Canadian Western Bank
Annual Report 2003

Plain-text annual report

20TH ANNUAL REPORT 2003 WHAT KIND OF A BANK CAN YOU BUILD IN 20 YEARS? A BANK BUILT ON RELATIONSHIPS. I C A N A D 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 3 WHAT KIND OF A BANK CAN YOU BUILD IN 20 YEARS? THIS IS THE WEST… the perennial land of opportunity. You can build almost any kind of bank you want… so we did. WE WANTED A BANK BASED IN THE WEST that served the needs of westerners. OUR CUSTOMERS WANTED A BANK BUILT ON RELATIONSHIPS and strongly rooted in western values. And our shareholders wanted to see consistent growth and profitability. We built that bank… your bank… Canadian Western Bank. BRANCH OFFICES ALBERTA Edmonton Edmonton Main 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 Telephone: (780) 424-4846 Branch Manager – Les Shore 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 St. Albert 300 – 700 St. Albert Road St. Albert, Alberta T8N 7A5 Opening Spring 2004 West Point 17603 – 100 Avenue Edmonton, Alberta T5S 2M1 Telephone: (780) 484-7407 Branch Manager – Ron Baker Calgary Northeast 2810 – 32nd Avenue N.E. Calgary, Alberta T1Y 5J4 Vancouver Deposit Processing Centre Suite 2368, 666 Burrard Street Surrey Strawberry Hill 7548 – 120 Street Telephone: (403) 250-8838 Vancouver, B.C. V6C 2X8 Surrey, B.C. V3W 3N1 Branch Manager – Glen Eastwood Telephone: (604) 443-5175 Telephone: (604) 591-1898 Toll free: 1-800-663-1000 Branch Manager – Rick Howard Chinook Station 6606 MacLeod Trail S.W. Calgary, Alberta T2H 0K6 Telephone: (403) 252-2299 Branch Manager – Lew Christie Foothills 6127 Barlow Trail S.E. Calgary, Alberta T2C 4W8 Telephone: (403) 269-9882 Acting Branch Manager – Michael Docherty Red Deer 4822 – 51 Avenue Branch Manager – Huguette Holmes Coquitlam 101 Schoolhouse Street Coquitlam, B.C. V3K 4X8 Telephone: (604) 540-8829 Branch Manager – David McCosh Courtenay 470 Puntledge Road Courtenay, B.C. V9N 3R1 Telephone: (250) 334-8888 Branch Manager – Alan Dafoe Red Deer, Alberta T4N 3H3 Telephone: (403) 341-4000 Branch Manager – Don Odell Kelowna Kelowna 1674 Bertram Street Lethbridge 744 – 4th Avenue South Lethbridge, Alberta T1J 0N8 Telephone: (403) 328-9199 Branch Manager – Don Grummett Grande Prairie 11226 – 100 Avenue Grande Prairie, Alberta T8V 7L2 Telephone: (780) 831-1888 Branch Manager – Keith MacLellan BRITISH COLUMBIA Kelowna, B.C. V1Y 9G4 Telephone: (250) 862-8008 Branch Manager – Ian Graham Kelowna Industrial Centre #101 – 1505 Harvey Avenue Kelowna, B.C. V1Y 6G1 Telephone: (250) 860-0088 Branch Manager – Jim Kitchin Cranbrook Satellite Office 2009 – 5th Street South Cranbrook, B.C. V1C 1K6 Telephone: (250) 426-1140 Victoria 1201 Douglas Street Victoria, B.C. V8W 2E6 Telephone: (250) 383-1206 Branch Manager – Gerry Laliberte SASKATCHEWAN Regina 1881 Scarth Street McCallum Hill Centre II Regina, Saskatchewan S4P 4K9 Telephone: (306) 757-8888 Branch Manager – Trent Bobinski 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 230 Portage Avenue Winnipeg, Manitoba R3C 0B1 Five Year Financial Summary Fold Out Highlights for 2003 Performance Targets 1 Message to Shareholders 4 What Kind of Bank Can You Build in 20 Years? 23 Management’s Discussion and Analysis of Operations and Financial Condition Corporate Governance Financial Statements Notes to Consolidated Financial Statements Senior Officers Board of Directors Shareholder Information 44 48 53 70 71 72 Inside Back Cover Branch Offices Edmonton Deposit Processing Centre Suite 2200, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Telephone: (780) 423-8888 Vancouver Regional Office 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 669-0081 Branch Manager – Lina Langford Regional Manager – Rod Sorbo Calgary Calgary Main 606 – 4th Street S.W. Calgary, Alberta T2P 1T1 Telephone: (403) 262-8700 Branch Manager – Doug Crook West Broadway 1333 West Broadway Vancouver, B.C. V6H 4C1 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 Account Manager – Mike Eckersley Telephone: (204) 956-4669 Kamloops Satellite Office 2224 Crescent Drive Kamloops, B.C. V2C 4J6 Telephone: (250) 828-1070 Manager – Hugh Sutherland 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 Branch Manager – Robert Bean CANADIAN WESTERN TRUST British Columbia Suite 2200, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 685-2081 Toll free: 1-800-663-1124 Alberta 200, 606 – 4th Street S.W. Calgary, Alberta T2P 1T1 Telephone: (403) 717-3145 Toll free: 1-888-894-2331 Design and Production by Vision Design Communications www.visiondc.com Printed by Speedfast Color Press Inc. Printed in Canada PERFORMANCE TARGETS 3 9 1 , 8 3 $ 5 4 1 , 0 3 $ 2 1 6 9 2 $ , 9 4 3 6 2 $ , 3 5 8 9 1 $ , 1999 2000 2001 2002 2003 2004 2004 Target $44 Million NET INCOME 2003 Results - Net income increased 29% in the year, almost doubling our target of 15%. Diluted earnings per share increased 26%. The significant increases were the result of strong organic loan growth, an improved net interest margin, increased fee income and excellent efficiency. 2004 Target - Net income growth of at least 15%. 1 8 9 , 2 3 1 $ 0 2 4 , 3 1 1 $ 9 5 2 , 5 0 1 $ 2 2 6 , 8 8 $ 6 4 7 , 4 7 $ } 2004 Target $149-$153 Million TOTAL REVENUES 2003 Results - Total revenues (teb) were $133 million, an increase of 17%, exceeding our target range of 12 - 15% growth. 2004 Target - Our target range is for total revenue growth of 12 - 15%. 1999 2000 2001 2002 2003 2004 1 0 6 , 3 $ 9 4 2 , 3 $ 7 8 8 , 2 $ 0 6 5 , 2 $ 4 5 2 , 2 $ 1999 2000 2001 2002 2003 2004 % 6 2 . 0 % 5 2 . 0 % 3 2 . 0 % 1 2 . 0 % 8 1 . 0 1999 2000 2001 2002 2003 2004 2004 Target $4,033 Million TOTAL LOANS 2003 Results - Total loans increased to $3,601 million or 11% year over year, slightly less than our target of 12%. However, the average loan balance for 2003 increased 14% over the average balance for 2002. 2004 Target - Total loan growth of 12%; maintaining our long term trend of double digit loan growth. 2004 Target maintain 0.25% CREDIT RISK 2003 Results - The provision for credit losses as a percentage of average loans was 0.25%, consistent with our target. Based only on net new specific provisions, credit losses represented 0.14% of average loans. 2004 Target - Maintain provisioning at 0.25% of average loans. 50,000 40,000 30,000 20,000 10,000 0 200,000 150,000 100,000 50,000 0 5,000 4,000 3,000 2,000 1,000 0 0.30 0.25 0.20 0.15 0.10 0.05 0 70 60 50 40 30 20 10 0 20 16 12 8 4 0 1.00 0.75 0.50 % 8 9 5 . % 3 4 5 . % 0 0 5 . % 7 0 5 . % 3 . 6 4 2004 Target 46% or less 1999 2000 2001 2002 2003 2004 % 7 . 4 1 % 5 . 3 1 % 8 . 2 1 % 9 . 2 1 % 2 . 1 1 2004 Target 13-15% } EFFICIENCY RATIO (expenses to revenues) 2003 Results - Our efficiency ratio (teb), which continues to lead the Canadian banking industry, was 46.3% surpassing our target of 50% or less. 2004 Target - Efficiency ratio (teb) of 46.0% or less. A significant branch development program was commenced in 2003 with completion expected in spring 2004. This program will provide future benefits by supporting loan and deposit growth as well as retail initiatives, but it is expected to slow improvement in our efficiency ratio in 2004 as compared to the improvement in 2003. RETURN ON EQUITY 2003 Results - ROE was 12.9%. No specific target was developed for 2003. The successful issue of non-dilutive subordinated debt in 2003, which improves our capital mix, makes a target for 2004 appropriate. 2004 Target - ROE of 13 to 15%. 1999 2000 2001 2002 2003 2004 % 5 9 . 0 % 5 9 . 0 % 5 9 . 0 % 3 8 . 0 % 4 8 . 0 2004 Target 0.98% or higher 1999 2000 2001 2002 2003 2004 RETURN ON ASSETS 2003 Results - ROA of 0.95% surpassed our target of greater than 0.88%. 2004 Target - ROA of 0.98% or higher. PERFORMANCE TARGETS 3 9 1 , 8 3 $ 5 4 1 , 0 3 $ 2 1 6 9 2 $ , 9 4 3 6 2 $ , 3 5 8 9 1 $ , 1999 2000 2001 2002 2003 2004 2004 Target $44 Million NET INCOME 2003 Results - Net income increased 29% in the year, almost doubling our target of 15%. Diluted earnings per share increased 26%. The significant increases were the result of strong organic loan growth, an improved net interest margin, increased fee income and excellent efficiency. 2004 Target - Net income growth of at least 15%. 1 8 9 , 2 3 1 $ 0 2 4 , 3 1 1 $ 9 5 2 , 5 0 1 $ 2 2 6 , 8 8 $ 6 4 7 , 4 7 $ } 2004 Target $149-$153 Million TOTAL REVENUES 2003 Results - Total revenues (teb) were $133 million, an increase of 17%, exceeding our target range of 12 - 15% growth. 2004 Target - Our target range is for total revenue growth of 12 - 15%. 1999 2000 2001 2002 2003 2004 1 0 6 , 3 $ 9 4 2 , 3 $ 7 8 8 , 2 $ 0 6 5 , 2 $ 4 5 2 , 2 $ 1999 2000 2001 2002 2003 2004 % 6 2 . 0 % 5 2 . 0 % 3 2 . 0 % 1 2 . 0 % 8 1 . 0 1999 2000 2001 2002 2003 2004 2004 Target $4,033 Million TOTAL LOANS 2003 Results - Total loans increased to $3,601 million or 11% year over year, slightly less than our target of 12%. However, the average loan balance for 2003 increased 14% over the average balance for 2002. 2004 Target - Total loan growth of 12%; maintaining our long term trend of double digit loan growth. 2004 Target maintain 0.25% CREDIT RISK 2003 Results - The provision for credit losses as a percentage of average loans was 0.25%, consistent with our target. Based only on net new specific provisions, credit losses represented 0.14% of average loans. 2004 Target - Maintain provisioning at 0.25% of average loans. 50,000 40,000 30,000 20,000 10,000 0 200,000 150,000 100,000 50,000 0 5,000 4,000 3,000 2,000 1,000 0 0.30 0.25 0.20 0.15 0.10 0.05 0 70 60 50 40 30 20 10 0 20 16 12 8 4 0 1.00 0.75 0.50 % 8 9 5 . % 3 4 5 . % 0 0 5 . % 7 0 5 . % 3 . 6 4 2004 Target 46% or less 1999 2000 2001 2002 2003 2004 % 7 . 4 1 % 5 . 3 1 % 8 . 2 1 % 9 . 2 1 % 2 . 1 1 2004 Target 13-15% } EFFICIENCY RATIO (expenses to revenues) 2003 Results - Our efficiency ratio (teb), which continues to lead the Canadian banking industry, was 46.3% surpassing our target of 50% or less. 2004 Target - Efficiency ratio (teb) of 46.0% or less. A significant branch development program was commenced in 2003 with completion expected in spring 2004. This program will provide future benefits by supporting loan and deposit growth as well as retail initiatives, but it is expected to slow improvement in our efficiency ratio in 2004 as compared to the improvement in 2003. RETURN ON EQUITY 2003 Results - ROE was 12.9%. No specific target was developed for 2003. The successful issue of non-dilutive subordinated debt in 2003, which improves our capital mix, makes a target for 2004 appropriate. 2004 Target - ROE of 13 to 15%. 1999 2000 2001 2002 2003 2004 % 5 9 . 0 % 5 9 . 0 % 5 9 . 0 % 3 8 . 0 % 4 8 . 0 2004 Target 0.98% or higher 1999 2000 2001 2002 2003 2004 RETURN ON ASSETS 2003 Results - ROA of 0.95% surpassed our target of greater than 0.88%. 2004 Target - ROA of 0.98% or higher. $ $ $ FIVE YEAR FINANCIAL SUMMARY ($ thousands, except per share amounts) Results of Operations Net interest income (teb)(1) Less teb adjustment Net interest income Total revenues (teb) Total revenues Net income from continuing operations(2) Net income Return on common shareholders' equity Return on average total assets Per Common Share Average common shares outstanding (thousands) Basic earnings per share Net income from continuing operations Net income Diluted earnings per share Net income from continuing operations Net income Dividends(3) Book value Market price High Low Close Balance Sheet and Off-Balance Sheet Summary Assets Cash resources and securities Loans Deposits Subordinated debentures Shareholders' equity Assets under administration Capital Adequacy Tangible common equity to risk-weighted assets Tier 1 ratio Total ratio Other Information Efficiency ratio (teb) Efficiency ratio Net interest margin (teb) Net interest margin Provision for credit losses as a percentage of average loans Net impaired loans as a percentage of total loans Number of full time equivalent staff Number of branches 2003 107,655 2,992 104,663 132,981 129,989 38,193 38,193 2002 2001 2000 1999 $ $ 91,284 2,449 88,835 113,420 110,971 29,612 29,612 $ 85,501 – 85,501 105,259 105,259 30,145 30,145 $ 73,367 – 73,367 88,622 88,622 29,394 26,349 61,729 – 61,729 74,746 74,746 22,754 19,853 12.9 % 0.95 % 11.2 % 0.84 % 13.5 % 0.95 % 14.7 % 0.95 % 12.8 % 0.83 % HIGHLIGHTS FOR 2003 Financial 12,808 12,629 12,001 11,134 10,153 • Achieved record net income of $38.2 million, an increase 2.98 2.98 $ 2.34 2.34 $ 2.51 2.51 $ 2.65 2.37 $ 2.69 2.69 0.46 24.32 40.00 23.25 39.95 $ 2.14 2.14 0.40 21.97 29.35 23.26 25.75 $ 2.26 2.26 0.36 20.08 30.50 22.30 26.27 $ 2.41 2.18 0.34 17.35 24.00 16.25 23.00 $ 2.24 1.96 1.98 1.76 0.48 15.68 24.25 17.30 17.60 $ 4,343,972 694,699 3,601,003 3,819,750 121,951 316,231 1,474,964 $ 3,828,162 533,496 3,248,747 3,429,071 57,126 278,087 1,166,489 $ 3,439,568 501,228 2,886,640 3,042,307 67,126 252,262 873,538 $ 3,059,540 446,351 2,560,092 2,727,809 67,126 194,595 741,181 $ 2,707,595 375,182 2,253,598 2,371,075 78,691 159,550 559,978 8.9 % 8.9 % 13.1 % 46.3 % 47.4 % 2.68 % 2.60 % 0.25 % (0.36)% 632 27 8.8 % 8.8 % 11.4 % 50.7 % 51.8 % 2.60 % 2.53 % 0.26 % 0.13 % 583 27 9.3 % 9.3 % 12.5 % 50.0 % 50.0 % 2.69 % 2.69 % 0.23 % 0.25 % 548 27 8.1 % 8.1 % 11.6 % 54.3 % 54.3 % 2.64 % 2.64 % 0.21 % 0.17 % 509 25 7.4 % 7.4 % 11.8 % 59.8 % 59.8 % 2.57 % 2.57 % 0.18 % 0.54 % 555 24 of 29% over 2002 • Recorded 62nd consecutive quarter of profitability • Surpassed $4 billion in total assets, a doubling in asset size in just over five years • Grew loans by 11% – our fourteenth consecutive year of double-digit loan growth • Demonstrated continued strong credit quality, with an annual provision for credit losses of 0.25% of average loans • Continued to lead the Canadian banking industry in productivity as reflected by our efficiency ratio (expenses to revenues) (teb) of 46.3% • Grew average lower cost demand and notice deposit balances by 23%, a key factor in leveraging our core profitability • Reached almost $1.5 billion in trust assets under administration, an increase of 26% • Strengthened our total capital ratio to 13.1%, and maintained a strong Tier 1 ratio of 8.9% (comprised entirely of tangible common equity) • Issued $65 million of non-dilutive subordinated debentures, improving our mix of regulatory capital • Announced anticipated change to quarterly dividend declarations in 2004 Operating • Commenced the relocation and significant upgrading of our existing Vancouver West Broadway, Winnipeg, Grande Prairie and Red Deer branches to new highly visible locations opening between November 2003 and January 2004 • Finalized plans for our 28th branch to be opened in St. Albert, Alberta in spring 2004 • Commenced the expansion of our Calgary Main branch and the development of a specialized industrial lending office in Prince George, British Columbia • Further developed programs and products to generate lower cost branch deposits • Enhanced our product line with the launch of both personal and business Think Western® MasterCards® through an agreement with MBNA Canada Bank • Provided trust services, through our subsidiary Canadian Western Trust, to a growing number of mutual fund dealers and financial advisors as well as other financial institutions • Reinforced our Think Western® culture and brand of service, which continues to translate into a competitive advantage in our markets • Identified as having one of the top corporate boards in a survey published by Canadian Business magazine • Recognized by our peers as one of Alberta’s three most respected corporations in the category of corporate performance of public companies in a poll conducted by Alberta Venture magazine • Continued our emphasis on straightforward business practices and strong, effective corporate governance (1) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividend received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. Prior to fiscal 2002, tax-exempt security income was insignificant and no taxable equivalent adjustments were made. The taxable equivalent basis does not have a standardized meaning prescribed by generally accepted accounting principles and therefore may not be comparable to similar measures presented by other banks. (2) The sale of our brokerage subsidiary closed February 16, 2000. The results of operations and the loss on disposal have been disclosed separately from continuing operations. (3) 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. $ $ $ FIVE YEAR FINANCIAL SUMMARY ($ thousands, except per share amounts) Results of Operations Net interest income (teb)(1) Less teb adjustment Net interest income Total revenues (teb) Total revenues Net income from continuing operations(2) Net income Return on common shareholders' equity Return on average total assets Per Common Share Average common shares outstanding (thousands) Basic earnings per share Net income from continuing operations Net income Diluted earnings per share Net income from continuing operations Net income Dividends(3) Book value Market price High Low Close Balance Sheet and Off-Balance Sheet Summary Assets Cash resources and securities Loans Deposits Subordinated debentures Shareholders' equity Assets under administration Capital Adequacy Tangible common equity to risk-weighted assets Tier 1 ratio Total ratio Other Information Efficiency ratio (teb) Efficiency ratio Net interest margin (teb) Net interest margin Provision for credit losses as a percentage of average loans Net impaired loans as a percentage of total loans Number of full time equivalent staff Number of branches 2003 107,655 2,992 104,663 132,981 129,989 38,193 38,193 2002 2001 2000 1999 $ $ 91,284 2,449 88,835 113,420 110,971 29,612 29,612 $ 85,501 – 85,501 105,259 105,259 30,145 30,145 $ 73,367 – 73,367 88,622 88,622 29,394 26,349 61,729 – 61,729 74,746 74,746 22,754 19,853 12.9 % 0.95 % 11.2 % 0.84 % 13.5 % 0.95 % 14.7 % 0.95 % 12.8 % 0.83 % HIGHLIGHTS FOR 2003 Financial 12,808 12,629 12,001 11,134 10,153 • Achieved record net income of $38.2 million, an increase 2.98 2.98 $ 2.34 2.34 $ 2.51 2.51 $ 2.65 2.37 $ 2.69 2.69 0.46 24.32 40.00 23.25 39.95 $ 2.14 2.14 0.40 21.97 29.35 23.26 25.75 $ 2.26 2.26 0.36 20.08 30.50 22.30 26.27 $ 2.41 2.18 0.34 17.35 24.00 16.25 23.00 $ 2.24 1.96 1.98 1.76 0.48 15.68 24.25 17.30 17.60 $ 4,343,972 694,699 3,601,003 3,819,750 121,951 316,231 1,474,964 $ 3,828,162 533,496 3,248,747 3,429,071 57,126 278,087 1,166,489 $ 3,439,568 501,228 2,886,640 3,042,307 67,126 252,262 873,538 $ 3,059,540 446,351 2,560,092 2,727,809 67,126 194,595 741,181 $ 2,707,595 375,182 2,253,598 2,371,075 78,691 159,550 559,978 8.9 % 8.9 % 13.1 % 46.3 % 47.4 % 2.68 % 2.60 % 0.25 % (0.36)% 632 27 8.8 % 8.8 % 11.4 % 50.7 % 51.8 % 2.60 % 2.53 % 0.26 % 0.13 % 583 27 9.3 % 9.3 % 12.5 % 50.0 % 50.0 % 2.69 % 2.69 % 0.23 % 0.25 % 548 27 8.1 % 8.1 % 11.6 % 54.3 % 54.3 % 2.64 % 2.64 % 0.21 % 0.17 % 509 25 7.4 % 7.4 % 11.8 % 59.8 % 59.8 % 2.57 % 2.57 % 0.18 % 0.54 % 555 24 of 29% over 2002 • Recorded 62nd consecutive quarter of profitability • Surpassed $4 billion in total assets, a doubling in asset size in just over five years • Grew loans by 11% – our fourteenth consecutive year of double-digit loan growth • Demonstrated continued strong credit quality, with an annual provision for credit losses of 0.25% of average loans • Continued to lead the Canadian banking industry in productivity as reflected by our efficiency ratio (expenses to revenues) (teb) of 46.3% • Grew average lower cost demand and notice deposit balances by 23%, a key factor in leveraging our core profitability • Reached almost $1.5 billion in trust assets under administration, an increase of 26% • Strengthened our total capital ratio to 13.1%, and maintained a strong Tier 1 ratio of 8.9% (comprised entirely of tangible common equity) • Issued $65 million of non-dilutive subordinated debentures, improving our mix of regulatory capital • Announced anticipated change to quarterly dividend declarations in 2004 Operating • Commenced the relocation and significant upgrading of our existing Vancouver West Broadway, Winnipeg, Grande Prairie and Red Deer branches to new highly visible locations opening between November 2003 and January 2004 • Finalized plans for our 28th branch to be opened in St. Albert, Alberta in spring 2004 • Commenced the expansion of our Calgary Main branch and the development of a specialized industrial lending office in Prince George, British Columbia • Further developed programs and products to generate lower cost branch deposits • Enhanced our product line with the launch of both personal and business Think Western® MasterCards® through an agreement with MBNA Canada Bank • Provided trust services, through our subsidiary Canadian Western Trust, to a growing number of mutual fund dealers and financial advisors as well as other financial institutions • Reinforced our Think Western® culture and brand of service, which continues to translate into a competitive advantage in our markets • Identified as having one of the top corporate boards in a survey published by Canadian Business magazine • Recognized by our peers as one of Alberta’s three most respected corporations in the category of corporate performance of public companies in a poll conducted by Alberta Venture magazine • Continued our emphasis on straightforward business practices and strong, effective corporate governance (1) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividend received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. Prior to fiscal 2002, tax-exempt security income was insignificant and no taxable equivalent adjustments were made. The taxable equivalent basis does not have a standardized meaning prescribed by generally accepted accounting principles and therefore may not be comparable to similar measures presented by other banks. (2) The sale of our brokerage subsidiary closed February 16, 2000. The results of operations and the loss on disposal have been disclosed separately from continuing operations. (3) 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. MESSAGE TO SHAREHOLDERS IT IS A PLEASURE TO REPORT ON THE BEST YEAR IN YOUR BANK’S HISTORY; A YEAR MARKED WITH RECORD FINANCIAL ACHIEVEMENTS. Our total revenues grew 17% over the previous year, while net income finished at an all time high of $38.2 million, up 29% over last year – almost double our growth target. As well, diluted earnings per share increased 26% to $2.69. The achievement of record earnings and our sixty- second consecutive quarter of profitability is even more satisfying as we are about to celebrate our 20th anniversary. Reflecting over the past two decades, we have developed a record of strong, steady, profitable growth by staying focused on our business plan and committed to our Think Western® culture. This focus and commitment helped us reach a new milestone of $4 billion in total assets in 2003, which represents a doubling in asset size in just over five years. During 2003, there was strong appreciation in our share price, which reached a record high and resulted in a shareholder return that outpaced the increase in both the S&P/TSX composite index and the Banks & Trust index. Our peers also recognized our continued success in 2003. In a poll of the Alberta business community conducted by Alberta Venture magazine, Canadian Western Bank was named one of the province’s three most respected corporations in terms of corporate performance. Performance was measured by the ability to sustain fiscal success, maintain or build market share and perform well in the public markets. Growing our Core Business in a Cost Effective Manner We are very proud of our long-term trend of double- digit annual loan growth, which averaged 13% over the past five years. This continues to be a strong indicator of how well our regional focus and niche strategy are being accepted by our customers. It is our ability to operate in a cost effective manner that further drives our profitability. In the financial industry, this ability is reflected in the efficiency ratio, which measures what it costs to generate each dollar of revenue. This year, we achieved a new record efficiency ratio (teb) of 46.3%, which leads the Canadian banking industry by a wide margin. Canadian Western Trust is a key component of our core business. Trust operations provide a growing contribution to non-interest revenues and lower cost deposits. In 2003, trust service fees grew 25% to $4 million and lower cost notice deposits increased 37%. A majority of the growth came from western Canadian mutual fund dealers and financial advisors who, in increasing numbers, are recognizing the Trust’s service advantage. The Trust has also been successful in developing relationships with and providing services to other financial institutions, including ATB Investor Services (a subsidiary of ATB Financial) and Vancouver City Savings Credit Union. CWB TWENTIETH ANNUAL REPORT 1 Strong Credit Quality For more than a decade we have had strong credit quality and low loan losses. The charge to income for loan losses was 25 basis points of average loans this year, consistent with our average over the past 10 years of 26 basis points. Our loan loss experience continues to compare favourably to the Canadian banking industry, both in terms of levels of losses and stability. A strong credit discipline ensures that we remain well prepared to deal with changes in the underlying economies that affect our customers. Investing in Our Future We undertook a number of new initiatives this year that build upon the strong foundation we have established. Strategically, we placed $65 million institutional of subordinated debentures with investors, which improved our capital mix and allows us to pursue growth opportunities without dilution to common shareholders. Operational initiatives included an increased emphasis on retail services and development of our branch network. The emphasis on retail operations carries with it the objective of leveraging core profitability by growing lower cost branch-generated deposits. Retail initiatives to date have included product enhancements, awareness advertising and targeted training for our employees. We are especially pleased with the launch of new personal and business Think Western® MasterCards®, which are offered through an agreement with MBNA Canada Bank. These credit cards fit well with our existing product offerings and improve our ability to serve customers, a top-of- mind priority. Further development of our branch network is also key, including the relocation and significant upgrading of our Grande Prairie, Red Deer, Winnipeg and Vancouver West Broadway branches which are scheduled to open between November 2003 and January 2004. We are also constructing our twenty- eighth branch, which is scheduled to open in St. Albert, Alberta in Spring 2004. These new, highly visible premises will offer a full range of products and services in our refreshing Think Western® style. In addition, we are expanding our Calgary Main branch and pursuing a specialized industrial lending office for Prince George, British Columbia. Think Western® Canadian Western Bank embraces the Think Western® philosophy – we don’t just talk about it. Since the inception of the Bank in 1984, this is what our customers tell us differentiates us from our competitors. Thinking Western is a commitment to western hospitality and specialty service, and is a reflection of the personality and style of our organization. It means we apply common sense to the way we do business, how we respond to customers and how we set policies. We work as a team. We talk face-to-face with customers, no voice mail. Most importantly – we listen. We want to be the bank of choice for small to mid-size businesses and individual customers in Western Canada who want high touch, personal service. Our track record of strong, steady, profitable growth is proof that providing personalized service to customers is a cost-effective way of growing our business. Corporate Governance There continues to be a significant focus on corporate governance issues. We have always made strong and effective corporate governance a priority, as we believe it is essential to long-term success. Our governance policies are designed to strengthen the ability of the Board of Directors to effectively supervise management and enhance shareholder value. The Board adapts the governance policies to meet changing needs and circumstances with the goal of maintaining high standards and improving effectiveness. Ongoing corporate accountability reforms and governance best practices are monitored in order that we may further refine our processes and policies. 2 CWB TWENTIETH ANNUAL REPORT We were pleased when Canadian Business magazine recognized Canadian Western Bank as having one of the top corporate boards in Canada. The survey, which included all Canadian public companies listed on the TSX, placed our board in a tie for second place. Companies were ranked on board composition, board performance and disclosure, responsiveness to shareholders and stock performance. Outlook In 2003 we undertook many initiatives that are expected to take Canadian Western Bank to the next level of financial performance and market acceptance. Overall, there is a growing feeling of excitement that we are on the right track. A strong sense of pride has developed – showcased in our premises and reflected in customers and staff embracing “their bank”. The Board and management also take satisfaction in the ability to increase dividends and raise subordinated debt to support future asset growth, as it underscores the Bank’s development and increasing market recognition. On the front cover, the question is asked, “what kind of a bank can you build in 20 years?” Throughout this report, we are certain you will find the answer. Our Bank was built on relationships. Relationships that create value for every person we deal with – each and every day. We sincerely thank those who helped build our Bank over the past 20 years – our employees for their dedication and extra efforts, and our customers for choosing to bank with us. In 2004 we will be celebrating our 20th anniversary. We will continue to focus on our business plan and fundamental strengths, while looking for new growth opportunities that will enhance our core business and increase shareholder return. Our key financial targets for 2004 include return on equity of 13-15% and net income growth of at least 15%. We trust our shareholders are pleased with our success and we remain committed to taking Canadian Western Bank to even higher levels of performance. Jack C. Donald Chairman Larry M. Pollock President and CEO “The major Canadian banks are moving away from the core business of banking… but we’re not. We are in the business of evaluating risk – making loans and investing people’s money – and we concentrate all our efforts on getting it right.” Jack C. Donald, with CWB Board 20 years Chairman of the Board “When I joined CWB, the potential was mind boggling. We were a $3 to $4 hundred million bank – with the vision of someday becoming a $5 billion bank… At the rate we’re growing, we might just get there in ‘04. And, when we arrive, it will be as the most efficient and cost effective bank in the country.” Larry M. Pollock, with CWB 14 years President and CEO CWB TWENTIETH ANNUAL REPORT 3 With a clear VISION, strong NICHE, focus on GROWTH and a commitment to RELATIONSHIPS… you can build a special kind of bank in 20 years… Canadian Western Bank… and this is our story. Focused, straightforward and truly western… that is our VISION. $36 MILLION 1984 2003 $4.3BILLION ASSETS BE TRUE TO YOUR VISION CWB TURNS 20 BACK IN 1984, WHEN THE BANK WAS FOUNDED, WE HAD A DREAM, A VISION… AND NOT MUCH ELSE. AS IT TURNS OUT, THAT WAS MORE THAN ENOUGH. Just two decades ago the world got its first look at the Apple computer and Ghost Busters. Clara Peller asked “Where’s the Beef?” and we launched Canadian Western Bank. Back then it was a little bank with a big vision. But it was also a bank with the resolve to stick to that vision. Canadian Western Bank came to life in 1984 when the late Dr. Charles A. Allard pursued his vision of a bank for westerners, based here in Western Canada. With hard work and commitment from dedicated founders, employees, and all those who followed, this vision became a reality – a very successful reality. Now, with over $4.3 billion in assets and 27 branches in the four western provinces, we are the largest publicly-traded Schedule I chartered bank with its headquarters and principal operations in Western Canada. At 20 years of age, our little bank that could has done just that, and in a big way. From the initial Bank of Alberta Charter in 1984 and the amalgamation with Western & Pacific Bank of Canada in 1988 and North West Trust Company in 1994, to the acquisition of Aetna Trust in 1996 (now Canadian Western Trust), CWB has continued to grow at a steady pace. We have consistently acquired assets and businesses and expanded our service offerings to fuel our vision of providing the highest quality financial services in our chosen niches. Over the last two decades, CWB has distinguished itself as a business leader. We’ve delivered on our promise of full service banking and high touch, personalized service for western Canadians. And we’ve enjoyed a long list of cumulative successes: 62 consecutive profitable quarters… fourteen consecutive years of double-digit loan growth… And, even during our most exciting periods of growth, we’ve never lost sight of the vision. It has never been about becoming the biggest, it is about being the best at what we do. “My father originally wanted a western institution that would provide a reliable, responsive alternative to the big eastern banks. And, he was ultimately concerned for the security of the people who deposit money with us. He took that responsibility very seriously...and it remains a priority today. You can see it in our loan loss experience...among the lowest in the country again this year.” Charles R. Allard, with CWB Board 18 years Director “Back in the 70s, my father always felt like he was going cap in hand for financing to the east. He built hotels in the west… in places bankers in the east had never heard of. And it was a constant barrier. So my father’s dream for CWB originally was for a stable bank that understood the western economy. We are now a full fledged Schedule I bank…a completely western Canadian institution… and we are here to stay.” Howard E. Pechet, with CWB Board 20 years Director CWB TWENTIETH ANNUAL REPORT 9 We charted our course, chose our NICHE… that’s our advantage. $36 MILLION 1984 2003 $500 MILLION MARKET CAPITALIZATION + STICK TO YOUR NICHE DO WHAT YOU’RE GOOD AT WHEN YOU KNOW WHAT YOU’RE GOOD AT, YOU STICK WITH IT. WE UNDERSTAND WESTERN BUSINESS BECAUSE WE ARE WESTERN BUSINESS. Canadian Western Bank was founded to serve the west, and that’s what we do. British Columbia, Alberta, Saskatchewan and Manitoba – it’s the market we know. We specialize in commercial lending, real estate financing, industrial equipment financing and energy lending. You can tell a lot about a bank by the company it keeps. For us, those companies are mid-market businesses that have what it takes to grow and prosper in an evolving marketplace. For two decades, we’ve built our business by helping them to grow theirs. We don’t believe that having a big bureaucracy makes you better. Far from it. Local businesses need local solutions. It’s on this level where we get down to business – important decisions involve local managers who know and understand their customers. We do not make decisions based strictly on numerical formulas, we understand the value of personal judgement. Since the inception of the Bank, we have prided ourselves on our Think Western® approach to customer service. This approach not only gives us an advantage in mid-market lending, but it also continues to deliver growth and service differentiation in retail banking. CWB provides full service personal banking through a competitive range of deposit accounts, investment products, mortgages, personal loans and credit cards as well as other banking services. Fast and friendly. It’s the way we do business. We provide trust services through Canadian Western Trust. Our niche is delivering value propositions such as partnering with independently-minded leaders in the investment industry, identifying service gaps in the trust industry and delivering results. We give our customers what they want: a preferred alternative to bigger banks… a regional bank that is agile, aware and focused on the client. Our approach is straightforward. We’ve adopted a service standard that differentiates us from all others. It’s what we call thinking western. We believe in and practice high touch personalized service. Every day. Every customer. Their business matters to us, and they know it. “CWB has earned our loyalty through their steadfast support and personal attention. They believed in us from the beginning and we have grown together. Other banks are interested in us but they have no any idea of the strength of our relationship, or they wouldn’t be asking.” Jim Ross, CWB client for 13 years President and CEO, Steeplejack Industrial Group Inc. CWB TWENTIETH ANNUAL REPORT 13 Real GROWTH requires a plan… and the conviction to see it through. $715 THOUSAND 1984 2003 $38MILLION NET INCOME FOCUS ON GROWTH MAINTAIN A STEADY COURSE WE WEREN’T HANDED THIS SUCCESS. WE EARNED IT. THE APPLICATION OF PROVEN METHODS, CONSISTENT APPROACHES, RESPONSIBLE STEWARDSHIP AND WESTERN THINKING – HAS MADE CWB THE SUCCESSFUL FINANCIAL INSTITUTION IT IS TODAY. At Canadian Western Bank, we believe in a course of steady and responsible growth. And our people have achieved it, delivering over a decade of double-digit loan growth in a constantly fluctuating world. The key to this growth is consistency. Since the earliest days, we have practiced a philosophy and leadership style that has resulted in dynamic growth and profitability. Back in 1984, our initial market capitalization and total assets were only $36 million. We’ve come a long way with market capitalization of more than $500 million and total assets of over $4.3 billion. This year, we celebrated our 62nd consecutive profitable quarter as well as a record year for net income. Our credit quality remains strong, with one of the lowest loan loss provisions and the best efficiency ratio in the Canadian banking industry. The theme of consistency is carried through to our approach to customer relations. We believe in open, honest communication that’s rooted in respect. That’s how we’ve always done business… and it continues to work for us and for our customers. Our ever-expanding full service personal banking line is a result of this two-way communication with our customers. Sound and effective corporate governance is also a priority at Canadian Western Bank. In fact, Canadian Western Bank was recently recognized by Canadian Business magazine as having one of the top corporate boards in the country. “I was there in the beginning. At first we worked out of a boardroom at the Mayfield Inn because our sponsoring shareholders, the Pechets, were good enough to let us do business there until we received our licence to operate. In the boardroom we had 3 desks, 3 phones and a typewriter. That was it. But I loved coming to work. It was so exciting. We were building a bank.” Esther Edwards, CWB’s first employee and with CWB 20 years Executive Assistant to President and CEO CWB TWENTIETH ANNUAL REPORT 17 Our RELATIONSHIPS with employees, customers and shareholders have taken us to new heights. 1984 110% 2003 110% COMMITMENT TO PEOPLE BUILD RELATIONSHIPS BE A GOOD NEIGHBOUR FROM DAY ONE, THE FOCUS HAS BEEN ON BUILDING RELATIONSHIPS WITH EMPLOYEES, CUSTOMERS, SHAREHOLDERS AND THE COMMUNITY. THE RESULTS FOR ALL STAKEHOLDERS ARE BETTER WHEN YOU WORK WITH A TEAM YOU TRUST. People are by far the most valuable asset of any organization. At CWB, we’ve built a team that you can bank on… a winning team… champions of common sense, western ways and values. Relationships are the very foundation of CWB. We want to know our customers, and we want them to know us. When you care about the people you serve, and those you work with, it raises customer service to a whole new level. We treat our customers the same way we would like to be treated: with respect, honesty and simple courtesy. We don’t believe that’s a lot to ask. That’s just a little thing we call thinking western – and it’s what sets us apart. We don’t believe in voicemail, or call centres. That’s far too impersonal – not our style. And we don’t care for long lineups, either. We realize your time is valuable, so we go out of our way to get the job done. The western tradition of doing for others is deeply ingrained in all of us at CWB. We proudly support the communities we serve… giving to a number of worthwhile causes from caregiving, to education, to the arts. Call it community spirit. Call it western hospitality. We call it good business. Our relationships don’t end at the bank door. We take that community-minded attitude home with us… to the neighbourhoods where we live… where our families live. We’re not just bankers, we’re parents, volunteers, soccer coaches, dance teachers, board members, and more. You’ll find over 600 of our employees throughout the West. Just down the street. Around the corner. Or across the way. We’re the ones with the friendly smile. “The bank is completely within my comfort zone. There’s a friendly atmosphere about it, and in 18 years I have never had a negative experience. CWB understands the ups and downs of our economy. They’ve always had a group of mature individuals working on the commercial side… Not a lot of turnover in personnel… makes for great continuity and very comfortable banking…” Bob Rowe, CWB client for 18 years General Manager, Phoenix Fence Inc. “My eventual successor will believe in our Think Western® culture or I’ll stay on ‘til I’m 90.” Larry Pollock, with CWB 14 years President and CEO CWB TWENTIETH ANNUAL REPORT 21 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 23 Quarterly Information 24 Overview of 2003 24 Critical Accounting Policies 25 Business Profile, Strategy and Outlook 26 Growth of the Core Business 26 Net Interest Income 27 Other Income 28 Loans 29 Deposits 30 Trust Operations 31 Cost Control 31 Non-interest Expenses 32 Taxes 33 Capital Expenditures 33 Credit Quality 33 Impaired Loans 34 Allowance for Credit Losses 35 Provision for Credit Losses 35 Diversification of Portfolio 36 Balance Sheet and Capital Management 36 Liquidity 38 Derivative Financial Instruments 38 Capital Funds and Adequacy 40 Risk Management 40 Overview 41 Credit Risk Management 41 Liquidity Risk 42 Market Risk 43 Operational Risk 43 Updated Share Information 44 CORPORATE GOVERNANCE 44 Introduction 44 The Board and Board Committees 45 Audit Committee 46 Conduct Review Committee 46 Corporate Governance & Human Resources Committee 47 Loans Committee 47 Other Areas of Consideration 47 Conclusion 48 FINANCIAL STATEMENTS 48 Management’s Report 49 Auditors’ Report 50 Consolidated Balance Sheet 51 Consolidated Statement of Income 51 Consolidated Statement of Changes in Shareholders’ Equity 52 Consolidated Statement of Cash Flow 53 Notes to Consolidated Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Quarterly Information ($ thousands, except per share amounts) Results of operations Q4 2003 Q3 Q2 Q1 Q4 2002 Q3 Q2 Q1 Net interest income (teb)(1) $ 27,500 $ 28,369 $ 25,953 $ 25,833 $ 24,534 $ 24,079 $ 20,677 $ 21,994 Less teb adjustment Net interest income per financial statements Total revenues (teb) Total revenues Net income Return on common 559 906 685 842 710 693 596 450 26,941 33,858 33,299 9,604 27,463 34,785 33,879 10,375 25,268 32,125 31,440 8,868 24,991 32,213 31,371 9,346 23,824 29,869 29,159 7,727 23,386 29,834 29,141 8,064 20,081 25,809 25,213 6,425 21,544 27,908 27,458 7,396 shareholders' equity (ROE) 12.2% 13.7% 12.5% 13.2% 11.2% 12.0% 10.1% 11.5% Return on average total assets (ROA) Earnings per common share Basic Diluted Efficiency ratio (teb) Efficiency ratio Net interest margin (teb) Net interest margin Provision for credit losses as a 0.91% 1.00% 0.92% 0.97% 0.83% 0.91% 0.77% 0.87% $ 0.74 $ 0.81 $ 0.70 $ 0.74 $ 0.67 46.9% 47.4% 2.60% 2.55% 0.72 44.5% 45.7% 2.73% 2.65% 0.63 47.8% 48.9% 2.69% 2.62% 0.67 46.0% 47.3% 2.68% 2.60% $ 0.61 0.56 50.9% 52.1% 2.64% 2.57% $ 0.64 0.58 49.1% 50.3% 2.72% 2.64% $ 0.51 0.47 54.5% 55.8% 2.47% 2.39% 0.59 0.53 48.7% 49.5% 2.58% 2.52% percentage of average loans 0.25% 0.25% 0.25% 0.25% 0.24% 0.26% 0.26% 0.27% (1) Most banks analyze revenue on a taxable equivalent basis to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividend received is significantly lower than would apply to a loan or security of the same amount. The adjustment to taxable equivalent basis of $3.0 million (2002 – $2.5 million) increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have a standardized meaning prescribed by generally accepted accounting principles and therefore may not be comparable to similar measures presented by other banks. Canadian Banking Industry Comparative performance indicators of the Canadian banking industry referred to in this document are obtained from the published results of the other publicly-traded Schedule I banks (Bank of Montreal, Canadian Imperial Bank of Commerce, Laurentian Bank of Canada, National Bank of Canada, Royal Bank Financial Group, Scotiabank and TD Bank Financial Group). Readers are cautioned that the banks in this industry group have operations and asset size that may not be directly comparable to each other or to Canadian Western Bank. Forward-looking Statements From time to time we make written and verbal forward-looking statements about our objectives and strategies, operations and targeted financial results. These may be included in our Annual Reports, regulatory filings, reports to shareholders, press releases, corporate presentations 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. We do not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time by us or on our behalf. CWB TWENTIETH ANNUAL REPORT 23 Overview of 2003 Key Performance Indicators ($ thousands, except per share amounts) Net income Earnings per share Basic Diluted Provision for credit losses as a percentage of average loans Efficiency ratio(1) (expenses to revenues) (teb)(2) Efficiency ratio Return on common shareholders’ equity Return on average total assets (1) A decrease in the ratio reflects improved efficiency. (2) See page 23 for a discussion of teb. The Bank achieved record earnings of $38.2 million in 2003, an increase of 29% over 2002. The increase was due to strong growth in total revenues and excellent efficiency. The efficiency ratio (teb) at 46.3% remained the best in the Canadian banking industry. Credit quality remained strong and stable. The provision for credit losses as a percentage of average loans was 0.25% in 2003 and has averaged 0.23% over the last five years. Diluted earnings per share were $2.69 in 2003 compared to $2.14 a year ago, an increase of 26%. Return on shareholders’ equity and return on assets were 12.9% and 0.95% respectively compared to 11.2% and 0.84% last year. Total assets increased 13% from one year ago to reach $4,344 million. Loans increased by $352 million, or 11% as the Bank’s long history of double digit annual loan growth continued. Branch generated deposits increased 14% in the year and account for over one half of total deposits. The Bank raised $65 million in conventional subordinated debentures which improved the mix of regulatory capital because growth is supported without dilution of common shareholders. The total capital adequacy ratio at October 31, 2003 was 13.1% (2002 – 11.4%) with a Tier 1 component of 8.9% (2002 – 8.8%). Critical Accounting Policies The Bank’s significant accounting policies are outlined in Note 1 of the consolidated financial statements. The policies discussed below are considered particularly important as they require management to make significant estimates or judgements, some of which may relate to matters that are inherently uncertain. $ $ $ 2003 38,193 $ 2002 29,612 $ Change from 2002 8,581 2.98 $ 2.69 $ 0.25% 46.3% 47.4% 12.9% 0.95% 2.34 $ 2.14 $ 0.26% 50.7% 51.8% 11.2% 0.84% 0.64 0.55 (0.01)% (4.4)% (4.4)% 1.7 % 0.11 % % Change 29% 27% 26% Allowance for Credit Losses The allowance for credit losses reflects management’s estimate of probable losses in the Bank’s loan portfolio at the balance sheet date. In assessing existing credit losses, management must rely on estimates and exercise judgement regarding matters for which the ultimate outcome is unknown. These matters include economic factors, developments affecting particular industries and specific issues with respect to single borrowers. Changes in circumstances may cause future assessments of credit risk to be significantly different than current assessments and may require an increase or decrease in the allowance for credit losses. Additional information on the process and methodology for determining the allowance for credit losses can be found in the discussion of credit quality on page 34 of Management’s Discussion and Analysis of Operations and Financial Condition and Note 1(e) to the consolidated financial statements. Income Taxes The provision for income taxes is calculated based on the expected tax treatment of transactions. In determining both the current and future components of the provision for income taxes, management must interpret tax legislation and make assumptions about the expected timing of the reversal of future tax assets and liabilities. If the Bank’s interpretations differ from those of tax authorities or if the timing of reversals is not as anticipated, the provision for income taxes could increase or decrease in future periods. 24 CWB TWENTIETH ANNUAL REPORT Business Profile, Strategy and Outlook Business Profile Canadian Western Bank (CWB) commenced operations in 1984 and today serves many thousands of small to medium sized businesses and individuals across the four western Canadian provinces. With a focus on mid-market commercial lending, real estate financing, industrial equipment financing and energy lending, the Bank has built strong customer relationships and provides value-added services to businesses in key sectors across the west. CWB also delivers a wide variety of financial products and services including deposit accounts, investment products, credit and debit cards, personal loans and mortgages. Customer accessibility is provided though a network of twenty-seven customer focused branches as well as via the Internet and telephone banking. Personal and corporate trust services are provided through a wholly-owned subsidiary, Canadian Western Trust (CWT). Strategy and Strengths The year 2004 will see the Bank celebrate its 20th anniversary. Upon reflection, CWB’s business plan has not strayed far from its roots. Rather, it has been an evolution based on strong fundamentals, values and focus. financial services, delivered Canadian Western Bank’s mission is to be known and respected as Canada’s western bank, providing western Canadians and other selected markets with a preferred source of individual and commercial its signature Think Western® style. The fundamental objectives are to provide shareholders with a sound and profitable return, provide clients with value, service and stability, provide employees with a positive and rewarding work environment and contribute to the communities in which CWB operates. in The Bank plans to achieve its mission through the following strategic priorities: • Build upon the Think Western® brand of service by ensuring CWB employees continue to manage customer relationships in the responsive and friendly CWB manner. CWB believes that experienced, knowledgeable and dedicated employees with a Think Western® attitude are critical to building customer loyalty. • Ensure growth is focused, strategic and ultimately enhances shareholder value. • Reinforce industry leadership in cost efficiency, return on assets and credit losses by maintaining low cost delivery capabilities, mitigating risks and ensuring continued rigorous credit risk management. • Leverage core profitability by the generation of lower cost deposits through the branch network and CWT. • Grow non-interest revenues from a continued emphasis on retail products and services and by ensuring appropriate resources are allocated to CWT to support corporate and personal trust services. • Increase ROE further by improving the mix of regulatory capital and through potential new business opportunities. • Maintain and reinforce CWB’s reputation and public confidence through enhanced communication, diligence in corporate governance practices and high standards in corporate reporting and accountability. Outlook Overall, the Bank expects continued strong financial performance in 2004, stable or improving economic conditions in Western Canada and stable to modestly rising interest rates. The recent and expected strength in the Canadian dollar will affect some borrowing customers positively and others negatively, but overall it is not expected to have a significant impact on the Bank’s credit quality or growth strategy. An increased emphasis on retail initiatives, together with the significant branch development projects that will be completed in fiscal 2004, are expected to further strengthen the Bank’s ability to drive core business growth and increase market recognition. Targets established for 2004 include net income growth of at least 15%, ROE of 13 to 15% and ROA of 0.98% or higher. The impact of potential big bank mergers on the Canadian financial industry is difficult to predict. It is generally felt that there would be additional growth opportunities for smaller financial institutions like CWB because of possible location duplication, customer interruption and more narrowly focused business strategies of the merged institutions, should mergers be allowed and indeed, if they occur. The balance of management’s discussion focuses on the following areas which form the financial basis of the Bank’s business plan and which management considers critical to long-term success: • Growth of the core business • Cost control • Credit quality • Balance sheet and capital management • Risk management CWB TWENTIETH ANNUAL REPORT 25 Growth of the Core Business Highlights of 2003 • Total revenues increased 17% • Net interest income increased 18% as a result of strong loan growth and an improved net interest margin • Other income increased 14% with strong growth in all operational areas • Loans increased 11% • Lower cost notice and demand deposits increased 18% • Trust operations, through Canadian Western Trust, continued to expand with the number of self-directed accounts up 15% Net Interest Income 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. Table 1 – Net Interest Income (teb)(1) ($ thousands) 2003 2002 Average Balance Mix Interest Interest Rate Average Balance Mix Interest Interest Rate Assets Securities and deposits with regulated financial institutions Loans Securities purchased under resale agreements Residential mortgages Other loans Total loans Total interest bearing assets Other assets Total Assets Liabilities Deposits Demand Notice Fixed term Total deposits Other liabilities Debentures Shareholders’ equity Total Liabilities Total Assets/Net Interest Income $ 526,489 13% $ 19,319 3.67% $ 436,589 13% $ 16,907 3.87% 61,468 631,511 2,756,634 3,449,613 3,976,102 45,810 $4,021,912 $ 115,392 444,778 3,014,956 3,575,126 83,700 67,372 295,714 $4,021,912 1 16 69 86 99 1 1,807 37,435 180,801 220,043 239,362 – 100% $ 239,362 3% $ – 6,245 121,521 127,766 – 3,941 – 100% $ 131,707 11 75 89 2 2 7 49,647 2.94 572,446 5.93 2,398,029 6.56 3,020,122 6.38 3,456,711 6.02 0.00 48,571 5.95% $3,505,282 83,715 0.00% $ 370,021 1.40 2,655,316 4.03 3,109,052 3.57 68,923 0.00 62,959 5.85 0.00 264,348 3.27% $3,505,282 2 16 68 86 99 1 1,193 34,907 157,897 193,997 210,904 – 100% $ 210,904 2% $ – 3,522 112,391 115,913 – 3,707 – 100% $ 119,620 11 76 89 2 2 7 2.40 6.10 6.58 6.42 6.10 0.00 6.01% 0.00% 0.95 4.23 3.73 0.00 5.89 0.00 3.41% $4,021,912 $ 107,655 2.68% $3,505,282 $ 91,284 2.60% (1) See page 23 for a discussion of teb. 26 CWB TWENTIETH ANNUAL REPORT In 2003, net interest income increased by $16.4 million, or 18%, primarily due to an increase of $519 million (15%) in average interest bearing assets and an increase in the net interest margin to 2.68% from 2.60%. the first half of 2002. The prime rate for the year averaged 4.69% in 2003 compared to 4.15% last year. The 2003 net interest margin of 2.68% was consistent with the margin of 2.69% achieved in 2001 prior to the fall in interest rates. The increase in net interest margin in 2003 reflects the recovery of rates from the record low interest rate environment experienced in Outlook In 2004, net interest income is expected to increase in response to the targeted loan growth of 12%. In addition, a continued emphasis on generating lower cost deposits will allow the Bank to gain leverage from core profitability. The Bank consistently maintains a positive interest rate gap with maturing assets exceeding maturing liabilities during the one year time frame. As a result of this positive interest rate gap, an increase in short term market rates would have a positive impact on margins, while a decrease would have the opposite impact. Overall, net interest margin is expected to be comparable to 2003 based on relatively stable interest rates with modest increases expected in late spring. Other Income Other income includes all revenues not classified as net interest income. Table 2 – Other Income ($ thousands) Credit related Retail services Trust services Gains on sale of securities Foreign exchange Other (1) Total Other Income Change from 2002 2003 13,099 $ $ 4,679 4,017 2,095 1,279 157 2002 11,050 $ 3,944 3,206 2,385 1,280 271 $ 25,326 $ 22,136 $ $ 2,049 735 811 (290) (1) (114) 3,190 % 19% 19 25 (12) (0) (42) 14% (1) Includes gains/losses on equipment disposals and other miscellaneous non-interest revenues. Other income was $25.3 million, an increase of $3.2 million or 14% over 2002. Notable changes include: • an increase of $2.0 million (19%) in credit fees due RRSP (registered retirement savings plan) and RRIF (registered retirement income fund) accounts and an increased offering of products available; and to loan growth; • a decrease in gains on securities sales. • an increase of $735,000 (19%) in retail fees as a result of volume growth and ongoing retail initiatives; • increased trust services fees in Canadian Western Trust (CWT) due to continued growth (15%) in the number of self-directed Other income as a percentage of total revenue (net interest income and other income) was 19% in 2003, down slightly from 20% in 2002 primarily as a result of the increase in net interest income generated from the increased net interest margin. Outlook Other income is expected to increase 12 – 15% in 2004, with growth in all areas except securities gains. The enhancement of retail operations will continue to be a focus in 2004, with the objective of increasing fee income through expanded product offerings, additional transactional deposit accounts and the generation of new business, all supported by the development of the Bank’s branch network. CWB TWENTIETH ANNUAL REPORT 27 Loans Loans, as reported on the consolidated balance sheet, totalled $3,601 million at the end of 2003 compared to $3,249 million at the end of 2002, an increase of 11%. Table 3 – Outstanding Loans by Type and by Provincial Location of Security ($ millions) October 31, 2003 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 Percentage October 31, 2002 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 Percentage British Columbia Alberta Saskatchewan Manitoba Other Provinces Composition Total(1) Percentage $ $ $ $ 326 $ 42 368 $ 246 61 307 62 $ 13 75 17 $ 3 20 – 351 355 234 – 940 1,308 $ 36% 72 471 585 325 165 1,618 1,925 53% 312 $ 43 355 220 59 279 – 330 294 202 – 826 1,181 $ 36% 66 452 491 272 160 1,441 1,720 52% $ $ $ – 13 41 19 4 77 152 $ 4% – 63 63 8 – 134 154 $ 4% 52 $ 14 66 12 $ 3 15 – 20 44 20 4 88 154 $ 5% – 50 61 9 – 120 135 $ 4% 14 $ – 14 – 56 5 21 – 82 96 $ 3% 10 $ – 10 – 46 13 19 – 78 88 $ 3% 665 119 784 72 954 1,049 607 169 2,851 3,635 100% 606 119 725 66 898 903 522 164 2,553 3,278 100% 18% 3 21 2 26 29 17 5 79 100% 18% 4 22 2 27 28 16 5 78 100% (1) This table does not include an allocation of the allowance for credit losses and deferred revenue and premiums. (2) Includes single and multi-unit residential mortgages. (3) Corporate loans (described on page 29) are included in Loans to Businesses based on the security of the specific loan and the nature of the borrower’s business. (4) Includes commercial term mortgages and project (interim) mortgages. 28 CWB TWENTIETH ANNUAL REPORT Highlights of the year-over-year changes in loans by type include: • the mix of loan type has remained relatively consistent; • construction and real estate loans increased $146 million (16%) and represent 29% of the portfolio versus 28% a year earlier; • commercial loans increased $56 million (6%) and comprise is selective about the loans it participates in and had a net reduction of $25 million in these loans during the year. Without this reduction in corporate loans, total loan growth for the year would have been 1% higher. At October 31, 2003 the corporate loan portfolio totalled $116 million (2002 – $141 million). 26%, versus 27% one year ago; and Loans by Portfolio • loans to individuals represent 21% of the total portfolio, compared to 22% in 2002. Highlights of the year-over-year changes in location of loan security were: • mix of location of security has remained relatively consistent; • loan growth of $222 million (11%) in the prairie provinces (primarily in Alberta); and • loans based in British Columbia increased $127 million (11%) and were consistent at 36% of the total portfolio. Loan growth for the year was entirely organic. Since 1999 the Bank has developed a portfolio of loans, identified internally as corporate loans, through participation in selected syndications, the majority of which have been structured and led by the major Canadian banks. This initiative has afforded the opportunity to participate in larger, investment grade credits as well as providing a degree of geographic diversification. The Bank Outlook Corporate Loans 4% Repurchase Agreements 2% Personal Loans 2% Residential Mortgages 8% Multi-unit Residential 5% Oil & Gas Production 4% General Commercial 23% Industrial Financing & Leasing 17% Commercial Mortgages Real Estate 23% Commercial Project Loans Real Estate 12% Consistent and strong loan growth of 12% is targeted for 2004, supported by the continuing development of the branch network. Deposits Table 4 – Deposits ($ 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 Growth in deposits of 11% was achieved this year. Lower cost business and personal deposits had strong growth of 18% and account for 16% of total deposits consistent with last year. The focus on increasing lower cost deposits is an ongoing priority due to the positive impact on earnings. Branch generated deposits grew by 14% this year and account for over one-half of total deposits. 2003 Amount % of Total 2002 Amount % of Total $ 206,710 431,218 2,020,207 601,215 533,647 3,792,997 26,753 $3,819,750 5% $ 169,737 368,764 11 53 16 14 99 1 1,787,391 555,276 523,534 3,404,702 24,369 100% $3,429,071 5% 11 52 16 15 99 1 100% All sources of deposits increased in real dollar terms over the year but the percentage of deposits raised by branches increased to 54% of the total. Branch generated deposits are generally considered to be more stable and the Bank will continue to focus on achieving further growth in this area as the capacity for additional growth exists in our network. Agent deposits are slightly more expensive because a commission is paid, but this added cost is countered by a reduced need for a more extensive branch network. CWB TWENTIETH ANNUAL REPORT 29 Deposits by Source ($ millions) 6 7 8 6 6 , 1 6 7 0 , 2 4 5 3 5 5 1 , 2 2 8 1 , 8 5 7 5 3 1 , 7 2 6 1 , 2 7 1 1 3 1 , 5 4 3 1 , 7 8 6 7 1 1 , 8 0 1 1 , 1999 2000 2001 2002 2003 5,000 4,000 3,000 2,000 1,000 0 Outlook Deposits by Source (as a % of total deposits) Wholesale Agent Branches Branches Deposit Agents Wholesale 1999 2000 47% 49% 4% 49% 48% 3% 2001 53% 45% 2% 2002 2003 54% 44% 2% 53% 45% 2% In 2004, increasing branch raised deposits (including through CWT) will continue to be a focus of ongoing retail initiatives. Particular emphasis will be placed on the lower cost notice and demand component which has associated transactional fee income and provides leverage to core profitability from margin expansion. Trust Operations CWT delivers value to customers through partnerships with leaders in the investment and benefits industry, identifying service gaps and providing knowledgeable and customer service oriented results. CWT had a very strong year in 2003. Total deposits raised through trust operations increased 37% to total $121.6 million at October 31, 2003 with growth in both personal and corporate trust deposits. Trust assets under administration, which are not reflected in the consolidated balance sheet (see also Note 16 to the consolidated financial statements), totalled approximately $1,475 million at October 31, 2003, an increase of 26% over the prior year. These assets are primarily held in self-directed RRSPs and RRIFs accounts which totalled 16,823 (2002 – 14,674), an increase of 15% from one year ago. Trust customers may hold and effect transactions in cash, mutual funds, term deposits, equities, bonds, arms-length mortgages and private company shares in registered and non-registered accounts. Corporate and group services include retirement compensation agreements, individual pension plans, registered pension plan, group RRSP and share purchase plan administration. Number of Self-directed Accounts 3 2 8 , 6 1 4 7 6 , 4 1 4 1 8 , 2 1 8 6 4 , 1 1 20,000 15,000 10,000 7 0 0 , 9 5,000 0 1999 2000 2001 2002 2003 Growth in the current year primarily came from organic growth through the existing network of financial planners and benefit consultants. CWT also arranged to provide RRSP and RRIF trustee and administrative support to approximately 500 members of Vancouver City Savings Credit Union and was appointed as bare trustee to ATB Investor Services (a subsidiary of ATB Financial). Outlook Assets under administration and the related fee income are expected to show continued strong growth in 2004 with targeted increases of 35% and 15%, respectively. A more modest target of 5% growth has been established for deposits raised through trust operations as balances were unusually high at year-end and fluctuate as customers reinvest funds in the market place. An investment in system software will be made in 2004 to allow CWT to more efficiently manage future growth. 30 CWB TWENTIETH ANNUAL REPORT Cost Control Highlights of 2003 Growing in a cost-effective manner is a key strength of the Bank. The efficiency ratio (teb), a measure of the cost to generate each dollar of revenue, improved to a record low of 46.3% and leads the Canadian banking industry. Overall, non-interest expenses increased 7% over 2002. Non-interest Expenses Table 5 – Non-interest Expenses and Efficiency Ratio ($ thousands) Salaries and Employee Benefits Salaries Employee benefits Total Premises Rent Depreciation Other Total Equipment and Furniture Depreciation Other Total General Marketing and business development Capital and business taxes Professional fees and services Postage and stationery Banking charges Travel Regulatory costs Communications Other Total Total Non-interest Expenses Efficiency Ratio Net interest income (teb) Other income Total revenues Change from 2002 2003 2002 $ $ 31,916 $ 5,764 37,680 29,147 $ 5,438 34,585 2,769 326 3,095 4,985 1,084 1,212 7,281 2,004 1,749 3,753 4,765 1,064 1,319 7,148 2,046 1,635 3,681 1,935 1,885 1,796 1,435 1,074 899 758 552 2,518 12,852 61,566 $ 1,539 1,691 1,954 1,440 1,059 792 923 557 2,146 12,101 57,515 $ $ 220 20 (107) 133 (42) 114 72 396 194 (158) (5) 15 107 (165) (5) 372 751 4,051 $ 107,655 $ 25,326 91,284 $ 22,136 $ 132,981 $ 113,420 $ 16,371 3,190 19,561 % 10% 6 9 5 2 (8) 2 (2) 7 2 26 11 (8) (0) 1 14 (18) (1) 17 6 7% 18% 14% 17% Efficiency Ratio (expenses as a percentage of total revenues) (teb) 46.3% 50.7% Non-interest expenses increased 7% to $61.6 million in 2003 primarily due to an increase in salary costs. The increase in salary costs related to annual salary adjustments and higher staffing levels that resulted from increased business activity. Also contributing to the increase was additional marketing and business development initiatives. The efficiency ratio (teb) improved to 46.3% from 50.7% in 2002 as revenue growth of 17% surpassed expense growth of 7%. The efficiency ratio continues to compare very positively to the other Canadian Schedule I banks which averaged 66.9% in fiscal 2003. Non-interest expenses as a percentage of average assets was 1.53% in 2003, down from 1.64% in 2002. CWB TWENTIETH ANNUAL REPORT 31 Efficiency Ratio(1) (expenses to revenues) % 8 9 5 . % 3 4 5 . % 0 0 5 . % 7 0 5 . % 3 . 6 4 1999 2000 2001 2002 2003 (1) A decrease in the ratio reflects improved efficiency. 80 60 40 20 0 Stock-Based Compensation Effective for stock options granted after October 31, 2002, the Bank adopted the provisions of Section 3870 of the Canadian Institute of Chartered Accountants Handbook "Stock-based Compensation and Other Stock Based Payments". The Bank has chosen to account for stock-based compensation using the fair value method which recognizes the fair value of the compensation cost in the financial statements. Compensation expense recognized in 2003 related to options granted this year totalled $252. The actual amount of compensation expense recorded in future years will depend on the specifics of the actual options granted in those periods and the variables at the time of the grant(s). Outlook The target for 2004 is to achieve an efficiency ratio (teb) of 46.0% or less. A significant branch development program was commenced in 2003 with completion expected in the spring of 2004. Non-interest expenses are expected to increase approximately 4% in 2004 due to these developments alone. The branch development program will provide future benefits by supporting loan and deposit growth as well as retail initiatives, but is expected to slow improvement in the efficiency ratio in 2004 as compared to the improvement in 2003. Taxes The provision for income taxes (teb) was $24.6 million in 2003, up from $18.6 million with the increase due to the increase in earnings. For the year ended October 31, 2003 the effective tax rate (teb) was approximately 39%, consistent with the prior year. Capital losses of $11.9 million (2002 – $11.8 million) are available to apply against future capital gains and have no expiry date. The tax benefit of these capital losses has not been recognized. Future tax assets and liabilities represent the cumulative amount of tax applicable to temporary differences between the carrying amount of the assets and liabilities and their values for tax purposes. The Bank’s significant future income tax asset relates primarily to the general allowance for credit losses. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in future income taxes related to a change in tax rates are recognized in income in the period of the tax rate change. There were no significant rate reductions enacted in 2003. Table 6 – Capital Taxes ($ thousands) British Columbia Alberta Saskatchewan Manitoba Total Capital Taxes Capital Tax Rate Capital Allocation 1.00% n/a 0.70% 3.00% 39% $ 54% 4% 3% $ 2003 1,289 $ – 131 288 1,708 $ 2002 1,151 $ – 105 271 1,527 $ Change from 2002 $ 138 – 26 17 181 % 12% – 25 6 12% Capital taxes for 2003 totalled $1.7 million compared to $1.5 million in 2002. The increase is primarily attributable to taxes exigible on increased capital due to retention of earnings. The goods and services tax (GST) carries with it a significant cost to the Bank, as it does to all financial institutions, 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. Outlook The effective tax rate is expected to decrease to the range of 35 – 37% in 2004, reflecting the announced federal income tax and large corporation tax rate reductions. Provincial capital tax is expected to increase by 12% in 2004 due to the retention of earnings. 32 CWB TWENTIETH ANNUAL REPORT Capital Expenditures In 2003 the Bank invested $2.4 million in capital expenditures. Significant expenditures the related Bank’s branch network ($1.0 million) and further investment in computer equipment ($1.2 million) including customer service enhancements to the banking system. to development of The Bank is investing in the future with the relocation and significant upgrading of its existing Grande Prairie, Red Deer, Winnipeg and Vancouver West Broadway branches, which are scheduled to open between November 2003 and January 2004. A new branch, the Bank’s twenty-eighth branch, is currently under construction in St. Albert, Alberta and scheduled to open in Spring 2004. Outlook Capital expenditures of $5.7 million, to be funded from general operating revenues, are expected in 2004 as the Bank continues to invest in the future. At year end there were specific commitments of $2.6 million for capital expenditures primarily related to the new St. Albert branch and the relocation and significant upgrading of four other branches. Credit Quality Highlights of 2003 • Credit quality remained strong • Provision for credit losses was stable at 0.25% of average loans • Gross impaired loans decreased $12.8 million and are at the low end of the expected range • Total allowance for credit losses represented 159% of gross impaired loans at year end Impaired Loans Gross impaired loans decreased $12.8 million or 37% in 2003. As shown in Table 7 gross impaired loans totalled $22.2 million and represented 0.62% (2002 – 1.08%) of outstanding loans. During the year, the Bank successfully resolved a number of situations to produce a historically low level of gross impaired loans at October 31, 2003. Table 7 – Change in Gross Impaired Loans ($ thousands) Gross impaired loans, beginning of year Net new formations (reductions) Write-offs, net of recoveries Total Gross Impaired Loans as a Percentage of Total Loans $ $ 2003 35,077 $ (8,596) (4,240) 22,241 $ 0.62% Change from 2002 2002 (403) 35,480 $ (13,286) 4,690 (5,093) 853 35,077 $ (12,836) 1.08% (0.46)% The combination of an increase in the allowance for credit losses and a decrease in impaired loans has resulted in the total allowance now exceeding gross impaired loans by $13.1 million, representing negative 0.36% of net loans outstanding. In 2002, impaired loans exceeded the allowance for credit losses by $4.1 million and represented 0.13% of net loans outstanding (see graph to right). The portfolio is reviewed regularly with credit decisions undertaken on a case by case basis to provide early identification of possible adverse trends. Loans that have become impaired are monitored closely with regular quarterly, or more frequent, review of each loan and the realization plan. Table 8 shows the year over year change to the allocation of the allowance for credit losses to specific provisions by category of impaired loans and to the general allowance for credit risk. Net Impaired Loans as a Percentage of Net Loans Outstanding % 4 5 . 0 % 5 2 . 0 % 7 1 . 0 % 3 1 . 0 ) % 6 3 0 . ( 1999 2000 2001 2002 2003 1.00 0.75 0.50 0.25 0.00 (0.25) (0.50) CWB TWENTIETH ANNUAL REPORT 33 Outlook The dollar level of gross impaired loans is expected to fluctuate over time within the Bank’s range of acceptable levels as loans become impaired and are subsequently resolved. The overall outlook for 2004 remains consistent with the 2003 experience with no expectation of adverse change in the general trend of the portfolio. Allowance for Credit Losses Table 8 – Allowance for Credit Losses ($ thousands) Specific Provisions Consumer and personal Real estate Industrial Other General Allowance Total (1) Recoveries in 2003 totalled $87 (2002 – $142). The allowance for credit losses is maintained to absorb losses in the loan portfolio and consists of $7.8 million in specific allowances and $27.6 million in the general allowance for credit risk. Specific allowances include the accumulated allowances 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 allowances for future losses inherent in the portfolio that are not presently identifiable on an account by account basis. The general allowance represents 0.77% of gross outstanding loans (0.73% in 2002) and 0.78% of risk-weighted assets (0.76% in 2002). This compares favourably with the Bank’s five year loan loss average of 0.23% (ten year average – 0.26%) 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% (ten year average – 0.18%). The allowance as a percentage of gross impaired loans (coverage ratio) has improved to 159% (2002 – 88%). An assessment of the adequacy of the general allowance is conducted quarterly and measured against the five and ten year loan loss averages. 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 is expected to increase in strong economic times and decrease in weaker economic times as allowances are allocated to specific credits. Outlook 2002 Write-offs, net of Recoveries(1) Ending Balance Provision for Credit Losses 2003 Ending Balance $ 281 $ 1,349 2,111 3,467 23,797 31,005 $ $ 418 $ 651 881 2,290 – 4,240 $ 503 640 $ 840 142 2,850 1,620 3,614 2,437 27,558 3,761 8,600 $ 35,365 Policies and methodology governing the management of the general allowance are in place. The loan portfolio is delineated through the assignment of internal risk ratings to each borrower. The rating is based on assessments of key evaluation factors for the nature of the exposure applied on a consistent basis across the portfolio. The rating system is based on twelve levels and is updated at least annually for all loans, with the exception of consumer loans and single-unit residential mortgages. Allowance for Credit Losses as a Percentage of Gross Impaired Loans % 9 5 1 % 6 8 % 0 8 % 8 8 % 8 6 1999 2000 2001 2002 2003 200 150 100 50 0 Further development of methodology to support the testing of the adequacy of the general allowance will continue during fiscal 2004. Significant change to the level of the general allowance is not anticipated based on expanded methodology, assuming no material change in the portfolio’s credit quality. 34 CWB TWENTIETH ANNUAL REPORT Provision for Credit Losses The provision for credit losses represented 0.25% of average loans in 2003, consistent with the five year average of 0.23% reflecting the strong credit quality of the portfolio. The Bank continues to report lower loan losses than the balance of the industry. The Bank has no material exposure outside Canada and does not underwrite direct agricultural risk. There has been no material portfolio deterioration due to the bovine spongiform encephalopathy issue in western Canada or the forest fires in British Columbia. External factors which may impact western Canada and the environments in which the Bank’s customers operate are continually analyzed. One particular factor that continues to be monitored is the potential impact of the possible implementation of the Kyoto accord. Provision for Credit Losses as a Percentage of Average Loans Outstanding (5 year average 0.23%; 10 year average 0.26%) 0.30 % 8 1 0 . 0.20 % 3 2 0 . % 1 2 0 . % 6 2 0 . % 5 2 . 0 0.10 0.00 1999 2000 2001 2002 2003 Outlook The provision for credit losses is expected to be consistent at 0.25% of average loans in 2004. Diversification of Portfolio Total Advances Based on Location of Security (also see Table 3) The following table illustrates the diversification in lending operations by industry sector: Table 9 – Total Advances Based on Industry Sector Geographical Distribution of Loans(1) (%) October 31 Real estate operations Construction Consumer loans and residential mortgages(1) Transportation and storage Hotel/motel Oil and gas (production) Finance and insurance Manufacturing Logging/forestry Oil and gas (service) Other services Retail trade Wholesale trade Other Total 2003 2002 25% 25% 18 19 12 10 8 8 5 6 5 5 4 4 4 4 3 3 4 3 3 3 2 3 2 2 5 5 100% 100% (1) Residential mortgages in this table include only single-family properties. (2) The Bank does not engage in direct lending to the agricultural sector. Management of the loan portfolio includes the strategy of focusing on areas of demonstrated lending expertise and avoiding high concentrations in one geographic area or industry sector. The portfolio is well diversified with a mix of corporate and personal business. Industrial lending units are set up within branches or as British Columbia 38% Alberta 51% Saskatchewan 4% Manitoba 4% Other 3% (1) Includes undrawn lines of credit and excludes securities purchased under resale agreements. stand alone operations, while oil and gas production 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. CWB TWENTIETH ANNUAL REPORT 35 Balance Sheet and Capital Management Highlights of 2003 • Issue of $65 million of non-dilutive subordinated debentures which improved the mix of regulatory capital • Strong total capital ratio of 13.1%, and Tier 1 ratio of 8.9% comprised entirely of common shareholders’ equity • Two semi-annual dividends of $0.23 per share were paid in fiscal 2003, an increase of 15% • Semi-annual dividend of $0.30 per share declared in December 2003, an increase of 30% Liquidity A schedule outlining the consolidated securities portfolio at October 31, 2003 is provided in Note 3 to the consolidated financial statements. A conservative policy is maintained in this area with: • all investments, other than those securities categorized as “other marketable securities”, are limited to high quality debt securities and short-term money market instruments to meet objectives of liquidity management and to provide an appropriate return; • specific investment criteria and procedures for purposes of management of the securities portfolio; • regular review, monitoring and approval by the Asset Liability Committee (ALCO) of policies regarding these investments and annual review and approval by the Board of Directors; and • quarterly reporting to the Board of Directors on the securities portfolio. Table 10 – Liquid Assets ($ thousands) Cash Deposits with regulated financial institutions Cheques in transit(1) 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 $ 2003 1,951 279,921 – 281,872 72,000 119,982 167,607 49,589 75,133 484,311 $ 766,183 $ 4,343,972 $ 2002 1,928 132,038 53,911 187,877 66,431 44,418 123,775 94,610 81,300 410,534 $ 598,411 $ 3,828,162 17.6% 15.6% $ 3,819,750 $ 3,429,071 20.1% 17.5% $ Change from 2002 23 147,883 (53,911) 93,995 5,569 75,564 43,832 (45,021) (6,167) 73,777 167,772 515,810 2.0% 390,679 2.6% $ $ $ (1) An operational change was implemented in 2003 to record cheques and other items cleared on the last day of the month in individual customer accounts on the same date. Prior to this change, items cleared on the last day of the month did not affect individual customer accounts until the first day of the following month. The financial statement impact of the change is that Cash Resources no longer includes cheques and other items in transit and customer notice and demand deposit accounts have been reduced by the last day of the month clearing. 36 CWB TWENTIETH ANNUAL REPORT • deposits with regulated financial institutions including Bankers' Acceptances increased to 37% (2002 – 22%) of liquid assets; and • other marketable securities decreased to 10% (2002 – 14%) of liquid assets but are expected to increase in amount in 2004 as additional preferred share investments are made. 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 uncommitted facilities have been arranged with a number of financial institutions. The government insured/guaranteed mortgage 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 11 and 12. Within 1 Month 137 520 457 1,114 $ $ 1 to 3 Months – $ – 386 386 $ 3 Months Cumulative to 1 Year Within 1 Year 137 520 1,885 2,542 – $ – 1,042 1,042 $ 968 $ 274 $ 991 $ 2,233 $ $ $ As shown in Table 10, liquid assets comprised of cash, interbank deposits, securities purchased under resale agreements and marketable securities, totalled $766 million at October 31, 2003, an increase of $168 million from October 31, 2002. Liquid assets represented 17.6% (2002 – 15.6%) of total assets and 20.1% (2002 – 17.5%) of total deposit liabilities at that date. Highlights of the composition of liquid assets at October 31, 2003 were as follows: • maturities within one year represent 88% (2002 – 79%) of liquid assets or $671 million (2002 – $473 million) partially reflecting higher liquidity balances at October 31, 2003 that were invested short term as well as lower balances invested in bonds with maturities exceeding one year resulting from the strategic realization of gains; • Government of Canada and provincial debt securities remained consistent at 44% (2002 – 44%) of liquid assets; Table 11 – Deposit Maturities Within One Year ($ millions) October 31, 2003 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 2002 Total Table 12 - Total Deposit Maturities ($ millions) October 31, 2003 Demand deposits Notice deposits Deposits payable on a fixed date Total October 31, 2002 Total Within 1 Year 137 $ 520 1,885 2,542 $ 1 to 2 Years 2 to 3 Years 3 to 4 Years 4 to 5 Years – $ – 453 453 $ – $ – 469 469 $ – $ – 224 224 $ – $ – 132 132 $ Total 137 520 3,163 3,820 2,233 $ 551 $ 286 $ 228 $ 131 $ 3,429 $ $ $ A breakdown of deposits by source is provided under the heading Deposits on page 30. 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 deposits through its branch network as the core funding source. However, the total dollar value of agent- generated deposits will likely increase even though the goal is to decrease funding from this source as a percentage of total deposit liabilities. CWT raises deposits mainly through notice accounts comprised primarily of cash balances held in self-directed accounts and corporate trust deposits and through the Bank’s branch network. At October 31, 2003, the trust’s notice account balances totalled $122 million (2002 – $89 million) and $72 million (2002 – $65 million) of CWT fixed term deposits had been raised through the Bank’s branch network. CWB TWENTIETH ANNUAL REPORT 37 Derivative Financial Instruments More detailed information on the nature of off-balance sheet derivative financial instruments is shown in Note 20 to the consolidated financial statements. Table 13 – Derivative Financial Instruments ($ thousands) Notional Amounts Interest rate contracts(1) Foreign exchange contracts(2) Equity contracts(3) Total 2003 2002 $ $ $ 819,500 86 15,825 835,411 $ 707,000 836 14,225 722,061 (1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between November 2003 and October 2007. The total gross positive replacement cost of interest rate contracts was $4,581 (2002 – $7,476). This market value represents an unrealized gain, or the payment the Bank would receive if these contracts were unwound and settled at that date. (2) 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, 2003 there were US$60 (2002 – US$500) forward foreign exchange contracts outstanding which mature in November 2003. (3) 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 2008. The total gross positive replacement cost is $24 (2002 – $223). The active use of interest rate contracts continues to be an integral part of the management of the Bank’s short-term positive gap position. 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. 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. As a simple example, a loan that is fully insured by the Canadian Mortgage & Housing Corporation is applied a risk weighting of 0% as the Bank’s risk of loss is nil, while uninsured commercial loans are assigned a risk weighting of 100% to reflect the higher level of risk associated with this type of asset. The ratio of regulatory capital to risk-weighted assets is calculated and compared to OSFI’s standards for well-capitalized financial institutions. Off-balance sheet assets, such as derivatives, are included in the calculation of risk-weighted assets and both the credit risk equivalent and the risk weight calculations are prescribed by OSFI. 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%. The Bank’s 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 Bank’s general allowance in Tier 2A capital to a maximum of 87.5 basis points of risk-weighted assets. OSFI has been working with other international regulators to develop a new Basel Capital Accord, which would result in some significant changes to the risk-weighting of assets and calculation of regulatory capital. Changes are not expected to affect the Canadian banking industry until at least 2007. No significant impact on the Bank’s required level of regulatory capital is expected as a result of the Accord, although there are still some major areas within the Accord that have not yet been fully developed. 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, while providing a satisfactory return on equity for shareholders. 38 CWB TWENTIETH ANNUAL REPORT Table 14 – Capital Structure and Regulatory Ratios at Year End ($ thousands) Tier 1 Capital Common shares Contributed surplus Retained earnings 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 2003 Change from 2002 2002 $ 150,782 $ 145,203 $ 252 165,197 316,231 – 132,884 278,087 5,579 252 32,313 38,144 27,558 121,951 149,509 3,761 64,825 68,586 $ 465,740 $ 359,010 $ 106,730 23,797 57,126 80,923 Tier 1 capital Tier 2 capital 0.1% 1.6% 1.7% Total Regulatory Capital Adequacy Ratio Assets to Regulatory Capital Multiple(2) (1.4) (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 8.9% 4.2% 13.1% 9.5 8.8% 2.6% 11.4% 10.9 been granted an inclusion rate to a maximum of 0.875% of risk-weighted assets. At October 31, 2003, the Bank’s general allowance represents 0.78% (2002 – 0.76%) 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. Table 15 – Risk-weighted Assets ($ thousands) Balance Sheet Assets Cash resources Securities Loans Other assets Total Credit Instruments(1) (contract amounts) Guarantees and standby letters of credit Commitments to extend credit(2) Total Derivative Financial Instruments(3) (notional amounts) Interest rate contracts Foreign exchange contracts Equity contracts Total Total Risk-weighted Assets (1) See Note 15 to the consolidated financial statements for further details. (2) Greater than one year only. (3) See Note 20 to the consolidated financial statements for further details. 2003 Risk- weighted Balance Balance Balance $ 281,872 $ 412,827 3,601,003 48,270 $ 4,343,972 55,984 $ 187,877 $ 75,648 3,274,694 46,100 345,619 3,248,747 45,919 3,452,426 $3,828,162 2002 Risk- weighted Balance 37,190 83,871 2,938,787 43,207 3,103,055 $ 64,413 93,868 $ 158,281 $ 819,500 86 15,825 $ 835,411 48,312 $ 46,934 95,246 $ 57,478 42,290 – – 57,478 42,290 1,415 $ 707,000 836 14,225 1,673 $ 722,061 – 258 $3,549,345 1,812 4 272 2,088 $3,147,433 At October 31, 2003 the total capital adequacy ratio was 13.1% (2002 – 11.4%) of which 8.9% (2002 – 8.8%) was Tier 1 capital. Total regulatory capital increased $106.7 million over 2002 as a result of: • share capital of $5.6 million issued primarily upon the exercise of employee stock options; and • an increase of $3.8 million in the general allowance for credit • the issuance of $65.0 million of subordinated debentures; losses. • earnings, net of dividends, of $32.3 million; CWB TWENTIETH ANNUAL REPORT 39 The private placement of $65 million of subordinated debentures significantly improved the Bank’s capital mix and will allow growth to be pursued without dilution to common shareholders. At year-end, subordinated debentures include both convertible ($53.8 million; 2002 – $54.0 million) and conventional ($68.1 million; 2002 – $3.1 million) debentures. The Bank currently has the ability to specify a date and force the conversion of the publicly-traded debentures. The terms of the conventional debentures are for a ten year period. After the first five years, if the debenture is not redeemed by the Bank or renegotiated, the interest rates change from fixed to floating and the debentures will commence straightline amortization for capital adequacy purposes over the final five year term to maturity. Note 10 to the consolidated financial statements provides more information on the terms of the debentures. Outlook Two semi-annual dividends of $0.23 per share were paid in fiscal 2003, an increase of 15% over the prior year. A semi-annual dividend of $0.30 per share was declared on December 4, 2003, an increase of 30%. The Bank also announced that it anticipates moving to quarterly dividend declarations in 2004. The Bank has stock 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 share price appreciation and dividend yield. Note 12 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. The Bank expects to remain well-capitalized in 2004. The current capital mix allows new opportunities or greater than anticipated organic growth to be funded through the issuance of additional subordinated debt. Tier 1 capital can be strengthened at any time by the forced conversion of the outstanding publicly-traded convertible debentures. A move to quarterly dividend declarations is anticipated in 2004. Derivative financial instruments will continue to be used for the purpose of asset liability structuring and management of interest rate risk. Risk Management Overview Effective risk management is central to the ability to remain financially sound and profitable and includes identifying, assessing, managing and monitoring all forms of risk. The Bank is exposed to several categories of risk including: strategic, reputation, credit, liquidity, structural (asset/liability), market, fiduciary and operational. Senior management is 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 risks and risk management policies is presented to the Board and/or Board committees for review and assessment. 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; • the review and approval of 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. The Asset Liability Committee (ALCO) provides the management oversight related to risks other than credit 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: • ensuring that risks other than credit risk are identified and assessed and appropriate policies are in place and effective; • 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 respecting management of risks. Asset liability management policies are approved and reviewed at least annually by the Board with quarterly status reporting provided to the Board. The Operations Committee meets regularly and is made up of supervisory and management personnel from all areas of operations and is chaired by a member of senior management. This committee is responsible for developing appropriate policies and procedures, including internal controls, respecting day-to-day, routine operations. The internal audit department performs inspections in all areas of the Bank, including CWT, and reports the results directly to senior management, the CEO and the Audit Committee. 40 CWB TWENTIETH ANNUAL REPORT Credit Risk Management Environmental Risk 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 common equity plus retained earnings. 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 approval 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 those 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; The operations of the Bank do not have a material effect on the environment. However, a risk of default may occur if a borrower is unable to repay loans due to environmental clean up costs. The Bank may become directly liable for clean up costs when 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 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 to 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 selected syndications, which are generally led by the major Canadian banks. In addition to being able to lend to larger companies, this initiative has also provided a degree of geographic diversification. • a standardized credit risk rating classification established for all Liquidity Risk credits and reviewed not less than annually; • annual reviews of individual credit facilities (excepting consumer loans and single-unit residential mortgages); • quarterly review of risk diversification by geographic area, industry sector and product measured against assigned portfolio limits; • 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 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; • detailed quarterly reviews of accounts rated less than satisfactory including establishment of an action plan for each account; and • completion of 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. 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. CWB TWENTIETH ANNUAL REPORT 41 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 forward four month rolling basis; • consideration of the term structure of assets and liabilities, with emphasis on deposit maturities, as well as expected loan fundings and other commitments to provide funds when determining required levels of liquidity; and • separate management of the liquidity position of the Bank and CWT to ensure compliance with related party and other regulatory tests. 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. 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 result in 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. To manage interest rate risk arising as a result of the financial intermediation process, ALCO establishes policy guidelines for interest rate gap positions and meets regularly to monitor the Bank’s position and decide future strategy. The objective is to manage the interest rate risk within prudent guidelines. Interest rate risk policies are approved and reviewed at least annually by the Board of Directors with quarterly reporting provided to the Board as to the gap position. Exposure to interest rate risk is controlled by managing the size of the static gap positions between interest sensitive assets and interest sensitive liabilities for future periods. Gap analysis is supplemented by computer simulation of the asset liability portfolio structure and dollar estimates of net interest income sensitivity for periods of up to one year. The interest rate gap is measured at least monthly. Note 18 to the consolidated financial statements shows the consolidated gap position at October 31, 2003 for selected time intervals. The gap analysis in Note 18 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 increased from 1.8% to 2.5% and the one month and under gap increased from 1.2% to 3.6%. Gaps remained positive and the Bank’s asset/liability position is expected to continue such that rising interest rates would tend to increase net interest income. Of the $1,885 million in fixed term deposit liabilities maturing within one year from October 31, 2003 (as shown in table 11), approximately $1,409 million (37% of total deposit liabilities) mature by April 30, 2004. The term in which maturing deposits are retained will have an impact on the future asset liability structure and hence interest rate sensitivity. Approximately $198 million of the fixed term deposit liabilities maturing within one month are floating rate redeemable deposits with a one year contractual maturity redeemable without penalty at any time. The estimated sensitivity of net interest income to a change in interest rates is presented in Table 16. The amounts represent the estimated change in net interest income over the time period shown resulting from a one percentage point change in interest rates. If rates increase, the effect would be an increase in net interest income while the opposite would occur if rates decrease. The estimates are based on a number of assumptions and factors, which include: • a constant structure in the asset liability portfolio; • interest rate changes affect interest sensitive assets and liabilities by the same amount and are applied at the appropriate repricing dates; and • no early redemptions. The interest sensitivity of the portfolio increased in both absolute dollar terms and as a percentage of estimated future net interest income during the year. 42 CWB TWENTIETH ANNUAL REPORT Table 16 – Estimated Sensitivity of Net Interest Income as a Result of a One Percentage Point Change in Interest Rates ($ thousands) Period 90 days 1 year 1 year percentage change It is management’s intention to continue to manage the asset liability structure and interest rate sensitivity through pricing and product policies to attract appropriate assets and liabilities as well as through the use of interest rate swaps or other appropriate hedging techniques (see discussion under Derivative Financial Instruments). Assets and liabilities having a term to maturity in excess of five years are subject to specific review and control. With the exception of the subordinated debentures, such items were not material as at October 31, 2003. The subordinated debentures are discussed in Note 10 to the consolidated financial statements. Foreign Exchange Risk In providing financial services to its customers, the Bank has assets and liabilities denominated in U.S. dollars. At October 31, 2003, assets denominated in U.S. dollars were 0.7% (2002 – 0.6%) of total assets and U.S. dollar liabilities were 0.7% (2002 – 0.7%) of total liabilities. Currencies other than U.S. dollars are not bought or sold other than to meet specific customer needs and therefore, the Bank has 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. Operational Risk Operational risk is inherent in all business activities. It is the potential for loss as a result of external events, human error or inadequacy or failure of processes, procedures or controls. Its impact can be financial loss, loss of reputation, loss of competitive position or regulatory penalties. The Bank is exposed to operational risk from internal business activities and from activities that are outsourced. The financial measure of operational risk is actual losses incurred. No material losses occurred in 2003 or 2002. $ 2003 508 2,110 $ 2002 305 1,842 2.0% 1.8% The Bank’s strategy to minimize and manage 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; • centralized reporting of operating losses for risk assessment; • 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 shareholders’ auditors report annually on the efficiency and effectiveness of internal controls over significant risk areas and provide their report to the Audit Committee. The Bank also maintains appropriate insurance coverage through a financial institution bond policy. Updated Share Information As at November 30, 2003 the Bank had 13,014,399 common shares outstanding. In addition, there were two outstanding debentures with a combined principal amount of $53.8 million that are convertible into a total of 1,793,113 common shares and employee stock options that have been issued which are or will be exercisable into 1,142,149 common shares (1,181,548 authorized) for proceeds of $27.5 million. Dated as of December 4, 2003. CWB TWENTIETH ANNUAL REPORT 43 CORPORATE GOVERNANCE Introduction Sound and effective corporate governance has always been a priority for Canadian Western Bank. 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 Bank’s corporate governance policies are reviewed regularly for improvement and are designed to strengthen the ability of the Board to effectively supervise management and enhance long-term shareholder value. The Board’s Corporate Governance & Human Resources Committee provides direction, monitors compliance and makes recommendations to the Board to enhance corporate performance and promote ongoing improvement in Board effectiveness. The Board and Board Committees The Board is currently comprised of twelve members. The number of directors reflects the desire to have the members represent the geographical jurisdictions in which the Bank operates and the need to fill the memberships of the two required committees, the Audit and Conduct Review Committees, and the other board committees which are the Loans Committee and the Corporate Governance & Human Resources Committee. The Board has reviewed the status of each of its directors and determined if they are "affiliated" (as defined by the affiliation rules set forth in the Bank Act (the Act)) or "unrelated", as defined in the Toronto Stock Exchange (TSX) 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. Currently the composition is well within these requirements as only one board member is non- resident (8%) and the CEO is the only employee on the Board. 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 identified and assessed and the internal controls to deal with them to be identified and reported upon by senior management to the Board and/or its committees. Members of the Board, who are not also employees, are required to own common shares of the Bank equivalent to two times their annual retainers. 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. At the end of every regularly scheduled Board meeting a session is held without any management, including the CEO, present. 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 including ethical conduct to the Board. In addition, certain governance issues have been delegated to other committees of the Board. The Bank Act (the Act) contains several sections dealing with the governance of a bank through its board of directors. These sections prescribe matters such as limitations on the number of directors who can be affiliated or non-resident, certain powers that must be transacted by the full Board, and requirements to establish both an audit committee and a conduct review committee. The Act also prescribes certain minimum benchmarks for board and committee membership, quorums and the transaction of business by the Board. The three encompassing duties in the Act that form the basis for the Board’s mandate are: • to manage or supervise the management of the business and affairs of the Bank; • to act honestly and in good faith with a view to the best interests of the Bank and exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances; and • to comply with the Act, the regulations, the Bank’s incorporating instrument and its by-laws. The mandate of the Board also includes references to compliance with the Canada Deposit Insurance Corporation's (CDIC) Standards of Sound Business and Financial Practices. An annual attestation on adherence to the CDIC 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 is completed. 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 and quarterly financial statements and specified returns, prior to release to the public or submission to OSFI; • review and approve the strategic plan, the annual 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; 44 CWB TWENTIETH ANNUAL REPORT • review any recommendations from regulators or shareholders’ • review a quarterly report from the Loans Committee of the auditors respecting their assessment of the effectiveness of the internal controls that come to their attention in the conduct of their work; Board, concerning the quality of the loan portfolio, the adequacy of the allowance for credit losses and accounts recommended for write-off; • ensure an independent audit/inspection function is in place to monitor the effectiveness of organizational and procedural controls; • review a report on adherence to the CDIC Standards of Sound Business and Financial Practices annually and report thereon to the directors before approval is given; • review and accept reports from the Audit, Conduct Review and Corporate Governance & Human Resources Committees; and • recommend to the Board the appointment of the shareholders’ auditors; • approve loan write-offs. Audit Committee Members: Robert Manning (Chair) Wendy Leaney Gerald McGavin Alan Rowe This committee is comprised of four financially literate, outside directors and includes at least one financial expert. Its mandate is summarized as follows: • review the annual financial statements 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’ auditors or any officer of the Bank may bring to the attention of the committee; • meet with the shareholders’ auditors to discuss the annual statements and the returns and transactions referred to within the mandate and receive the auditors’ reports thereon; • 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 earnings reports to the shareholders, including the interim unaudited statements, and report thereon to the directors before approval is given and information is disclosed publicly; • review the terms of the shareholders’ auditors’ engagement, their level of compensation, the audit plan, any proposed changes in accounting policies, their presentation and input concerning significant risks and key estimates and judgements of management; • review the independence of the shareholders’ auditors; • 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’ auditors’ management letter and OSFI’s annual review letter and management’s responses thereto; • review the appointment of the Chief Financial Officer (CFO) and the Chief Inspector; • meet regularly with the Chief Inspector and shareholders’ auditors without management present; • review and approve the policy for non-audit services that can be carried out by the shareholders’ auditors including pre- approval for all but de minimis engagements; • as the Committee sees as fit and proper, review other items or matters that may affect the well-being of the Bank; • establish procedures for the receipt and handling of complaints received by the Bank regarding accounting, internal accounting controls, or auditing matters, and establish procedures for the confidential, anonymous submission by employees of the Bank of concerns regarding questionable accounting or auditing matters; • review and approve the Bank’s hiring policies regarding employees and former employees of the present and former external auditors of the Bank; • engage independent counsel or advisors and fix their remuneration as the Committee deems appropriate; and • review periodically the Code of Conduct for senior financial officers. CWB TWENTIETH ANNUAL REPORT 45 Conduct Review Committee Members: Albrecht Bellstedt (Chair) Charles Allard Allan Jackson Arnold Shell This committee is comprised of four outside directors and its mandate is summarized as follows: • no less than annually, report to the Board on corporate governance issues and any instances of non-compliance, together with appropriate recommendations; and • 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. • establish procedures to ensure disclosure of transactions with Executive Employees: Recruitment and Compensation 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 over permitted limits brought to the Board for consideration; • review the conduct policy and any other specialized standards 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. Corporate Governance & Human Resources Committee Members: Jack Donald (Chair) Albrecht Bellstedt Allan Jackson Robert Manning Howard Pechet Robert Phillips This committee is comprised of six outside directors and its mandate is summarized as follows: Corporate Governance • 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; • 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 such descriptions remain current and appropriate 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: - all 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; - 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; and • review and report to the Board on compensation plans for senior management and other personnel in order to confirm they are consistent with the Bank’s sustainable long-term objectives. 46 CWB TWENTIETH ANNUAL REPORT Board Composition and Development • provide direction with respect to the identification criteria, • seek and recommend individuals to be considered for Board membership, as required by the Board, and forward their recommendations to the Board for its consideration; • review, monitor, and make recommendations regarding new director orientation and the ongoing development of existing Board members; • evaluate bi-annually, Board effectiveness including membership criteria, composition structure and size and, on alternate years, the involvement and contribution of the individual members 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. Loans Committee Members: Allan Jackson (Chair) Charles Allard Jack Donald Wendy Leaney Gerald McGavin Howard Pechet Robert Phillips Larry Pollock Arnold Shell 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 loans to a foreign country and for amounts in excess of delegated limits up to the limit established, not to exceed ten percent of common equity plus retained earnings or eleven percent for sovereign, provincial or major municipalities; • recommend for approval of the full Board, any loan proposals in excess of the committee’s limit; • recommend, for approval of the full Board, loan proposals to directors (must be cash secured), 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/amend 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 procedure and action required on loans reported by management to be less than satisfactory. Other Areas of Consideration 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. 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. On every alternate year, directors complete a formal assessment of individual directors’ effectiveness including committee and board chairs. In the current year a formal assessment of individual directors’ effectiveness was completed. 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. The Bank has adopted a corporate disclosure (communication) policy which is reviewed annually as well as a policy to handle complaints or concerns regarding accounting, internal accounting controls or auditing matters. Inquiries and requests for information from shareholders and potential investors receive prompt attention from an appropriate officer. The Bank’s quarterly earnings conference calls with analysts and institutional investors are broadcast live, via the Internet, and archived on the Bank’s web site for sixty days. The calls are also accessible on a live and recorded basis via telephone to interested retail investors, the media and members of the public. The Bank also includes all significant disclosure documents on the investor relations page of its web site at: www.cwbank.com/investor_relations/default.asp. The CEO, CFO and other members of senior management also meet periodically with financial analysts and institutional investors. The Bank has engaged an independent Ombudsman to receive complaints from banking clients who are unable to obtain satisfaction from the internal complaint handling process. Conclusion The Bank’s corporate governance approach is in compliance with the TSX 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. CWB TWENTIETH ANNUAL REPORT 47 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 fairly presented and 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, assets are safeguarded and 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 shareholders’ auditors. report, financial statements and annual The Audit Committee, appointed by the Board of Directors, is comprised entirely of independent directors who are not officers or employees of the Bank. The committee is responsible for reviewing the including management’s discussion and analysis of operations and financial condition, and recommending them to the Board of Directors for approval. Other key responsibilities of the Audit Committee include meeting with management, the Chief Inspector and the shareholders’ auditors to discuss the effectiveness of internal controls over the financial reporting process and the planning and results of the external audit. The committee also meets regularly with the Chief Inspector and the shareholders’ auditors without management present. 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 independent auditors appointed by the shareholders of the Bank, have performed an audit of the consolidated financial statements and their report follows. The shareholders’ auditors have full and free access to, and meet periodically with, the Audit Committee to discuss their audit and matters arising therefrom. Larry M. Pollock President and Chief Executive Officer December 1, 2003 Tracey C. Ball, CA Senior Vice President and Chief Financial Officer 48 CWB TWENTIETH ANNUAL REPORT FINANCIAL STATEMENTS Auditors’ Report To The Shareholders of Canadian Western Bank We have audited the Consolidated Balance Sheet of Canadian Western Bank as at October 31, 2003 and 2002 and the Consolidated Statements of Income, Changes in Shareholders’ Equity and Cash Flow for the years then ended. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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, 2003 and 2002 and the results of its operations and its cash flow for the years then ended in accordance with Canadian generally accepted accounting principles. Deloitte & Touche LLP Chartered Accountants Edmonton, Alberta December 1, 2003 CWB TWENTIETH ANNUAL REPORT 49 CONSOLIDATED BALANCE SHEET As at October 31 ($ thousands) Assets Cash Resources Cash Deposits with regulated financial institutions Cheques and other items in transit Securities Issued or guaranteed by Canada Issued or guaranteed by a province or municipality Other securities Loans Securities purchased under resale agreements Residential mortgages Other Allowance for credit losses 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 Cheques and other items in transit Other liabilities Subordinated Debentures Conventional Convertible Shareholders’ Equity Capital stock Contributed surplus Retained earnings Total Liabilities and Shareholders’ Equity 2003 2002 $ 1,951 $ 279,921 – 281,872 241,352 95,826 75,649 412,827 72,000 662,825 2,901,543 3,636,368 (35,365) 3,601,003 1,928 132,038 53,911 187,877 174,409 88,394 82,816 345,619 66,431 605,582 2,607,739 3,279,752 (31,005) 3,248,747 13,019 35,251 48,270 4,343,972 $ 13,749 32,170 45,919 3,828,162 136,874 $ 519,560 3,163,316 3,819,750 115,783 438,231 2,875,057 3,429,071 17,477 68,563 86,040 68,126 53,825 121,951 – 63,878 63,878 3,126 54,000 57,126 150,782 252 165,197 316,231 4,343,972 $ 145,203 – 132,884 278,087 3,828,162 $ $ $ (Note 3) (Note 4) (Note 5) (Note 6) (Note 7) (Note 8) (Note 9) (Note 10) (Note 11) Jack C. Donald Chairman Larry M. Pollock President and Chief Executive Officer 50 CWB TWENTIETH ANNUAL REPORT 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 Gains on sale of securities Foreign exchange gains and 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 Earnings Per Common Share Basic Diluted (Note 5) (Note 13) (Note 14) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY For the year ended October 31 ($ thousands) Capital Stock Balance at beginning of year Issued on exercise of employee stock options Issued on debenture conversions Balance at end of year Contributed Surplus Balance at beginning of year Amortization of fair value of employee stock options Balance at end of year Retained Earnings Balance at beginning of year Net income Dividends Balance at end of year Total Shareholders' Equity (Note 11) (Note 2) 2003 $ 220,043 $ 2002 193,997 10,893 3,565 208,455 115,913 3,707 119,620 88,835 7,740 81,095 11,050 3,944 3,206 2,385 1,551 22,136 103,231 34,585 10,829 10,574 1,527 57,515 45,716 16,104 29,612 11,900 4,427 236,370 127,766 3,941 131,707 104,663 8,600 96,063 13,099 4,679 4,017 2,095 1,436 25,326 121,389 37,680 11,034 11,144 1,708 61,566 59,823 21,630 38,193 $ $ $ $ $ 2.98 $ 2.69 2.34 2.14 2003 2002 145,203 $ 5,404 175 150,782 143,942 1,261 – 145,203 – 252 252 – – – 132,884 38,193 (5,880) 165,197 316,231 $ 108,320 29,612 (5,048) 132,884 278,087 CWB TWENTIETH ANNUAL REPORT 51 CONSOLIDATED STATEMENT OF CASH FLOW For the year ended October 31 ($ thousands) Cash Flows from Operating Activities Net income Adjustments to determine net cash flows: Provision for credit losses Depreciation and amortization Future income taxes, net Gain on sale of securities, net Accrued interest receivable and payable, net Current income taxes payable, net Other items, net Cash Flows from Financing Activities Deposits, net Common shares issued Dividends Debentures issued Debentures redeemed Cash Flows from Investing Activities Loans, net Interest bearing deposits with regulated financial institutions, net Securities, purchased Securities, sales proceeds Securities, maturities 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 Non-operating, interest bearing deposits with regulated financial institutions Cheques in transit 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 (Note 11) (Note 10) 2003 2002 $ 38,193 $ 29,612 8,600 3,088 (1,581) (2,095) 5,043 37 (3,750) 47,535 390,679 5,404 (5,880) 65,000 – 455,203 (360,856) (117,516) (1,012,656) 99,828 849,846 (2,382) (543,736) (40,998) 61,520 20,522 $ 7,740 3,110 (31) (2,385) (5,600) (5,256) 2,152 29,342 386,764 1,261 (5,048) – (10,000) 372,977 (369,847) 62,999 (992,091) 302,814 612,791 (917) (384,251) 18,068 43,452 61,520 281,872 $ (243,873) (17,477) 20,522 $ 187,877 (126,357) – 61,520 127,247 $ 23,174 $ 126,184 21,253 $ $ $ $ $ 52 CWB TWENTIETH ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 2003 ($ thousands, except per share amounts) 1. Significant Accounting Policies b) Cash Resources 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 Canadian 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. These accounting policies conform, in all material respects, to Canadian generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with Canadian GAAP 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 intercompany transactions and balances. Subsidiaries are defined as corporations whose operations are controlled by the Bank and are corporations in which the Bank owns more than fifty percent of the voting shares. See Note 23 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, including identifiable intangible assets, represents goodwill. Other intangibles with a finite life are amortized to income over their expected life. Goodwill and other intangibles with an indefinite life are not amortized. Goodwill and other intangibles are subject to a fair value impairment test at least annually. Any excess of book value over fair value is charged to income in the period of impairment. Cash resources includes cash and cash equivalents represented by cash and highly liquid deposits with the Bank of Canada and non- interest-bearing deposits with other banks less cheques in transit. c) 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 and preferred shares are stated at amortized cost and other equity securities are stated at cost or, if an impairment in value is other than temporary, at net realizable value. Gains and losses realized on disposal of securities and adjustments to record any other than temporary 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. d) Loans Loans are stated net of unearned income, unamortized premiums and an allowance for credit losses (Note 1(e)). 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. CWB TWENTIETH ANNUAL REPORT 53 1. Significant Accounting Policies (continued) d) Loans (continued) Impairment is measured as the difference between the carrying value of the loan at the time it is classified as impaired and the present value of the expected cash flows (estimated realizable amount), using the interest rate inherent in the loan at the date the loan is classified as impaired. When the amounts and timing of future cash flows cannot be reliably estimated, either the fair value of the security underlying the loan, net of any expected realization costs, or the current market price for the loan may be used to measure the estimated realizable amount. At the time a loan is classified as impaired, interest income will cease to be recognized in accordance with the loan agreement, and any uncollected but accrued interest will be added to the carrying value of the loan together with any unamortized premiums, discounts or loan fees. Subsequent payments received on an impaired loan are recorded as a reduction of the recorded investment in the loan. Impaired loans are returned to performing status when the timely collection of both principal and interest is reasonably assured and all delinquent principal and interest payments are brought current and all charges for loan impairment have been reversed. 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. Premiums paid on the acquisition of loan portfolios are amortized to interest income over the expected term of the loans. e) 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 adequacy of the allowance for credit losses is reviewed at least quarterly. The allowance for credit losses is deducted from the loan balance. 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. f) 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. g) Land, Buildings and Equipment Land is carried at cost. Buildings, equipment and furniture, and leasehold improvements are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated primarily using the straight-line method over the estimated useful life of the asset 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 year of disposal. h) Deferred Financing Costs Deferred financing costs relating to the issuance of debentures are amortized on a straight-line basis over the life of the related debenture. 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. 54 CWB TWENTIETH ANNUAL REPORT 1. Significant Accounting Policies (continued) j) Stock Option Plans The fair value based method has been adopted to account for stock options granted to employees on or after November 1, 2002. The estimated fair value is recognized over the applicable vesting period as an increase to both salary expense and contributed surplus. When options granted on or after November 1, 2002 are exercised, the proceeds received and the applicable amount in contributed surplus will be credited to capital stock. In accordance with GAAP, no expense is recognized for options granted prior to November 1, 2002. When these options are exercised, the proceeds received are credited to capital stock. k) 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. l) Derivative Financial Instruments Interest rate, foreign exchange and equity contracts such as futures, options, swaps and floors are entered into for risk management purposes in accordance with the Bank’s asset liability management policies. It is the Bank’s policy not to utilize derivative financial instruments for trading or speculative purposes. Interest rate swaps and floors are used to reduce the impact of fluctuating interest rates. Equity contracts are used to offset the return paid to depositors on certain deposit products that are linked to a stock index. Foreign exchange contracts are only used for the purposes of meeting needs of clients or day to day business. The Bank designates each derivative financial instrument as a hedge of identified assets and liabilities, firm commitments or forecasted transactions. On an ongoing basis the Bank assesses whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of the hedged items. Derivatives that qualify for hedge accounting are accounted for on the accrual basis. Interest income received or interest expense paid is recognized as interest income or expense, as appropriate, over the term of the hedge contract. Premiums on purchased contracts are amortized to interest expense over the term of the contract. Accrued interest receivable and payable and deferred gains and losses for these contracts are recorded in other assets or liabilities as appropriate. Realized and unrealized gains or losses associated with derivative instruments, which have been terminated or cease to be effective prior to maturity, are deferred under other assets or other liabilities, as appropriate, and amortized into income over the original hedged period. In the event a designated hedged item is terminated or eliminated prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in income. m) Employee Future Benefits All employee future benefits are accounted for on an accrual basis. n) Earnings per Common Share Basic earnings per common share is calculated based on the average number of common shares outstanding during the year. Diluted earnings per share is calculated based on the treasury stock method which assumes that any proceeds from the exercise of in-the-money stock options would be used to purchase the Bank’s common shares at the average market price during the year. Convertible debentures are assumed to be converted into common shares at the beginning of the year, or at the date the debenture was issued if later, and all related income statement charges are added back to earnings. 2. Change in Accounting Policy – Stock-Based Compensation Effective November 1, 2002, the Bank adopted the requirements of the Canadian Institute of Chartered Accountants (CICA) accounting standard on stock-based compensation as described in Note 1(j). Salary expense of $252 (2002 – nil) has been recognized relating to the estimated fair value of options granted in the year with an offsetting credit to Contributed Surplus. CWB TWENTIETH ANNUAL REPORT 55 3. Securities The analysis of securities at carrying value, by type and maturity is as follows: Securities issued or guaranteed by: Canada A province or municipality Other debt securities Floating rate notes Other debt Equity securities Preferred shares Other equity Total(1) Maturities Within 1 Year Over 1 to 3 Years Over 3 to 5 Years 2003 Total Years Book Value Over 5 2002 Total Book Value $ 226,475 $ 62,611 4,998 $ 25,274 9,879 $ 7,941 – $ 241,352 $ 174,409 88,394 – 95,826 – 3,236 – – – – – – – 3,236 1,000 14,553 24,573 – 16,113 – 6,278 – $ 316,895 $ 46,385 $ 24,098 $ 24,933 516(2) 66,747 516 25,449 $ 412,827 $ 345,619 71,897 516 (1) All securities are held in the investment account. (2) Includes securities with no specific maturity. The analysis of unrealized gains and losses on investment securities is as follows: 2003 2002 Book Unrealized Unrealized Losses Gains Value Estimated Market Value Book Value Unrealized Gains Unrealized Losses Estimated Market Value $ 241,352 $ 765 $ 41 $ 242,076 $ 174,409 $ 1,367 $ 15 $ 175,761 95,826 430 43 96,213 88,394 1,440 – 3,236 71,897 516 – – 1,176 618 2,989 $ – 1 224 – – 3,235 72,849 1,134 1,000 14,553 66,747 516 309 $ 415,507 $ 345,619 $ 3 – 4 89,831 1,000 14,550 – 1 628 70 3,506 $ 268 – 67,107 586 290 $ 348,835 Securities issued or guaranteed by: Canada A province or municipality Other debt securities Floating rate notes Other debt Equity securities Preferred shares Other equity Total $ 412,827 $ 56 CWB TWENTIETH ANNUAL REPORT 4. Loans Outstanding gross loans and impaired loans, net of allowances for credit losses, are as follows: 2003 Gross Amount Gross Impaired Amount Specific Allowance Net Impaired Loans Gross Amount 2002 Gross Impaired Amount Specific Allowance Net Impaired Loans $ 72,000 $ 388,516 1,442,271 609,951 1,123,630 $3,636,368 $ – $ – $ – $ 66,431 $ – $ – $ – 2,421 3,376 7,276 9,168 22,241 $ 503 841 2,849 3,614 7,807 1,918 2,535 4,427 5,554 395,900 1,230,756 521,619 1,065,046 14,434 $3,279,752 $ (27,558) 1,427 6,424 11,459 15,767 35,077 $ 281 1,349 2,111 3,467 7,208 1,146 5,075 9,348 12,300 27,869 (23,797) $ (13,124) $ 4,072 Securities purchased under resale agreements Consumer and personal Real estate Industrial Other Totals General allowance(1) Net impaired loans after general allowance (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 $nil (2002 – $11) and a related specific allowance of $nil (2002 – $nil). At October 31, 2003 other past due loans totalled $nil (2002 – $29). 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 $2,063 (2002 – $1,460). 5. Allowance for Credit Losses The following table shows the changes in the allowance for credit losses during the year. 2003 General 2002 General Specific Allowance for Specific Allowance for Balance at beginning of year Provision for credit losses Write-offs Recoveries Balance at end of year $ $ Provisions Credit Risk Total 7,208 $ 23,797 $ 31,005 8,600 3,761 4,839 (4,327) – (4,327) 87 – 87 7,807 $ 27,558 $ 35,365 $ $ Provisions Credit Risk 21,453 $ 6,905 $ 5,396 (5,235) 142 Total 28,358 7,740 (5,235) 142 7,208 $ 23,797 $ 31,005 2,344 – – The Bank has virtually no loans booked outside of Canada and therefore has no country risk provisions. 6. Land, Buildings and Equipment Land Buildings Computer equipment Office equipment and furniture Leasehold improvements Total $ $ 2,935 $ 3,156 11,117 6,903 9,050 33,161 $ Depreciation and amortization for the year amounted to $3,088 (2002 – $3,110). Accumulated Depreciation and Cost Amortization – $ 2003 2002 Net Book Net Book Value Value 2,624 2,935 $ 1,007 1,064 3,095 3,008 2,246 1,863 4,777 4,149 20,142 $ 13,019 $ 13,749 2,092 8,109 5,040 4,901 CWB TWENTIETH ANNUAL REPORT 57 7. Other Assets Accrued interest receivable Prepaid expenses Future income tax asset Accounts receivable Deferred financing costs(1) Other Total (1) Amortization for the year amounted to $178 (2002 – $163) (Note 13) $ $ 2003 13,391 $ 2002 13,974 6,419 6,669 2,192 884 2,032 35,251 $ 32,170 8,749 8,262 1,924 1,394 1,531 Business and Individuals Government $ 8,162 $ 128,712 $ 199,886 2,598,171 319,674 540,048 $2,806,219 $ 988,434 $ Financial Institutions 2003 Total – $ 136,874 519,560 – 25,097 3,163,316 25,097 $3,819,750 Business and Individuals Government Financial Institutions $ 5,910 $ 109,873 $ 164,579 2,402,050 273,652 469,736 $2,572,539 $ 853,261 $ 2002 Total – $ 115,783 438,231 – 3,271 2,875,057 3,271 $3,429,071 2003 57,286 $ $ 5,383 4,082 537 235 1,040 $ 68,563 $ 2002 52,826 5,346 4,345 545 223 593 63,878 (Note 13) 8. Deposits Payable on demand Payable after notice Payable on a fixed date Total Payable on demand Payable after notice Payable on a fixed date Total 9. Other Liabilities Accrued interest payable Taxes payable Accounts payable Deferred revenue Future income tax liability Other Total 58 CWB TWENTIETH ANNUAL REPORT 10. 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 CICA 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. Maturity Date June 30, 2012 July 7, 2013 October 24, 2013 Earliest Date Redeemable or Convertible by CWB June 30, 2007 July 7, 2008 October 24, 2008 March 31, 2008 July 31, 2009 March 31, 2003 July 31, 2004 Interest Rate Conventional 6.85% (1) 5.66% (2) 5.96% (2) Convertible 5.50% (3) 5.70% (4) Total 2003 2002 $ 3,126 $ 3,126 30,000 35,000 68,126 – – 3,126 49,825 4,000 53,825 $ 121,951 $ 50,000 4,000 54,000 57,126 (1) This conventional debenture has a ten year term with a fixed interest rate for the first five years. Thereafter, unless the terms are amended or the debenture is redeemed by the Bank, interest will be payable at a rate equal to the Canadian Dollar CDOR 90 day Bankers’ Acceptance rate plus 100 basis points. (2) These conventional debentures have a ten year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly to the Canadian Dollar CDOR 90 day Bankers’ Acceptance rate plus 175 basis points. (3) These debentures are convertible into common shares at the option of the holder at any time prior to maturity, or the date specified for conversion by the Bank, whichever is earlier, at a conversion price of $30.50 per share (1,633,603 shares, 2002 – 1,639,344 shares). Since March 31, 2003, the Bank has had the ability to specify a date for conversion of the debentures. During the year, convertible debentures of $175 (2002 – nil) were converted by the holders into 5,736 common shares. (4) 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). 11. 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 exercise of options Issued on conversion of debentures Outstanding at end of year 2003 Number of Shares Amount 2002 Number of Shares Amount 12,659,372 $ 145,203 12,560,348 99,024 – $ 143,942 1,261 – 13,002,066 $ 150,782 12,659,372 $ 145,203 336,958 5,736 5,404 175 The Bank has subordinated debentures which are convertible to common shares of the Bank as more fully described in Note 10. The Bank is prohibited by the Bank Act from declaring any dividends on common shares when the Bank is or would be placed, as a result of the declaration, in contravention of the capital adequacy and liquidity regulations or any regulatory directives issued under the Act. These limitations do not currently restrict the payment of dividends. CWB TWENTIETH ANNUAL REPORT 59 12. Stock Option Plans The Bank has authorized 1,193,391(1) common shares (2002 – 1,167,849) for issuance under stock option plans. Of the amount authorized, options exercisable into 1,153,992 shares (2002 – 1,129,815) are issued and outstanding. The options generally vest within three years and 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. All options expire within ten years of date of grant. Outstanding options expire on dates ranging from June 2004 to November 2008. 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 2003 2002 Weighted Average Exercise Price 19.28 31.26 16.04 25.48 24.02 Number of Options 1,129,815 $ 371,235 (336,958) (10,100) 1,153,992 $ (1) Weighted Average Exercise Price 17.56 26.81 12.74 18.59 19.28 Number of Options 1,077,783 $ 159,806 (99,024) (8,750) 1,129,815 $ 637,957 $ 19.26 658,609 $ 15.74 (1) Of this amount, 257,500 options are subject to shareholder and Toronto Stock Exchange approval. further details relating to stock options outstanding and exercisable follow: Range of exercise prices $8.73 to $12.93 $14.00 to $19.11 $19.50 to $26.12 $26.40 to $26.91 $27.38 to $33.32 Options Outstanding Weighted Average Remaining Contractual Life (years) 2.1 3.0 1.8 3.5 4.8 3.1 Weighted Average Exercise Price 11.42 18.47 25.47 26.60 32.94 24.02 $ $ Options Exercisable Weighted Average Exercise Price 11.42 18.47 25.59 26.87 28.23 19.26 $ $ Number of Options 188,758 195,048 235,495 16,656 2,000 637,957 Number of Options 188,758 195,048 262,730 228,956 278,500 1,153,992 Salary expense of $252 has been recognized relating to the estimated fair value of options granted in the year. The fair value of options granted was estimated using a binomial option pricing model with the following variables and assumptions: (i) risk-free interest rate of 4.1%, (ii) expected option life of 3.9 years, (iii) expected volatility of 21%, and (iv) expected dividends of 1.5%. The weighted average fair value of options granted was estimated at $5.59 per share. 60 CWB TWENTIETH ANNUAL REPORT 13. Income Taxes The provision for income taxes consists of the following: Current Future Provision for income taxes 2003 23,211 $ (1,581) 21,630 $ $ $ 2002 16,135 (31) 16,104 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 Increase (decrease) arising from: Tax-exempt income Large corporations tax Unclaimed tax deductions from prior years Other Provision for income taxes and effective tax rate Future income tax balances are comprised of the following: Net future income tax asset Allowance for credit losses Other temporary differences Net future income tax liability of subsidiary Allowance for credit losses Other temporary differences 2003 2002 $ 22,584 37.8% $ 18,401 40.3% (1,887) 358 – 575 $ 21,630 (3.2) 0.6 (1,422) 308 (2,059) 876 36.2% $ 16,104 – 1.0 2003 $ $ $ $ 9,613 $ (1,351) 8,262 $ (415) $ 650 235 $ The Bank has approximately $11,851 (2002 – $11,840) 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 the consolidated financial statements. (3.1) 0.7 (4.5) 1.8 35.2% 2002 8,577 (1,908) 6,669 (374) 597 223 CWB TWENTIETH ANNUAL REPORT 61 14. Earnings per Common Share The calculation of earnings per common share is as follows: Numerator Net income – basic Dilutive instruments: Conversion of debentures(1) Net income – diluted Denominator Weighted average number of common shares outstanding – basic Dilutive instruments: Conversion of debentures Employee stock options(2) Weighted average number of common shares outstanding – diluted Earnings per Common Share Basic Diluted 2003 2002 $ 38,193 $ 29,612 1,947 40,140 $ 2,010 31,622 $ 12,808,335 12,628,938 (Note 10) 1,798,578 329,782 14,936,695 1,799,344 341,075 14,769,357 $ $ 2.98 $ 2.69 $ 2.34 2.14 (1) Net income is adjusted by the potential impact on earnings if the convertible debentures were converted into common shares at the beginning of the year. (2) The denominator excludes those employee stock options where the exercise price is greater than the average market price. 15. Contingent Liabilities and Commitments a) Credit 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. 2003 2002 Credit Instruments Guarantees and standby letters of credit Commitments to extend credit Total $ 64,413 $ 57,478 613,098 $ 876,495 $ 670,576 812,082 Guarantees and standby letters of credit represent the Bank’s obligation to make payments to third parties when a customer is unable to make required payments or meet other contractual obligations. These instruments carry the same credit risk, recourse and collateral security requirements as loans extended to customers and generally have a term that does not exceed one year. 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 undrawn availability under lines of credit and commercial operating loans of $294 million (2002 – $266 million) and recently authorized but unfunded loan commitments of $518 million (2002 – $347 million). In the majority of instances, availability of undrawn commercial commitments is subject to the borrower meeting specified financial tests or other covenants regarding completion or satisfaction of certain conditions precedent. It is also usual practice to include the right to review and withhold funding in the event of a material adverse change in the financial condition of the borrower. 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. 62 CWB TWENTIETH ANNUAL REPORT 15. Contingent Liabilities and Commitments (continued) b) Lease Commitments The Bank has obligations under long-term non-cancellable operating 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: 2004 2005 2006 2007 2008 2009 and thereafter Total c) Guarantees $ $ 4,714 4,469 4,454 4,084 3,259 13,314 34,294 The Bank has adopted the requirements of a new CICA accounting guideline that expands the definition of a guarantee and requires additional disclosure in respect of guarantees. Under the new guideline, a guarantee is defined as a contract that contingently requires the guarantor to make payments to a third party based on i) changes in an underlying economic characteristic that is related to an asset, liability or equity security of the guaranteed party, ii) failure of another party to perform under an obligating agreement, or iii) failure of another third party to pay indebtedness when due. Significant guarantees provided to third parties include guarantees and standby letters of credit as discussed above. In the ordinary course of business, the Bank enters into contractual arrangements under which the Bank may agree to indemnify the other party. Under these agreements, the Bank may be required to compensate counterparties for costs incurred as a result of various contingencies such as changes in laws and regulations and litigation claims. A maximum potential liability cannot be identified as the terms of these arrangements vary and generally no pre-determined amounts or limits are identified. The likelihood of occurrence of contingent events that would trigger payment under these arrangements is either remote or difficult to predict and in the past payments under these arrangements have been insignificant. The Bank issues personal and business credit cards through an agreement with a third party card issuer. The Bank has indemnified the card issuer from loss if there is a default on the issuer’s collection of the business credit card balances. The Bank has provided no indemnification relating to the personal or travel reward credit card balances. The issuance of business credit cards and establishment of business credit card limits are approved by the Bank and subject to the same credit assessment, approval and monitoring as the extension of direct loans. The total approved business credit card limit at October 31, 2003 was $114 and the balance outstanding was $6. No balances were in arrears and no payments have been made to date under the indemnity. No amounts are reflected in the consolidated financial statements related to these guarantees and indemnifications. 16. Trust Assets Under Administration Trust assets under administration of $1,474,964 (2002 – $1,166,489) 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. 17. 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 $21,319 (2002 – $20,969). CWB TWENTIETH ANNUAL REPORT 63 18. Interest Rate Sensitivity The Bank is exposed to interest rate risk as a result of a difference, or gap, between the maturity or repricing date of interest sensitive assets and liabilities. The following table shows the gap position at October 31, for selected time intervals. Figures in brackets represent an excess of liabilities over assets or a negative gap position. Asset Liability Gap Positions ($ millions) Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year 1 Year to 5 Years Over 5 Years Non- interest Sensitive $ – $ – $ 83 $ 8 1,968 – 25 2,084 1,114 – – – 785 1,899 100 $ 100 141 – 80 421 386 – – – – 386 61 $ 208 364 – 319 952 1,042 – 4 – – 1,046 Total Within 1 Year 244 $ 316 2,473 – 424 3,457 2,542 – 4 – 785 3,331 72 1,147 – 361 1,580 1,278 – 118 – – 1,396 185 $ 185 $ 35 $ 220 $ (94) $ 126 $ 126 $ 126 $ 184 $ 310 $ Total 282 413 3,601 48 785 5,129 3,820 86 122 316 785 5,129 – – 38 $ – (34) 48 – 52 – 86 – 316 – 402 (350) $ – $ 25 15 – – 40 – – – – – – 40 $ 350 $ October 31, 2003 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 3.6% 4.3% 2.5% 2.5% 6.0% 6.8% – – October 31, 2002 Total assets Total liabilities and equity Interest Rate Sensitive Gap $ Cumulative Gap $ Cumulative Gap as a $ 1,742 $ 1,689 53 $ 53 $ 277 $ 274 3 $ 56 $ 1,067 $ 1,041 26 $ 82 $ 3,086 $ 3,004 82 $ 82 $ 1,362 $ 1,203 159 $ 241 $ 23 $ – 23 $ 264 $ 79 $ 343 (264) $ – $ 4,550 4,550 – – Percentage of Total Assets 1.2% 1.2% 1.8% 1.8% 5.3% 5.8% – – Notes: (1) Accrued interest is excluded in calculating interest sensitive assets and liabilities. (2) Potential prepayments of fixed rate loans and early redemption of redeemable fixed term deposits have not been estimated. Redemptions of fixed term deposits where depositors have this option are not expected to be material. The majority of fixed rate loans, mortgages and leases are either closed or carry prepayment penalties. 64 CWB TWENTIETH ANNUAL REPORT 18. Interest Rate Sensitivity (continued) The effective weighted average interest rates for each class of financial asset and liability, including off-balance sheet instruments, are shown below. Weighted Average Effective Interest Rates (%) October 31, 2003 Assets Cash resources Securities Loans Off-Balance sheet swaps Total Liabilities Deposits Debentures Off-Balance sheet swaps Total Interest Rate Sensitive Gap October 31, 2002 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 2.4% 2.7 5.5 2.9 5.4 1.9 – 2.7 2.2 3.2% 5.4% 2.2 3.2% 2.7% 3.2 5.8 3.5 4.0 3.4 – – 3.4 0.6% 4.7% 3.8 0.9% 3.0% 3.4 6.7 3.5 4.7 3.9 5.7 – 3.9 0.8% 4.9% 3.9 1.0% 2.7% 3.3 5.7 3.5 5.0 2.9 5.7 2.7 2.9 2.1% 5.1% 2.9 2.2% – % – % 4.9 6.8 3.8 6.0 4.4 5.7 – 4.5 1.5% 6.5% 5.0 1.5% 7.7 6.2 – 7.1 – – – – 7.1% 6.8% – 6.8% 2.7% 3.9 6.0 3.6 5.3 3.4 5.7 2.7 3.4 1.9% 5.6% 3.5 2.1% 19. 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. 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, 2003 and 2002 there were no financial instruments held for trading purposes. CWB TWENTIETH ANNUAL REPORT 65 19. Fair Value of Financial Instruments (continued) The table below sets out the fair values of on-balance sheet financial instruments and off-balance sheet derivative instruments using the valuation methods and assumptions referred to below the table. The table does not include assets and liabilities that are not considered financial instruments. (Note 3) Assets Cash resources Securities Loans(1) Other assets(2) Liabilities Deposits(1) Other liabilities(3) Subordinated debentures Derivative Financial Instruments Net asset (Note 20) 2003 Fair Value Over (Under) 2002 Fair Value Over (Under) Book Value Fair Value Book Value Book Value Fair Value Book Value $ 281,872 $ 281,872 $ – $ 187,877 $ 187,877 $ 412,827 3,599,008 16,846 415,507 3,608,566 16,846 2,680 9,558 – 345,619 3,246,033 18,198 348,835 3,258,458 18,198 3,819,536 84,228 121,951 3,853,955 84,228 124,938 34,419 – 2,987 3,428,634 62,693 57,126 3,472,306 62,693 58,031 – 3,216 12,425 – 43,672 – 905 $ 3,560 $ 6,707 (1) Loans and deposits exclude deferred premiums which are not financial instruments. (2) Other assets exclude land, buildings and equipment, future income tax asset, prepaid expenses, financing costs and other items which are not financial instruments. (3) Other liabilities exclude future income tax liability, deferred revenue and other items which are not financial instruments. (4) For further information on interest rates associated with financial assets and liabilities, including off-balance sheet instruments, refer to Note 18. 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. 66 CWB TWENTIETH ANNUAL REPORT 20. Derivative Financial Instruments The Bank enters into off-balance sheet 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 (ALCO) of the Bank. Foreign exchange transactions are undertaken 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 ALCO 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. Additional discussion of OSFI’s capital adequacy requirements is provided on page 38 of Management’s Discussion and Analysis of Operations and Financial Condition. Notional Amount Replace- ment Cost 2003 Future Credit Credit Risk- Risk weighted Exposure Equivalent Balance 2002 Notional Amount Replace- ment Cost Future Credit Credit Risk- Risk weighted Exposure Equivalent Balance Interest rate contracts Interest rate swaps $ 769,500 $ 4,524 $ 2,462 $ 6,986 $ 1,404 $ 707,000 $ 7,476 $ 1,585 $ 9,061 $ 1,812 Interest rate floor Equity contracts Foreign exchange 50,000 15,825 contracts(1) 86 57 24 – 31 1,266 88 1,290 11 258 – 14,225 – 223 – – 1,138 1,361 – 272 1 1 – 836 12 8 20 4 Total $ 835,411 $ 4,605 $ 3,760 $ 8,365 $ 1,673 $ 722,061 $ 7,711 $ 2,731 $ 10,442 $ 2,088 (1) The Bank has contracted to deliver Canadian dollars in exchange for United States dollars (2002 – deliver United States dollars in exchange for Canadian dollars). 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). 2003 2002 Favourable Contracts Fair Notional Value Amount Unfavourable Contracts Fair Notional Value Amount Favourable Contracts Fair Notional Value Amount Unfavourable Contracts Fair Notional Value Amount Interest rate contracts Interest rate swaps Interest rate floor Equity contracts Foreign exchange contracts Total $ 607,500 $ 50,000 1,600 – 57 24 – 4,524 $ 162,000 $ (514) $ 647,000 $ – 14,225 – (525) – 1,610 7,476 $ – 60,000 $ – 223 12,615 (66) – (938) $ 659,100 $ 4,605 $ 176,311 $ (1,045) $ 649,446 $ 7,711 $ 72,615 $ 86 (6) 836 12 – – (1,004) CWB TWENTIETH ANNUAL REPORT 67 20. Derivative Financial Instruments (continued) 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) 2003 $ $ 6,306 $ $ 976 2002 6,020 1,340 The following table summarizes maturities of off-balance sheet financial instruments and weighted average interest rates paid and received on interest rate contracts. 2003 Maturity 2002 Maturity 1 year or less Over 1 to 5 years 1 year or less Over 1 to 5 years Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Interest rate contracts Interest rate swaps – receive fixed amounts(1) Interest rate floor(2) Equity contracts(3) Foreign exchange contracts(4) Total $ 271,000 50,000 – 86 $ 321,086 3.07% $ 498,500 – 3.00% 15,825 3.90% $ 390,000 – – – 3.13% $ 317,000 – 14,225 – 4.45% – – $ 514,325 836 $ 390,836 – $ 331,225 (1) The Bank pays (floating) interest amounts based on the one month (30 day) Canadian Bankers’ Acceptance rate. (2) The Bank receives interest amounts when the one month (30 day) Canadian Bankers’ Acceptance rate falls below a specified rate. (3) The contractual interest rate is not meaningful for equity contracts. The Bank receives amounts based on the increase in an equity index. (4) The contractual interest rate is not applicable for foreign exchange contracts. 21. Risk Management As part of the Bank’s risk management practices, the risks that are significant to the business are identified, monitored and controlled. These risks include credit risk, liquidity risk, market risk and operational risk. The nature of these risks and how they are managed is provided in the commentary on pages 40 to 43 of Management’s Discussion and Analysis of Operations and Financial Condition. Information on specific measures of risk including the allowance for credit losses, derivative financial instruments, interest rate sensitivity and fair value of financial instruments are included in the notes to the consolidated financial statements. 22. Segmented Information The Bank operates principally in personal and commercial banking in Canada and management has identified banking operations as the only business segment. Personal and commercial banking includes the operations of the Bank and its trust subsidiary which together provide a wide range of banking and trust services to retail and personal clients and commercial business clients primarily in western Canada. 68 CWB TWENTIETH ANNUAL REPORT 23. Subsidiaries Canadian Western Bank Subsidiaries (annexed in accordance with subsection 308 (3) of the Bank Act) October 31, 2003 Canadian Western Trust Company CWB Canadian Western Financial Ltd. Address of Head Office 10303 Jasper Avenue Edmonton, Alberta 10303 Jasper Avenue Edmonton, Alberta Carrying Value of Voting Shares Owned by the Bank(1) 13,018 $ $ 35 Percentage of Issued and Outstanding Voting Shares Owned by the Bank 100% 100% (1) The carrying value of voting shares is stated at the Bank’s equity in the investments. 24. Future Accounting Changes Hedging Relationships The CICA has issued an accounting guideline for hedging relationships that establishes certain requirements for the application of hedge accounting. Effective November 1, 2003 derivatives that do not qualify for hedge accounting are recorded at fair value. The Bank enters into derivative financial instruments for risk management purposes as described in Note 20. The implementation of this guideline is not expected to have a significant impact on the Bank’s financial results. Consolidation of Variable Interest Entities (VIEs) The CICA has issued an accounting guideline that will become effective November 1, 2004. This guideline provides a framework for identifying VIEs and requires the consolidation of VIEs if the company absorbs a majority of the VIE’s expected losses or receives a majority of the VIE’s expected residual returns, or both. The Bank has no significant VIEs that would require consolidation. 25. Comparative Figures Certain comparative figures have been reclassified to conform with the current year presentation. CWB TWENTIETH ANNUAL REPORT 69 SENIOR OFFICERS Chairman Jack C. Donald MARKETING AND PRODUCT DEVELOPMENT COMMERCIAL BANKING NORTHERN ALBERTA REGION OFFICE OF THE CEO Larry M. Pollock President and Chief Executive Officer David R. Pogue Vice President TREASURY AND OPERATIONS Ricki L. Moffat Treasurer Michael Vos Chief Technology Officer M. Wayne Bond Assistant Vice President, Corporate Administration Roger J. Pogue Assistant Vice President, Operations COMMERCIAL BANKING PRAIRIE REGION S. Wayne Bamford Vice President and Regional Manager Michael N. Halliwell Vice President and Regional Manager (Regional Manager effective March 1, 2004) Douglas R. Crook Senior Assistant Vice President Main Branch, Calgary Gus W. Itzek Senior Assistant Vice President, Energy Lending Main Branch, Calgary Allister J. McPherson Executive Vice President Jack C. Wright Vice President CREDIT RISK MANAGEMENT Donald C. Kemp Senior Vice President Chris H. Fowler Vice President Wally N. Streit Senior Assistant Vice President CORPORATE AND STRATEGIC OPERATIONS William J. Addington Executive Vice President FINANCE Tracey C. Ball, CA Senior Vice President and Chief Financial Officer Darin R. Coutu, CA Senior Assistant Vice President and Chief Accountant HUMAN RESOURCES Uve Knaak Vice President INTERNAL AUDIT David R. Gillespie Vice President and Chief Inspector William A. Book Vice President and Regional Manager L.W. (Les) Shore Senior Assistant Vice President Main Branch, Edmonton COMMERCIAL BANKING BRITISH COLUMBIA REGION Rod W. Sorbo Vice President and Regional Manager Serge Biln Senior Assistant Vice President Park Place, Vancouver REAL ESTATE LENDING VANCOUVER Raymond L. Young Vice President Robert E. Wigmore Senior Assistant Vice President INDUSTRIAL LENDING AND LEASING James O. Burke General Manager CANADIAN WESTERN TRUST COMPANY VANCOUVER Adrian M. Baker Vice President and General Manager Cathy L. Phillips Managing Director, Fiduciary Operations and Risk Management Robert D. Nakoneshny Managing Director, Strategic and Business Development OMBUDSMAN R. Graham Gilbert 70 CWB TWENTIETH ANNUAL REPORT DIRECTORS EMERITUS John Goldberg Jordan L. Golding Arthur G. Hiller Peter M.S. Longcroft Dr. Maurice W. Nicholson Alma M. McConnell Eugene I. Pechet Dr. Maurice M. Pechet Fred Sparrow BOARD OF DIRECTORS CANADIAN WESTERN BANK & TRUST Charles R. Allard President Rosedale Meadows Development Inc. Edmonton, Alberta Albrecht W. A. Bellstedt, QC Executive Vice President Law and General Counsel TransCanada Corporation Calgary, Alberta Jack C. Donald Board Chairman Parkland Properties Ltd. Red Deer, Alberta Allan W. Jackson President ARCI Ltd. Calgary, Alberta Wendy A. Leaney President Wyoming Associates Ltd. Toronto, Ontario Robert A. Manning President Cathton Holdings Ltd. Edmonton, Alberta Gerald A.B. McGavin, FCA, CM President McGavin Properties Inc. Vancouver, British Columbia Howard E. Pechet President Mayfield Consulting Inc. La Jolla, California, USA Robert L. Phillips Group President and CEO BCR Group of Companies North Vancouver, British Columbia Larry M. Pollock President and CEO Canadian Western Bank & Trust Edmonton, Alberta Alan M. Rowe, CA Senior Vice President, Chief Financial Officer and Corporate Secretary Crown Life Insurance Company Regina, Saskatchewan Arnold J. Shell President Arnold J. Shell Consulting Inc. Calgary, Alberta AWARDS OF EXCELLENCE* 2000 Terra Fuessel Theresa Howard Carl Knowler Cathy Phillips Sharon Thompson 2001 Brunella Bertucci Theresa Gromnisky Roy Jefferson Leslie John Marlene Serediuk 2002 Adele Carson Leon Chow Jodi Dull Trenna Guglich Kelly Howell Sandra Irvine Renai Jackle Nancy Staley 2003 Sonia Atkin Charmaine Barclay Marie Barwick Allison Betton Libei Cheng Bev Foord Theresa Howard Jim Kitchin Kim Newall Heather Sanregret Jessica Sheppard *Awards of Excellence recognize employees who display qualities for which CWB is known and which are inherent under the brand Think Western®. CWB TWENTIETH ANNUAL REPORT 71 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 Suite 2200, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 685-2081 Fax: (604) 669-6069 Website: www.cwt.ca Stock Exchange Listing The Toronto Stock Exchange Share Symbol: CWB Convertible Debenture Symbol: CWB.DB.A Transfer Agent and Registrar Mailing Address Computershare Trust Company of Canada Suite 600, 530 – 8th Avenue SW Calgary, Alberta T2P 3S8 Telephone: (800) 564-6253 Fax: (403) 267-6529 Corporate Secretary Charles R. Allard Rosedale Meadows Development Inc. Edmonton, Alberta Inquiries From Shareholders Any notification regarding change of address or change in registration of shares should be directed to the Transfer Agent. Any inquiries other than change of address or change in registration may be directed to the President and Chief Executive Officer. Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held on March 4, 2004 at the Hyatt Regency (Regency Ballrooms A and B), 655 Burrard Street, Vancouver, British Columbia at 3:00 p.m. (PST). Investor Relations For further financial information contact: Vicki Warwaruk Senior Manager, Investor and Public Relations Canadian Western Bank Telephone: (780) 423-8865 Fax: (780) 423-8899 E-mail: InvestorRelations@cwbank.com or visit our website at www.cwbank.com Online Investor Information Additional investor information including supplemental financial information and a corporate presentation is available on our website at www.cwbank.com Complaints or Concerns regarding Accounting, Internal Accounting Controls or Auditing Matters Please contact either: Tracey C. Ball Senior Vice President and Chief Financial Officer Canadian Western Bank Telephone: (780) 423-8855 Fax: (780) 423-8899 E-mail: tracey.ball@cwbank.com or Robert A. Manning Chairman of the Audit Committee c/o 210 – 5324 Calgary Trail Edmonton, AB T6H 4J8 Telephone: (780) 438-2626 Fax: (780) 438-2632 E-mail: rmanning@shawbiz.ca 72 CWB TWENTIETH ANNUAL REPORT WHAT KIND OF A BANK CAN YOU BUILD IN 20 YEARS? THIS IS THE WEST… the perennial land of opportunity. You can build almost any kind of bank you want… so we did. WE WANTED A BANK BASED IN THE WEST that served the needs of westerners. OUR CUSTOMERS WANTED A BANK BUILT ON RELATIONSHIPS and strongly rooted in western values. And our shareholders wanted to see consistent growth and profitability. We built that bank… your bank… Canadian Western Bank. BRANCH OFFICES ALBERTA Edmonton Edmonton Main 11350 Jasper Avenue Edmonton, Alberta T5K 0L8 Telephone: (780) 424-4846 Branch Manager – Les Shore 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 St. Albert 300 – 700 St. Albert Road St. Albert, Alberta T8N 7A5 Opening Spring 2004 West Point 17603 – 100 Avenue Edmonton, Alberta T5S 2M1 Telephone: (780) 484-7407 Branch Manager – Ron Baker Calgary Northeast 2810 – 32nd Avenue N.E. Calgary, Alberta T1Y 5J4 Vancouver Deposit Processing Centre Suite 2368, 666 Burrard Street Surrey Strawberry Hill 7548 – 120 Street Telephone: (403) 250-8838 Vancouver, B.C. V6C 2X8 Surrey, B.C. V3W 3N1 Branch Manager – Glen Eastwood Telephone: (604) 443-5175 Telephone: (604) 591-1898 Toll free: 1-800-663-1000 Branch Manager – Rick Howard Chinook Station 6606 MacLeod Trail S.W. Calgary, Alberta T2H 0K6 Telephone: (403) 252-2299 Branch Manager – Lew Christie Foothills 6127 Barlow Trail S.E. Calgary, Alberta T2C 4W8 Telephone: (403) 269-9882 Acting Branch Manager – Michael Docherty Red Deer 4822 – 51 Avenue Branch Manager – Huguette Holmes Coquitlam 101 Schoolhouse Street Coquitlam, B.C. V3K 4X8 Telephone: (604) 540-8829 Branch Manager – David McCosh Courtenay 470 Puntledge Road Courtenay, B.C. V9N 3R1 Telephone: (250) 334-8888 Branch Manager – Alan Dafoe Red Deer, Alberta T4N 3H3 Telephone: (403) 341-4000 Branch Manager – Don Odell Kelowna Kelowna 1674 Bertram Street Lethbridge 744 – 4th Avenue South Lethbridge, Alberta T1J 0N8 Telephone: (403) 328-9199 Branch Manager – Don Grummett Grande Prairie 11226 – 100 Avenue Grande Prairie, Alberta T8V 7L2 Telephone: (780) 831-1888 Branch Manager – Keith MacLellan BRITISH COLUMBIA Kelowna, B.C. V1Y 9G4 Telephone: (250) 862-8008 Branch Manager – Ian Graham Kelowna Industrial Centre #101 – 1505 Harvey Avenue Kelowna, B.C. V1Y 6G1 Telephone: (250) 860-0088 Branch Manager – Jim Kitchin Cranbrook Satellite Office 2009 – 5th Street South Cranbrook, B.C. V1C 1K6 Telephone: (250) 426-1140 Victoria 1201 Douglas Street Victoria, B.C. V8W 2E6 Telephone: (250) 383-1206 Branch Manager – Gerry Laliberte SASKATCHEWAN Regina 1881 Scarth Street McCallum Hill Centre II Regina, Saskatchewan S4P 4K9 Telephone: (306) 757-8888 Branch Manager – Trent Bobinski 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 230 Portage Avenue Winnipeg, Manitoba R3C 0B1 Five Year Financial Summary Fold Out Highlights for 2003 Performance Targets 1 Message to Shareholders 4 What Kind of Bank Can You Build in 20 Years? 23 Management’s Discussion and Analysis of Operations and Financial Condition Corporate Governance Financial Statements Notes to Consolidated Financial Statements Senior Officers Board of Directors Shareholder Information 44 48 53 70 71 72 Inside Back Cover Branch Offices Edmonton Deposit Processing Centre Suite 2200, 10303 Jasper Avenue Edmonton, Alberta T5J 3X6 Telephone: (780) 423-8888 Vancouver Regional Office 22nd Floor, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 669-0081 Branch Manager – Lina Langford Regional Manager – Rod Sorbo Calgary Calgary Main 606 – 4th Street S.W. Calgary, Alberta T2P 1T1 Telephone: (403) 262-8700 Branch Manager – Doug Crook West Broadway 1333 West Broadway Vancouver, B.C. V6H 4C1 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 Account Manager – Mike Eckersley Telephone: (204) 956-4669 Kamloops Satellite Office 2224 Crescent Drive Kamloops, B.C. V2C 4J6 Telephone: (250) 828-1070 Manager – Hugh Sutherland 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 Branch Manager – Robert Bean CANADIAN WESTERN TRUST British Columbia Suite 2200, 666 Burrard Street Vancouver, B.C. V6C 2X8 Telephone: (604) 685-2081 Toll free: 1-800-663-1124 Alberta 200, 606 – 4th Street S.W. Calgary, Alberta T2P 1T1 Telephone: (403) 717-3145 Toll free: 1-888-894-2331 Design and Production by Vision Design Communications www.visiondc.com Printed by Speedfast Color Press Inc. Printed in Canada 20TH ANNUAL REPORT 2003 WHAT KIND OF A BANK CAN YOU BUILD IN 20 YEARS? A BANK BUILT ON RELATIONSHIPS. I C A N A D 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 3 

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