation percentages are for the Bank only although total capital tax includes capital taxes paid in British Columbia and Alberta by a subsidiary. (2) Alberta’s capital tax was eliminated on April 1, 2001; prior to that date the rate was 0.70%. Loans Table 5 – Outstanding Loans by Type and by Provincial Location of Branch ($ millions) 37 1 0 0 2 b w c British Columbia Alberta Saskatchewan Manitoba Total (1) Composition % October 31,2001 Loans to Individuals Residential mortgages(2) Other Total Loans to Businesses(3) Securities purchased under resale agreements Commercial Construction and real estate(4) Industrial Energy Total Total Loans Composition % October 31, 2000 Loans to Individuals Residential mortgages(2)(5) Other Total Loans to Businesses(3) Securities purchased under resale agreements Commercial Construction and real estate(4)(5) Industrial Energy Total Total Loans Composition % $ 1,197 $ $ 132 $ 109 $ 41 % 51 % 4 % 4 % $ 303 37 340 – 310 363 184 – 857 $ 280 33 313 – 251 384 182 – 817 $ $ 184 53 237 75 392 322 295 154 1,238 1,475 85 326 333 220 60 1,024 1,242 $ $ 169 49 218 $ 56 13 69 – 20 25 18 – 63 $ 13 3 16 – 32 49 12 – 93 $ 43 11 54 – 23 19 20 – 62 14 4 18 – 30 38 13 – 81 99 $ $ 556 106 662 75 754 759 509 154 2,251 2,913 100 % 506 97 603 85 630 774 435 60 1,984 2,587 100 % 19 % 4 23 3 26 26 17 5 77 100 % 20 % 4 24 3 24 30 17 2 76 100 % $ 1,130 $ $ 116 $ 44 % 48 % 4 % 4 % Includes single and multi-unit residential mortgages. (1) This table does not include an allocation of the allowance for credit losses and deferred revenue and discounts. (2) (3) Corporate loans (described on page 38) are included in Loans to Businesses based on the security of the specific loan and the nature of the borrower’s business. (4) (5) Balances at October 31, 2000 have been reclassified to conform to the current year’s presentation. Includes commercial term mortgages and project (interim) mortgages. Loans, as reported on the consolidated balance sheet, totalled $2,883 million at the end of 2001 compared to $2,560 million at the end of 2000, an increase of 13%. Highlights of the year-over-year changes are: Portfolio • commercial loans increased $124 million (20%) and comprise 26% of the portfolio compared to 24% one year ago; the energy portfolio, a specialty in the Calgary market, grew $94 million (157%); • • • • the industrial portfolio increased $74 million (17%); construction and real estate loans decreased $15 million (2%) and represent 26% of the portfolio versus 30% a year earlier; and loans to individuals represent 23% of the total portfolio, down from 24% in 2000. Together with organic growth, two portfolio acquisitions during the fourth quarter of 2001 contributed to the portfolio increase: • • $48 million of term loans and leases to energy and general commercial borrowers acquired from Westcoast Capital; and $48 million of assets (primarily residential mortgages) acquired from Laurentian Bank. 38 1 0 0 2 b w c Since 1999 the Bank has developed a portfolio of loans, identified internally as corporate loans, through participation in syndications, the majority of which have been structured and led by the major Canadian banks. This initiative has afforded the opportunity to participate in larger investment grade credits as well as providing a degree of geographic diversification. At October 31, 2001 the corporate loan portfolio totalled $103 million (2000 - $70 million). Location • • loan growth of $259 million (18%) in the prairie provinces (primarily in Alberta); and loans held at Alberta branches increased from 48% of the total portfolio at October 31, 2000 to 51% at October 31, 2001 due to strong economic growth in the province with a corresponding decrease in the British Columbia loan portfolio from 44% to 41%. Deposits Growth of 12% in deposits was achieved this year. Of particular note, is the fact that the lower cost business and personal deposits grew faster than total deposits and these deposits now account for almost 15% of total deposits compared to 13% last year. The focus on increasing lower cost deposits will continue to be an ongoing priority. Branch generated deposits grew by 21% this year and now account for over one-half of total deposits. Table 6 – Deposits ($ thousands) Canadian Currency Personal chequing and savings Business demand and savings Fixed term: Under $100,000 $100,000 and over Registered retirement products Total Foreign Currency (Canadian equivalent) Total Deposits Although some market sectors are expected to slow relative to 2001, overall loan growth of 14% is planned for 2002. Loans by Portfolio 4% 11% 20% 3% 12% 4% 18% 24% 4% Commercial Energy Industrial Personal Securities purchased under resale agreements Real estate project mortgages Multi-unit residential mortgages Real estate term mortgages Corporate Loans The source of deposits is broken down as follows: • branches – 53% (2000 – 49%) • deposit agents – 45% (2000 – 48%) • wholesale clients – 2% (2000 – 3%) CWT deposits are included in the foregoing numbers.The trust’s growth in low cost notice deposits (primarily cash balances held in self-directed accounts and corporate trust deposits) has contributed to the improved mix of these deposits for the Bank. The Bank’s branch network generated $50.0 million of CWT’s fixed term deposits (a 16% increase from last year), with the remainder of the fixed term deposits received through deposit agents, as CWT has no retail branches. 2001 2000 Amount % of Total Amount % of Total $ 147,770 290,542 4.8 % $ 117,215 9.6 238,579 1,592,122 470,242 518,075 3,018,751 23,556 52.3 15.5 17.0 99.2 0.8 1,481,227 364,441 514,321 2,715,783 12,026 4.3 % 8.7 54.3 13.4 18.9 99.6 0.4 $ 3,042,307 100.0 % $ 2,727,809 100.0 % 39 1 0 0 2 b w c Branch generated deposits are generally considered to be more stable and we continue to focus on achieving 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. Capital Funds and Adequacy 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 weighting of 0% to 100% is assigned. Published regulatory guidelines require banks to maintain a minimum ratio of capital to risk-weighted assets and off- balance sheet items of 8%, of which 4% must be core capital (Tier 1) and the remainder supplementary capital (Tier 2). However, 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%. Deposits by Source ($ millions) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1 3 1 9 5 8 8 2 8 7 9 9 1 5 9 7 0 0 , 1 8 5 9 8 9 9 1 2 7 1 1 3 , 1 5 4 3 , 1 0 0 0 2 7 8 6 7 1 , 1 8 0 1 , 1 9 9 9 1 8 5 7 5 3 , 1 7 2 6 , 1 1 0 0 2 Branches Agent Wholesale In the Bank, Tier 1 capital is comprised entirely 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 inclusion of the general allowance in Tier 2A capital to a maximum of 87.5 basis points (0.875%) of risk-weighted assets. Prior to October 2001, the inclusion rate was a maximum of 75.0 basis points (0.750%) of risk-weighted assets. Table 7 – Capital Structure and Regulatory Ratios at Year End ($ thousands) Tier 1 Capital Retained earnings Common shares Less unamortized goodwill Total Tier 2 Capital 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) 2001 2000 2001/2000 Increase (decrease ) $ 108,320 $ 83,853 $ 24,467 143,942 111,342 – (194 ) 252,262 195,001 21,454 67,126 88,580 17,911 67,126 85,037 32,600 194 57,261 3,543 – 3,543 $ 340,842 $ 280,038 $ 60,804 9.3 % 3.2 % 12.5 % 10.3 8.1 % 3.5 % 11.6 % 11.1 1.2 % (0.3 )% 0.9 % (0.8 ) (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 to a maximum of 0.875% (previously 0.750%) of risk-weighted assets as of October 2001. At October 31, 2001, the Bank’s general allowance represents 0.79% 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. 40 1 0 0 2 b w c Table 8 - Risk-weighted Assets ($ thousands) Balance Sheet Assets Cash resources Securities Loans Other assets Total Credit Instruments(1) (contract amounts) Guarantees and standby letters of credit Commitments to extend credit(2) Total Derivative Financial Instruments(3) (notional amounts) Interest rate contracts Equity contracts Total Total Risk-weighted Assets (1) See Note 12 to the Consolidated Financial Statements for further details. (2) Greater than one year only. (3) See Note 16 to the Consolidated Financial Statements for further details. Capital funds are managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and which take into account forecasted capital needs and markets. The goal is to maintain adequate regulatory capital to be considered well capitalized, to protect customer deposits and to provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets. The capital mix is managed to improve the return on equity. At October 31, 2001 the total capital adequacy ratio was 12.5% (2000 – 11.6%) of which 9.3% (2000 – 8.1%) was Tier 1 capital. Total regulatory capital increased $60.8 million over 2000 as a result of: • • • • • earnings, net of dividends, of $25.9 million; share capital of $29.4 million issued on an equity offering and $3.2 million issued upon the exercise of stock options; an increase in the inclusion of the general allowance for credit losses of $3.5 million due to greater risk-weighted assets and a higher inclusion rate; offset by a charge to retained earnings of $805,000 for share issue costs, net of taxes, related to the equity offering; and a charge to retained earnings of $600,000 on adoption of the new accounting policy regarding income taxes. 2001 Risk- weighted Balance 2000 Risk- weighted Balance Balance Balance $ 232,808 $ 46,173 $ 214,935 $ 42,695 268,420 33,657 231,416 30,274 2,882,636 2,561,083 2,560,092 2,255,509 55,704 51,057 53,097 46,141 $ 3,439,568 2,691,970 $ 3,059,540 2,374,619 $ $ 44,006 32,178 – – 44,006 32,178 $ $ 42,489 1,844 44,333 $ 372,000 9,005 $ 381,005 1,650 189 1,839 $ 269,000 3,535 $ 272,535 29,366 922 30,288 136 164 300 $2,725,987 $ 2,405,207 Subordinated debentures include both convertible ($54.0 million) and conventional ($13.1 million) debentures. The conventional debentures have a ten year term and all reach their five year anniversary date during fiscal 2002. At the respective anniversary dates, if the debenture is not redeemed by the Bank or renegotiated, the interest rate will change from fixed to floating and the debenture will commence straightline amortization for capital adequacy purposes over the final five year term to maturity. Note 9 to the Consolidated Financial Statements details the terms of the debentures. In each of January and July 2001, semi-annual dividends of $0.18 per share were paid. The Bank has share option plans that are provided as an incentive to officers and employees who are in a position to materially impact the longer term financial success of the Bank as measured by shareholder wealth. Note 10 to the Consolidated Financial Statements details the number of shares under option outstanding, the weighted average exercise price and the amounts exercisable at year-end. 41 1 0 0 2 b w c 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 CEO and the Audit Committee. CREDIT RISK MANAGEMENT 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 an amount not exceeding 10% of regulatory capital. Net Impaired Loans as a Percentage of Net Loans Outstanding 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 % 8 6 . 0 % 3 5 . 0 % 4 5 . 0 % 5 2 . 0 % 7 1 . 0 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 Risk Management OVERVIEW 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. 42 1 0 0 2 b w c 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; • delegated lending authorities which are clearly • communicated to personnel engaged in the credit granting process, a defined approval process for loans in excess of limits and the review of larger credits by a senior management group prior to recommendation to the Loans Committee 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 single-unit 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; independent annual reviews of credit valuation, risk classification and credit management procedures by the internal audit group which includes reporting the results to senior management, the 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. Table 9 – Change in Gross Impaired Loans ($ thousands) Gross impaired loans, beginning of year Net additions (reductions) Write-offs Total Gross Impaired Loans as a Percentage of Total Loans Environmental Risk The operations of the Bank do not have a material effect on the environment. However, losses can be incurred if a borrower is unable to repay loans due to environmental clean up costs or if the Bank becomes directly liable for clean up costs if it is deemed to have taken control or ownership of a contaminated property. Risk assessment criteria and procedures are in place to manage environmental risks and these are communicated to lending personnel. Reports on environmental inspections and findings are reviewed by senior management and reported upon quarterly to the Board. Portfolio Quality The Bank’s strategy is to continually improve and maintain a quality portfolio. Efforts are directed towards achieving a wide diversification, engaging experienced personnel who provide a hands on approach in credit granting, account management and quick action when problems develop. The lending focus is primarily directed to small and medium-sized businesses and individuals with operations conducted in the four western provinces. Relationship banking and “know your customers” are important tenets of account management. An appropriate financial return on the level of risk is fundamental. Over the past several years the Bank has also participated in larger investment grade credits (corporate loans) through participation in syndications, which are generally led by the major Canadian banks. In addition to allowing us to lend to larger companies this initiative has also provided a degree of geographic diversification. Impaired Loans Gross impaired loans increased $4.4 million in 2001, a 14% increase primarily attributable to loans domiciled in British Columbia and reflecting the current economic environment. As shown in Table 9 gross impaired loans total $35.5 million and represent 1.23% (2000 – 1.21%) of total outstanding loans. Impaired loans net of the allowance for credit losses are 0.25% of net loans outstanding, compared to 0.17% in 2000 (see graph on page 41). At year end there are no significant changes in the impaired loans due to current economic uncertainties in the markets we focus on. Going forward in 2002, the general trends within 2001 31,097 $ 9,002 (4,619 ) 2001/2000 Increase (decrease ) 2000 $ 38,189 $ (7,092 ) (2,612 ) (4,480 ) 11,614 (139 ) $ 35,480 $ 31,097 $ 4,383 1.23 % 1.21 % 0.02 % 43 1 0 0 2 b w c the portfolio are not expected to experience a material adverse change. Impaired loans will continue to be monitored closely to provide early identification of any possible adverse trends. Table 10 shows the year over year change to the allocation of the allowance for credit losses to specific provisions by category of impaired loans and to the general allowance for credit risk. Allowance For Credit Losses The allowance for credit losses consists of $6.9 million in specific provisions and $21.5 million in the general allowance for credit risk with the latter now representing 0.74% of gross outstandings and 0.79% of risk-weighted assets.This compares favourably with the Bank’s five year loan loss average of 0.22% which is based on the annual charges to the income statement. The five year loan loss average based only on net new specific provisions (i.e. excluding the annual increase or decrease in the general allowance for credit risk ) is 0.18%. The general allowance is available to cover credit losses inherent in the portfolio which are not currently identifiable on an account by account basis. An assessment of the adequacy of the general allowance is conducted quarterly and measured against the five year loan loss average. In addition, a method of applying a progressive (increasing with higher risk) loss ratio range against groups of loans of a common risk rating is utilized to test the general allowance adequacy. The general allowance would be expected to increase in strong economic times and decrease in weaker economic times as provisions are allocated to specific credits. In October 1998 OSFI began providing guidance to all deposit-taking institutions on establishing general allowances for credit risk (unallocated loan loss provisions) in their ongoing program to strengthen general allowances and related methodologies. While OSFI did not believe that there was a systemic problem of asset quality in the Canadian system, they felt the need for higher general allowances was supported by, amongst other things, the current position in the economic cycle, growing potential off-balance sheet Table 10 – Allowance for Credit Losses ($ thousands) Specific Provisions Consumer and personal Real estate Industrial Other General Allowance Total (1) Recoveries in 2001 totalled $19 (2000 - $222). activity and associated credit risk, and the current levels of allowances of a number of Canadian institutions in relation to historical levels and compared to institutions in other jurisdictions. OSFI’s revised general allowance criteria were effective for 1999. In accordance with the guidance provided by OSFI, a one-time increase of $11.7 million was added to the general allowance at April 30, 1999 through a charge to retained earnings, net of taxes. The Bank also commenced the development of policies and methodology governing the management of the general allowance, as appropriate for the nature of the loan portfolio. A final OSFI guideline has been issued which will be effective for the 2002 fiscal year. The development of expanded methodology will continue for 2002. A significant change to the level of the general allowance is not anticipated based on either the new guideline or methodology and assuming no material change in the portfolio’s credit quality. Allowance for Credit Losses as a Percentage of Gross Impaired Loans 100 75 50 25 0 % 4 . 6 8 % 9 . 9 7 % 1 . 8 6 % 5 . 7 5 % 7 . 8 4 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2000 Ending Balance Write-offs, net of Recoveries (1) Provision for Credit Losses $ 310 $ 1,764 2,278 1,595 20,915 442 822 2,478 858 – $ 575 $ 1,591 2,016 1,376 538 2001 Ending Balance 443 2,533 1,816 2,113 21,453 $ 26,862 $ 4,600 $ 6,096 $ 28,358 44 1 0 0 2 b w c Geographical Distribution of Loans Provision for Credit Losses as a Percentage of Average Loans Outstanding (5 year average 0.22%) 40% Alberta 0.40 5% 4% 2% British Columbia Manitoba Saskatchewan Other 49% Provision for Credit Losses For the year ended October 31, 2001, the provision for credit losses represented 0.23% of average loans. As reflected in the graph, the provision for credit losses remains consistent with the five year average of 0.22% reflecting the strong credit quality of the portfolio. Diversification of Portfolio Total Advances Based on Location of Borrower (also see Table 5) The following table illustrates the diversification in lending operations by industry sector. Table 11 – Total Advances Based on Industry Sector (%) October 31 Construction Real estate operations Consumer loans and residential mortgages(1) Transportation and storage Oil and gas (production) Hotel/motel Manufacturing Logging/forestry Finance and insurance Other services Wholesale trade Government guaranteed Other Total (1) Residential mortgages in this table include only single-family properties. 0.30 0.20 0.10 0.00 % 5 2 . 0 % 2 2 . 0 % 3 2 . 0 % 1 2 . 0 % 8 1 . 0 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 Management of the loan portfolio includes the strategy of avoiding high concentrations in one geographic area or industry sector. The Bank’s portfolio is well diversified with a mix of corporate and personal business. Industrial lending units are set up within branches or as stand alone operations, while oil and gas lending is conducted by specialists in the Calgary market. In addition to these areas, the Bank also has real estate divisions established in the major centres in which it operates. 2001 20.7 % 20.2 13.7 2000 22.7 % 22.2 13.8 8.0 5.7 4.7 4.0 3.5 3.3 2.8 2.5 0.8 10.1 7.1 2.7 4.4 4.0 3.3 3.2 4.2 2.6 0.9 8.9 100.0 % 100.0 % LIQUIDITY RISK 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 pool of high quality 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 • Table 12 – Liquid Assets ($ 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 45 1 0 0 2 b w c • 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, 2001 is provided in Note 3 to the Consolidated Financial Statements. A conservative policy is maintained in this area with: • • • significantly 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. As shown in Table 12, liquid assets comprised of cash, interbank deposits, items in transit, securities purchased under resale agreements and marketable securities, totalled $575 million at October 31, 2001, an increase of $45 million from October 31, 2000. Liquid assets represented 16.7% (2000 – 17.3%) of total assets and 18.9% (2000 – 19.4%) of total deposit liabilities at that date. $ 2001 1,945 190,978 39,885 232,808 75,000 25,743 58,548 151,292 31,490 342,073 $ 2000 1,460 168,652 44,823 214,935 84,932 15,826 123,844 61,477 28,921 315,000 2001/2000 Increase (decrease ) $ 485 22,326 (4,938 ) 17,873 (9,932 ) 9,917 (65,296 ) 89,815 2,569 27,073 $ 574,881 $ 529,935 $ 44,946 $3,439,568 $ 3,059,540 $ 380,028 16.7 % 17.3 % (0.6 )% $3,042,307 $ 2,727,809 $ 314,498 18.9 % 19.4 % (0.5 )% 46 1 0 0 2 b w c Table 13 – Deposit Maturities Within One Year ($ millions) October 31,2001 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 2000 Total Table 14 – Total Deposit Maturities ($ millions) October 31,2001 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 2000 Total Within 1 Month 1 to 3 Months 3 Months to 1 Year Within 1 Year Cumulative $ $ $ 79 371 475 925 708 $ $ $ – – 202 202 177 Within 1 Year 1 to 2 Years 2 to 3 Years 3 to 4 Years $ $ $ 79 371 1,509 1,959 1,797 $ $ $ – – 402 402 372 $ $ $ – – 339 339 261 $ $ $ – – 156 156 186 $ $ $ $ $ $ – – 832 832 912 4 to 5 Years – – 186 186 112 $ $ $ $ $ $ 79 371 1,509 1,959 1,797 Total 79 371 2,592 3,042 2,728 Highlights of the composition of liquid assets at October 31, 2001 follow: • maturities within one year total 71% of liquid assets or $407 million; • Government of Canada and provincial debt securities made up 41% of liquid assets; and • deposits with regulated financial institutions including bankers' acceptances were 33% of liquid assets. Also included in liquid assets are securities purchased under resale agreements. These are short term advances, typically no more than a few days in duration, to securities dealers and require the dealer to repurchase the securities comprised of treasury bills or other high quality liquid securities. Short term credit facilities have been arranged with a number of financial institutions. The expansion of such facilities will continue to be pursued as an additional liquidity safeguard. The government insured/guaranteed mortgage and loan portfolios also represent a potential source of liquidity. The primary source of new funding is the issuance of deposit instruments. A summary of the deposits by maturity is presented in Tables 13 and 14. A breakdown of deposits by source is provided under the heading Deposits. Target limits by source have been established as part of the overall liquidity policy and are monitored to ensure an acceptable level of diversification in sources of funding is maintained. The Bank continues to aggressively pursue retail deposits generated through its branch network as a core funding source. However, the total dollar value of agent generated deposits will likely continue to increase even though the goal is to decrease funding from this source as a percentage of total deposit liabilities. CWT raises new deposits mainly through the Bank’s branch network and through notice accounts comprised primarily of cash balances held in self-directed accounts and corporate trust deposits. At October 31, 2001, $50.0 million (2000 - $43.1 million) of CWT deposits had been raised via the Bank’s branch network and the trust’s notice account balances totalled $70.0 million (2000 – $53.4 million). 47 1 0 0 2 b w c MARKET RISK Market risk is the impact on earnings resulting from changes in financial market variables such as interest rates and foreign exchange rates. Market risk arises when making loans, taking deposits and making investments. The Bank itself does not undertake trading activities and, therefore, does not have risks related to such activities as market making, arbitrage or proprietary trading. Therefore, the Bank’s material market risks are confined to interest rates and foreign exchange as discussed below. Interest Rate Risk Interest rate risk or sensitivity can be defined as the impact on net interest income, both current and future, resulting from a change in market interest rates. This risk and potential variability in earnings arises primarily when cash flows associated with interest sensitive assets and liabilities have different repricing dates. The differentials, or interest rate gaps, arise as a result of the financial intermediation process and reflect differences in term preferences on the part of borrowers and depositors. A positive interest rate gap exists when interest sensitive assets exceed interest sensitive liabilities for a specific maturity or repricing period. A positive gap will tend to lead to an increase in net interest income when market interest rates rise since assets are repricing earlier than liabilities. The opposite impact will occur when market interest rates fall. A negative gap is the opposite of a positive gap. To manage interest rate risk 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. Table 15 – Asset Liability Gap Positions ($ millions) October 31,2001 Assets Cash resources Securities Loans Other assets Off-Balance sheet swaps Total Liabilities and Equity Deposits Other liabilities Debentures Shareholders’ equity Off-Balance sheet swaps Total Interest Rate Sensitive Gap Cumulative Gap Cumulative Gap as a Percentage of Total Assets October 31, 2000 Total assets Total liabilities and equity Interest Rate Sensitive Gap Cumulative Gap Cumulative Gap as a $ $ $ $ $ Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year Total Within 1 Year 1 Year to 5 Years Over 5 Years Non- interest Sensitive $ 152 $ 24 $ 11 $ 187 $ 2 $ 28 134 – 30 216 202 – – – – 15 1,403 – 10 1,580 925 – – – 381 1,306 274 $ 274 $ 56 403 – 195 665 99 1,940 – 235 2,461 153 959 – 146 1,260 832 1,959 1,083 – 13 – – – 13 – 381 2,353 108 $ 108 $ – 54 – – 1,137 123 $ 231 $ – 16 13 – – 29 – – – – – – $ 44 $ – (29 ) 56 – 71 – 79 – 252 – 331 29 260 $ $ (260 ) $ – $ 202 14 $ 288 $ 845 (180 ) $ 108 $ 7.2 % 7.5 % 2.8 % 2.8 % 6.0 % 6.8 % – 1,365 $ 212 $ 679 $ 2,256 $ 993 $ 980 385 $ 385 $ 177 35 $ 420 $ 912 2,069 (233 ) $ 187 $ 187 $ 187 $ 998 (5 ) $ 182 $ 10 – 10 192 $ $ $ 74 $ 266 (192 ) $ – $ Total 233 268 2,883 56 381 3,821 3,042 79 67 252 381 3,821 – – – 3,333 3,333 – – – Percentage of Total Assets 11.6 % 12.6 % 5.6 % 5.6 % 5.5 % 5.8 % – 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. The majority of fixed rate loans, mortgages and leases are either closed or carry prepayment penalties. 48 1 0 0 2 b w c Table 16 – Weighted Average Effective Interest Rates (%) October 31,2001 Assets Cash resources Securities Loans Off-Balance sheet swaps Total Liabilities Deposits Debentures Off-Balance sheet swaps Total Interest Rate Sensitive Gap October 31, 2000 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 2.9 % 4.1 % 4.3 % 3.1 % 5.1 % – % 3.2 % 5.1 5.5 6.4 5.2 2.3 – 3.0 2.5 2.7 % 8.0 % 4.7 3.3 % 5.2 6.9 5.4 6.1 4.8 – – 4.8 1.3 % 6.8 % 5.6 1.2 % 5.1 7.5 4.6 6.4 4.9 6.6 – 4.9 5.2 6.0 4.8 5.6 3.7 6.6 3.0 3.6 5.4 7.8 4.8 7.1 5.6 5.5 – 5.5 5.5 8.1 – 6.6 – – – – 5.1 6.6 4.8 6.1 4.3 5.7 3.0 4.2 1.5 % 2.0 % 1.6 % 6.6 % 1.9 % 7.2 % 5.9 1.3 % 7.6 % 5.3 2.3 % 7.7 % 5.9 1.8 % 5.6 % – 5.6 % 7.6 % 5.5 2.1 % Exposure to interest rate risk is controlled by managing the size of the static gap positions between interest sensitive assets and interest sensitive liabilities for future periods. Gap analysis is supplemented by computer simulation of the asset liability portfolio structure and dollar estimates of net interest income sensitivity for periods of up to one year. The interest rate gap is measured at least monthly. Table 15 shows the consolidated gap position at October 31, 2001 for selected time intervals. Comparative summary figures are given at October 31, 2000. Figures in brackets represent an excess of liabilities over assets or a negative gap position. The gap analysis in Table 15 is a static measurement of interest rate sensitive gaps at a specific time. These gaps can change significantly in a short period of time. The impact of changes in market interest rates on earnings will depend upon the magnitude and rate of change in interest rates as well as the size and maturity structure of the cumulative interest rate gap position and management of those positions over time. During the year: • • the one year and under cumulative gap decreased from 5.6% to 2.8%; and the one month and under gap decreased from 11.6% to 7.2%. Of the $1,509 million in fixed term deposit liabilities maturing within one year from October 31, 2001, approximately $1,070 million (35% of total deposit liabilities) mature by April 30, 2002. The term in which maturing deposits are retained will have an impact on the future asset liability structure and hence interest rate sensitivity. Approximately $136 million of the fixed term deposit liabilities maturing within one month are floating rate redeemable deposits with a one year contractual maturity redeemable without penalty at any time. The effective interest rates for each class of financial asset and liability, including off-balance sheet instruments, are shown in Table 16. The estimated sensitivity of net interest income to a change in interest rates is presented in Table 17. The amounts represent the estimated change in net interest income over the time period shown resulting from a one percentage point change in interest rates. If rates increase, the effect would be an increase in net interest income while the opposite would occur if rates decrease. The estimates are based on a number of assumptions and factors, which include: • • a constant structure in the asset liability portfolio; interest rate changes affect interest sensitive assets and liabilities by the same amount and are applied at the appropriate repricing dates; and • no early redemptions. 49 1 0 0 2 b w c OPERATIONAL RISK 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. The financial measure of operational risk is actual losses incurred. No material losses occurred in 2001 or 2000. These risks can never be completely eliminated but the Bank’s strategy to minimize operational risk includes: • • • a knowledgeable and experienced management team that is committed to the risk management policies; regular meetings of the Operations Committee, a management committee made up of supervisory and management personnel from all operational areas and chaired by a member of senior management, which is responsible for the development and recommendation of policies and procedures regarding day-to-day, routine operations; communication of the importance of effective risk management to all levels of staff through training and policy implementation; regular inspections for compliance and the effectiveness of procedural controls by a strong, independent internal audit team; implementation of policies and procedural controls appropriate to address identified risks and which include segregation of duties and built-in checks and balances; • use of technology via automated systems with built-in • • • controls; continual review and upgrade of systems and procedures; and • updated and tested procedures 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. Table 17 – Estimated Sensitivity of Net Interest Income As a Result of a One Percentage Point Change in Interest Rates ($ thousands) Period 90 days 1 year 1 year percentage change 2001 678 $ $ 2,353 2.8 % 2000 948 3,654 4.8 % The interest sensitivity of the portfolio decreased in both absolute dollar terms and as a percentage of estimated future net interest income during the year. Virtually all of the decrease in the level of interest sensitivity occurred in the first quarter when the three month gap was reduced by nearly 50% and the one year gap reduced by 24%. It is management’s intention to continue to manage the asset liability structure and interest rate sensitivity through pricing and product policies to attract appropriate assets and liabilities as well as through the use of interest rate swaps or other appropriate hedging techniques (see discussion under Off-Balance Sheet Financial Instruments Including Derivatives). Assets and liabilities having a term to maturity in excess of five years are subject to specific review and control and with the exception of debentures, as outlined in Note 9 to the Consolidated Financial Statements, such items were not material as at October 31, 2001. Foreign Exchange Risk In providing financial services to its customers, the Bank has assets and liabilities denominated in U.S. dollars. At October 31, 2001, assets denominated in U.S. dollars were 0.7% (2000 – 0.4%) of total assets and U.S. dollar liabilities were 0.8% (2000 – 0.4%) of total liabilities. Currencies other than U.S. dollars are not bought or sold other than to meet specific customer needs and therefore, the Bank has virtually no exposure to currencies other than U.S. dollars. Foreign exchange risk arises when there is a difference between assets and liabilities denominated in U.S. dollars. Policy is established setting a limit on the difference between U.S. dollar assets and liabilities. The difference is measured daily and managed by use of U.S. dollar contracts or other means. Policy respecting foreign exchange exposure is reviewed and approved at least annually by the Board of Directors, and deviations from policy are reported to the Board and ALCO. 50 1 0 0 2 b w c Off-Balance Sheet Financial Instruments Including Derivatives Table 18 – Off-Balance Sheet Financial Instruments ($ thousands) Credit Instruments Guarantees and standby letters of credit(1) Commitments to extend credit(2) Total Derivative Financial Instruments (notional amounts) Interest rate contracts(3) Equity contracts(4) Total Assets Under Administration 2001 2000 $ 44,006 $ 42,489 556,383 442,667 $ 600,389 $ 485,156 $ 372,000 $ 269,000 9,005 3,535 $ 381,005 $ 272,535 $ 873,538 $ 741,181 (1) Letters of credit and guarantees are issued on behalf of clients to third party beneficiaries as part of normal business operations. (2) Commitments to extend credit to customers arise in the normal course of business. Includes undrawn availability authorized under lines of credit and commercial operating loans of $239 million (3) (2000 - $183 million) and recently authorized but unfunded loan commitments of $317 million (2000 - $260 million). Interest rate swaps are used as hedging devices to control interest rate risk.The outstanding swaps mature between November 2001 and September 2006.The total gross positive replacement cost of interest rate swaps was $7,317 (2000 - $359).This market value represents an unrealized gain, or the payment the Bank would receive if these contracts were unwound and settled at that date. (4) 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 March 2006.The total gross positive replacement cost is $225 (2000 - $538). (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, 2001 and 2000 there were no forward foreign exchange contracts outstanding. More detailed information on the nature of off-balance sheet financial instruments is shown in Notes 12, 13 and 16 to the Consolidated Financial Statements. Continued use of interest rate swaps or other off-balance sheet hedging instruments is expected in the future for the purpose of asset liability structuring and management of interest rate risk. The Bank only enters into these off-balance sheet derivative financial instruments for its own account and does not act as an intermediary in this market. Transactions are entered into on the basis of industry standard contracts with approved counterparties subject to periodic and at least annual review. Policies regarding the use of off-balance sheet financial instruments are approved, reviewed, and monitored on a regular basis by ALCO and reviewed and approved by the Board of Directors at least annually. Trust assets under administration, administered by CWT, totalled approximately $874 million at October 31, 2001 (2000 - $741 million). These assets are primarily in self- directed RRSPs and RRIFs. Trust assets under administration are held in 12,814 accounts (2000 – 11,468), an increase of 12% from one year ago. Assets under administration, and the related fee income, are expected to increase in 2002. 15,000 12,000 9,000 6,000 3,000 0 Number of Self-directed Accounts 4 1 8 , 2 1 8 6 4 , 1 1 7 0 0 , 9 7 4 8 , 6 5 3 3 , 6 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 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 including the requirements of the Bank Act and related rules and regulations issued by the Superintendent of Financial Institutions Canada. 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. 51 1 0 0 2 b w c 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” “Tracey C. Ball” Larry M. Pollock President and Chief Executive Officer November 30, 2001 Tracey C. Ball, C.A. Senior Vice President and Chief Financial Officer 52 1 0 0 2 b w c Auditors’ Report TO THE SHAREHOLDERS OF CANADIAN WESTERN BANK We have audited the Consolidated Balance Sheet of Canadian Western Bank as at October 31, 2001 and 2000 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, 2001 and 2000 and the results of its operations and its cash flow for the years then ended in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions Canada. “Deloitte & Touche LLP” Deloitte & Touche LLP Chartered Accountants Edmonton, Alberta November 30, 2001 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 Total Liabilities and Shareholders’ Equity 53 1 0 0 2 b w c 2001 2000 (restated Note 2 ) $ 1,945 $ 1,460 190,978 39,885 232,808 118,549 117,034 32,837 268,420 75,000 552,585 2,255,051 2,882,636 16,014 39,690 55,704 168,652 44,823 214,935 103,227 97,920 30,269 231,416 84,932 503,142 1,972,018 2,560,092 14,750 38,347 53,097 $ 3,439,568 $ 3,059,540 $ 78,562 $ 71,572 370,566 2,593,179 3,042,307 293,370 2,362,867 2,727,809 77,873 70,010 13,126 54,000 67,126 143,942 108,320 252,262 13,126 54,000 67,126 111,342 83,253 194,595 $ 3,439,568 $ 3,059,540 (Note 3) (Notes 4 & 5) (Note 6) (Note 7) (Note 8) (Note 9) (Note 10) “Jack C. Donald” Jack C. Donald Chairman “Larry M. Pollock” Larry M. Pollock President and Chief Executive Officer 54 1 0 0 2 b w c 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 2001 2000 (restated Note 2 ) $ 210,668 $ 192,006 14,319 8,906 233,893 144,404 3,988 148,392 85,501 6,096 79,405 10,262 3,397 2,252 3,847 19,758 99,163 30,469 10,084 10,150 1,878 52,581 46,582 16,437 30,145 – 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 6,041 29,394 3,045 $ 30,145 $ 26,349 12,000,926 11,133,880 14,344,438 13,649,587 $ $ $ $ 2.51 2.31 2.51 2.31 $ $ $ $ 2.65 2.44 2.37 2.21 (Note 5) (Note 11) (Note 18) (Note 1(k)) (Note 1(k)) 55 1 0 0 2 b w c Consolidated Statement of Changes in Shareholders’ Equity For the year ended October 31 ($ thousands) Capital Stock Balance at beginning of year Common shares issued Balance at end of year Retained Earnings Balance at beginning of year, as previously stated Restatement – income taxes Balance at beginning of year, restated Net income Dividends (Note 10) (Note 2) Share issue costs, net of income taxes of $534 (2000 - $175) (Note 10) Balance at end of year Total Shareholders’ Equity 2001 2000 $ 111,342 $ 98,484 32,600 143,942 12,858 111,342 83,853 (600 ) 83,253 30,145 (4,273 ) (805 ) 108,320 61,066 – 61,066 26,349 (3,779 ) (383 ) 83,253 $ 252,262 $ 194,595 56 1 0 0 2 b w c 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 Future 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) 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 (Note 10) Cash Flows Used in Investing Activities Loans, net Interest bearing deposits with regulated financial institutions, net Securities, net Land, buildings and equipment, net (Decrease) 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 2001 2000 (restated Note 2 ) $ 30,145 $ 29,394 6,096 3,279 8,126 (2,328 ) 92 (1,353 ) 44,057 – – 44,057 5,100 3,006 13,716 (49 ) 7,753 (7,731 ) 51,189 (3,045 ) (13,780 ) 34,364 314,498 356,734 (4,273 ) 31,261 (3,779 ) 735 341,486 353,690 (328,640 ) (311,594 ) (22,441 ) (34,676 ) (4,354 ) (44,194 ) (26,176 ) (5,339 ) (390,111 ) (387,303 ) (4,568 ) 48,020 751 47,269 $ 43,452 $ 48,020 $ 232,808 $ 214,935 189,356 166,915 $ 43,452 $ 48,020 $ 146,618 $ 126,728 $ 2,190 $ 1,514 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57 1 0 0 2 b w c October 31, 2001 ($ thousands, unless otherwise stated) 1. SIGNIFICANT ACCOUNTING POLICIES 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. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the year. Actual results could differ from those estimates. a) Basis of Consolidation The consolidated financial statements include the assets, liabilities and results of operations of the Bank and all of its subsidiaries, after the elimination of inter company 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) Securities Securities are held in either the investment account or the trading account. Investment account securities are purchased with the original intention to hold the securities to maturity or until market conditions render alternative investments more attractive. 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 realized on disposal of securities and adjustments to record any permanent impairment in value are included in other income. Amortization of premiums and discounts are reported in interest income from securities in the Consolidated Statement of Income. Trading account securities, which are purchased for resale over a short period of time, are carried at estimated current market value. Gains and losses realized on disposal and adjustments to market value are reported in other income in the Consolidated Statement of Income in the period during which they occur. c) Loans Loans are stated net of unearned income and an allowance for credit losses (Note 1(d)). Interest income is recorded on the accrual basis except for loans classified as impaired. Loans are determined to be impaired when 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 58 1 0 0 2 b w c 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. 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. d) Allowance for Credit Losses 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 identified impaired loans required to reduce the carrying value of those loans to their estimated realizable amount. 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. 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) Securities Purchased Under Resale Agreements 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) Land, Buildings and Equipment Land is carried at cost. Buildings, equipment and furniture, and leasehold improvements are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated primarily using the straight-line method over the estimated useful life g) Translation of Foreign Currencies 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) Loan Fees Loan fees, net of directly related costs, are amortized to interest income over the expected term of the loan when such fees are considered to be an integral part of the return earned on the particular loan. Loans are stated net of unamortized fees. i) Income Taxes The Bank follows the asset and liability method of accounting for income taxes whereby current income taxes are recognized for the estimated income taxes payable for the current year. Future tax assets and liabilities represent the cumulative amount of tax applicable to temporary differences between the carrying amount of the assets and liabilities, and their values for tax purposes. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in future income taxes related to a change in tax rates are recognized in income in the period of the tax rate change. All future income tax assets are expected to be realized in the normal course of operations. j) Derivative Financial Instruments 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. 59 1 0 0 2 b w c k) Earnings per Common Share Basic earnings per common share is calculated based on the average number of common shares outstanding during the year. Fully diluted earnings per share is calculated based on the imputed earnings method and includes the effect of all potential dilutive factors on earnings per common share. l) Stock Option Plans The Bank has stock option plans which are described in Note 10. No expense is recognized for these plans 2. CHANGE IN ACCOUNTING POLICY – INCOME TAXES Effective November 1, 2000, the Bank adopted the asset and liability method of accounting for corporate income taxes as described in Note 1(i). Prior to November 1, 2000, the deferral method of accounting for income taxes was used. The provisions were applied retroactively with restatement of the prior year’s financial statements. As a result of the restatement, future income tax assets (included in Other Assets) were increased and deferred revenue (included in Other Liabilities) relating to unclaimed tax deductions was recorded. Future income tax assets relating to temporary differences between the tax and accounting bases of assets and liabilities were reduced by $600 with a corresponding increase to tax expense in 2000 to reflect the reduction in corporate income tax rates announced in the February 2000 federal budget. when the stock options are issued to the employees. Any consideration paid by employees on exercise of stock options is credited to share capital. m) Employee Future Benefits Effective November 1, 2000, the Bank adopted a new accounting pronouncement which requires that all employee future benefits be accounted for on an accrual basis. There is no material impact on the financial statements resulting from this change. Comparative financial statements as at October 31, 2000 were restated as follows: Other assets increased Other liabilities increased Net income and shareholders’ equity decreased $ 3,511 4,111 600 In addition, a net future income tax liability of $426 has been reclassified from Other Assets to Other Liabilities to comply with the new provisions. 3. SECURITIES 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. Includes securities with no specific maturity. (2) Maturities Within 1 Year Over 1 to 3 Years Over 3 to 5 Years Over 5 Years 2001 Total Book Value 2000 Total Book Value $ 67,243 $ 40,044 $ 6,169 $ 17,048 39,984 51,023 5,093 8,979 $ 118,549 $ 103,227 117,034 97,920 – – 14,547 $ 98,838 $ – – 15,701 95,729 – – – $ 57,192 $ 1,000 – 1,589 (2) 16,661 1,000 – 31,837 1,000 19,954 9,315 $ 268,420 $ 231,416 60 1 0 0 2 b w c The analysis of unrealized gains and losses on investment securities is as follows: 2001 2000 Book Unrealized Unrealized Losses Gains Value Estimated Market Value Book Unrealized Gains Value Unrealized Losses Estimated Market Value Securities Issued or Guaranteed by: Canada A province Other Debt Securities Floating rate notes Other debt Equity Securities Total $ 118,549 $ 1,169 $ 1 $ 119,717 $ 103,227 $ 117,034 4,554 1,000 – 31,837 – – 55 – – – 121,588 97,920 1,000 – 1,000 19,954 9,315 148 31,744 5 38 – 5 72 $ 69 $ 103,163 189 97,769 – 27 731 1,000 19,932 8,656 $ 268,420 $ 5,778 $ 149 $ 274,049 $ 231,416 $ 120 $ 1,016 $ 230,520 4. IMPAIRED LOANS 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) 2001 Specific Provisions Gross Amount $ 2,369 $ 16,483 6,120 10,508 35,480 – 443 2,533 1,816 2,113 6,905 21,453 Carrying Amount 2000 Carrying Amount $ 1,926 $ 2,373 13,950 4,304 8,395 28,575 (21,453 ) 13,454 5,217 4,106 25,150 (20,915 ) $ 35,480 $ 28,358 $ 7,122 $ 4,235 (1) The general allowance for credit risk is available for the total loan portfolio. (2) Impaired loans include foreclosed real estate assets held for sale with a gross carrying value of $826 (2000 - $1,561) and a related specific allowance of $146 (2000 - $171). At October 31, 2001 other past due loans totalled $nil (2000 - $1,828). 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 $1,320 (2000 - $714). 5. ALLOWANCE FOR CREDIT LOSSES The following table shows the changes in the allowance for credit losses during the year. Balance at beginning of year Provision for credit losses Write-offs Recoveries Balance at end of year 2001 General Allowance for Credit Risk Total Specific Provisions 2000 General Allowance for Credit Risk Total $ 20,915 $ 26,862 $ 538 – – 6,096 (4,619 ) 19 5,172 5,033 (4,480 ) 222 $ 20,848 $ 26,020 67 – – 5,100 (4,480 ) 222 Specific Provisions $ 5,947 5,558 (4,619 ) 19 $ 6,905 $ 21,453 $ 28,358 $ 5,947 $ 20,915 $ 26,862 The Bank has virtually no loans booked outside of Canada and therefore has no country risk provisions. 61 1 0 0 2 b w c 6. LAND, BUILDINGS AND EQUIPMENT Land Buildings Equipment and furniture Leasehold improvements Total 2001 Accumulated Depreciation and Amortization $ – 1,948 9,578 3,400 $ Cost 2,753 3,190 16,045 8,952 2000 Net Book Value 2,753 1,375 6,651 3,971 $ $ Net Book Value 2,753 1,242 6,467 5,552 $ 30,940 $ 14,926 $ 16,014 $ 14,750 Depreciation and amortization for the year amounted to $3,085 (2000 - $2,752). 7. OTHER ASSETS Accrued interest receivable Future income tax asset Prepaid expenses Deferred premiums and financing costs(1) Taxes receivable Other Total (Note 11) 2001 2000 (restated Note 2 ) $ 14,938 $ 13,256 6,777 6,254 5,051 3,697 2,973 14,433 5,839 1,211 1,535 2,073 $ 39,690 $ 38,347 (1) The Consolidated Statement of Income includes amortization of deferred premiums and financing costs in interest income/expense of $322 (2000 – $150) and in other expenses of $13 (2000 – $13). 8. OTHER LIABILITIES Accrued interest payable Taxes payable Accounts payable Deferred revenue Future income tax liability Other Total 2001 2000 (restated Note 2 ) $ 59,391 $ 57,617 11,987 5,087 708 362 338 525 4,811 4,712 426 1,919 $ 77,873 $ 70,010 (Note 11) 62 1 0 0 2 b w c 9. SUBORDINATED DEBENTURES 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) Total Interest Rate Maturity Date 6.660 % March 31, 2007 $ 6.590 % 6.415 % June 30, 2007 July 31, 2007 5.500 % March 31, 2008 5.700 % July 31, 2009 2001 5,000 3,126 5,000 13,126 50,000 4,000 54,000 $ 2000 5,000 3,126 5,000 13,126 50,000 4,000 54,000 $ 67,126 $ 67,126 (1) Each of the conventional debentures has a ten year term with a fixed interest rate for the first five years.Thereafter, if not redeemed by the Bank, interest will be payable at a rate equal to the Canadian Dollar CDOR 90 day Bankers Acceptance Rate plus 1%. (2) These debentures are convertible into common shares at the option of the holder at any time prior to maturity, or the date specified for conversion by the Bank, whichever is earlier, at a conversion price of $30.50 per share (1,639,344 shares). At any time after March 31, 2003 the debentures are convertible by the Bank. (3) 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). 10. CAPITAL STOCK 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 equity offering Issued on conversion of debentures and exercise of options(1) Outstanding at End of Year 2001 2000 Number of Shares Amount Number of Shares Amount 11,216,417 $ 111,342 10,172,191 $ 98,484 1,100,000 243,932 29,425 3,175 – – 1,044,226 12,858 12,560,349 $ 143,942 11,216,417 $ 111,342 (1) In 2001, 243,932 (2000 – 119,026) options were exercised, at a weighted average exercise price of $13.02 (2000 - $10.86). In 2000, $11,565 of the 6.75% debentures were converted into 925,200 shares. 63 1 0 0 2 b w c On April 3, 2001, the Bank completed an issue of 1,100,000 common shares. Gross cash proceeds totalled $29,425 and $805 was charged to retained earnings for share issue expenses, net of future income taxes. The Bank has subordinated debentures which are convertible to common shares of the Bank as more fully described in Note 9. 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 future income taxes. The Bank also has authorized 1,126,873(1) common shares (2000 – 1,107,805) for issuance under option plans. Of the amount authorized, options exercisable into 1,077,783 shares are issued and outstanding (2000 – 1,039,870) 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 $26.12. Their weighted average remaining contractual life is 4.0 years and they expire on dates ranging from June 2003 to December 2007. The details of and changes in the issued and outstanding options follow: Options Balance at beginning of year Granted Exercised Forfeited Balance at end of year Exercisable at end of year (1) Of this amount, 170,000 options are subject to shareholder and Toronto Stock Exchange approval. 11. INCOME TAXES Income taxes consist of the following: Consolidated Statement of Income Current Future Future federal and provincial tax rate reductions Provision for income taxes Income tax benefit relating to loss from discontinued operations Shareholders’ Equity Income tax benefit related to share issue expenses Total income taxes 2001 Weighted Average Exercise Price 14.28 25.50 13.02 17.94 17.56 14.67 Number of Options 1,039,870 $ 289,445 (1) (243,932 ) (7,600 ) 1,077,783 389,669 $ $ 2000 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 $ $ 2001 2000 (restated Note 2 ) $ 8,311 6,876 15,187 1,250 16,437 – 16,437 $ (7,675 ) 13,116 5,441 600 6,041 (2,074 ) 3,967 (534 ) (175 ) $ 15,903 $ 3,792 64 1 0 0 2 b w c A reconciliation of the statutory tax rates and income tax that would be payable at these rates to the effective income tax rates and provision for income taxes that is reported in the Consolidated Statement of Income is as follows: Combined Canadian federal and provincial income taxes and statutory tax rate $ 20,341 43.7 % $ 16,017 45.2 % 2001 2000 (restated Note 2) Permanent differences Deferred revenue from unclaimed deductions for tax Tax-exempt income Temporary differences Unclaimed deductions for tax Origination and reversal Large corporations tax Other Future federal and provincial tax rate reductions(1) Provision for income taxes and effective tax rate (4,100 ) (281 ) (6,840 ) 6,876 444 (1,253 ) 15,187 1,250 (8.8 ) (0.6 ) (14.7 ) 14.8 1.0 (2.7 ) 32.7 2.7 (11,102 ) (254 ) (12,788 ) 13,116 604 (152 ) 5,441 600 (31.3 ) (0.7 ) (36.1 ) 37.0 1.7 (0.5 ) 15.3 1.7 $ 16,437 35.4 % $ 6,041 17.0 % (1) Future federal and provincial tax rate reductions represent the write-down of future income tax assets to reflect corporate income tax rate reductions enacted for accounting purposes. Future income tax balances are comprised of the following: Net future income tax asset Allowance for credit losses Unclaimed deductions for tax Other temporary differences Net future income tax liability of subsidiary Allowance for credit losses Other temporary differences 2001 $ $ $ $ 8,122 – (1,345 ) 6,777 (288 ) 650 362 $ $ $ $ 2000 8,982 6,503 (1,052 ) 14,433 (331 ) 757 426 At October 31, 2001, the Bank has approximately $11,796 (2000 - $11,796) of capital losses which are available to apply against future capital gains and have no expiry date. The tax benefit of these losses has not been recognized in income. 12. CONTINGENT LIABILITIES AND COMMITMENTS a) Off-Balance Sheet Instruments In the normal course of business, the Bank enters into various commitments and has contingent liabilities which are not reflected in the Consolidated Balance Sheet. These items are reported below and are expressed in terms of the contractual amount of the related commitment. Credit Instruments Guarantees and standby letters of credit Commitments to extend credit Total 2001 2000 $ 44,006 $ 42,489 556,383 442,667 $ 600,389 $ 485,156 65 1 0 0 2 b w c 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. Guarantees and standby letters of credit are issued on behalf of clients to third party beneficiaries as part of normal business operations. In the event of a call on any of these instruments, the Bank has recourse against its client. Issuance of guarantees and standby letters of credit is subject to the same credit assessment, approval, monitoring and control procedures as the extension of direct loans. Losses, if any, resulting from these transactions are not expected to be material. Commitments to extend credit to customers also arise in the normal course of business and include recently authorized credit facilities not yet drawn down or credit facilities available on a revolving basis. In the majority of instances, availability of undrawn commercial commitments is subject to the borrower meeting specified financial tests or other covenants regarding completion or satisfaction of certain conditions precedent. It is also usual practice b) Lease Commitments The Bank has obligations under long-term non- cancellable leases for the rental of premises and office equipment. Minimum future lease commitments for each of the five succeeding years and thereafter are as follows: 2002 2003 2004 2005 2006 2007 and thereafter Total $ $ 4,037 4,192 3,919 3,486 3,416 10,646 29,696 13. TRUST ASSETS UNDER ADMINISTRATION Trust assets under administration of $873,538 (2000 - $741,181) 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. 14. RELATED PARTY TRANSACTIONS 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 $18,086 (2000 - $17,577). 15. FAIR VALUE OF FINANCIAL INSTRUMENTS 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. 66 1 0 0 2 b w c 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, 2001 and 2000 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 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 3. 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 terms; and the fair values of subordinated debentures 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. 2001 Book Value Fair Value Fair Value Over (Under ) Book Value Book Value 2000 Fair Value Over (Under ) Fair Value (3) Book Value (Note 3) $ 232,808 $ 232,808 $ – $ 214,935 $ 214,935 $ 268,420 274,049 2,882,636 2,907,653 19,474 19,474 5,629 25,017 – 231,416 2,560,092 15,612 230,520 2,542,528 15,612 3,042,307 3,091,461 49,154 2,727,809 2,725,890 76,610 67,126 76,610 69,729 – 2,603 63,255 67,126 63,255 66,620 – (896 ) (17,564 ) – (1,919 ) – (506 ) Assets Cash resources Securities Loans Other assets(1) Liabilities Deposits Other liabilities(2) Subordinated debentures Off-Balance Sheet Derivative Financial Instruments Net asset (Note 16) $ 6,807 $ 455 The table does not include assets and liabilities that are not considered financial instruments, such as land, buildings and equipment. (1) Other assets exclude future income tax asset, prepaid expenses, deferred premiums and financing costs and other items which are not financial instruments. (2) Other liabilities exclude future income tax liability, deferred revenue and other items which are not financial instruments. (3) During the year, the method of calculating the interest rates used to discount the expected future cash flows for loans and deposits was changed. In order to provide meaningful year-over-year comparison, comparative fair value amounts for 2000 have been restated. Fair value amounts for 2000 have changed as follows: loans decreased $3, 336 and deposits decreased $6,113. (4) 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. 67 1 0 0 2 b w c 16. DERIVATIVE FINANCIAL INSTRUMENTS 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 2001 Future Credit Credit Risk- Risk weighted Balance Notional Amount Replace- ment Cost Exposure Equivalent 2000 Future Credit Credit Risk- Risk weighted Balance Exposure Equivalent Interest Rate Contracts Interest rate swaps Equity Contracts Total $ 372,000 $ 7,317 $ 935 $ 8,252 $ 1,650 $ 269,000 $ 359 $ 320 $ 679 $ 9,005 225 720 945 189 3,535 538 283 821 $ 381,005 $ 7,542 $ 1,655 $ 9,197 $ 1,839 $ 272,535 $ 897 $ 603 $ 1,500 $ 136 164 300 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). 2001 2000 Favourable Contracts (Assets) Unfavourable Contracts (Liabilities) Favourable Contracts (Assets) Unfavourable Contracts (Liabilities) Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value $ 352,000 $ 7,317 $ 20,000 $ 12 $ 170,000 $ 1,610 225 7,395 723 3,410 $ 353,610 $ 7,542 $ 27,395 $ 735 $ 173,410 $ 359 538 897 $ $ 99,000 $ 125 99,125 $ 440 2 442 Interest Rate Contracts Interest rate swaps Equity Contracts Total 68 1 0 0 2 b w c 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) 2001 2,925 598 $ $ 2000 842 748 $ $ The following table summarizes maturities of off-balance sheet financial instruments and weighted average interest rates paid and received on interest rate contracts. 2001 Maturity 2000 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 $ 185,000 4.60 % $ 187,000 5.01 % $ 205,000 6.02 % $ 64,000 5.90 % – $ 185,000 9,005 $ 196,005 – $ 205,000 3,535 $ 67,535 Interest Rate Contracts Interest rate swaps - receive fixed amounts(1) Equity Contracts(1)(2) Total (1) The Bank pays (floating) interest amounts based on the one month (30 day) Canadian bankers’ acceptance rate. (2) The contractual interest rate is not meaningful for equity contracts.The Bank receives amounts based on the increase in an equity index. 17. RISK MANAGEMENT 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 41 to 49 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 47 to 49 of Management’s Analysis of Operations and Financial Condition. 18. DISCONTINUED OPERATIONS On December 21, 1999 the Bank announced the sale of its brokerage subsidiary, which closed February 16, 2000. An after tax loss of $3,045, including the operating loss and loss on disposal, was charged to discontinued operations in 2000. 19. SEGMENTED INFORMATION The Bank operates principally in personal and commercial banking in Canada. 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 commercial business clients primarily in western Canada. 69 1 0 0 2 b w c 20. SUBSIDIARIES Canadian Western Bank Subsidiaries (annexed in accordance with subsection 308 (3) of the Bank Act) October 31, 2001 Address of Head Office Canadian Western Trust Company 10303 Jasper Avenue Edmonton, Alberta CWB Canadian Western Financial Ltd. 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 Voting Shares Owned by the Bank (1) 13,938 – $ $ Percentage of Issued and Outstanding Voting Shares Owned by the Bank 100 % 100 % 21. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform with the current year presentation. 70 1 0 0 2 b w c CORPORATE GOVERNANCE Introduction The Board of Directors and management of the Bank are committed to govern and maintain the Bank’s operations effectively and efficiently within its regulatory environment. The Corporate Governance & Human Resources Committee provides direction, monitors compliance and makes recommendations to the Board on the optimum approach to governance issues to enhance corporate performance. The Board and Board Committees The Board is currently comprised of thirteen members. The number of directors reflects the desire to have the members represent the geographical jurisdictions in which the Bank operates and the need to fill the memberships of the two required committees, the Audit and Conduct Review Committees, and the other board committees which are the Loans Committee and the Corporate Governance & Human Resources Committee. The Board has reviewed the status of each of its directors and determined if they are “affiliated” (as defined by the affiliation rules set forth in the Bank Act (the ”Act”)) or “unrelated”, as defined in the Toronto Stock Exchange (“TSE”) guidelines on corporate governance. As a result of this review, the Board has determined that one of the directors is affiliated (the CEO) and he is also the only inside director. All other directors are “unrelated”. At the time of appointment to the Board, at least 75 percent of the board members must be resident Canadians and no more than four members may be employees of the Bank. The Chairman is an independent director and is appointed annually by the members of the Board. Responsibilities not delegated to senior management or to a committee of the Board remain those of the full Board. The Board expects all significant risks and internal controls to be identified and reported upon by senior management to the Board and/or its committees. The Board holds four regular meetings each year, as well as additional meetings as required. Most committees meet quarterly and all meet annually at a minimum. A meeting agenda matrix is issued to ensure meetings of the Board and its committees are efficient and complete. The Board of Directors as a whole has expressly assumed responsibility for developing the Bank’s approach to governance issues although the Corporate Governance & Human Resources Committee plays a key role by recommending and reporting on governance issues to the Board. In addition, certain governance issues have been delegated to other committees of the Board. The Act contains several sections dealing with the governance of a bank through its board of directors. These sections prescribe matters such as limitations on the number of directors who can be affiliated or non-resident, certain powers that must be transacted by the full Board, and requirements to establish both an audit committee and a conduct review committee. The Act also prescribes certain minimum benchmarks for board and committee membership, quorums and the transaction of business by the Board. The three encompassing duties in the Act that form the basis for the Board’s mandate are: • • • to manage or supervise the management of the business and affairs of the Bank; to act honestly and in good faith with a view to the best interests of the Bank and exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances; and to comply with the Act, the regulations, the Bank’s incorporating instrument and its by-laws. 71 1 0 0 2 b w c The mandate of the Board also includes references to compliance with the Canada Deposit Insurance Corporation's (“CDIC”) Standards of Sound Business and Financial Practices. Generally speaking, the current practices and related standards covered all major risk areas of a bank and called 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. The areas of real estate appraisals and credit risk management have been delegated to the Loans Committee of the Board. CDIC with consultation from the Canadian Bankers Association has recently completed the modernization of the Standards. The first reporting cycle under the new Standards commences in July 2002. Similar to the previous process, an annual attestation on adherence to the modernized Standards (covering the broad areas of Corporate Governance, Strategic Management, Risk Management, Liquidity and Funding Management, Capital Management, Control Environment, Business Conduct and Process to Ensure Control) will be required. The mandate of the Board also specifically includes other matters which are not necessarily stated in the Act or in the CDIC standards and they are summarized as follows: • • approve the annual statement and specified returns, prior to release to the public or submission to OSFI; review and approve the annual strategic business plan and accompanying capital plan and financial operating budget, including capital expenditures; • declare dividends; • outline the content and frequency of management reports on financial operations; review and ratify the employment, appointment, grade levels and compensation of the top five executive employees and approve all senior officer appointments; review succession plans; review any recommendations from regulators or external auditors respecting their assessment of the effectiveness of the internal controls that come to their attention in the conduct of their work; ensure an independent audit/inspection function is in place to monitor the effectiveness of organizational and procedural controls; review and accept reports from the Audit, Conduct Review and Corporate Governance & Human Resources Committees; and approve loan write-offs. • • • • • • 72 1 0 0 2 b w c Audit Committee This committee is comprised of five outside directors and its mandate is summarized as follows: • • • • review the annual statement and other required and related annual public documents and report thereon to the directors before approval is given; review such returns as OSFI may specify; require management to implement and maintain appropriate internal control procedures. Review, evaluate and approve those procedures; review such investments and transactions of the Bank, that could adversely affect the well-being of the Bank as the shareholders’ auditor or any officer of the Bank may bring to the attention of the committee; • meet with the shareholders’ auditor to discuss the annual statements and the returns and transactions referred to within the mandate; • meet with the chief inspector and management to discuss reports on internal audit activities and findings and the effectiveness of the internal control procedures established for the Bank. Review the mandate and annual plan of the internal audit department; review the quarterly reports to the shareholders, including the interim unaudited statements, and report thereon to the directors before approval is given; • Conduct Review Committee This committee is comprised of four outside directors and its mandate is summarized as follows: • • establish procedures to ensure disclosure of transactions with specified related parties of the Bank and, further, to review any such transactions to ensure compliance with the Act, either approving or declining the transactions, as required; review and approve internal policies for credit arrangements and financial services available to employees of the Bank under the regulations concerning officers and associated parties; • monitor aggregate transactions of the Bank with directors as well as officers and their interests to ensure continued compliance with the Act with excesses brought to the Board for consideration; • • • • • • review a quarterly report from the Loans Committee of the Board, concerning the quality of the loan portfolio, the adequacy of the allowance for credit losses and accounts recommended for write-off; review the CDIC Standards Assessment and Reporting Program (SARP) annually and report thereon to the directors before approval is given; review the terms of the shareholders’ auditor’s engagement, their level of compensation, the audit plan, any proposed changes in accounting policies, their presentation and input concerning significant risks and key estimates and judgements of management; review the independence of the shareholders’ auditor; review correspondence received from regulators concerning the effectiveness of internal controls within the Bank or other matters falling within the responsibility of the Committee, including a review of the shareholders’ auditor’s management letter and OSFI’s annual review letter and management’s responses thereto; review the appointment of the Chief Financial Officer and the Chief Inspector; • meet regularly with the internal and external auditors • • without management present; and as the Committee sees as fit and proper, review other items or matters that may affect the well-being of the Bank. review the conduct policy on an annual basis to ensure relevance and completeness in regard to legislative requirements; • monitor procedures for conflicts of interest, confidential information, disclosure of information and handling of customer complaints, and be satisfied that the procedures are being adhered to; ensure every employee, officer and Board member agrees to comply, in writing, with annual acknowledgement, with the Bank’s conduct policy; and after each meeting provide a report to the directors on all transactions and other matters reviewed by the committee. • • 73 1 0 0 2 b w c - share incentive plans and similar arrangements involving the grant of share options, or other benefits to employees attendant upon the issuance of securities, and, in addition, to make grants of options under any share incentive plan and generally to administer such plans, subject to necessary regulatory and shareholder approval; and - annuity, pension, and retirement programs for executive employees; • • • • • review the human resource succession plan as prepared by senior management for all officers and any other senior position considered critical to operations; seek and recommend individuals to be considered for Board membership, as required by the Board, and forward their recommendations with written rationale, compared against published terms of reference, to the Board for their consideration; review, monitor, and make recommendations regarding new director orientation and the ongoing development of existing Board members; evaluate, at least bi-annually, Board membership (including composition and size) and the involvement/performance of the membership with concerns recorded, and brought to the attention of the committee chair, who, in conjunction with the committee, determines if further action is required; review and recommend to the Board the fees and other benefits to be paid to directors; and • make recommendations to the Board regarding revisions or additions to the Board of Directors Manual. Corporate Governance & Human Resources Committee This committee is comprised of six outside directors and its mandate is summarized as follows: • • recommend to the Board appropriate structure and process required to address governance issues and maintain compliance with all corporate governance guidelines; review and monitor compliance with corporate governance guidelines and follow any issues noted by the members or as reported to them by management or other directors from time to time; • no less than annually, report to the Board on corporate governance issues and any instances of non-compliance, together with appropriate recommendations; • • • hire appropriate consultants, or request management to perform studies and to furnish other information as required; to review such information and take such actions based thereon as appropriate; review and recommend to the Board the employment and appointment of the top five executive employees, to establish their grade levels and compensation, as well as to determine promotions and to make changes in the level of compensation and grade of incumbent executive employees and officers; review the position descriptions for the top five executive employees, ensuring they remain current and accurate and, further, to also ensure position descriptions are in place for all other executive officers; establish an executive compensation structure to compensate all levels of executive employees and, within such compensation structure as may at that time be in effect, to make adjustments and annual revisions as necessary; ensure an annual performance appraisal is completed for the CEO and that it is reviewed with him by the Chairman of the Board; establish, amend and, where appropriate, terminate: - programs and other personal benefits granted • • • to executive employees; - incentive compensation plans and other bonus arrangements, to administer such plans and to make appropriate interpretations and determinations as required; 74 1 0 0 2 b w c Loans Committee Other Areas of Consideration This committee is comprised of nine directors, eight of whom are unrelated. The CEO, who is an affiliated, inside director, is a member of this Committee. Its mandate is summarized as follows: • • • • • • establish and approve a lending limit for the Bank and the CEO within the limits established by the Board and review such limits at least annually; review, approve and/or decline all credit applications for amounts in excess of delegated limits up to the limit established, not to exceed ten percent of regulatory capital; recommend for approval of the full Board, any loan proposals in excess of the Bank’s limit; recommend for approval of the full Board loan proposals to directors, related entities and Bank subsidiaries; annually review and approve the credit risk management program and policies, including management’s real estate appraisal policies and procedures, to ensure they are sound, prudent and in accordance with CDIC standards; review 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 required on loans reported by management to be less than satisfactory. The Bank has not adopted a formalized process of orientation for new Board members although all directors are provided with a Directors Manual, outlining key governance information and reference material. It is worthy of note that seven of the twelve outside directors have served on the Board for twelve years or more. There is also a Board and member review and assessment program whereby every second year, directors complete a formal assessment of the operations and effectiveness of the Board and its committees. Every second year, directors may complete a formal assessment on individual directors’ effectiveness. In the current year a formal assessment on individual directors’ effectiveness was undertaken. 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. The Bank is also committed to ensuring quality and timely information is available to all shareholders. Inquiries and requests for information from shareholders and potential investors receive prompt attention from an appropriate officer. The 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. 75 1 0 0 2 b w c EXECUTIVE OFFICERS CHAIRMAN Jack C. Donald TREASURY & OPERATIONS Ricki L. Moffat Senior Assistant Vice President, Treasury and Agent Administration 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 INTERNAL AUDIT David R. Gillespie Vice President and Chief Inspector Blair R. Himmelreich Assistant Vice President OFFICE OF THE CHIEF EXECUTIVE OFFICER Larry M. Pollock President and Chief Executive Officer Allister J. McPherson Executive Vice President Jack C. Wright Vice President CREDIT RISK MANAGEMENT Donald C. Kemp Senior Vice President Chris H. Fowler Senior Assistant Vice President Wally N. Streit Senior Assistant Vice President Dennis M. Crough Assistant Vice President, Industrial Credit A. Wayne MacInnes Assistant Vice President L.W. (Les) Shore Assistant Vice President, Commercial Banking Ken W. Stewart Assistant Vice President CORPORATE & STRATEGIC OPERATIONS William J. Addington Executive Vice President Erwin Granson Assistant Vice President, Asset Management Richard N. Hallson Assistant Vice President, Corporate Lending MARKETING AND PRODUCT DEVELOPMENT R. Graham J. Gilbert Vice President 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 J. Richard Ferris Assistant Vice President Foothills Branch, Calgary Doug A. Finnie Assistant Vice President, Saskatoon Donald P. Grummett Assistant Vice President Lethbridge Ken R. MacDonald Assistant Vice President Regina Donald J. Odell Assistant Vice President Red Deer Al Steingart Assistant Vice President Chinook Station, Calgary COMMERCIAL BANKING NORTHERN ALBERTA REGION William A. Book Vice President and Regional Manager Ken Arndt Assistant Vice President South Edmonton Common Ron S. Baker Assistant Vice President West Point, Edmonton David M. Castell Assistant Vice President Main Branch, Edmonton Gary L. Comber Assistant Vice President, Real Estate Lending Main Branch, Edmonton Roger J. Delveaux Assistant Vice President and Deputy Manager Main Branch, Edmonton Wayne C. Dosman Assistant Vice President South Edmonton Common Robert Inkpen Assistant Vice President, Real Estate Lending Main Branch, Edmonton Heinz H. Kleist Assistant Vice President Southside 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 76 1 0 0 2 b w c COMMERCIAL BANKING BRITISH COLUMBIA REGION 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 Russ M. Burke Assistant Vice President Nanaimo Bob Duffield Assistant Vice President Park Place, Vancouver Ian G. Graham Assistant Vice President Kelowna Mark R.C. Ireton Assistant Vice President Park Place, Vancouver Gerald W. Laliberte Assistant Vice President Victoria Craig Martin Assistant Vice President Langley Dave McCosh Assistant Vice President Coquitlam CANADIAN WESTERN TRUST COMPANY - VANCOUVER Adrian M. Baker Vice President and General Manager Mario V. Furlan Assistant Vice President, Real Estate Lending Patrick F. Rennison Assistant Vice President, Real Estate Lending OMBUDSMAN W. Paul Lefaivre REAL ESTATE LENDING VANCOUVER INDUSTRIAL LENDING AND LEASING Raymond L. Young Vice President Robert E. Wigmore Senior Assistant Vice President W. Bruce Gibbard Assistant Vice President Jack B. Harms Assistant Vice President Donald C. Watson Vice President James O. Burke Assistant Vice President and District Manager Calgary Dean G. Cudmore Assistant Vice President Coquitlam Michael J. Docherty Assistant Vice President Foothills Branch, Calgary James S. Kitchin Assistant Vice President Kelowna Industrial Centre Taras D. Luciw Assistant Vice President West Point, Edmonton Keith C. MacLellan Assistant Vice President Grande Prairie David B. Subject Assistant Vice President Nanaimo John Van Boeyen Assistant Vice President Coquitlam BOARD OF DIRECTORS 77 1 0 0 2 b w c CANADIAN WESTERN BANK & TRUST Charles R. Allard2,3 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 Jack C. Donald2,4 Board Chairman Parkland Industries Ltd. Red Deer, Alberta Jordan L. Golding1 Corporate Director and Consultant Retired Partner KPMG Boston, Massachusetts, USA Allan W. Jackson2,3,4 President ARCI Ltd. Calgary, Alberta Wendy A. Leaney1,2 President Wyoming Associates Ltd. Toronto, Ontario Robert A. Manning1,4 President Cathton Holdings Ltd. Edmonton, Alberta Gerald A.B. McGavin, F.C.A., C.M.1,2 President McGavin Properties Inc. Vancouver, British Columbia Howard E. Pechet2,4 President Mayfield Consulting Inc. La Jolla, California, USA Robert L. Phillips2,4 Group President & CEO BCR Group of Companies North Vancouver, British Columbia Larry M. Pollock2 President and Chief Executive Officer Canadian Western Bank & Trust Edmonton, Alberta Alan M. Rowe, C.A.1 Senior Vice President, Chief Financial Officer and Corporate Secretary Crown Life Insurance Company Regina, Saskatchewan Arnold J. Shell2,3 President Arnold J. Shell Consulting Inc. Calgary, Alberta 1 2 3 4 Audit Committee Member Loans Committee Member Conduct Review Committee Member Corporate Governance & Human Resources Committee Member DIRECTORS EMERITUS John Goldberg Arthur G. Hiller Peter M.S. Longcroft Dr. Maurice W. Nicholson Alma M. McConnell Eugene I. Pechet Dr. Maurice M. Pechet Fred Sparrow SHAREHOLDER INFORMATION Canadian Western Bank & Trust Head Office Suite 2300, Canadian Western Bank Place 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Telephone: (780) 423-8888 Fax: (780) 423-8897 Website: www.cwbank.com Subsidiary Regional Office 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 Stock Exchange Listing The Toronto Stock Exchange Share Symbol: CWB Convertible Debenture Symbol: CWB.DB.A Corporate Secretary Charles R. Allard Rosedale Meadows Development Inc. Edmonton, Alberta Transfer Agent and Registrar Mailing Address Computershare 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. Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held on March 7, 2002 at the Fairmont Hotel MacDonald (Empire Ballroom), 10065 – 100th Street, Edmonton, Alberta at 2:00 p.m. (MST). Investor Relations For further financial information call Jon Kieran at Hume, Kieran Inc. (416) 868-1079, or fax (416) 868-6198, or visit our website at www.cwbank.com/investor_info 78 1 0 0 2 b w c BRANCH OFFICES 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 Branch Manager – Doug Finnie YORKTON #45, 277 Broadway Street E. Yorkton, Saskatchewan S3N 3G7 Telephone: (306) 782-1002 Branch Manager – Barb Apps Manitoba WINNIPEG 234 Portage Avenue Winnipeg, Manitoba R3C 0B1 Telephone: (204) 956-4669 Branch Manager – Robert Bean Canadian Western Trust BRITISH COLUMBIA 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 Alberta EDMONTON Edmonton Main 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 Telephone: (780) 424-4846 Deputy Branch Manager – Roger Delveaux 103rd Street Canadian Western Bank Place 10303 Jasper Avenue Edmonton, Alberta T5J 3N6 Telephone: (780) 423-8801 Branch Manager – Jake Muntain South Edmonton Common 2142 – 99 Street Edmonton, Alberta T6N 1L2 Telephone: (780) 988-8607 Branch Manager – Wayne Dosman Southside 7933 - 104 Street Edmonton, Alberta T6E 4C9 Telephone: (780) 433-4286 Branch Manager – Heinz Kleist West Point 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 606 - 4th Street S.W. Calgary, Alberta T2P 1T1 Telephone: (403) 262-8700 Branch Manager – Michael Halliwell Calgary Northeast 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 6127 Barlow Trail S.E. Calgary, Alberta T2C 4W8 Telephone: (403) 269-9882 COQUITLAM Unit 310, 101 Schoolhouse Street Coquitlam, BC V3K 4X8 Telephone: (604) 540-8829 Branch Manager – Rick Ferris Branch Manager – David McCosh RED DEER 5013 - 49 Avenue Red Deer, Alberta T4N 3X1 Telephone: (403) 341-4000 COURTENAY 470 Puntledge Road Courtenay, B.C. V9N 3R1 Telephone: (250) 334-8888 Branch Manager – Don Odell Branch Manager – Alan Dafoe LETHBRIDGE 744 - 4th Avenue South Lethbridge, Alberta T1J 0N8 Telephone: (403) 328-9199 Branch Manager – Donald Grummett KELOWNA Kelowna 1674 Bertram Street Kelowna, B.C. V1Y 9G4 Telephone: (250) 862-8008 Branch Manager – Ian Graham GRANDE PRAIRIE INDUSTRIAL LENDING CENTRE 5th Floor, 214 Place Kelowna Industrial Centre #101, 1505 Harvey Avenue Kelowna, B.C. V1Y 6G1 Telephone: (250) 860-0088 9909 - 102 Street Branch Manager – James Kitchin 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 2899 Granville Street Vancouver, B.C. V6H 3J4 Telephone: (604) 730-8818 Branch Manager – Rob Berzins Park Place 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 Cranbrook Satellite Office 2009 – 5th Street South Cranbrook, BC V1C 1K6 Telephone: (250) 426-1140 Account Manager – Mike Eckersley LANGLEY 19915 – 64th Avenue Langley, B.C. V2Y 1G9 Telephone: (604) 539-5088 Branch Manager – Craig Martin NANAIMO 6475 Metral Drive Nanaimo, B.C. V9T 2L9 Telephone: (250) 390-0088 Branch Manager – Russ Burke SURREY Strawberry Hill 7548 - 120 Street Surrey, B.C. V3W 3N1 Telephone: (604) 591-1898 Branch Manager – Richard Howard VICTORIA 1201 Douglas Street Victoria, B.C. V8W 2E6 Telephone: (250) 383-1206 Branch Manager – Gerry Laliberte [ great progress] “ For Canadian Western Bank and its people, 2001 was a very good year. We stuck to the program: well-managed, controlled growth, and, for the ninth consecutive year, posted record profits. This is what happens when excellence becomes your corporate philosophy. ” table of contents five year financial summary highlights for 2001 performance targets western people western bank message to shareholders management’s analysis of operations and financial condition financial statements notes to consolidated financial statements corporate governance executive officers board of directors and shareholder information branch offices 1 2 3 5 16 28 31 51 57 70 75 77 78 Designed and produced by Vision Design Communications. www.visiondc.com Photography by Bluefish Studios Printed by Speedfast Color Press Inc. Printed in Canada. C a n a d i a n W e s t e r n B a n k A n n u a l R e p o r t 2 0 0 1 b a n k i n g o n p e o p l e “ Try squeezing even a bit of loyalty or compassion out of a computer. See how much dedication, good will or good cheer you can extract banking [on people] from a faceless organization. Or, try asking a standard loan application to generate ideas or build relationships… Sound impossible? We think it is. So instead, we bank on people… a typical western sentiment… Sure, we have our fair share of computers and forms, but we never ask them to do the thinking, or the talking… We don’t like to undermine the brilliance of our employees or customers. So we let them speak for themselves… ” Canadian Western Bank Place Suite 2300, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Canadian Western Bank Annual Report 2001 

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