Canadian Western Bank
Annual Report 2007

Plain-text annual report

canadian western bank 2007 annual report c a n a d i a n w e s t e r n b a n k 2 0 0 7 a n n u a l r e p o r t p u r p o s e d r i v e n our history of financial performance (cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:34)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)(cid:1)(cid:9)(cid:5)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:10) (cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:45)(cid:80)(cid:66)(cid:79)(cid:84)(cid:1)(cid:9)(cid:5)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:10) (cid:10)(cid:12)(cid:6)(cid:3)(cid:6) (cid:23)(cid:12)(cid:18)(cid:22)(cid:24) (cid:21)(cid:12)(cid:23)(cid:16)(cid:21) (cid:20)(cid:12)(cid:25)(cid:17)(cid:25) (cid:20)(cid:12)(cid:19)(cid:20)(cid:20) (cid:18)(cid:16)(cid:16)(cid:19) (cid:18)(cid:16)(cid:16)(cid:20) (cid:18)(cid:16)(cid:16)(cid:21) (cid:18)(cid:16)(cid:16)(cid:22) (cid:3)(cid:1)(cid:1)(cid:8) (cid:24)(cid:12)(cid:16)(cid:16)(cid:16) 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(cid:9)(cid:70)(cid:89)(cid:81)(cid:70)(cid:79)(cid:84)(cid:70)(cid:84)(cid:1)(cid:85)(cid:80)(cid:1)(cid:83)(cid:70)(cid:87)(cid:70)(cid:79)(cid:86)(cid:70)(cid:84)(cid:10) (cid:20)(cid:22)(cid:14)(cid:19)(cid:6) (cid:20)(cid:25)(cid:14)(cid:21)(cid:6) (cid:20)(cid:24)(cid:14)(cid:22)(cid:6) (cid:20)(cid:22)(cid:14)(cid:16)(cid:6) (cid:5)(cid:5)(cid:14)(cid:7)(cid:6) (cid:18)(cid:16)(cid:16)(cid:19) (cid:18)(cid:16)(cid:16)(cid:20) (cid:18)(cid:16)(cid:16)(cid:21) (cid:18)(cid:16)(cid:16)(cid:22) (cid:3)(cid:1)(cid:1)(cid:8) (cid:17)(cid:16)(cid:12)(cid:16)(cid:16)(cid:16) (cid:24)(cid:12)(cid:16)(cid:16)(cid:16) (cid:22)(cid:12)(cid:16)(cid:16)(cid:16) (cid:20)(cid:12)(cid:16)(cid:16)(cid:16) (cid:18)(cid:12)(cid:16)(cid:16)(cid:16) (cid:16) (cid:19)(cid:16)(cid:16) (cid:18)(cid:21)(cid:16) (cid:18)(cid:16)(cid:16) (cid:17)(cid:21)(cid:16) (cid:17)(cid:16)(cid:16) (cid:21)(cid:16) (cid:16) (cid:17)(cid:14)(cid:16)(cid:16) (cid:16)(cid:14)(cid:23)(cid:21) (cid:16)(cid:14)(cid:21)(cid:16) (cid:16)(cid:14)(cid:18)(cid:21) (cid:16)(cid:14)(cid:16)(cid:16) five year financial summary performance targets ($ thousands, except per share amounts) Results of Operations Net interest income (teb) (1) ............................................ $ Less teb adjustment .......................................................... Net interest income per financial statements ............... Other income ..................................................................... Total revenues (teb) ......................................................... Total revenues ................................................................... Net income ........................................................................ Return on common shareholders’ equity (2) .................. Return on average total assets (3) ..................................... Per Common Share (4) Average common shares outstanding (thousands) ..... Earnings per share Basic ............................................................................... $ Diluted .......................................................................... Dividends (5) ....................................................................... Book value .......................................................................... Market price ....................................................................... High ............................................................................... Low ................................................................................ Close .............................................................................. 1.54 1.50 0.3400 9.48 30.86 20.78 30.77 Balance Sheet and Off-Balance Sheet Summary Assets .................................................................................. $ 9,525,040 1,961,241 Cash resources, securities and repurchase agreements ..... 7,405,580 Loans ................................................................................... 8,256,918 Deposits .............................................................................. 390,000 Subordinated debentures ................................................. 595,493 Shareholders’ equity ......................................................... Assets under administration ............................................ 4,283,900 Capital Adequacy Tangible common equity to risk-weighted assets (6) .......... Tier 1 ratio (7) ..................................................................... Total ratio (7) ...................................................................... Other Information Efficiency ratio (teb) (8) .................................................... Efficiency ratio ................................................................... Net interest margin (teb) (9) ............................................ Net interest margin ........................................................... Provision for credit losses 44.6% 45.5 2.58 2.51 7.7% 9.1 13.7 as a percentage of average loans ................................ Net impaired loans as a percentage of total loans ........ Number of full-time equivalent staff (10) ........................ Number of bank branches ............................................... 0.16 (0.57) 1,185 35 2007 2006 2005 2004 2003 210,659 5,410 205,249 62,821 273,480 268,070 96,282 $ 168,684 4,078 164,606 53,086 221,770 217,692 72,007 $ 140,320 3,975 136,345 45,561 185,881 181,906 54,391 $ 117,236 3,898 113,338 35,052 152,288 148,390 44,161 $ 107,655 2,992 104,663 25,326 132,981 129,989 38,193 17.4% 1.18 14.8% 1.12 12.7% 1.03 12.9% 0.97 12.9% 0.95 62,354 61,514 60,394 53,564 51,232 $ 1.17 1.13 0.2500 8.39 22.78 16.64 21.15 $ 7,268,360 1,332,987 5,781,837 6,297,007 198,126 519,530 3,344,414 $ 0.90 0.87 0.1900 7.48 20.35 11.04 17.60 $ 5,705,028 976,000 4,590,263 4,913,307 128,126 457,990 2,649,065 $ 0.83 0.75 0.1875 6.73 12.07 9.57 11.92 $ 0.75 0.67 0.1150 6.08 10.00 5.82 9.99 $ 4,918,895 848,179 3,930,114 4,267,788 110,600 367,589 1,759,473 $ 4,343,972 766,699 3,529,003 3,819,750 121,951 316,231 1,474,964 8.6% 10.1 13.7 46.0% 46.9 2.62 2.56 0.20 (0.75) 1,097 33 9.7% 9.7 12.4 48.6% 49.7 2.66 2.59 0.24 (0.68) 999 31 9.0% 9.0 11.8 49.5% 50.8 2.57 2.48 0.25 (0.36) 936 29 8.9% 8.9 13.1 46.3% 47.4 2.68 2.60 0.25 (0.37) 632 27 (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 statements 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. The taxable equivalent basis does not have a standardized meaning prescribed by generally accepted accounting principles (GAAP) and, therefore, may not be comparable to similar measures presented by other banks. (2) Return on shareholders’ equity is calculated as net income divided by average shareholders’ equity. (3) Return on assets is calculated as net income divided by average total assets. (4) Stock dividends effecting a two-for-one split of the Bank’s common shares were paid in 2005 and 2007. All prior period common share and per common share information has been restated to reflect these effective splits. (5) The dividend policy was amended to be quarterly instead of semi-annually during the first quarter of fiscal 2004. The dividend rate for fiscal 2004 appears unusually high as it includes the last semi-annual dividend of $0.0750 per share paid in the first quarter and quarterly dividends of $0.0375 paid in subsequent quarters. (6) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less trust subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI). (7) Tier 1 and total capital adequacy ratios are calculated in accordance with guidelines issued by OSFI. (8) Efficiency ratio is calculated as non-interest expenses divided by total revenues. (9) Net interest margin is calculated as net interest income divided by average total assets. (10) The increase in staff in 2004 reflects the acquisitions of Canadian Direct Insurance Incorporated and Valiant Trust Company. Canadian Western Bank (CWB or the Bank) surpassed all fiscal 2007 performance targets by considerable margins. Record earnings benefited from excellent loan growth of 28% and reflect the ongoing success of every business within the CWB Group. Performance targets for fiscal 2008 reflect expectations for continued strong results supported by the Bank’s expanding market presence and ongoing economic strength in CWB’s chosen markets. Management will maintain its disciplined approach to growth and plans to deliver continued strong financial performance for shareholders by taking care of what matters most: customers and employees. Net income growth Total revenue (teb) growth Loan growth 2007 Target 20% 15% 14% Provision for credit losses as a percentage of average loans 0.20% or less Efficiency ratio (teb) Return on equity Return on assets Highlights of 2007 46% 15% 1.10% 2007 Performance 34% 23% 28% 0.16% 44.6% 17.4% 1.18% 2008 Target 15% 17% 15% 0.15% 45% 17% 1.10% • Achieved organic loan growth of 28%, marking the Bank’s 18th consecutive year of double-digit loan growth. Increased net income 34% to a record $96 million and a corresponding improvement in return on equity (ROE) of 260 • basis points to 17.4%. • • • • • • Opened new branches in Abbotsford, British Columbia and Medicine Hat, Alberta. Established a new benchmark efficiency ratio, which measures non-interest expenses against total revenues, of 44.6%. Surpassed $9.5 billion in total assets and $4.0 billion in trust assets under administration. Named one of the “50 Best Employers in Canada”, as recognized by the Globe & Mail Report on Business magazine. Celebrated the 20th anniversary of Canadian Western Trust. Expanded Internet service capabilities for Canadian Direct Insurance. Locations Canadian Western Bank REGIONAL OFFICES BRItISh COLumBIA 22nd Floor, 666 Burrard Street Vancouver (604) 669-0081 Greg Sprung NORthERN ALBERtA 2300, 10303 Jasper Avenue Edmonton (780) 423-8888 Bill Book PRAIRIES 606 – 4 Street S.W. Calgary (403) 262-8700 Michael Halliwell EquIPmENt FINANCING #300, 5222 – 130 Avenue S.E. Calgary (403) 257-8235 Jim Burke ALBERtA EDmONtON Edmonton main 11350 Jasper Avenue (780) 424-4846 Keith Wilkes 103rd Street 10303 Jasper Avenue (780) 423-8801 Jake Muntain Old Strathcona 7933 – 104 Street (780) 433-4286 Donna Austin South Edmonton Common 2142 – 99 Street (780) 988-8607 Wayne Dosman St. Albert 300 – 700 St. Albert Road (780) 458-4001 Jeff Suggitt West Point 17603 – 100 Avenue (780) 484-7407 Kevin MacMillen CALGARY Calgary main 606 – 4 Street S.W. (403) 262-8700 Doug Crook Calgary Chinook 6606 MacLeod Trail S.W. (403) 252-2299 Lew Christie Calgary Foothills 6127 Barlow Trail S.E. (403) 269-9882 Chris Minke Calgary Northeast 2810 – 32 Avenue N.E. (403) 250-8838 June Lavigueur Calgary South trail Crossing #300, 5222 – 130 Avenue S.E. (403) 257-8235 Glen Eastwood GRANDE PRAIRIE 11226 – 100 Avenue (780) 831-1888 David Hardy LEthBRIDGE 744 – 4 Avenue South (403) 328-9199 Don Grummett mEDICINE hAt 102, 1111 Kingsway Avenue S.E. (403) 527-7321 Les Erickson RED DEER 4822 – 51 Avenue (403) 341-4000 Don Odell BRItISh COLumBIA VANCOuVER Kitsilano 3190 West Broadway (604) 732-4262 Paul Cheng Park Place Suite 100, 666 Burrard Street (604) 688-8711 Rob Berzins Vancouver Real Estate 22nd Floor, 666 Burrard Street (604) 669-0081 Bob Wigmore West Broadway Suite 110, 1333 West Broadway (604) 730-8818 Jules Mihalyi ABBOtSFORD #100, 2548 Clearbrook Road (604) 855-4941 Rick Howard COquItLAm 310, 101 Schoolhouse Street (604) 540-8829 Ron Baker COuRtENAY Unit 200, 470 Puntledge Road (250) 334-8888 Alan Dafoe CRANBROOK 2nd Floor, 828A Baker Street (250) 426-1140 Mike Eckersley KELOWNA Kelowna 1674 Bertram Street (250) 862-8008 Grant Fletcher Kelowna Equipment Financing Centre #101 – 1505 Harvey Avenue (250) 860-0088 Jim Kitchin KAmLOOPS Unit 112, 300 Columbia Street (250) 828-1070 Hugh Sutherland LANGLEY 100, 19915 – 64 Avenue (604) 539-5088 Craig Martin NANAImO 101, 6475 Metral Drive (250) 390-0088 Russ Burke PRINCE GEORGE 300 Victoria Street (250) 612-0123 David Duck SuRREY 1, 7548 – 120 Street (604) 591-1898 Bob Duffield VICtORIA 1201 Douglas Street (250) 383-1206 Bob Granger SASKAtChEWAN REGINA #100, 1881 Scarth Street The Hill Center Tower II (306) 757-8888 Kelly Dennis SASKAtOON 244 – 2 Avenue S. (306) 477-8888 Ron Kowalenko YORKtON 45, 277 Broadway Street East (306) 782-1002 Barb Apps mANItOBA WINNIPEG 230 Portage Avenue (204) 956-4669 Robert Bean Canadian Western Financial Ltd. EDmONtON Suite 2300, 10303 Jasper Avenue (780) 423-8888 m o c . c d n o i s i v . w w w s n o i t a c i n u m m o C n g i s e D n o i s i V Canadian Western Trust Company VANCOuVER Suite 600, 750 Cambie Street (604) 685-2081 BuRLINGtON 201A-3190 Harvester Road (905) 631-5342 CALGARY Suite 200, 606 4 St. S.W. (403) 717-3145 WINNIPEG 230 Portage Avenue (204) 956-4669 REAL EStAtE LENDING 22nd Floor, 666 Burrard Street Vancouver (604) 669-0081 OPtImum mORtGAGE Edmonton Suite 2300, 10303 Jasper Avenue (780) 423-9748 Calgary 2810 – 32 Avenue N.E. (403) 720-8958 Coquitlam 310, 101 Schoolhouse Street (604) 523-5250 Park Place Suite 100 – 666 Burrard Street (604) 602-2773 Canadian Direct Insurance Inc. VANCOuVER Suite 600 – 750 Cambie Street (604) 699-3678 EDmONtON 11th Floor, 10250 – 101 Street (780) 413-5933 Valiant Trust Company CALGARY 310, 606 4 Street S.W. (403) 233-2801 EDmONtON Suite 2300, 10303 Jasper Avenue (780) 423-8888 VANCOuVER Suite 600, 750 Cambie Street (604) 699-4880 purpose driven | cwb 2007 annual report 85 five year financial summary performance targets ($ thousands, except per share amounts) Results of Operations Net interest income (teb) (1) ............................................ $ Less teb adjustment .......................................................... Net interest income per financial statements ............... Other income ..................................................................... Total revenues (teb) ......................................................... Total revenues ................................................................... Net income ........................................................................ Return on common shareholders’ equity (2) .................. Return on average total assets (3) ..................................... Per Common Share (4) Average common shares outstanding (thousands) ..... Earnings per share Basic ............................................................................... $ Diluted .......................................................................... Dividends (5) ....................................................................... Book value .......................................................................... Market price ....................................................................... High ............................................................................... Low ................................................................................ Close .............................................................................. 1.54 1.50 0.3400 9.48 30.86 20.78 30.77 Balance Sheet and Off-Balance Sheet Summary Assets .................................................................................. $ 9,525,040 1,961,241 Cash resources, securities and repurchase agreements ..... 7,405,580 Loans ................................................................................... 8,256,918 Deposits .............................................................................. 390,000 Subordinated debentures ................................................. 595,493 Shareholders’ equity ......................................................... Assets under administration ............................................ 4,283,900 Capital Adequacy Tangible common equity to risk-weighted assets (6) .......... Tier 1 ratio (7) ..................................................................... Total ratio (7) ...................................................................... Other Information Efficiency ratio (teb) (8) .................................................... Efficiency ratio ................................................................... Net interest margin (teb) (9) ............................................ Net interest margin ........................................................... Provision for credit losses 44.6% 45.5 2.58 2.51 7.7% 9.1 13.7 as a percentage of average loans ................................ Net impaired loans as a percentage of total loans ........ Number of full-time equivalent staff (10) ........................ Number of bank branches ............................................... 0.16 (0.57) 1,185 35 2007 2006 2005 2004 2003 210,659 5,410 205,249 62,821 273,480 268,070 96,282 $ 168,684 4,078 164,606 53,086 221,770 217,692 72,007 $ 140,320 3,975 136,345 45,561 185,881 181,906 54,391 $ 117,236 3,898 113,338 35,052 152,288 148,390 44,161 $ 107,655 2,992 104,663 25,326 132,981 129,989 38,193 17.4% 1.18 14.8% 1.12 12.7% 1.03 12.9% 0.97 12.9% 0.95 62,354 61,514 60,394 53,564 51,232 $ 1.17 1.13 0.2500 8.39 22.78 16.64 21.15 $ 7,268,360 1,332,987 5,781,837 6,297,007 198,126 519,530 3,344,414 $ 0.90 0.87 0.1900 7.48 20.35 11.04 17.60 $ 5,705,028 976,000 4,590,263 4,913,307 128,126 457,990 2,649,065 $ 0.83 0.75 0.1875 6.73 12.07 9.57 11.92 $ 0.75 0.67 0.1150 6.08 10.00 5.82 9.99 $ 4,918,895 848,179 3,930,114 4,267,788 110,600 367,589 1,759,473 $ 4,343,972 766,699 3,529,003 3,819,750 121,951 316,231 1,474,964 8.6% 10.1 13.7 46.0% 46.9 2.62 2.56 0.20 (0.75) 1,097 33 9.7% 9.7 12.4 48.6% 49.7 2.66 2.59 0.24 (0.68) 999 31 9.0% 9.0 11.8 49.5% 50.8 2.57 2.48 0.25 (0.36) 936 29 8.9% 8.9 13.1 46.3% 47.4 2.68 2.60 0.25 (0.37) 632 27 (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 statements 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. The taxable equivalent basis does not have a standardized meaning prescribed by generally accepted accounting principles (GAAP) and, therefore, may not be comparable to similar measures presented by other banks. (2) Return on shareholders’ equity is calculated as net income divided by average shareholders’ equity. (3) Return on assets is calculated as net income divided by average total assets. (4) Stock dividends effecting a two-for-one split of the Bank’s common shares were paid in 2005 and 2007. All prior period common share and per common share information has been restated to reflect these effective splits. (5) The dividend policy was amended to be quarterly instead of semi-annually during the first quarter of fiscal 2004. The dividend rate for fiscal 2004 appears unusually high as it includes the last semi-annual dividend of $0.0750 per share paid in the first quarter and quarterly dividends of $0.0375 paid in subsequent quarters. (6) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less trust subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI). (7) Tier 1 and total capital adequacy ratios are calculated in accordance with guidelines issued by OSFI. (8) Efficiency ratio is calculated as non-interest expenses divided by total revenues. (9) Net interest margin is calculated as net interest income divided by average total assets. (10) The increase in staff in 2004 reflects the acquisitions of Canadian Direct Insurance Incorporated and Valiant Trust Company. Canadian Western Bank (CWB or the Bank) surpassed all fiscal 2007 performance targets by considerable margins. Record earnings benefited from excellent loan growth of 28% and reflect the ongoing success of every business within the CWB Group. Performance targets for fiscal 2008 reflect expectations for continued strong results supported by the Bank’s expanding market presence and ongoing economic strength in CWB’s chosen markets. Management will maintain its disciplined approach to growth and plans to deliver continued strong financial performance for shareholders by taking care of what matters most: customers and employees. Net income growth Total revenue (teb) growth Loan growth 2007 Target 20% 15% 14% Provision for credit losses as a percentage of average loans 0.20% or less Efficiency ratio (teb) Return on equity Return on assets Highlights of 2007 46% 15% 1.10% 2007 Performance 34% 23% 28% 0.16% 44.6% 17.4% 1.18% 2008 Target 15% 17% 15% 0.15% 45% 17% 1.10% • Achieved organic loan growth of 28%, marking the Bank’s 18th consecutive year of double-digit loan growth. Increased net income 34% to a record $96 million and a corresponding improvement in return on equity (ROE) of 260 • basis points to 17.4%. • • • • • • Opened new branches in Abbotsford, British Columbia and Medicine Hat, Alberta. Established a new benchmark efficiency ratio, which measures non-interest expenses against total revenues, of 44.6%. Surpassed $9.5 billion in total assets and $4.0 billion in trust assets under administration. Named one of the “50 Best Employers in Canada”, as recognized by the Globe & Mail Report on Business magazine. Celebrated the 20th anniversary of Canadian Western Trust. Expanded Internet service capabilities for Canadian Direct Insurance. Locations Canadian Western Bank REGIONAL OFFICES BRItISh COLumBIA 22nd Floor, 666 Burrard Street Vancouver (604) 669-0081 Greg Sprung NORthERN ALBERtA 2300, 10303 Jasper Avenue Edmonton (780) 423-8888 Bill Book PRAIRIES 606 – 4 Street S.W. Calgary (403) 262-8700 Michael Halliwell EquIPmENt FINANCING #300, 5222 – 130 Avenue S.E. Calgary (403) 257-8235 Jim Burke ALBERtA EDmONtON Edmonton main 11350 Jasper Avenue (780) 424-4846 Keith Wilkes 103rd Street 10303 Jasper Avenue (780) 423-8801 Jake Muntain Old Strathcona 7933 – 104 Street (780) 433-4286 Donna Austin South Edmonton Common 2142 – 99 Street (780) 988-8607 Wayne Dosman St. Albert 300 – 700 St. Albert Road (780) 458-4001 Jeff Suggitt West Point 17603 – 100 Avenue (780) 484-7407 Kevin MacMillen CALGARY Calgary main 606 – 4 Street S.W. (403) 262-8700 Doug Crook Calgary Chinook 6606 MacLeod Trail S.W. (403) 252-2299 Lew Christie Calgary Foothills 6127 Barlow Trail S.E. (403) 269-9882 Chris Minke Calgary Northeast 2810 – 32 Avenue N.E. (403) 250-8838 June Lavigueur Calgary South trail Crossing #300, 5222 – 130 Avenue S.E. (403) 257-8235 Glen Eastwood GRANDE PRAIRIE 11226 – 100 Avenue (780) 831-1888 David Hardy LEthBRIDGE 744 – 4 Avenue South (403) 328-9199 Don Grummett mEDICINE hAt 102, 1111 Kingsway Avenue S.E. (403) 527-7321 Les Erickson RED DEER 4822 – 51 Avenue (403) 341-4000 Don Odell BRItISh COLumBIA VANCOuVER Kitsilano 3190 West Broadway (604) 732-4262 Paul Cheng Park Place Suite 100, 666 Burrard Street (604) 688-8711 Rob Berzins Vancouver Real Estate 22nd Floor, 666 Burrard Street (604) 669-0081 Bob Wigmore West Broadway Suite 110, 1333 West Broadway (604) 730-8818 Jules Mihalyi ABBOtSFORD #100, 2548 Clearbrook Road (604) 855-4941 Rick Howard COquItLAm 310, 101 Schoolhouse Street (604) 540-8829 Ron Baker COuRtENAY Unit 200, 470 Puntledge Road (250) 334-8888 Alan Dafoe CRANBROOK 2nd Floor, 828A Baker Street (250) 426-1140 Mike Eckersley KELOWNA Kelowna 1674 Bertram Street (250) 862-8008 Grant Fletcher Kelowna Equipment Financing Centre #101 – 1505 Harvey Avenue (250) 860-0088 Jim Kitchin KAmLOOPS Unit 112, 300 Columbia Street (250) 828-1070 Hugh Sutherland LANGLEY 100, 19915 – 64 Avenue (604) 539-5088 Craig Martin NANAImO 101, 6475 Metral Drive (250) 390-0088 Russ Burke PRINCE GEORGE 300 Victoria Street (250) 612-0123 David Duck SuRREY 1, 7548 – 120 Street (604) 591-1898 Bob Duffield VICtORIA 1201 Douglas Street (250) 383-1206 Bob Granger SASKAtChEWAN REGINA #100, 1881 Scarth Street The Hill Center Tower II (306) 757-8888 Kelly Dennis SASKAtOON 244 – 2 Avenue S. (306) 477-8888 Ron Kowalenko YORKtON 45, 277 Broadway Street East (306) 782-1002 Barb Apps mANItOBA WINNIPEG 230 Portage Avenue (204) 956-4669 Robert Bean Canadian Western Financial Ltd. EDmONtON Suite 2300, 10303 Jasper Avenue (780) 423-8888 m o c . c d n o i s i v . w w w s n o i t a c i n u m m o C n g i s e D n o i s i V Canadian Western Trust Company VANCOuVER Suite 600, 750 Cambie Street (604) 685-2081 BuRLINGtON 201A-3190 Harvester Road (905) 631-5342 CALGARY Suite 200, 606 4 St. S.W. (403) 717-3145 WINNIPEG 230 Portage Avenue (204) 956-4669 REAL EStAtE LENDING 22nd Floor, 666 Burrard Street Vancouver (604) 669-0081 OPtImum mORtGAGE Edmonton Suite 2300, 10303 Jasper Avenue (780) 423-9748 Calgary 2810 – 32 Avenue N.E. (403) 720-8958 Coquitlam 310, 101 Schoolhouse Street (604) 523-5250 Park Place Suite 100 – 666 Burrard Street (604) 602-2773 Canadian Direct Insurance Inc. VANCOuVER Suite 600 – 750 Cambie Street (604) 699-3678 EDmONtON 11th Floor, 10250 – 101 Street (780) 413-5933 Valiant Trust Company CALGARY 310, 606 4 Street S.W. (403) 233-2801 EDmONtON Suite 2300, 10303 Jasper Avenue (780) 423-8888 VANCOuVER Suite 600, 750 Cambie Street (604) 699-4880 purpose driven | cwb 2007 annual report 85 canadian western bank 2007 annual report c a n a d i a n w e s t e r n b a n k 2 0 0 7 a n n u a l r e p o r t p u r p o s e d r i v e n our history of financial performance (cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:34)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)(cid:1)(cid:9)(cid:5)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:10) (cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:45)(cid:80)(cid:66)(cid:79)(cid:84)(cid:1)(cid:9)(cid:5)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:10) (cid:10)(cid:12)(cid:6)(cid:3)(cid:6) (cid:23)(cid:12)(cid:18)(cid:22)(cid:24) (cid:21)(cid:12)(cid:23)(cid:16)(cid:21) (cid:20)(cid:12)(cid:25)(cid:17)(cid:25) (cid:20)(cid:12)(cid:19)(cid:20)(cid:20) (cid:18)(cid:16)(cid:16)(cid:19) (cid:18)(cid:16)(cid:16)(cid:20) 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(cid:18)(cid:21)(cid:16) (cid:18)(cid:16)(cid:16) (cid:17)(cid:21)(cid:16) (cid:17)(cid:16)(cid:16) (cid:21)(cid:16) (cid:16) (cid:17)(cid:14)(cid:16)(cid:16) (cid:16)(cid:14)(cid:23)(cid:21) (cid:16)(cid:14)(cid:21)(cid:16) (cid:16)(cid:14)(cid:18)(cid:21) (cid:16)(cid:14)(cid:16)(cid:16) people infrastructure 2 message to shareholders 6 8 10 process 12 business enhancement 14 community investment 16 the year in review 19 management’s discussion and analysis 57 financial statements 83 board of directors and senior officers 84 shareholder information 85 locations About our organization Since 1984, we’ve grown from a small bank to a significant financial force in Western Canada. Our common sense strategies and unwavering commitment to deliver exceptional service continue to set us apart. Customers choose us to experience our Think Western® way of doing business. The Canadian Western Bank Group (CWB Group) now has more than $9.5 billion in total assets. Canadian Western Bank (CWB). Our flagship company offers a full range of business and personal banking services and is the largest Schedule I bank headquartered in Western Canada. With 35 branches in strategically selected markets in the four western provinces, we serve people who want friendly, relationship-based banking. Canadian Western Trust Company (CWT). We provide clients with solutions in retirement, trustee and custodial financial services. With over twenty years of service and more than $4.0 billion in assets under administration, we offer innovative product solutions supported by our commitment to provide superior customer experiences. Valiant Trust Company (Valiant). Specializing in corporate trust, stock transfer and employee plan services to public and private corporations and trusts, we offer the highest quality of service and flexibility to meet our clients’ needs. Canadian Direct Insurance Incorporated (CDI). We offer auto and home insurance to individuals in Alberta and British Columbia (BC). Our focus is delivering friendly and informed service at competitive rates to customers via the Internet or telephone, as well as through select auto insurance brokers in BC. purpose driven | CWB 2007 AnnuAL reporT 1 Message to Shareholders Canadian Western Bank (CWB or the Bank) has a history of meeting or exceeding expectations and our growth this year was excellent. We are very pleased to report that your Bank achieved record annual earnings and revenues led by unprecedented 28% loan growth. We surpassed all 2007 performance targets by considerable margins. New targets for 2008 reflect our expectations for continued strong performance, driven by more sustainable double-digit growth levels. CWB shares closed at $30.77 at year-end, which, including reinvested dividends and adjusted for a two-for-one stock dividend paid in January 2007, represented a twelve-month total return to shareholders of 47%. While we have benefited from robust economic conditions in our chosen markets, our success would not have been possible without the continued dedication and hard work of everyone within the CWB Group. Our talented team of employees has continually risen to the demands of building a successful, high-growth organization and we would like to personally thank everyone for their ongoing efforts. Among our financial highlights, total assets surpassed $9.5 billion thanks to excellent contributions from all business lines. Western Canada’s economic strength, coupled with the Bank’s growing market presence, led to record earnings growth of 34%. Very strong operating performance supported by our more efficient capital structure also contributed to a 260 basis point year-over-year improvement in return on equity (ROE), to a record 17.4%. Although it was a great year, we will not rest on our past success. We must continually challenge ourselves to find new and better ways to do things as we expand within our markets. The theme of the 2007 Annual Report is “Purpose Driven”, a phrase that sums up our culture as well as our ongoing commitment to maximize value for both our shareholders and our customers. Through this theme, we highlight four essential foundations for CWB’s ongoing success and the focus of our strategic direction: People, Infrastructure, Process and Business Enhancement. banking services Loan growth was double our 14% annual target and continued to be the primary driver of the Bank’s earnings. We maintained our focus on high quality assets within Western Canada’s robust economies and non-performing loans continued to be very low in comparison to the total portfolio. As always, we are monitoring the portfolio closely for signs of a material shift in economic fundamentals. The Bank’s strong balance sheet, combined with our consistent provisions for loan losses, have us well positioned to manage turns in the credit cycle. Building on CWB’s relationship-based banking strategy remains key for ongoing success and we will continually enhance this focus as we further expand in our markets. 2 purpose driven | CWB 2007 AnnuAL reporT In line with our infrastructure strategy, we opened new branches in Abbotsford, British Columbia and Medicine Hat, Alberta in 2007. Our confirmed infrastructure objectives for the near future include three new full-service branches in Alberta located in Sherwood Park, Leduc and Airdrie. Other plans currently in progress also include two additional branches in British Columbia. Our strategies to increase internal funding sources showed excellent results, with 27% growth in branch-raised deposits keeping pace with loan growth. The demand and notice component of branch-raised deposits increased 34%, partially due to the success of our recently launched high-interest savings account branded Summit Savings®. Generating continued growth in branch-raised deposits is a key focus of our retail strategy, as success in this area provides important diversification of funding sources. Another highlight in 2007 was the ongoing success of our alternative mortgage business, Optimum Mortgage. This business has produced very strong returns and we remain comfortable with its overall risk profile. Optimum’s portfolio increased 64% this year to comprise approximately 5% of total loans and we are optimistic about opportunities for continued strong growth in this business. trust services Canadian Western Trust Company (CWT) marked its 20th anniversary this year with several notable accomplishments. CWT’s trust assets under administration grew 28% to surpass a new milestone of more than $4.0 billion. These assets have more than doubled in the past three years, reflecting the success of our growing customer base as well as customers’ appreciation of our innovative, customized services. Several exciting new product features were introduced as CWT continued to build on its commitment to provide superior customer experiences. Valiant Trust Company (Valiant) exceeded our expectations despite challenges related to ongoing uncertainty for income trusts and fewer initial public offerings. Valiant made excellent strides in enhancing its systems capability and overall business efficiencies. Products were also expanded through a strategic partnership with another service provider. Valiant is currently seeking incorporation as a federal trust company and growth plans for 2008 include opening an office in Toronto. insurance Canadian Direct Insurance Incorporated (CDI) exceeded $104 million in gross written premiums as we continued to increase our brand awareness throughout Alberta and British Columbia. In Alberta, we achieved double-digit growth in policies outstanding in both the home and auto product lines. Our most recent customer surveys also reflect enviable customer satisfaction rates for claims servicing. Sales over the Internet have been a great success and more and more of our customers are choosing to purchase their policies this way. We continue to enhance our web-based delivery channel and now have the ability to deliver auto policy documents to our customers electronically. We are pleased with the progress of this business despite ongoing regulatory and competitive challenges. Insurance operations provide a solid contribution and support our strategies to diversify revenues and increase ROE. Future initiatives include continued enhancements to our Internet- based technology platform, which will help facilitate new growth opportunities, including the ability to sell our home product online. purpose driven | CWB 2007 AnnuAL reporT 3 think western® CWB’s selection as one of the “50 Best Employers in Canada” was a highlight in the year. Results were based on employee surveys and we used the feedback to further enhance our position as an employer of choice within our markets. The introduction of our cwbalance® program further confirmed our commitment to provide employees with a more rewarding work/life balance. We recognize that the Bank’s future success rests on a continued ability to retain and recruit top-quality talent and this will remain a key management priority. Offering friendly, Think Western service is a major element that sets us apart from our competition and employees are directly charged with the most important role in our company – taking care of customers. governance Our Board of Directors and senior management remain committed to developing the best business strategies for the Bank within an effective governance framework. We continually evaluate changing standards and best practices with the goal of implementing ideas that promote the collective best interests of CWB’s stakeholders. outlook Our proven strategies for responsible growth and conservative risk management will remain top-of-mind as we build on 2007’s excellent results. Strong earnings will contribute to our growing capital base and we will also remain flexible regarding the addition of further non-dilutive sources of capital. We will maintain higher liquidity raised in response to increased uncertainties in the financial markets. Although this strategy has a negative effect on net interest margin, it is consistent with our conservative risk tolerance and augments our position to manage future unexpected events. We will also remain well positioned to capitalize on strategic opportunities, including accretive acquisitions that may become available. Higher credit spreads and a corresponding increase in loan yields are ultimately expected to help offset margin compression once financial markets normalize. Achieving high quality growth has always been a focal point of the Bank’s success, but operating within Western Canada’s robust economies also presents some unique challenges. Supporting career development for our existing staff and the recruitment of more first-rate performers remains a top priority. We will also capitalize on economies of scale and ongoing process improvements to help mitigate cost pressures in our markets. Economic activity in Western Canada has moderated from the very high levels observed over the recent past and softness is apparent within certain industries, particularly forestry and natural gas. Our portfolio continues to be well secured with a very low level of impaired assets. Strong loan growth is expected to continue, but at more sustainable double-digit levels than have been achieved over the past two fiscal years. Our commitment to add value for shareholders will be accomplished through taking care of what matters most – our customers and employees. Our expectations for growth in loans, revenues and income reflect confidence in our strategic direction and ongoing opportunities in our chosen markets. We look forward to celebrating continued success in 2008 as we take the Bank to the next level of its development. Jack C. Donald chairman Larry M. Pollock president and ceo 4 purpose driven | CWB 2007 AnnuAL reporT Everything has a purpose... At Canadian Western Bank Group, we offer banking, trust and insurance services in a way that is thoughtful, responsive and forward-looking. Throughout almost a quarter of a century, we’ve grown and prospered by staying connected to our core purpose. Our fundamental purpose is to provide shareholders with a sound and profitable return; clients with value, service and stability; and employees with a positive and rewarding work environment – while contributing to the communities in which we operate. Strategy is a road map to achieve our goals. We concentrate our strategic efforts in four main areas – people, infrastructure, process and business enhancement. A fifth facet, community investment, is how we deepen our relationship with the places and people that have welcomed us. We work hard to be known and respected as Canada’s western bank, providing western Canadians and other select markets with a preferred source of individual and commercial financial services. Maintaining clarity of focus is the key to making the best business decisions and providing value to our customers, shareholders and employees. By defining ourselves through the customers and markets we serve, we’ve built our organization on relationships and exceptional service delivery. This priority permeates every aspect of our decision-making and is the bar we measure all decisions against. In each of these areas, we know exactly where we’re going and why we’re headed in that direction. People come first – always. Our services are offered to meet our customers’ needs and help them achieve their financial goals. We step into the future with confidence knowing our relationships are strong enough to give us insight into their needs. When you act with purpose, you become a powerful force. purpose driven | CWB 2007 AnnuAL reporT 5 6 purpose driven | CWB 2007 AnnuAL reporT people Let’s be clear about why we exist... People trust us with something very important: financial growth, stability and protection. We deliver common sense advice and impeccable service as we work to meet the needs of customers as circumstances change and their goals evolve. There’s no substitute for getting to know a person face-to-face. We are set apart by our commitment to serving organizations and individuals by nurturing strong relationships. We engage with customers to uncover the purpose behind their needs – goals like expanding their business, creating more financial flexibility, buying a house, safeguarding their assets or sending kids to college. By gaining this understanding, we forge deeper connections with customers and ensure we’re delivering the best options for them. As a service organization, employees are the foundation of our company. Key factors in attracting and keeping good people include maintaining a strong workplace culture, competitive benefits and compensation packages, and flexible career tracks. Our Think Western® culture – accessible, optimistic, know- ledgeable, respectful and sensible – embodies our attitude. It’s reflected in all our relationships, including interactions with customers, suppliers, shareholders and each other. Benefits and compensation packages are comprehensive and strengthened by employee feedback. We have been recognized as one of the “50 Best Employers in Canada”, confirming our people strategy and further identifying us as an employer of choice. As a thriving company, we have plenty of room for career advancement and exploration. There are visible opportunities for career progression and for people to initiate projects and contribute ideas. Diversification allows growth through many avenues and career development is supported throughout our organization, from entry level to senior management. When you take care of people, they look out for you. The purpose of creating a dynamic workplace is to attract and retain people who’ll enhance customer experience and fuel our continued success. purpose driven | CWB 2007 AnnuAL reporT 7 infrastructure The right tools to get things done… Clarity of purpose is key to determining need. This certainty drives our infrastructure – our physical premises, technological systems, capital and brand are all focused on delivering Think Western service. The strength of these four factors is critical to our growth. Branches are opened only in markets we are confident will support them and are generally profitable in the first year. Programs for upgrades and expansions to existing facilities are ongoing, keeping our physical premises welcoming and current. Open building plans give us flexibility to reconfigure space to remain responsive to the communities we serve. Strong capital supports growth and gives us flexibility to act on strategic opportunities while appropriately managing risks. In addition to growing retained earnings with strong profitability, we add value for shareholders by utilizing efficient sources of non-dilutive capital, including Innovative Tier 1 and subordinated debentures. Technology is used to improve processes and add value to customer experiences. We choose proven and efficient technology, and implement something new when we fully understand the impact and benefits of our choices and can integrate it seamlessly into our services. Banking and insurance technology initiatives – like adding more ABMs or the ability to deliver auto insurance policies electronically – are offered with greater customer convenience in mind. Brand may seem the least tangible of our infrastructure elements, but it serves a function vital to our success – it reflects the Think Western values and culture on which we base our relationships. Together, these four facets of infrastructure create an operating environment that supports our processes and helps us better serve customers. 8 purpose driven | CWB 2007 AnnuAL reporT purpose driven | CWB 2007 AnnuAL reporT 9 10 purpose driven | CWB 2007 AnnuAL reporT process We do what makes sense... Process is about taking the best course of action to achieve our purpose. Successful processes depend on policies, regulations, risk management, operations and procedures. Customers trust us to help them achieve their financial goals. To get them on the best road, we act with “intelligent flexibility”. Processes without clear motives are frustrating and mire an organization in bureaucracy. to market changes with confident action, closely monitoring circumstances and taking advantage of positive developments. We continually evaluate and improve processes to ensure we are maximizing efficiencies and adding value for our stakeholders. One reason we strive to hire the right people is that we need them to be the human element in our policies. Employees understand the purpose behind policies and are empowered to make appropriate, common sense decisions. Our feedback programs gather ideas from all levels on what we can do better. Intelligent flexibility also keeps us agile while managing risk. We choose to maintain a conservative risk profile as part of our overall growth strategy, based on our market knowledge and business expertise. Our strong credit culture responds We engage in continual reassessment to ensure our policies and procedures keep pace with customer needs and the world around us. We look for opportunities to share technology and processes to become more effective and efficient. And we always ask ourselves the most important question: does it serve our purpose? purpose driven | CWB 2007 AnnuAL reporT 11 12 purpose driven | CWB 2007 AnnuAL reporT business enhancement Driving our growth… We’re always on the lookout for opportunities that fit our purpose and better serve our customers, shareholders and employees. Our future is about building on these founding principles. Following this rule of thumb, we’ll explore new avenues of growth that continue our tradition of offering commercial and personal financial services with a difference, in Western Canada and beyond. We started out as a small bank in an underserved niche and we maintain our “small bank” values as we grow. We still believe in the things that made us a better choice for western Canadian customers in the first place and we still serve the same purpose. Our focus and determination continues to build on our history of excellence. Our strategy includes enhancing product distribution, identifying new stable and cost-effective funding sources, sharing resources and looking for opportunities for cross- promotion to increase awareness. We also remain ready to capitalize on strategic acquisitions. Our strategy will take us into the next era of Canadian Western Bank Group and sustain our growth without compromising quality or security. We’ll maintain our commercial lending and retail banking focus and build on our strengths to add value for customers, shareholders and employees. Over almost 25 years serving western Canadians, we’ve learned that forward thinking, balanced by prudence and informed by experience, works as well for our customers as it does for us. We’ll continue to explore new avenues of development because a strong core purpose opens up endless opportunities. purpose driven | CWB 2007 AnnuAL reporT 13 community investment A shared purpose and future… Communities welcome us and provide us the opportunity to grow and succeed. We strengthen our relationships by supporting causes that build a better future in neighbourhoods we call home. CWB’s values are reflected in our activities and our involvement doesn’t stop at financial contributions. Our people are active community members who donate time, energy and expertise to their chosen causes. We’ve enhanced our community investment program to maximize benefits and allow branches to respond to priorities in their regions. We review all requests to ensure projects we support are aligned with our Think Western values. Areas of focus include community programs, education, health and caregiving. Like everything else we do, our community investment makes sense. We direct our help to complement the need and purpose of causes. We can have a larger impact with a flexible approach that supports novel ways of meeting community investment needs. One example is the Alberta Diabetes Foundation (ADF). We have worked alongside the ADF as it has grown from a small organization into a recognized charitable foundation with resources to support its strong purpose. Edmonton is acknowledged worldwide as a centre of innovative discovery and care for this serious illness and the ADF plays a vital role in fundraising efforts for research to prevent and treat this disease. Our relationship has been built over many years, and we’ve established that we can work creatively to help meet its goals. We’ve supported the ADF with funds, people, expertise and other initiatives. Most recently, we donated office furniture to the ADF that will be used in the Alberta Diabetes Institute at the University of Alberta. As we continue to prosper, our community investment will also grow. 14 purpose driven | CWB 2007 AnnuAL reporT purpose driven | CWB 2007 AnnuAL reporT 15 2007 Highlights the year in review awards of excellence recipients for 2007 Awards of Excellence recognize employees who display qualities for which CWB is known and that are inherent under the brand Think Western. When staff Think Western, they exceed expectations in the areas of client service (both internal and external), peer relationships, innovation and initiative. They are enthusiastic about their work and their employer, reliable, respectful and responsive to both customers and co-workers. Alma Bonneau, CWB Corporate Ann Brandson, CWB Calgary Foothills Barbara Walker, CWB Grande Prairie Brad Swanson, CWT Vancouver Candace Speck, Valiant Calgary Carol Hunt, CWB Calgary Northeast Hue Nguyen, CWB Park Place Kelly Jones, CWB Coquitlam Lana Moritz, CWB Grande Prairie Lisa Poitras, CDI BC Lynne Kunz, CDI BC Tanis Poshtar, CWB Edmonton Main Terri Todd, CWB Corporate canadian western bank Recognized as one of the “50 Best Employers in Canada” through input provided by our employees. Purpose: Confirm strategy and provide valuable feedback to further improve and differentiate CWB as an employer of choice. Area: People Opened new branches in Abbotsford, BC and Medicine Hat, AB. Confirmed plans to open three additional branches in Alberta and started plans for at least two additional branches in BC. Purpose: Continued expansion into markets with identified demand for the Bank’s services. Area: Infrastructure Launched cwbalance initiative in support of the Bank’s commitment to offer employees a strong work/life balance. Purpose: Help promote a healthy work environment and improve employee morale. Area: People Significantly enhanced employee benefit program. Purpose: Take care of existing employees and provide additional incentives for recruiting more high quality people with strong Think Western attitudes. Area: People Completed systems and process improvements across several business units. Created a business improvement team to critically and independently assess ways to improve our businesses. Purpose: Improve efficiencies and increase operating capacity. Area: Process 16 purpose driven | CWB 2007 AnnuAL reporT Increased brand awareness and diversified funding sources with the successful launch of a high-interest Summit Savings account. Purpose: Meet customer needs while increasing funding sources and brand awareness. Area: Business Enhancement valiant trust company Completed major systems upgrade. Purpose: Add greater stability and control, particularly in a high-growth environment. Area: Infrastructure/Process Expanded scope of in-house training programs and built a dedicated training centre at Corporate Office. Purpose: Cultivate the next generation of leaders in commercial and retail banking. Area: People/Infrastructure Initiated an expansion of the Bank’s ABM network. Purpose: Provide added convenience for customers. Area: Business Enhancement/Infrastructure Goals for 2008 include • Ongoing expansion of the branch network. • Continuous improvements to the retail banking platform with a goal of improving customer relationship management capabilities. • Launch of online account opening capability to further diversify and enhance deposit sources. • Increase brand awareness through expanded cross-marketing initiatives. • Further development of the cwbalance program. Entered a strategic partnership with another specialized service provider. Purpose: Enhance product offerings and expand client base. Area: Business Enhancement Accepted as an approved transfer agent for the New York Stock Exchange. Purpose: Expand client base and improve service options for existing customers. Area: Business Enhancement Goals for 2008 include • Finalize incorporation as a federal trust company and open an office in Toronto. • Expand and diversify operations with a targeted business development focus in BC and Ontario. • Integrate further systems upgrades to improve product offerings and risk management capabilities. • Ongoing review of all major business processes and controls to identify areas for further process and efficiency improvements. purpose driven | CWB 2007 AnnuAL reporT 17 canadian western trust company Worked with other service providers to develop a unique mutual fund service and pricing model. Purpose: Enhanced product offering that allows selected financial advisor customers to improve their corporate branding and increase profitability. Area: Business Enhancement Improved Group RRSP recordkeeping system and developed preferred institutional pricing with select investment managers. Purpose: Expand reach into new markets. Area: Business Enhancement Implemented new business practices and documentation for the valuation of mortgages held in self-directed registered plans. Purpose: Integrate changing regulations into processes. Area: Process Goals for 2008 include • Convert paper record keeping to document imaging – improve security and efficiencies. • Leverage technology to increase lead generations and optimize upselling opportunities. • Offer low-cost, personalized Group RRSP to small-to-medium sized companies. • Launch the next phase of our client and advisor online query (Cweb2) tool to provide customers enhanced online capabilities. • Expand inside sales and telesales to optimize performance. canadian direct insurance incorporated Introduced quarterly “Town Hall” meetings for employees. Purpose: Keep staff informed on current issues and provide increased interaction with senior management. Area: People Improved internal training programs. Purpose: Update training for better performance and job satisfaction. Area: People/Business Enhancement Launched new online auto quote and sales system for BC and AB customers. Purpose: Provide further product differentiation, efficiencies and added customer convenience. Area: Infrastructure/Business Enhancement Added Human Resource home page and access to CWB intranet. Purpose: Provide staff convenient access to company information, including policies, forms, benefits, etc. Area: People Commenced project to replace imaging system in Claims Department. Purpose: Enhance process management and improve productivity and customer visibility. Area: Process/Infrastructure Initiated pilot program to distribute white-labelled BC auto optional product through a broker network. Purpose: Alternate distribution model to leverage existing technology. Area: Business Enhancement Goals for 2008 include • Formalize employee orientation program and Think Western customer service training. • Enhance CDI.com career page. • Migrate all major systems to new databases to improve security. • Install a new call recording system at the Alberta call centre. • Complete next phase of Internet-based technology platform. 18 purpose driven | CWB 2007 AnnuAL reporT Management’s Discussion and Analysis 25 Business Profile and strategy 27 grouP finanCial PerforManCe 27 Overview 28 Net Interest Income 29 Other Income 30 Non-interest Expenses and Efficiency 32 Income and Capital Taxes 32 Comprehensive Income 32 Cash and Securities 33 Loans 34 Credit Quality 37 Deposits 39 Other Assets and Other Liabilities 39 Liquidity Management 41 Contractual Obligations 41 Capital Management 44 Financial Instruments and Other Instruments 44 Acquisitions 44 Off-Balance Sheet Arrangements 45 oPerating segMent review 45 Banking and Trust 46 Insurance 48 suMMary of Quarterly results and fourth Quarter 48 Quarterly Results 48 Fourth Quarter of 2007 49 aCCounting PoliCies and estiMates 49 Critical Accounting Estimates 50 Changes in Accounting Policies Including Initial Adoption 51 Future Changes in Accounting Policies 51 risk ManageMent 51 Overview 51 Credit Risk 52 Liquidity Risk 52 Market Risk 54 Insurance Risk 54 Operational Risk 55 General Business and Economic Conditions 55 Level of Competition 55 Regulatory Risk 55 Litigation Risk 55 Accuracy and Completeness of Information on Customers and Counterparties 55 Ability to Attract and Retain Key Personnel 55 Ability to Execute Growth Initiatives 55 Information Systems and Technology 56 Reputation Risk 56 Other Factors 56 uPdated share inforMation 56 Controls and ProCedures purpose driven | CWB 2007 AnnuAL reporT 19 CORPORATE GOVERNANCE IntroductIon Sound and effective corporate governance has always been a priority for Canadian Western Bank (the Bank). The Board of Directors (the Board) and management of the Bank are committed to govern and maintain the Bank’s operations effectively and efficiently within its regulatory environment. 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 of dIrectors The Board has reviewed the status of each of its directors to determine whether such director is independent as defined in National Instrument 58-101 Disclosure of Corporate Governance Practices (NI58-101) and affiliated as defined by the affiliation regulations set forth in the Bank Act. The review included the completion of self-assessment questionnaires by each of the directors and a detailed review of such questionnaires by the Conduct Review Committee. As a result of this review and after consideration of all business, charitable and family relationships among the directors and the Bank, the Board has determined that all of the directors, except Mr. Pollock, (or 92% of the Board) are both independent and not affiliated with the Bank. Mr. Pollock is not independent and is affiliated with the Bank as a result of his position as President and Chief Executive Officer (CEO) of the Bank. It is a requirement under the Bank Act that the CEO be a director of the Bank. The Board holds four regular meetings each year, as well as additional meetings as required. At the end of every regularly scheduled Board meeting, a session is held without any management, including the CEO, present. In the year ended October 31, 2007, the Board had four sessions at which the CEO and other members of management were not in attendance. Mr. Jack Donald is the Chairman of the Board. Mr. Donald is an independent director as defined in NI58-101. As Chairman of the Board, his responsibilities include ensuring that the Board functions effectively and independently of management and that it meets its obligations and responsibilities as set out in its mandate. Board Mandate The Board’s mandate sets out the Board’s purpose, organization, duties and responsibilities. Its written mandate is summarized as follows. The Board has responsibility for stewardship of the Bank, including to the extent feasible, satisfying itself as to the integrity of the CEO and other executive officers (as defined in National • Instrument 51-102 Continuous Disclosure Obligations) and that the CEO and other executive officers create a culture of integrity throughout the organization; adopting a strategic planning process and approving, on at least an annual basis, a strategic plan which takes into account, • among other things, the opportunities and risks of the business; the identification of the principal risks of the Bank’s business and ensuring the implementation of appropriate systems to • manage these risks; • overseeing succession planning (including appointing, training and monitoring senior management); • adopting a communication and disclosure policy for the Bank; • overseeing the Bank’s internal control and management information systems; developing the Bank’s approach to corporate governance, including developing a set of corporate governance principles and • guidelines that are specifically applicable to the Bank; and • reviewing and disclosing, no less than annually, measures for receiving feedback from stakeholders. In addition to the above, the Board shall with the assistance of the Corporate Governance & Human Resources Committee, review and ratify the employment, • appointment, grade levels and compensation of the top five executive employees of the Bank and approve all senior officer appointments (Vice President and higher); with the assistance of the Corporate Governance & Human Resources Committee, develop a position description for the CEO, • which, together with other board-approved policies and practices, should provide for a definition of the limits to management’s responsibilities, approve the objectives of the Bank to be met by the CEO, and ensure the performance of the CEO is evaluated at least annually; with the assistance of the Corporate Governance & Human Resources Committee, develop a process to evaluate the effectiveness of • each director and the Board as a whole on no less than a biennial basis; • review and approve the strategic plan, the annual business plan and accompanying capital plan and financial operation budget, including capital expenditures; • approve material divestitures, acquisitions and financial commitments; with the assistance of the Audit Committee, approve the annual audited and quarterly unaudited financial statements, the annual and • quarterly Management’s Discussion and Analysis (MD&A), the Annual Information Form, the Management Information Circular and other annual public documents of the Bank; 20 purpose driven | CWB 2007 AnnuAL reporT • determine the content and frequency of management reports; review any recommendations from regulators or the external auditors respecting their assessment of the effectiveness of the internal • controls that come to their attention in the conduct of their work; ensure an independent audit/inspection function is in place to monitor the effectiveness of organizational and procedural controls; • and • with the assistance of the Audit Committee and Loans Committee, approve loan write-offs. The Board has developed written position descriptions for the Chairman of the Board as well as the Chair of each board committee. The Board has also developed a written position description for the CEO. orIentatIon and contInuIng educatIon The Bank has not adopted a formalized process of orientation for new Board members although all directors are provided with a Directors’ Manual, which includes a copy of all Board and committee mandates and policies, the Bank’s bylaws and other reference material. New directors are also provided the opportunity to meet with senior management and other directors. Directors are kept informed as to matters impacting, or which may impact, the Bank’s operations through reports and presentations at the quarterly Board meetings. Special presentations on specific business operations are also provided to the Board. In 2007, presentations were made to the Board on the liquidity issues associated with the asset-backed commercial paper market, the Bank’s business strategy and the Bank’s information technology strategy. In addition, a presentation was made to the Audit Committee on International Financial Reporting Standards. ethIcal BusIness conduct The Bank has a written code of conduct for its directors and a written code of conduct for its officers and employees. A copy of both of these codes may be found on the Bank’s website at www.cwbankgroup.com. The Board monitors compliance with the codes by requiring each director, officer and employee to annually sign a certificate confirming his/her compliance with the applicable code. To the knowledge of the Board, there have been no departures from the code during fiscal 2007 that would have required the filing of a material change report. In the event a director or executive officer has a material interest in any transaction or agreement considered by the Board, or any committee of the Board, such interest must be declared and recorded in the minutes of the meeting, and the director or executive officer must vacate the meeting while the transaction or agreement is being discussed. The responsibilities of the Conduct Review Committee include establishing procedures to ensure disclosure and review of related party transactions in accordance with the requirements under the Bank Act. These procedures include obtaining an annual certificate from each director and officer of the Bank, which discloses all related parties of the director or officer and any related party transactions with the Bank. The Board believes that a culture of strong corporate governance and ethical business conduct must be endorsed by the Board and the executive officers. The codes of conduct address many areas of business conduct. A whistleblower procedure for the Bank has been established through which complaints or concerns regarding questionable audit or accounting matters can be made. The Bank has adopted a corporate disclosure policy which is reviewed annually. Quarterly and annual financial packages are reviewed by an internal Disclosure Committee prior to being recommended for Board approval and CEO/CFO certification of annual and interim filings. 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 website for 60 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 its website at www.cwbankgroup.com. 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. noMInatIon of dIrectors The Corporate Governance & Human Resources Committee has responsibility for identifying new candidates for board nomination. This committee is comprised of six directors, all of whom are independent. The mandate of this committee in respect of nomination and board assessment matters specifically sets out the following duties and responsibilities • identify and recommend to the Board qualified candidates to be considered for Board membership; review, monitor and make recommendations regarding new director orientation and the ongoing development and education of • existing Board members; evaluate biennially Board effectiveness, membership, selection criteria, composition and size and make recommendations to the • Board and, on alternate years, evaluate the involvement and contribution of individual members; and • make recommendations to the Board regarding revisions to the Board of Directors’ Manual. The Corporate Governance & Human Resources Committee annually reviews both the size and composition of the Board in accordance with the Bank’s policy “Board and Member Review and Assessment”. The Board is comprised of 12 directors, which is large enough to permit a diversity of views and staff the committees, without being so large as to detract from its efficiency and effectiveness. In considering new nominees for the Board, the Committee assesses the skills, expertise and experience of the incumbent directors in order to determine the skills, expertise and experience it should seek in new board members to add value to the Board. As each director is expected to participate on one or more of the Board’s four committees, expertise and experience related to a particular committee may be considered by the Committee. The Committee also considers such matters as a candidate’s integrity, independence and residency. The Committee then assesses each potential nominee against the criteria developed by the Committee. purpose driven | CWB 2007 AnnuAL reporT 21 coMpensatIon The Corporate Governance & Human Resources Committee has responsibility for determining the compensation of the Bank’s directors and officers. This committee is comprised of six directors, all of whom are independent. The mandate of this committee in respect of compensation matters specifically sets out the following duties and responsibilities • review and recommend to the Board the fees and other benefits to be paid to directors; • review and recommend to the Board the employment and appointment of the executive officers; • review the position descriptions for the executive officers, ensuring such descriptions remain current and appropriate; establish an executive compensation structure for the CEO and, in conjunction with the CEO, establish an executive compensation • structure for all other executive officers of the Bank and its affiliates; • ensure an annual performance appraisal is completed for the CEO and that it is reviewed with him by the Chairman of the Board; review and recommend to the Board any written employment-related contract entered into between the Bank or one of its affiliates • and an officer; establish, amend, monitor and, where appropriate, terminate all compensation plans and arrangements for officers and employees • of the Bank and its affiliates; and • review the human resource succession plan as prepared by senior management for all officers of the Bank and its affiliates. The remuneration paid to the Bank’s directors and officers is reviewed each year by the Corporate Governance & Human Resources Committee. The level of remuneration is designed to provide a competitive level of remuneration relative to comparable positions in the marketplace. A comparator group is developed by identifying companies, primarily within the Bank’s market, of similar size considering value of assets, number of employees and revenue. The aggregate annual remuneration payable to all directors is set out in the Bank’s bylaws. Any increase to this total amount requires shareholder approval. The Corporate Governance & Human Resources Committee has the power to retain consultants, including compensation consultants or advisors, as the Committee may determine necessary or advisable to carry out its responsibilities. No outside advisors were retained by the Committee during the year ended October 31, 2007. Board coMMIttees The Board has four standing committees: the Audit Committee, the Conduct Review Committee, the Corporate Governance & Human Resources Committee and the Loans Committee. The Audit Committee and Conduct Review Committee are required committees under the Bank Act. All directors currently participate in at least one standing committee. audit committee Members: Robert Manning (Chair) Wendy Leaney Gerald McGavin Robert Phillips Alan Rowe This committee is comprised of five financially literate and independent directors. Its written mandate is summarized as follows: review the earnings press releases, the annual audited and quarterly unaudited financial statements, the annual and quarterly MD&A, • the Annual Information Form and other annual public documents of the Bank containing financial information and report thereon to the directors before approval is given; discuss major issues regarding accounting principles and financial statement presentations, analyses prepared by management or • the external auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements; meet with the external auditors to discuss the annual and quarterly financial results and the returns referred to within this mandate • and receive the auditors’ reports thereon; • recommend to the Board the appointment of the external auditors and review the terms of the external auditors’ engagement, the audit plan, any proposed changes in accounting policies, their presentation and input concerning significant risks and key estimates and judgments of management; • resolve disagreements between management and the external auditors regarding financial reporting; • review and approve the policy for non-audit services to be completed by the external auditors. The Committee may delegate to one or more Committee members the authority to grant approval of such services, provided the decisions of such members are reported to the full Committee at its next meeting; review and approve the Bank’s hiring policies regarding employees and former employees of the present and former external auditors • of the Bank; • review, evaluate and approve the internal control procedures implemented by management; meet with the Chief Internal Auditor of the Bank and with management of the Bank 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 correspondence received from regulators and external auditors together with management’s responses concerning the • effectiveness of internal controls and other matters that fall within the responsibility of the Committee; 22 purpose driven | CWB 2007 AnnuAL reporT • review such returns of the Bank as the Superintendent of Financial Institutions may specify; review such investments and transactions of the Bank that could adversely affect the well-being of the Bank as the external auditors • or any officer of the Bank may bring to the attention of the Committee; receive quarterly reports from the Loans Committee, the Bank’s Disclosure Committee and the Canadian Direct Insurance • Incorporated Audit and Conduct Review Committee; • review the appointment of the Chief Financial Officer and the Chief Internal Auditor; • review periodically the Code of Conduct for senior financial officers; and establish a whistleblower procedure for the Bank through which complaints or concerns regarding questionable audit or accounting • matters can be made. conduct review committee Members: Albrecht Bellstedt (Chair) Charles Allard Allan Jackson Arnold Shell This committee is comprised of four independent directors. Its written mandate is summarized as follows: • establish procedures to ensure disclosure of transactions with specified related parties of the Bank and review any such transactions to ensure compliance with the Bank 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 its directors and officers and their interests to ensure continued compliance with • the Bank Act and that excesses over the permitted limits are 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; and ensure every employee, officer and director agrees to comply, by way of an annual written acknowledgement, with the Bank’s • conduct policies. 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 independent directors. This committee is responsible for the identification of new directors (as described under “Nomination of Directors” above) and the determination of the compensation of the Bank’s directors and officers (as described under “Compensation” above). In addition, this committee’s written mandate includes the following: review corporate governance trends and best practices and make recommendations to the Board on changes to the Bank’s • governance policies and practices; and • review and monitor compliance with corporate governance guidelines and report instances of non-compliance to the Board. loans committee Members: Allan Jackson (Chair) Charles Allard Albrecht Bellstedt Jack Donald Wendy Leaney Gerald McGavin Howard Pechet Robert Phillips Larry Pollock Alan Rowe This committee is comprised of ten directors, nine of whom are independent. Mr. Phillips serves as an alternate member and, in such capacity, attends meetings only when required to ensure a quorum. The CEO, who is not independent, is a member of this committee. This committee’s written mandate is summarized as follows: establish and approve lending limits 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 which are in excess of the lending limit for the CEO but within the • Committee’s lending limit, or which relate to loans to, or guaranteed by, a foreign country; • make recommendations to the Board for loan proposals in excess of the Committee’s limit; • review the policy of Director Related Loans and make recommendations to the Board; • approve all amendments to the Bank’s lending policies and guidelines; review management’s recommendations for the allowance for impairment and loan write-offs and make recommendations • to the Audit Committee; and • review no less than quarterly the Bank’s management of loan and portfolio credit risk issues and make recommendations to the Board. purpose driven | CWB 2007 AnnuAL reporT 23 assessMents In response to the Board’s commitment to effective corporate governance, a two-pronged evaluation process has been initiated. On “even” years, the Board members assess their effectiveness as a Board. In “odd” years, a peer evaluation of each member is scheduled. During the board assessment, members are asked to rate items such as structure and size of the Board, the knowledge and diversity of the membership, as well as the timeliness and completeness of information received for discussion and the overall effectiveness of the decision-making process. The peer evaluation involves questions such as effectiveness in discussions and decision-making, attendance and whether the director’s non-Bank activities enhance or detract from shareholder value. Both evaluation processes are conducted in-house and require all members to complete questionnaires that are forwarded to the Chairman of the Corporate Governance & Human Resources Committee. The Chairman then compiles the results and prepares a single document that includes any comments that may have been forwarded. Anonymity of the particular submitter is maintained with the aggregate results presented to the Corporate Governance & Human Resources Committee for discussion and action, if required. The results are then communicated on an aggregate basis to the full Board for discussion and recommendations, as required. 24 purpose driven | CWB 2007 AnnuAL reporT MANAGEMENT’s DisCussiON AND ANAlysis BusIness profIle and stRAtegY Canadian Western Bank (CWB or the Bank) is the largest publicly traded Schedule I chartered bank headquartered in and regionally focused on Western Canada. Supported by its unwavering commitment to customer service, CWB today serves thousands of small- to-medium sized businesses and individuals across the four western provinces. The Bank, along with its wholly owned subsidiaries, Canadian Western Trust Company (CWT), Valiant Trust Company (Valiant), Canadian Western Financial Ltd. (CWF) and Canadian Direct Insurance Incorporated (Canadian Direct or CDI), operate in three pillars of the financial services industry. The Bank remains primarily focused on its core mid-market commercial and retail banking business in Western Canada. Third party mutual funds are offered to clients through CWF, the Bank’s mutual fund dealer subsidiary. CWT provides trust services, including self-directed RRSPs and RRIFs, as well as corporate and group trust services to independent financial advisors, corporations and individuals. Valiant’s operations include stock transfer and trustee services to public companies and income trusts. CDI provides personal auto and home insurance to customers in British Columbia (BC) and Alberta. In 2007, CWB continued its long history of excellent financial performance and growth. This year marked many milestones, including record earnings and return on equity (ROE), as well as the Bank’s 18th consecutive year of double-digit loan growth. CWB’s mission is to be known and respected as Canada’s western bank, providing western Canadians and other select markets with a preferred source of individual and commercial financial services. The fundamental objectives are to provide shareholders with a sound and profitable return, clients with value, service and stability, and employees with a positive and rewarding work environment, while contributing to the communities in which CWB operates. CWB plans to achieve its mission through the following strategic priorities: build brand recognition by ensuring CWB employees continue to manage customer relationships in a responsive and friendly • manner. CWB believes that experienced, knowledgeable and dedicated employees with a Think Western® attitude are critical to expanding the Bank’s businesses and further building customer loyalty; develop and recruit high quality employees who embrace the Bank’s culture by offering a rewarding work environment that includes • comprehensive employee benefits, career growth opportunities, strong work/life balance and competitive compensation packages; expand value-added product offerings across all business areas with a focus on meeting or exceeding customer needs and earning a • profitable return for shareholders; • maintain a conservative risk profile while ensuring growth is focused, strategic and accretive for shareholders; reinforce leadership in cost efficiency, return on assets and credit losses by enhancing service delivery capabilities and maintaining • strong discipline in managing the Bank’s lending portfolio; leverage core profitability and lessen risks related to external funding sources with ongoing generation of increased internal deposits • raised through the branch network and CWT; improve CWB’s revenue diversification by further developing non-interest revenue sources in banking, trust and insurance • operations through internal growth as well as strategic acquisitions; grow the earnings and revenue contribution from the insurance segment through strong client acquisition and retention and new • distribution channels, while continuing to focus on customer satisfaction, disciplined policy underwriting and cost control; • maximize potential opportunities through co-branding, cross selling and controlled expansion into new markets; increase ROE by maintaining strong operating performance, an efficient capital structure, and continued diversification into businesses • with lower capital requirements, including residential mortgages, insurance and trust services. Organic growth and resulting benefits to ROE may be accelerated by acquisitions that are both accretive and a good strategic fit with current operations; and maintain and reinforce CWB’s reputation and public confidence through continued stakeholder communication, diligence in • corporate governance practices and high standards in corporate reporting and accountability. CWB’s consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are presented in Canadian dollars. The following pages contain management’s discussion of the financial performance of CWB, as well as a discussion of the performance of each operating segment and a summary of quarterly and fourth quarter results. Additional information relating to the Bank, including the Annual Information Form, are available on SEDAR at www.sedar.com and on the Bank’s website at www.cwbankgroup.com. purpose driven | CWB 2007 AnnuAL reporT 25 forward-looking statements From time to time, Canadian Western Bank (the Bank) makes written and verbal forward-looking statements. Statements of this type are included in the Annual Report and reports to shareholders and may be included in filings with Canadian securities regulators or in other communications such as press releases and corporate presentations. Forward-looking statements include, but are not limited to, statements about the Bank’s objectives and strategies, targeted and expected financial results and the outlook for the Bank’s businesses or for the Canadian economy. Forward-looking statements are typically identified by the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may impact” and other similar expressions, or future or conditional verbs such as “will”, “should”, “would” and “could”. By their very nature, forward-looking statements involve numerous assumptions. A variety of factors, many of which are beyond the Bank’s control, may cause actual results to differ materially from the expectations expressed in the forward-looking statements. These factors include, but are not limited to, fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, legislative and regulatory developments, legal developments, the level of competition in the Bank’s markets, the occurrence of weather-related and other natural catastrophes, the accuracy of and completeness of information the Bank receives about customers and counterparties, the ability to attract and retain key personnel, the ability to complete and integrate acquisitions, reliance on third parties to provide components of the Bank’s business infrastructure, changes in tax laws, technological developments, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and management’s ability to anticipate and manage the risks associated with these factors. The preceding list is not exhaustive of possible factors. These and other factors should be considered carefully and readers are cautioned not to place undue reliance on these forward-looking statements. The Bank does not undertake, unless required by securities law, to update any forward-looking statement, whether written or verbal, that may be made from time to time by it or on its behalf. taxable equivalent Basis (teb) 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 statements 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 $5.4 million (2006 – $4.1 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 GAAP and, therefore, may not be comparable to similar measures presented by other banks. Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this Management’s Discussion and Analysis (MD&A). non-gaap Measures Taxable equivalent basis, return on shareholders’ equity, return on assets, efficiency ratio, net interest margin, tangible common equity to risk-weighted assets, Tier 1 and total capital adequacy ratios, average balances, claims loss ratio, expense ratio and combined ratio do not have standardized meanings prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other financial institutions. The non-GAAP measures used in this MD&A are calculated as follows: • taxable equivalent basis – described above; • return on shareholders’ equity – net income divided by average shareholders’ equity; • return on assets – net income divided by average total assets; • efficiency ratio – non-interest expenses divided by total revenues (net interest income plus other income); • net interest margin – net interest income divided by average total assets; tangible common equity to risk-weighted assets – shareholders’ equity less trust subsidiary goodwill divided by risk-weighted assets, • calculated in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI); • Tier 1 and total capital adequacy ratios – in accordance with guidelines issued by OSFI; • average balances – average daily balances; • claims loss ratio – net insurance claims and adjustment expenses as a percentage of net earned premiums; expense ratio – policy acquisition costs and non-interest expenses net of commissions and processing fees as a percentage of net • earned premiums; and • combined ratio – sum of the claims loss and expense ratios. 26 purpose driven | CWB 2007 AnnuAL reporT group fInancIal perforMance overview Highlights of 2007 • • • • All performance targets surpassed by considerable margins. Record net income of $96.3 million, an increase of 34%. Diluted earnings per share of $1.50, up 33%. Record total revenues (teb) of $273.5 million, up 23%. Excellent loan growth of 28%, driving total assets to more than $9.5 billion. Return on equity of 17.4%, a 260 basis point improvement due to strong operating performance and a more efficient • capital structure. • • • • A new benchmark efficiency ratio (teb) of 44.6%, a 140 basis point improvement. Strong and consistent credit quality. Cash dividends paid to shareholders increased 36%. Stock dividend paid effecting a two-for-one split of the Bank’s common shares. Table 1 – Select Annual Financial Information(1) ($ thousands, except per share amounts) Key Performance Indicators Net income .................................................................... Earnings per share(2) ..................................................... Basic ............................................................................ Diluted ........................................................................ Provision for credit losses as a percentage of average loans .......................................................... Efficiency ratio(4) (expenses to revenues) (teb) ....... Efficiency ratio .............................................................. Return on common shareholders' equity .................. Return on average total assets ..................................... Other Financial Information Total revenues (teb) ..................................................... $ 273,480 268,070 Total revenues ............................................................... Total assets ..................................................................... 9,525,040 390,000 Subordinated debentures ............................................. Dividends ....................................................................... 0.34 0.16% 44.6 45.5 17.4 1.18 2007 2006 2005 Change from 2006 % $ $ 96,282 $ 72,007 $ 54,391 $ 24,275 34% 1.54 1.50 0.37 0.37 32 33 1.17 1.13 0.20% 46.0 46.9 14.8 1.12 0.90 0.87 0.24% 48.6 49.7 12.7 1.03 $ 221,770 217,692 7,268,360 198,126 0.25 $ 185,881 181,906 5,705,028 128,126 0.19 $ 51,710 50,378 2,256,680 191,874 0.09 (4)bp(3) (140) (140) 260 6 23% 23 31 97 36 (1) See page 26 for a discussion of teb and non-GAAP measures. (2) Stock dividends effecting a two-for-one split of the Bank’s common shares were paid during 2005 and 2007. All prior period common share and per common share information has been restated to reflect these effective splits. (3) bp – basis points. (4) A decrease in the ratio reflects improved efficiency. Net income for fiscal 2007 was a record $96.3 million, representing an increase of 34% ($24.3 million) over the previous year. Results reflect CWB’s increased market presence from improved brand awareness and expanded infrastructure, combined with Western Canada’s robust economic conditions. Annual total revenues (teb) grew 23% to reach $273.5 million due to excellent 28% loan growth and very strong other income. Credit quality remained strong and the provision for credit losses as a percentage of average loans was 16 basis points, compared to 20 basis points in 2006 and an average of 22 basis points over the past five years. CWB’s efficiency ratio (teb), which measures non-interest expense as a percentage of total revenues (teb), set a new benchmark of 44.6%, reflecting strong revenue growth and disciplined cost control. Diluted earnings per share of $1.50 increased 33% from $1.13 a year earlier. Return on shareholders’ equity of 17.4% improved 260 basis points due to strong operating performance and a more efficient capital structure. Return on assets improved to 1.18%, compared to 1.12% in the previous year. Total cash dividends paid to shareholders were up 36%, reflecting two increases in the quarterly dividend rate. In January 2007, a stock dividend was paid that effectively achieved a two-for- one split of the Bank’s common shares. Total assets increased 31% to reach $9,525 million, primarily driven by excellent loan growth of 28% ($1,624 million). Loan growth reflects very strong double-digit performance in all lending sectors, with the vast majority of growth being sourced in Alberta and BC. Loans in the Bank’s alternative residential mortgage business, Optimum Mortgage, increased 64% in the year to comprise approximately 5% of total loans. purpose driven | CWB 2007 AnnuAL reporT 27 Ongoing strategies to increase internal funding sources were very successful with growth of 27% in total branch-generated deposits, which kept pace with loan growth. The lower cost demand and notice component was up 34% for the year to comprise 27% of total deposits, up from 26% in 2006. A portion of growth in demand and notice deposits reflects the success of a newly launched high-interest savings account branded Summit Savings®. In response to financial market events that commenced in the late summer, additional deposits were raised through the deposit broker network to augment the Bank’s liquidity position. This higher liquidity is reflected in the decrease in branch-generated deposits as a percentage of total deposits, which was 64%, down from 66% in 2006. During 2007, CWB completed a $200 million issue of subordinated debentures to support continued loan growth. The success of this private placement underscores the market’s ongoing confidence in CWB and was consistent with the Bank’s objective to maintain a strong and efficient capital base. The performance targets established for the 2007 fiscal year are presented below, together with actual performance and targets for fiscal 2008. Net income growth ................................................................................................. Total revenue (teb) growth ................................................................................... Loan growth ............................................................................................................. Provision for credit losses as a percentage of average loans ............................. Efficiency ratio (teb) .............................................................................................. Return on equity ..................................................................................................... Return on assets ...................................................................................................... 2007 Target 20% 15% 14% 0.20% or less 46% 15% 1.10% 2007 Performance 34% 23% 28% 0.16% 44.6% 17.4% 1.18% 2008 Target 15% 17% 15% 0.15% 45% 17% 1.10% Outlook for Overall Financial Performance The outlook for CWB reflects expectations for continued strong financial performance. Economic conditions in Western Canada are expected to remain strong due to a high demand for resources, solid consumer spending, generally favourable tax regimes and a low interest rate environment. There is ongoing strength in real estate and construction markets, although activity has moderated somewhat from highs previously observed. There has been a softening in lending areas related to forestry and natural gas markets due to a combination of lower market prices, the impact of the rising Canadian currency and an economic slowdown in the U.S. CWB will maintain its long history of disciplined credit underwriting and continue to monitor the credit environment very closely for signs of any material shifts in economic fundamentals. With its strong balance sheet and high quality loan portfolio, the Bank remains well positioned to manage turns in the credit cycle. Higher liquidity levels will be maintained until spreads in financial markets return to more normal levels. Although this strategy has a negative effect on net interest margin, it is consistent with the Bank’s conservative risk tolerance and will ensure CWB remains well positioned to manage future unexpected events. The Bank remains ready to capitalize on accretive growth opportunities that may become available, including strategic acquisitions. A continued emphasis on core banking and trust operations supported by higher income contributions from Canadian Direct are expected to further strengthen the Bank’s ability to grow and increase market recognition. Strategies to develop and attract high quality employees who embrace CWB’s Think Western® approach to business are key for the Bank’s ongoing success and this will remain a top management priority. Performance targets established for fiscal 2008 include net income growth of 15%, total revenue (teb) growth of 17% and loan growth of 15%. net Interest Income Highlights of 2007 • • Net interest income (teb) was a record $210.7 million, up 25%. Net interest margin (teb) was 2.58%, down from 2.62%. Net interest income is the difference between interest and dividends earned on assets and interest expensed on deposits and other liabilities, including debentures. Net interest margin is net interest income as a percentage of average total assets. 28 purpose driven | CWB 2007 AnnuAL reporT Table 2 – Net Interest Income (teb)(1) ($ thousands) 2007 2006 Average Balance Mix Interest Interest Rate Average Balance Mix Interest Interest Rate Assets Cash, securities and deposits with regulated financial institutions ........... $ 1,404,004 17% $ 62,404 4.44% $ 1,126,605 18% $ 45,006 3.99% Securities purchased under resale agreements .............. Loans ....................................... Residential mortgages ....... Other loans ......................... Total interest bearing assets .. Other assets ............................ Total Assets ............................ Liabilities Deposits Demand ............................... Notice .................................. Fixed term ........................... Deposit from CWB Capital Trust........ Other liabilities ...................... Subordinated debentures ...... Shareholders’ equity .............. Total Liabilities and Equity ... Total Assets/ Net Interest Income .............. 51,657 1 2,274 4.40 25,368 – 987 3.89 1,561,866 5,008,165 6,570,031 8,025,692 151,853 $ 8,177,545 $ 361,526 1,494,823 5,088,457 105,000 7,049,806 259,741 315,776 552,222 $ 8,177,545 97,014 19 61 80 98 2 342,653 439,667 504,345 – 100% $ 504,345 6.21 6.84 6.69 6.28 0.00 1,125,617 4,015,958 5,141,575 6,293,548 140,182 6.17% $ 6,433,730 18 62 80 98 2 100% $ 65,109 262,479 327,588 373,581 – 373,581 5% $ 18 62 – 45,611 223,481 1 86 3 4 7 6,748 275,840 – 17,846 – 100% $ 293,686 3.05 4.39 6.43 3.91 0.00 5.65 0.00 0.00% $ 314,579 1,099,376 4,105,566 17,782 5,537,303 215,703 194,237 486,487 3.59% $ 6,433,730 5% $ 17 64 – 27,791 164,710 – 86 3 3 8 100% $ 1,145 193,646 – 11,251 – 204,897 5.78 6.54 6.37 5.94 0.00 5.81% 0.00% 2.53 4.01 6.44 3.50 0.00 5.79 0.00 3.19% $ 8,177,545 $ 210,659 2.58% $ 6,433,730 $ 168,684 2.62% (1) See page 26 for a discussion of teb and other non-GAAP measures. Net interest income (teb) increased 25% ($42 million) in the year driven by 28% growth in average interest bearing assets, partially offset by a four basis point decline in net interest margin (teb) to 2.58%. Lower net interest margin primarily reflects higher debenture interest costs related to subordinated debentures issued in March 2007 and changes in the deposit mix (including a full year of interest related to the August 2006 issue of Innovative Tier 1 capital), which more than offset the positive impact of strong growth in branch- generated deposits. A flat yield curve, which occurs when short- and long-term interest rates are almost the same, was apparent through most of 2007 and restricts net interest margin expansion as changing the underlying terms of specific assets or liabilities has little impact and, hence, reduces the effectiveness of portfolio management within policy limitations. The average balance of lower cost demand and notice deposits increased 31% to comprise 23% of average funding sources (liabilities and equity), compared to 22% in 2006. The prime rate averaged 6.08%, compared to 5.57% last year. Outlook for Net Interest Income Fiscal 2008 net interest income is expected to increase in response to targeted loan growth of 15%. Net interest margin was compressed in the last quarter of fiscal 2007, stemming from uncertainties in financial markets that increased funding costs and prompted the Bank to raise liquidity levels. Higher liquidity strengthens the Bank’s position, but it has a negative effect on net interest margin as only a nominal spread is earned upon reinvestment. Increased yields on new loans should help offset higher deposit costs, but pressures on net interest margin are expected to continue until spreads in financial markets return to more normal levels. other Income Highlights of 2007 • Other income increased 18% ($9.7 million) due to very strong growth in trust services, credit related and retail services fee income, as well as higher gains related to foreign exchange and the sale of securities. Other income represented 23% of total revenues (teb), compared to 24% in 2006, reflecting increased net interest income from • excellent loan growth. purpose driven | CWB 2007 AnnuAL reporT 29 Table 3 – Other Income ($ thousands) Insurance 2007 2006 $ Change from 2006 Net earned premiums ........................................................................... $ Commissions and processing fees ....................................................... Net claims and adjustment expenses ................................................... Policy acquisition costs ......................................................................... Net insurance revenues ............................................................................. Credit related .............................................................................................. Trust services .............................................................................................. Retail services ............................................................................................. Foreign exchange ....................................................................................... Gains on sales of securities, net................................................................ Other(1) ........................................................................................................ Total Other Income .................................................................................. $ 94,914 2,751 (62,391) (20,011) 15,263 22,426 14,943 7,290 2,159 438 302 62,821 $ $ 81,674 4,826 (52,962) (18,334) 15,204 18,846 10,809 6,337 1,520 142 228 53,086 $ $ 13,240 (2,075) (9,429) (1,677) 59 3,580 4,134 953 639 296 74 9,735 % 16% (43) 18 9 0 19 38 15 42 208 32 18% (1) Includes gains/losses on land, buildings and equipment disposals and other miscellaneous non-interest revenues. Beginning in 2007, also includes changes in fair value related to derivative financial instruments not accounted for as hedges (see discussion in Changes in Accounting Policies on page 50 of this MD&A). Other income of $62.8 million represented an 18% increase over 2006. Trust services fees showed the highest growth due to strong performance from both CWT and Valiant. Growth in trust services fee income was further enhanced by revenues related to unusually large trust transactions that occurred late in the year. Credit related fees showed very strong growth primarily driven by excellent lending activity. Retail service fees primarily reflect volume-driven increased commercial account transaction fees and growth in mutual fund fees and commissions, as well as the success of increased brand awareness relating to CWB’s expanded suite of financial products and services. Net insurance revenues were consistent with last year, as unusually high frequency and severity of claims related to severe storms in BC in the first quarter offset growth in net earned premiums and positive experience from the Alberta Risk Sharing Pools (the Pools). All sources of other income benefited from increased market share and customer acceptance in CWB’s chosen markets. Foreign exchange income was $0.6 million higher than 2006, while gains on securities were up $0.3 million. Other income as a percentage of total revenues (net interest income and other income) decreased slightly to 23%, compared to 24% in the prior year. Lower revenue diversification was attributed to higher growth in net interest income driven by excellent new loan volume. Outlook for Other Income Strong growth in other income is expected to continue in fiscal 2008. The Bank will maintain its focus on enhancing transactional services with an objective to increase fee income through expanded product offerings and ongoing generation of new business. This strategy is supported by confirmed plans for at least three new full-service branches as well as continued development of existing premises. Continued strong growth is expected in trust services resulting from increased market share and the opening of a Valiant office in Toronto. Insurance top line revenue growth will benefit from strong customer retention and policy growth, supported by Canadian Direct’s enhanced distribution capabilities, which will include ongoing development of its Internet-based technology platform. Continued strong performance in Alberta, and the BC home product line, will help lessen the impact of ongoing regulatory and competitive challenges related to the BC auto product line. non-interest expenses and efficiency Highlights of 2007 • • A new benchmark efficiency ratio (teb) of 44.6%, an improvement of 140 basis points. Non-interest expenses were up 19% ($19.9 million) over 2006, largely driven by increased costs related to business growth. 30 purpose driven | CWB 2007 AnnuAL reporT 2007 2006 $ Change from 2006 Table 4 – Non-interest Expenses and Efficiency Ratio ($ thousands) Salaries and Employee Benefits Salaries ..................................................................................................... Employee benefits .................................................................................. $ Premises Rent .......................................................................................................... Depreciation ............................................................................................ Other ........................................................................................................ Equipment and Furniture Depreciation ............................................................................................ Other ........................................................................................................ General Professional fees and services ............................................................... Marketing and business development ................................................. Postage and stationery ........................................................................... Capital and business taxes ..................................................................... Banking charges ...................................................................................... Travel ....................................................................................................... General insurance ................................................................................... Regulatory costs...................................................................................... Communications .................................................................................... Other ........................................................................................................ Total Non-interest Expenses ................................................................... 64,130 12,376 76,506 9,802 2,064 1,695 13,561 3,410 3,268 6,678 5,319 3,228 2,706 2,725 1,771 1,363 1,054 979 938 5,106 25,189 $ 121,934 $ 55,431 9,328 64,759 8,060 1,784 1,516 11,360 2,922 2,966 5,888 3,886 2,508 2,235 2,139 1,194 1,346 915 825 806 4,188 20,042 $ 102,049 $ 8,699 3,048 11,747 1,742 280 179 2,201 488 302 790 1,433 720 471 586 577 17 139 154 132 918 5,147 19,885 $ % 16% 33 18 22 16 12 19 17 10 13 37 29 21 27 48 1 15 19 16 22 26 19% Efficiency Ratio (teb)(1) ............................................................................ 44.6% 46.0% (140)bp(2) (1) Non-interest expenses as a percentage of total revenues (net interest income (teb) plus other income). See page 26 for a discussion of non-GAAP measures. (2) bp – basis points. Non-interest expenses of $121.9 million increased 19% ($19.9 million) over 2006. Higher non-interest expenses mainly reflect an increased staff complement, with full-time equivalent employees increasing 8% from October 31, 2006. Other factors include annual salary increments, additional premises costs related to a 9% increase in square footage, a $1.5 million interest adjustment related to staff loans and deposits that increase both benefit costs and net interest income, $1.3 million of additional non-cash stock-based compensation expense (total expense of $4.5 million, compared to $3.3 million in 2006) and a $0.9 million professional fee related to an income tax recovery described in Income and Capital Taxes on page 32 of this MD&A. Additional increases reflect costs to manage business growth as well as other inflationary pressures related to Western Canada’s robust economic conditions. Growth in total revenues (teb) continued to surpass growth in non-interest expenses, leading to a new benchmark efficiency ratio (teb) of 44.6%, a 140 basis point improvement over the prior year. Non-interest expenses as a percentage of average assets decreased to 1.5% from 1.6% in 2006. Outlook for Non-interest Expenses and Efficiency CWB’s branch development initiatives will continue with confirmed plans for three new full-service branch locations in Alberta located in Sherwood Park, Leduc and Airdrie. Other plans in progress include two additional full-service branches in BC. There will also be ongoing expansion and upgrades of existing premises. Western Canada’s economic strength will continue to make the recruitment and retention of staff a heightened priority and annual salary increments of approximately 5% are anticipated. A 14% increase in full-time staff along with anticipated salary increases and further enhancements to CWB’s benefit plan are expected to be the primary drivers of non-interest expense growth. Revenue growth should offset the impact of higher costs and CWB expects to maintain its efficiency ratio (teb) at 45% or less. The announced 1% decrease in the GST, to 5%, that will take effect January 1, 2008 is expected to be slightly positive to the Bank’s operating costs. purpose driven | CWB 2007 AnnuAL reporT 31 Income and capital taxes The provision for income taxes (teb) was 31.9%, a decrease from 34.3% in the prior year. The current year’s provision includes a tax benefit recognized upon the affirmation from taxation authorities of certain prior period transactions that reduced income taxes by $3.5 million and the effective tax rate by 260 basis points. The 2006 provision included a similar tax benefit of $2.0 million that reduced the effective tax rate by 190 basis points, but was largely offset by the revaluation of future tax assets from the reduction of future federal and provincial income tax rates. Lower statutory income tax rates resulted in a 60 basis point reduction in the provision for income taxes compared to 2006. The provision before the teb adjustment in fiscal 2007 was 29.2%, compared to 31.7% in the previous 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. The 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. Capital losses of $11.1 million (2006 – $11.1 million) are available to apply against future capital gains and have no expiry date. The tax benefit of these capital losses has not been recognized. Table 5 – Capital Taxes ($ thousands) Capital Tax Rate Capital Allocation British Columbia ................................. Alberta .................................................. Saskatchewan ....................................... Manitoba .............................................. Total Capital Taxes ............................ 1.00% n/a 0.70% 3.00% 27% $ 68% 4% 1% $ Change from 2006 2007 1,747 – 267 395 2,409 $ $ 2006 1,348 – 200 331 1,879 $ $ $ 399 – 67 64 530 % 30% – 34 19 28% Capital taxes for 2007 totalled $2.4 million, an increase of 28% over 2006. Higher capital taxes are mainly attributed to increased capital associated with the retention of earnings and additional subordinated debentures. Outlook The effective tax rate (teb) is anticipated to be approximately 33% in 2008. Provincially levied capital taxes are expected to increase due to the retention of earnings, but management is optimistic that steps taken by the federal government to eliminate capital taxes, including an incentive program aimed at the provinces, will cause provincial tax policy-makers to further reduce or eliminate capital taxes. comprehensive Income With the implementation of new accounting standards relating to financial instruments (see discussion of Changes in Accounting Policies, on page 50 of this MD&A), a new statement of comprehensive income has been added to the consolidated financial statements. Comprehensive income is composed of net income and other comprehensive income (OCI). CWB’s OCI includes unrealized gains and losses on available-for-sale cash and securities and changes in the fair value of derivative instruments designated as cash flow hedges, all net of tax. Table 6 – Comprehensive Income ($ thousands) Net Income ............................................................................................................................................................................. Other Comprehensive Income (Loss) Available-for-sale securities Loss from change in fair value, net of tax of $2,720 ...................................................................................................... Reclassification to other income, net of tax of $144 ..................................................................................................... Balance at end of year ............................................................................................................................................................ Derivatives designated as cash flow hedges Losses from change in fair value, net of tax of $197 ...................................................................................................... Reclassification to net interest income, net of tax of $882 ........................................................................................... Balance at end of year ............................................................................................................................................................ Total Comprehensive Income ............................................................................................................................................ $ cash and securities The level of cash and securities was increased in late fiscal 2007 and is expected to be maintained until uncertainties in financial markets return to more normal levels. Cash resources, securities and securities purchased under resale agreements totalled $1,961 million at October 31, 2007, compared to $1,333 million last year. Although this strategy has a negative effect on net interest margin, it is consistent with the Bank’s conservative risk tolerance and augments its strong position to manage future unexpected events. The Bank has no direct exposure to any troubled non-bank sponsored asset-backed commercial paper, collateralized debit obligations or U.S. subprime lending. 32 purpose driven | CWB 2007 AnnuAL reporT For the year ended October 31, 2007 96,282 $ (5,544) (295) (5,839) (403) 1,805 1,402 (4,437) 91,845 As a result of new accounting standards for financial instruments (see discussion of Changes in Accounting Policies on page 50 of this MD&A) commencing November 1, 2006, all of CWB's cash and securities have been designated as available-for-sale and are recorded on the balance sheet at fair value with changes in value recognized in other comprehensive income. The unrealized loss recorded on the balance sheet at October 31, 2007 was $9.3 million, compared to unrealized and unrecorded losses as at October 31, 2006 of $0.6 million. The cash and securities portfolio is primarily comprised of high quality debt instruments and preferred shares that are not held for trading purposes. Where applicable, all securities are typically held until maturity. Fluctuations in fair value are generally attributed to changes in interest rates and shifts in the interest rate curve. See Table 26 – Valuation of Financial Instruments on page 50 of this MD&A for additional information. Cash and securities are managed in conjunction with CWB’s overall liquidity and additional information is included in the Liquidity Management discussion beginning on page 39 of this MD&A. loans Highlights of 2007 • • • • Excellent loan growth of 28%, marking 18 consecutive years of double-digit loan growth. Growth in personal loans and residential mortgages, including Optimum Mortgage, of 36%. Growth in equipment financing and commercial loans of 19% and 21%, respectively. Growth in construction and real estate loans of 31%. Table 7 – Outstanding Loans by Type and by Provincial Location of Security ($ millions) October 31, 2007 Loans to Individuals British Columbia Alberta Saskatchewan Manitoba Other Composition Total(1) Percentage Residential mortgages(2) ....................... Other loans ............................................. $ Loans to Businesses(3) Commercial ............................................ Construction and real estate(4) ............ Equipment financing............................. Energy ..................................................... Total Loans ................................................ Composition Percentage ......................... $ October 31, 2006 Loans to Individuals Residential mortgages(2) ....................... Other loans ............................................. $ Loans to Businesses(3) Commercial ............................................ Construction and real estate(4) ............ Equipment financing............................. Energy ..................................................... Total Loans ................................................. Composition Percentage .......................... $ 889 $ 79 968 720 157 877 $ 970 596 1,069 688 891 365 322 22 1,671 3,252 2,639 $ 4,129 35% 55% $ 644 $ 58 702 538 $ 111 649 482 538 352 – 1,372 2,074 $ 35% 775 808 708 198 2,489 3,138 54% $ 80 $ 18 98 76 65 39 – 180 278 4% $ 69 $ 17 86 50 54 30 – 134 220 $ 4% 48 $ 4 52 68 57 16 – 141 193 $ 3% 39 $ 4 43 59 62 14 – 135 178 $ 3% 45 $ 1 46 138 31 16 – 185 231 $ 3% 24 $ – 24 189 1 11 – 201 225 $ 1,782 259 2,041 1,848 1,910 1,327 344 5,429 7,470 100% 1,314 190 1,504 1,555 1,463 1,115 198 4,331 5,835 4% 100% (1) This table does not include an allocation of the allowance for credit losses or deferred revenue and premiums. (2) Includes single- and multi-unit residential mortgages and project (interim) mortgages on residential property. (3) Corporate loans (described on page 34) 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 for non-residential property. 24% 3 27 25 25 18 5 73 100% 23% 3 26 27 25 19 3 74 100% Loans, excluding the allowance for credit losses, increased $1,633 million (28%) to total $7,469 million at year-end. All lending sectors achieved very strong double-digit growth, reflecting CWB’s increased market presence, customer appreciation of the Bank’s Think Western® service commitment and robust economic conditions. The mix of loan type shifted slightly during the year (see Figure 1 on page 34) with the level of growth in real estate project loans, residential mortgages, corporate loans, and oil and gas production exceeding that in commercial mortgages, general commercial loans and equipment financing. The geographical distribution of loans (see Figure 3 on page 37) also changed slightly year-over-year, reflecting very robust economic conditions in Alberta. Based on the location of security, Alberta and BC, respectively, represented 55% and 35% of total loans at year-end. purpose driven | CWB 2007 AnnuAL reporT 33 The Bank’s alternative residential mortgage business, Optimum Mortgage, showed excellent results and ended the year with total loans of $375 million, up 64%, to comprise approximately 5% of the total portfolio. This business has produced very strong returns and the overall risk profile remains sound. Although residential real estate activity has moderated somewhat in certain markets, there are still excellent opportunities for continued strong growth in this business. Corporate loans are centrally sourced and administered through CWB’s head office and include participation in select syndications structured and led primarily by the major Canadian banks. At October 31, 2007, this portfolio totalled $477 million (2006 – $280 million). This total excludes participation in various other syndicated facilities that are sourced through relationships developed at CWB branches – these loans are primarily real estate project loans and oil and gas production loans and are included under appropriate classifications in Figure 1: Figure 1 – Loans by Portfolio General Commercial 19% Personal Loans & Mortgages 13% Corporate Loans 6% Oil & Gas Production 5% Equipment Financing 18% Outlook for Loans General Mortgages 19% Real Estate Project Loans 20% CWB’s fiscal 2008 loan growth target of 15% reflects expectations for continued strong performance at more sustainable double- digit levels than have been achieved in the past two fiscal years. This target includes consideration of current industry and market conditions. Overall, economic conditions in Western Canada are expected to remain strong and loan growth will be further supported by CWB’s increased market presence and ongoing branch development. credit Quality Highlights of 2007 • • • Credit quality remained strong. Provision for credit losses was consistent at $10.2 million and represented 16 basis points of average loans. Gross impaired loans remain below the low end of the expected range at 28 basis points of total loans, compared to 18 basis points in 2006. Total allowance for credit losses represented 299% of gross impaired loans at year-end and continues to reflect a low level • of impaired loans despite the reduction from 514% reported in 2006. Impaired Loans As shown in Table 8 on page 35, gross impaired loans totalled $21.1 million and represented 28 basis points of outstanding loans. Fluctuations in the level of impaired loans is expected within normal operation of the loan portfolio and the level remains below historical norms. A significant portion of the year-over-year increase in impaired loans is due to accounts related to forestry, as there have been ongoing difficulties in this industry, mainly attributed to an economic slowdown in the U.S. and a rapid appreciation of the Canadian currency. Total exposure to this industry remains low at approximately 3% of the portfolio. 34 purpose driven | CWB 2007 AnnuAL reporT Table 8 – Change in Gross Impaired Loans ($ thousands) Gross impaired loans, beginning of year ................................................................................ $ Net new formations (reductions) ........................................................................................... Recoveries, net of write-offs (write-offs, net of recoveries)................................................. Total ............................................................................................................................................. $ Gross Impaired Loans as a Percentage of Total Loans ....................................................... 2007 10,403 11,400 (699) 21,104 0.28% $ $ $ Change from 2006 (1,084) 13,285 (1,500) 10,701 0.10% 2006 11,487 (1,885) 801 10,403 0.18% $ A consistent provision for credit losses in dollar terms representing 16 basis points of average loans for 2007, together with the level of impaired loans, has resulted in the allowance for credit losses exceeding gross impaired loans over the past five years. At October 31, 2007, the total allowance for credit losses exceeded gross impaired loans by $41.9 million (2006 – $43.1 million), which represented negative 57 basis points (2006 – negative 75 basis points) of net loans outstanding (see Figure 2), while the general allowance represented 72 basis points of risk-weighted assets (2006 – 80 basis points). The allowance for credit losses as a percentage of gross impaired loans (coverage ratio) decreased to 299% (2006 – 514%). Figure 2 – Net Impaired Loans as a Percentage of Net Loans Outstanding (0.57%) (0.75%) (0.68%) (0.36%) (0.37%) 2007 2006 2005 2004 2003 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 its realization plan. Outlook for Impaired Loans 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. Gross impaired loans represented 28 basis points of total loans at October 31, 2007 and have been exceptionally low over the past three years. The 10-year average for gross impaired loans measured against total loans is 86 basis points, with a high of 169 basis points in 1999 and a low of 18 basis points in 2006. Gross impaired loans are expected to return to more normal levels over time. There is ongoing weakness apparent in lending areas related to the forestry and natural gas markets, which has negatively impacted some borrowers. There has also been moderating residential sales activity in some markets. Exposures to these areas are being closely monitored and management remains confident in the strength and diversity of the loan portfolio. Allowance for Credit Losses Table 9 shows the year-over-year change in the allocation of the allowance for credit losses to specific provisions by category of impaired loans and to the general allowance for credit risk. Table 9 – Allowance for Credit Losses ($ thousands) 2007 Opening Balance Write-Offs, net of Recoveries(1) Provision for Credit Losses Specific Provisions Commercial ........................................................................................... $ Real estate .............................................................................................. Industrial ................................................................................................ Consumer and personal ...................................................................... General Allowance .................................................................................. Total .......................................................................................................... $ (1) Recoveries in 2007 totalled $87 (2006 – $2,075). 3,892 693 585 314 5,484 48,037 53,521 $ $ 9 233 385 72 699 – 699 $ $ (266) 436 2,350 109 2,629 7,571 10,200 $ $ 2007 Ending Balance 3,617 896 2,550 351 7,414 55,608 63,022 purpose driven | CWB 2007 AnnuAL reporT 35 The allowance for credit losses is maintained to absorb both identified and unidentified losses in the loan portfolio and, at October 31, 2007, consisted of $7.4 million in specific allowances and $55.6 million in the general allowance for credit losses. 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 represented 75 basis points of gross outstanding loans (2006 – 83 basis points) and 72 basis points of risk-weighted assets (2006 – 80 basis points). An assessment of the adequacy of the general allowance is conducted quarterly and measured against the five- and 10-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 adequacy of the general allowance. The general allowance is expected to increase in strong economic times and decrease in weaker economic times as allowances are allocated to specific credits. 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 has 12 levels of risk and ratings are updated at least annually for all loans, with the exception of consumer loans and single-unit residential mortgages. Development of additional methodology to support the testing of the adequacy of the general allowance will continue. Outlook for Allowance for Credit Losses Specific allowances will continue to be determined on an account-by-account basis and reviewed quarterly. The general allowance is expected to vary from quarter to quarter to account for portfolio growth, lower levels of specific allowances in strong economic times and higher levels of specific allowances in weaker economic times. Provision for Credit Losses The provision for credit losses represented 16 basis points of average loans in 2007 (see Table 10), a decrease from the five- and ten-year averages of 22 basis points. The decrease in the provision as a percentage of average loans reflects a consistent dollar level of provisioning and robust asset growth supported by a continued strong credit environment. Net new specific provisions (excluding the increase in the general allowance) represented four basis points of average loans in 2007. The credit quality of the portfolio resulted in 75% of the current year’s provision for credit losses being allocated to the general allowance for credit losses. These results compare to the five-year trend when the specific provision for credit losses averaged eight basis points (10-year average – 13 basis points) of average loans. The Bank has a long history of strong credit quality and low loan losses, both of which compare favourably to the Canadian banking industry. External factors that may impact Western Canada and the sectors in which the Bank’s customers operate are continually analyzed. The overall economic outlook for Western Canada remains strong and the loan portfolio is expected to remain of high quality. Table 10 – Provision for Credit Losses Provision for credit losses(1) ................................................ Net new specific provisions (net recovery)(2) ................... General allowance (thousands) .......................................... Coverage ratio(3) .................................................................... $ 2007 0.16% 0.04 55,608 299% $ 2006 0.20% (0.03) 48,037 514% $ 2005 0.24% 0.06 36,462 370% $ 2004 0.25% 0.22 28,816 158% $ 2003 0.25% 0.14 27,558 159% (1) As a percentage of average loans. (2) Portion of the year’s provision for credit losses allocated to specific provisions as a percentage of average loans. (3) Allowance for credit losses as a percentage of gross impaired loans. Outlook for Provision for Credit Losses The provision for credit losses is expected to represent approximately 15 basis points of average loans in 2008. The provision reflects an assessment of expected growth and the current quality of the portfolio as well as the adequacy of the general allowance for credit losses. This assessment will continue to be reviewed on a quarterly basis. 36 purpose driven | CWB 2007 AnnuAL reporT Diversification of Portfolio Total Advances Based on Location of Security (also see Table 7 on page 33) Figure 3 – Geographical Distribution of Loans(1) The following table illustrates the diversification in lending operations by standard industry sectors Table 11 – Total Advances Based on Industry Sector(1) % at October 31 British Columbia 35% Saskatchewan 4% Manitoba 3% Other 3% (1) Includes letters of credit. Alberta 55% Construction .................................... Real estate operations ..................... Consumer loans and residential mortgages(2) .............. Transportation and storage ............ Oil and gas (service) ....................... Oil and gas (production) ............... Manufacturing ................................. Other services .................................. Hotel/motel ..................................... Finance and insurance .................... Logging/forestry ............................. Retail trade ....................................... Wholesale trade ............................... Other ................................................. Total ................................................. 2007 24% 20 14 7 6 4 4 4 4 3 3 2 2 3 100% 2006 20% 21 13 7 3 4 4 3 6 4 4 3 2 6 100% (1) Table is based on the Standard Industrial Classification (SIC) codes. (2) Residential mortgages in this table include only single-family properties. The loan portfolio is focused on areas of demonstrated lending expertise while concentrations measured by geographic area and industry sector are managed within specific tolerance levels. The portfolio is well diversified with a mix of commercial and personal businesses. Equipment financing is sourced within branches or through stand-alone equipment financing centres, while oil and gas production lending is conducted by specialists in the Calgary market. In addition to these areas, real estate divisions are established in each major centre in which the Bank operates. A specialized group manages the alternative residential mortgage business, Optimum Mortgage, with administration based in Edmonton. Outlook for Diversification of Portfolio Portfolio diversification by industry sector and geographic location is expected to remain relatively consistent with continued growth in all sectors. deposits Highlights of 2007 • • • Personal deposits, which include the Bank’s lowest cost sources of funding, increased 32%. Business and government deposits increased 32%. Branch and trust generated deposits were 64% of total deposits, down from 66% a year earlier, reflecting higher liquidity levels. purpose driven | CWB 2007 AnnuAL reporT 37 Table 12 – Deposits ($ thousands) Personal .......................................................................... Business and government ........................................... Deposit taking institutions .......................................... Deposit from CWB Capital Trust(1) ........................... Total Deposits ............................................................... % of Total ....................................................................... Demand $ 15,873 360,615 – – $ 376,488 Notice $ 788,199 1,055,600 – – $ 1,843,799 Term $ 3,909,616 2,012,015 10,000 105,000 $ 6,036,631 2007 Total $ 4,713,688 3,428,230 10,000 105,000 $ 8,256,918 5% 22% 73% 100% Demand Personal .......................................................................... $ 13,765 Business and government ............................................ 377,487 Deposit taking institutions .......................................... – Deposit from CWB Capital Trust(1) ........................... – Total Deposits ............................................................... $ 391,252 % of Total ....................................................................... 6% Notice $ 426,546 835,724 – – $ 1,262,270 Term $ 3,138,917 1,381,605 17,963 105,000 $ 4,643,485 2006 Total $ 3,579,228 2,594,816 17,963 105,000 $ 6,297,007 20% 74% 100% % of Total 57% 42 – 1 100% % of Total 57% 41 – 2 100% (1) The senior deposit note of $105 million issued to Canadian Western Bank Capital Trust (CWB Capital Trust) is reflected as a deposit payable on a fixed date. This senior deposit note bears interest at an annual rate of 6.199% until December 31, 2016 and, thereafter, at the CDOR 180-day Bankers’ Acceptance Rate plus 2.55%. This note is redeemable at the Bank’s option, in whole or in part, on and after December 31, 2011, or earlier in certain specified circumstances, both subject to the approval of OSFI. Each one thousand dollars of WesTS note principal is convertible at any time into 40 non-cumulative redeemable CWB First Preferred Shares Series 1 of the Bank at the option of CWB Capital Trust. CWB Capital Trust will exercise this conversion right in circumstances in which holders of WesTS exercise their holder exchange right. See the Capital Management discussion on page 41 of this MD&A or Note 13 to the consolidated financial statements for more information on WesTS and CWB Capital Trust. Deposits totalled $8,257 million at October 31, 2007, an increase of 31% ($1,960 million). All sources of deposits increased with excellent 32% growth in both personal and business and government deposits. Western Canada’s strong economies resulted in a significant increase in larger commercial and wholesale balances, which can be subject to greater fluctuation (see the Liquidity Management section on page 39 of this MD&A). The significant increase in internally sourced deposits confirms the success of CWB’s ongoing retail initiatives and supports growing demand for the Bank’s Think Western brand of customer service. Table 13 – Deposits by Source (as a percentage of total deposits at October 31) Branches ......................................................................... Deposit brokers ............................................................. Corporate wholesale ..................................................... Deposit from CWB Capital Trust .............................. Total ................................................................................ 2007 64% 33 2 1 100% 2006 66% 30 2 2 100% 2005 67% 32 1 – 100% 2004 2003 57% 42 1 – 100% 54% 44 2 – 100% Deposits are primarily generated from the branch network (including CWT) and a deposit broker network. Increasing deposits generated by the branch network is an ongoing focus as success in this area supports net interest margin and lessens the use of other, often more costly, external funding sources. In July 2007, CWB launched a high-interest savings account branded Summit Savings that has been very well received. The total dollar value of deposits from this source increased $258 million in the fourth quarter to reach $321 million at year-end. This product is expected to be an excellent tool to further expand the Bank’s customer base and increase brand awareness. Deposits raised through deposit brokers also remain a valuable funding source. Although these funds are often more expensive due to very competitive pricing and required commissions, this added cost is countered by a reduced dependence on a more extensive branch network. Corporate wholesale deposits represent larger deposits raised through CWB’s corporate office rather than the branch network. Growth in total branch and trust generated deposits of 27% kept pace with excellent loan growth in the year. The lower cost demand and notice component within branch-raised deposits increased 34% to comprise 27% of total deposits, up from 26% in the previous year. At October 31, 2007, branch and trust generated deposits comprised 64% of total deposits, compared to 66% in the previous year. This decrease reflects additional deposits raised in the fourth quarter through the deposit broker network to increase liquidity levels in response to financial market uncertainties explained in the Liquidity Management section on page 39 of this MD&A. Outlook for Deposits A strategic focus on increasing branch-raised deposits (including CWT) will continue in 2008, with particular emphasis on the demand and notice component, which often has associated transactional fee income. Robust economies in Western Canada and the Bank’s focus on business banking services have contributed to large balances of funds on deposit by commercial customers, which can be subject to greater fluctuation. Growing awareness of the Bank’s high-interest savings account is expected to drive continued growth in this source of funds and should translate to increased customer penetration and new cross-selling opportunities. Increased market presence and an expanded branch network also support objectives to generate additional branch- raised deposits. 38 purpose driven | CWB 2007 AnnuAL reporT other assets and other liabilities At October 31, 2007, other assets totalled $158 million (2006 – $154 million). CDI’s insurance related other assets were $52 million (2006 – $57 million) and consisted primarily of instalment premiums receivable as well as the reinsurers’ share of unpaid claims. Other assets at October 31, 2007 also include goodwill and intangible assets of $6.9 million and $2.7 million, respectively. Other liabilities totalled $283 million at October 31, 2007 (2006 – $254 million). CDI’s insurance related other liabilities were $124 million (2006 – $121 million) and consisted primarily of provisions for unpaid claims and adjustment expenses and unearned premiums. liquidity Management Highlights • • • Strong liquidity position and conservative investment profile. Increased liquidity levels in response to disruptions in financial markets. No direct exposure to troubled asset classes. A schedule outlining the consolidated securities portfolio at October 31, 2007 is provided in Note 4 to the consolidated financial statements. A conservative investment profile is maintained by ensuring all investments, other than preferred shares and those securities categorized as “other marketable securities”, are limited to high • quality debt securities and short-term money market instruments; • specific investment criteria and procedures are in place to manage the securities portfolio; • regular review, monitoring and approval of investment policies by the Asset Liability Committee (ALCO); and quarterly reporting to Board of Directors on the composition of the securities portfolio supported by an annual review and approval • by the Board. The Bank has no direct exposure to any troubled non-bank sponsored asset-backed commercial paper, collateralized debt obligations or U.S. subprime mortgages. The Bank’s liquidity position was enhanced in the fourth quarter in response to increased uncertainties and disruptions in the financial markets, with the following initiatives • increased liquidity reserve levels; • shortened duration of the liquidity portfolio; • enhanced credit profile of the liquidity portfolio; and • strengthened deposit monitoring and market surveillance. Table 14 – Liquid Assets ($ thousands) Cash ............................................................................................................................................... $ Deposits with regulated financial institutions.......................................................................... Cheques and other items in transit ........................................................................................... Total Cash Resources ................................................................................................................. Securities purchased under resale agreements ........................................................................ Government of Canada treasury bills ....................................................................................... Government of Canada, provincial and municipal bonds, $ 2007 6,446 405,122 1,122 412,690 206,925 332,358 $ Change from 2006 (80,458) 54,521 333 (25,604) 2006 86,904 350,601 789 438,294 9,000 213,083 197,925 119,275 term to maturity 1 year or less ................................................................................................ 332,721 222,559 110,162 Government of Canada, provincial and municipal bonds, term to maturity more than 1 year ......................................................................................... 216,735 Preferred shares ............................................................................................................................ 221,878 Other marketable securities ........................................................................................................ 236,256 Total Securities Purchased Under Resale Agreements and Marketable Securities ......... 1,546,873 Total Liquid Assets ...................................................................................................................... $ 1,959,563 Total Assets .................................................................................................................................. $ 9,525,040 Liquid Assets as a Percentage of Total Assets ......................................................................... 21% Total Deposit Liabilities ............................................................................................................. $ 8,256,918 Liquid Assets as a Percentage of Total Deposit Liabilities ................................................... 24% 67,576 191,581 188,044 891,843 $ 1,330,137 $ 7,268,360 18% $6,297,007 21% 149,159 30,297 48,212 655,030 $ 629,426 $ 2,256,680 3% $ 1,959,911 3% As shown in Table 14, liquid assets comprised of cash, interbank deposits, securities purchased under resale agreements and marketable securities totalled $1,960 million at October 31, 2007, an increase of $629 million compared to a year earlier. The increase reflects changes in liquidity resulting from growth in total deposits, shifts in the deposit portfolio mix, continued strong anticipated loan fundings and additional liquidity due to increased uncertainties in financial markets. Liquid assets represented 21% (2006 – 18%) of total assets and 24% (2006 – 21%) of total deposit liabilities at year-end. purpose driven | CWB 2007 AnnuAL reporT 39 Highlights of the composition of liquid assets at October 31, 2007 are as follows: • maturities within one year increased to 69% (2006 – 66%) of liquid assets, or $1,354 million (2006 – $879 million); • Government of Canada, provincial and municipal debt securities increased to 45% (2006 – 38%) of liquid assets; • deposits with regulated financial institutions, including Bankers' Acceptances, decreased to 21% (2006 – 26%) of liquid assets; • preferred shares decreased to 11% (2006 – 14%) of liquid assets; and • other marketable securities decreased to 12% of liquid assets (2006 – 14%). Included in liquid assets are securities purchased under resale agreements. These are short-term advances, typically no more than a few days in duration, to securities dealers and require the dealer to repurchase the securities, which are comprised of treasury bills or other high quality liquid securities. Short-term uncommitted facilities have been arranged with a number of financial institutions. The government insured/guaranteed mortgage portfolios held by the Bank also represent a potential source of liquidity. CWB may also enter into reverse repurchase agreements as an additional source of short-term liquidity. These are short-term borrowings from securities dealers and require repurchase of the securities, typically in a few days. The shifting of deposit mix to increased levels of branch-generated deposits has contributed to an increased volume of larger, commercial client deposits. Although these deposits may be subject to more volatility, to date this funding source has been reliable and stable. The primary source of new funding is the issuance of deposit instruments. A summary of outstanding deposits by contractual maturity date is presented in Tables 15 and 16. Table 15 – Deposit Maturities Within One Year ($ millions) October 31, 2007 Demand deposits ..................................................................................... $ Notice deposits ......................................................................................... Deposits payable on a fixed date ............................................................ Total ........................................................................................................... $ Within 1 Month 376 1,844 1,440 3,660 1 to 3 Months – $ – 687 687 $ $ 3 Months to 1 Year – – 1,580 1,580 $ $ Cumulative Within 1 Year 376 1,844 3,707 5,927 $ October 31, 2006 Total........................................................................... $ 2,899 $ 592 $ 1,210 $ 4,701 Table 16 – Total Deposit Maturities ($ millions) October 31, 2007 Demand deposits ....................................... Notice deposits ........................................... Deposits payable on a fixed date .............. Note to CWB Capital Trust ..................... Total ............................................................. $ $ Within 1 Year 376 $ 1,844 3,707 – 5,927 $ 1 to 2 Years – $ – 1,012 – 1,012 $ 2 to 3 Years 3 to 4 Years 4 to 5 Years More than 5 Years – $ – 546 – 546 $ – $ – 282 – 282 $ – $ – 385 – 385 $ – $ – – 105 105 $ Total 376 1,844 5,932 105 8,257 October 31, 2006 Total............................. $ 4,701 $ 702 $ 441 $ 197 $ 151 $ 105 $ 6,297 A breakdown of deposits by source is provided in Table 13 on page 38. Target limits by source have been established as part of the overall liquidity policy and are monitored to ensure an acceptable level of funding diversification is maintained. The Bank continues to aggressively pursue deposits through its branch network as the core funding source. At the same time, the total dollar value of deposit broker-generated deposits could still increase, particularly in times of market uncertainty when higher levels of liquidity are maintained. CWT raises deposits through notice accounts (comprised primarily of cash balances held in self-directed accounts), corporate trust deposits and the Bank’s branch network, in addition to deposit broker-generated deposits. At October 31, 2007, CWT’s notice account balances totalled $368 million (2006 – $312 million). 40 purpose driven | CWB 2007 AnnuAL reporT In addition to deposit liabilities, CWB has subordinated debentures outstanding that are presented in the table below. Table 17 – Subordinated Debentures Outstanding ($ thousands) Interest Rate 5.660%(1) 5.960%(1) 5.550%(2) 5.426%(3) 5.070%(4) 5.571%(5) 6.850%(6) Total Maturity Date July 7, 2013 October 24, 2013 November 19, 2014 November 21, 2015 March 21, 2017 March 21, 2022 June 30, 2012 Earliest Date Redeemable by CWB at Par July 8, 2008 October 25, 2008 November 20, 2009 November 22, 2010 March 22, 2012 March 22, 2017 June 30, 2007 2007 30,000 35,000 60,000 70,000 120,000 75,000 – $ 390,000 2006 30,000 35,000 60,000 70,000 – – 3,126 $ 198,126 (1) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 175 basis points. (2) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 160 basis points. (3) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 180 basis points. (4) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 155 basis points. Of the $125,000 debentures issued, $5,000 were acquired by Canadian Direct Insurance Incorporated, a wholly owned subsidiary, and have been eliminated on consolidation. (5) These conventional debentures have a 15-year term with a fixed interest rate for the first ten years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 180 basis points. (6) This conventional debenture had a 10-year term with a fixed interest rate for the first five years and was redeemed by the Bank at face value on June 30, 2007. Outlook for Liquidity Management The Bank expects the increased uncertainties and resulting volatility in financial markets will continue into fiscal 2008. In response, a conservative risk profile will be maintained, supported by liquidity reserves above historic levels. contractual obligations In addition to the obligations related to deposits and subordinated debentures discussed in the Deposit and Liquidity Management sections on pages 37 and 39 of this MD&A, as well as Notes 12, 16 and 26 of the consolidated financial statements, the following contractual obligations are outstanding at October 31, 2007: Table 18 – Contractual Obligations ($ thousands) Lease commitments .............................................................. Purchase obligations for capital expenditures .................. capital Management Highlights of 2007 Within 1 Year 6,883 969 7,852 $ $ 1 to 3 Years 13,992 – 13,992 $ $ 4 to 5 Years 13,045 – 13,045 $ $ $ More than 5 Years 32,723 – 32,723 $ Total 66,643 969 67,612 $ $ • Maintained strong Total and Tier 1 capital adequacy ratios of 13.7% and 9.1%, respectively. Increased the quarterly cash dividend 14% in December 2006 to $0.08 per common share and a further 13% in July 2007 to • $0.09 per common share. • • Paid a stock dividend in January 2007 that effectively achieved a two-for-one split of the Bank’s common shares. Issued $200 million of conventional subordinated debentures in March 2007. Subsequent Highlights • In December 2007, the Bank declared a quarterly cash dividend of $0.10 per common share, representing an 11% increase over the previous quarterly cash dividend and a 25% increase over the quarterly cash dividend declared one year earlier. • Basel II capital management framework effective for fiscal 2008. purpose driven | CWB 2007 AnnuAL reporT 41 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 an example, a loan that is fully insured by the Canada Mortgage and Housing Corporation (CMHC) 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 Canadian financial institutions. Off-balance sheet assets, such as the notional amount of derivatives and some credit commitments, are included in the calculation of risk-weighted assets and both the credit risk equivalent and the risk- weight calculations are prescribed by OSFI. As Canadian Direct is subject to separate OSFI capital requirements specific to insurance companies, the Bank’s investment in CDI is deducted from total capital and CDI’s assets are excluded from the calculation of risk- weighted assets. Current regulatory guidelines require banks to maintain a minimum ratio of capital to risk-weighted assets and off-balance sheet items of 8%, of which 4% must be core capital (Tier 1) and the remainder supplementary capital (Tier 2). However, OSFI has established that Canadian banks need to maintain a minimum total capital adequacy ratio of 10% with a Tier 1 ratio of not less than 7%. CWB’s Tier 1 capital is comprised of common shareholders’ equity and innovative capital (to a regulatory maximum of 15% of net Tier 1 capital), while Tier 2 capital includes subordinated debentures (to the regulatory maximum amount of 50% of net Tier 1 capital), the inclusion of the general allowance for credit losses (to the regulatory maximum of 87.5 basis points of risk-weighted assets) and any remaining innovative capital. Capital funds are managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and markets. The goal is to maintain adequate regulatory capital to be considered well capitalized, protect customer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all while providing a satisfactory return for shareholders. The Bank has a share incentive plan that is provided 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 18 to the consolidated financial statements details the number of shares under options outstanding, the weighted average exercise price and the amounts exercisable at year-end. Table 19 – Capital Structure and Regulatory Ratios at Year-End ($ thousands) Tier 1 Capital Retained earnings ................................................................................................................... Accumulated other comprehensive income(1) ................................................................... Capital stock ............................................................................................................................ Contributed surplus ............................................................................................................... Innovative capital instrument(2) ........................................................................................... Less goodwill of trust subsidiary .......................................................................................... Total ............................................................................................................................................. Tier 2 Capital General allowance for credit losses (Tier A)(3) .................................................................. Subordinated debentures (Tier B)(4) .................................................................................. Innovative capital instrument(2) ........................................................................................... Total ............................................................................................................................................. Less investment in insurance subsidiary ............................................................................. Total Regulatory Capital .......................................................................................................... Regulatory Capital to Risk-weighted Assets Tier 1 capital ........................................................................................................................... Tier 2 capital ........................................................................................................................... Less investment in insurance subsidiary ............................................................................. Total Regulatory Capital Adequacy Ratio ............................................................................ Assets to Regulatory Capital Multiple(5) ................................................................................ 2007 Change from 2006 2006 $ $ 372,739 (1,741) 219,004 9,681 105,000 (3,679) 701,004 $ 297,841 – 215,349 6,340 91,031 (3,679) 606,882 74,898 (1,741) 3,655 3,341 13,969 – 94,122 55,627 350,502 – 406,129 (47,864) $ 1,059,269 48,037 198,126 13,969 260,132 (40,253) $ 826,761 7,590 152,376 (13,969) 145,997 (7,611) $ 232,508 9.1% 5.3% (0.7)% 13.7% 9.1 10.1% 4.3% (0.7)% 13.7% 8.8 (1.0)% 1.0% 0.0% 0.0% 0.3 (1) Effective November 1, 2007, shareholders’ equity includes accumulated other comprehensive income, which is described in the Changes in Accounting Policies discussion on page 50 of this MD&A. Accumulated other comprehensive income related to unrealized losses on available-for-sale equity securities reduces Tier 1 capital. (2) Innovative capital may be included in Tier 1 capital to a maximum of 15% of net Tier 1 capital. Any excess innovative capital outstanding is included in Tier 2B capital. (3) Banks are allowed to include their general allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2A capital. The Bank has been granted an inclusion rate to a maximum of 0.875% of risk-weighted assets. At October 31, 2007, the Bank’s general allowance represented 0.72% (2006 – 0.80%) of risk-weighted assets. (4) Tier 2B capital may be included in Tier 2 capital to a maximum of 50% of net Tier 1 capital. Any excess Tier 2B capital is included in capital as net Tier 1 capital increases. At October 31, 2007, $44,498 (2006 – $nil) of subordinated debentures exceed the Tier 2B threshold and are available for inclusion in the future. (5) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital. 42 purpose driven | CWB 2007 AnnuAL reporT  Table 20 – Risk-weighted Assets ($ thousands) Balance Sheet Assets Cash resources .................................................................................. Securities............................................................................................ Securities purchased under repurchase agreements ................... Loans .................................................................................................. Other assets ....................................................................................... Credit Instruments(1) (contract amounts) Guarantees and standby letters of credit(2) ................................... Commitments to extend credit(3) ................................................... Derivative Financial Instruments(4) (notional amounts) Interest rate contracts ...................................................................... Foreign exchange contracts ............................................................ Equity contracts ................................................................................ Total Risk-weighted Assets ................................................................. Balance $ 412,690 1,341,626 206,925 7,405,580 158,219 $ 9,525,040 $ 204,431 216,300 $ 420,731 $ 482,000 3,405 6,000 $ 491,405 2007 Risk- weighted $ 80,135 403,654 – 6,892,689 139,730 7,516,208 2006 Risk- weighted Balance $ 438,294 885,693 9,000 5,781,837 153,536 $ 7,268,360 $ 79,103 345,029 – 5,305,763 125,516 5,855,411 99,068 108,150 207,218 $ 149,222 174,482 $ 323,704 76,316 87,241 163,557 391 14 199 604 $ 7,724,030 $ 618,500 19,084 9,570 $ 647,154 407 43 272 722 $ 6,019,690 (1) See Note 19 to the consolidated financial statements for further details. (2) Includes guarantee for outstanding balance on business credit cards. See Note 19 to the consolidated financial statements for further details. (3) Greater than one year only. (4) See Note 10 to the consolidated financial statements for further details. At October 31, 2007, the total capital adequacy ratio was 13.7% (2006 – 13.7%), of which 9.1% (2006 – 10.1%) was Tier 1 capital. Total regulatory capital increased $233 million over 2006, primarily from the combination of • the issue of $200 million of subordinated debentures (of which $156 million qualified as Tier 2B capital at October 31, 2007); • earnings, net of dividends, of $75 million; • an increase in the general allowance for credit losses of $8 million; • an increase of $5 million related to the expensing of stock-based compensation; partially offset by • an $8 million increase in the deduction for CWB’s insurance subsidiary investment, calculated on the equity basis. In December 2006, the quarterly dividend was increased to $0.08 per common share, reflecting an increase of 14%. The quarterly dividend was increased a further 13% to $0.09 per share in July 2007. Capital Management – Basel II The revised international framework for capital measurement and standards known as Basel II is effective for the Bank at the beginning of fiscal 2008. Basel II introduces some significant changes to the risk-weighting of assets and calculation of regulatory capital. Significant changes for the Bank under Basel II include • a shift into lower risk-weight categories for residential mortgages and loans to small-to-medium sized enterprises; and • a new capital requirement related to operational risk. Basel II is not expected to have a significant impact on the overall required level of regulatory capital. New procedures and system enhancements have been developed to conform to the new framework, including the formalization of CWB’s internal capital adequacy assessment process (ICAAP). Pro forma calculations of regulatory capital adequacy ratios under Basel II (BCAR) compared to the current calculation (CAR) at October 31, 2007 are included in Table 21. Table 21 – Regulatory Capital Ratios under Basel II ($ thousands) BCAR Risk-weighted assets .................................................................................................................... $ 7,495,920 Tier 1 capital ................................................................................................................................. 697,350 Total capital .................................................................................................................................. 1,057,042 Tier 1 capital ratio ........................................................................................................................ Total capital ratio ......................................................................................................................... 9.3% 14.1% CAR $ 7,724,030 701,004 1,059,269 9.1% 13.7% Change (3)% (1) – 20 bp(1) 40 (1) bp – basis points. purpose driven | CWB 2007 AnnuAL reporT 43 Outlook for Capital Management CWB expects to remain well capitalized in 2008, with organic earnings growth supporting the anticipated achievement of all the Bank’s 2008 performance targets. Increased return on equity will be achieved through continued execution of CWB’s key business strategies, including the maintenance of a strong and efficient capital structure. To the extent possible within the Bank’s strategic objectives, ongoing growth will be supported with non-dilutive sources of capital. financial Instruments and other Instruments As a financial institution, most of CWB’s balance sheet is comprised of financial instruments and the majority of net income results from gains, losses, income and expenses related to the same. Financial instrument assets include cash resources, securities, securities purchased under resale agreements, loans and derivative financial instruments. Financial instrument liabilities include deposits, securities purchased under reverse resale agreements, derivative financial instruments and subordinated debentures. The use of financial instruments exposes the Bank to credit, liquidity and market risk. A discussion of how these and other risks are managed can be found in the Risk Management section on pages 51 to 56 of this MD&A. Further information on how the fair value of financial instruments is determined is included in the Financial Instruments Measured at Fair Value discussion in the Critical Accounting Estimates section of this MD&A on page 49. Income and expenses are classified as to source, either securities or loans for income, and deposits or borrower funds for expense. Gains on the sale of securities, net, are shown separately in other income. Derivative Financial Instruments More detailed information on the nature of derivative financial instruments is shown in Note 10 to CWB’s consolidated financial statements. The notional amounts of derivative financial instruments are not reflected on the consolidated balance sheets. Table 22 – Derivative Financial Instruments ($ thousands) Notional Amounts 2007 2006 Interest rate contracts(1) ...................................................................................................................................................... $ Equity contracts(2) ................................................................................................................................................................ Foreign exchange contracts(3) .............................................................................................................................. Total ............................................................................................................................................................................ $ 482,000 6,000 3,405 491,405 $ 618,500 9,570 19,084 $ 647,154 (1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between January 2008 and March 2012. The total gross positive replacement cost of interest rate contracts was $946 (2006 – $98). This market value represents an unrealized gain, or the approximate payment the Bank would receive if these contracts were unwound and settled at that date. (2) 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 February 2008 and March 2011. The total gross positive replacement cost was $515 (2006 – $593). (3) 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, 2007, there were $3,408 U.S. (2006 – $17,030 U.S.) of forward foreign exchange contracts outstanding that mature between November 2007 and February 2008. The active use of interest rate contracts continues to be an integral component in managing the Bank’s short-term gap position. Derivative financial instruments are entered into only for the Bank’s own account and CWB 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, including an assessment of the credit worthiness of the counterparty. Policies regarding the use of derivative 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. acquisitions There were no acquisitions in 2006 or 2007. off-Balance sheet arrangements In the normal course of business, CWB is involved in off-balance sheet arrangements, which are primarily guarantees. Guarantees Significant guarantees provided by CWB in the ordinary course of business include guarantees and standby letters of credit provided to third parties and commitments to extend credit to customers. CWB also issues business credit cards through an agreement with a third party card issuer and indemnifies the card issuer from loss if there is a default on the issuer’s collection of the business credit card balances. More detailed information on guarantees is available in Note 19 to CWB’s consolidated financial statements for 2007. 44 purpose driven | CWB 2007 AnnuAL reporT opeRAtIng segMent reVIeW CWB operates in two business segments: 1) banking and trust, and 2) insurance. Segmented information is also provided in Note 29 of the audited consolidated financial statements. Banking and trust Highlights of 2007 • • • • • • • • Realized net income of $88.5 million, an increase of 36% ($23.4 million). Achieved organic loan growth of 28%, marking the 18th consecutive year of double-digit growth. Maintained strong and consistent credit quality. Grew branch and trust-generated deposits 27%, with the lower cost demand and notice component up 34%. Opened branches in Abbotsford, BC and Medicine Hat, Alberta and continued with further upgrades to existing premises. Established a new benchmark efficiency ratio (teb) of 44.8%, an improvement of 140 basis points. Surpassed $4.0 billion in trust assets under administration. Celebrated the 20th anniversary of CWT. The operations of the banking and trust segment include commercial and retail banking services, personal and corporate trust services provided through the Bank’s wholly owned subsidiaries, CWT and Valiant, and third party mutual funds offered through CWF, another wholly owned subsidiary. With a focus on mid-market commercial banking, real estate financing, equipment financing and energy lending, CWB’s proven strategy is based on building strong customer relationships and providing value-added services to businesses across Western Canada. The Bank also delivers a wide variety of retail financial products and services, including personal loans and mortgages, deposit accounts, investment products and other banking services. Customer accessibility is provided though a network of 35 client-focused branches in select locations across the four western provinces. Internet and telephone banking services are also offered. CWT provides a varied range of products and services, including self-directed RRSPs and RRIFs, and corporate and group trust services to independent financial advisors, corporations and individuals. Valiant is a non-deposit taking specialty trust company that offers stock transfer and corporate trustee services to public companies and income trusts. Table 23 – Banking and Trust Highlights(1) ($ thousands) 2007 Net interest income (teb) .......................................................................................................... $ 205,867 47,506 Other income ................................................................................................................................ 253,373 Total revenues (teb) .................................................................................................................... 10,200 Provision for credit losses ........................................................................................................... 113,456 Non-interest expenses ................................................................................................................. 41,208 Provision for income taxes (teb) ............................................................................................... 88,509 Net income ................................................................................................................................... $ 2006 $ 165,249 37,791 203,040 10,200 93,711 34,062 65,067 $ Change from 2006 25% 26 25 0 21 21 36% Efficiency ratio (teb) ................................................................................................................... Efficiency ratio ............................................................................................................................. Net interest margin (teb) ........................................................................................................... Net interest margin ..................................................................................................................... Average loans ($ millions)(3) ...................................................................................................... $ Average assets ($ millions)(3) ..................................................................................................... 44.8% 45.7 2.57 2.51 6,570 8,014 $ 46.2% 47.0 2.63 2.57 5,142 6,287 (140)bp(2) (130) (6) (6) 28% 27 (1) See page 26 for a discussion of teb and non-GAAP measures. (2) bp – basis points. (3) Loans and assets are disclosed on an average daily balance basis as this measure is most relevant to a financial institution and is the measure reviewed by management. Banking and trust net income was a record $88.5 million, up 36% ($23.4 million) on 25% ($50.3 million) growth in total revenues (teb), partially offset by a 21% increase ($19.7 million) in non-interest expenses. Total revenues (teb) reflected excellent 28% loan growth and a 26% ($9.7 million) increase in other income. Growth in other income was driven by increases in trust services, credit related and retail services fee income of 38% ($4.1 million), 19% ($3.6 million) and 15% ($1 million), respectively. Income from foreign exchange and the sale of securities was up $0.6 million and $0.3 million, respectively. Higher non-interest expenses mainly reflect increased staff complement, stock-based compensation charges, annual salary increments, and premises and other expenses to manage business growth. Inflationary cost pressures due to Western Canada’s robust economies were also a factor contributing to higher non-interest expenses in the year. Included in non-interest expense was a $1.5 million interest adjustment for staff loans and deposits, $1.3 million of additional non-cash, non-tax deductible stock-based compensation expense (total expense of $4.5 million, compared to $3.2 million in 2006) and a $0.9 million expense attributed to a tax benefit recognized in the fourth quarter. Total revenue growth continued to exceed growth in non-interest expenses as evidenced by a 140 basis point improvement in this segment’s efficiency ratio (teb), to 44.8%. purpose driven | CWB 2007 AnnuAL reporT 45 Net interest margin (teb) in the year was 2.57%, down six basis points mainly due to higher debenture interest costs attributed to $200 million of subordinated debentures issued in March 2007 and changes in the deposit mix. Growth in total branch and trust deposits, which support net interest margin and reduce the need for external funding sources, kept pace with loan growth increasing 27%. The lower demand and notice component of branch and trust deposits was up 34%, reflecting the ongoing success of CWB’s retail strategy, including the benefit of a newly launched high interest savings account offered in July 2007. Fiscal 2007 earnings reflect a $3.5 million reduction in income tax expense and associated before tax non-interest expense of $0.9 million, which together increased net income by approximately $2.9 million. For comparison purposes, fiscal 2006 income tax expense benefited from the resolution of a tax filing position taken in a prior year that increased net income by $2.0 million, partially offset by $1.2 million additional tax expense related to the revaluation of future tax assets. Additions to the branch network in 2007 included a full-service branch in Abbotsford, BC and a specialized commercial services branch in Medicine Hat, Alberta. Further upgrades and expansions to existing premises were also completed. Combined assets under administration in CWT and Valiant grew 28% ($939 million) in the year, to total $4,284 million at October 31, 2007. Assets under administration are not reflected in the consolidated balance sheets (see Note 24 to the consolidated financial statements). A portion of assets under administration are held in investment accounts, including self-directed RRSP and RRIF accounts, which numbered 37,473 (2006 – 31,716), an increase of 18% from one year ago. Figure 4 – Number of Investment Accounts 2007 2006 2005 2004 2003 37,473 31,716 24,943 18,803 16,823 Outlook for Banking and Trust This segment will continue to be the primary driver of the Bank’s earnings and the outlook is for continued strong performance. Western Canada’s economic strength, coupled with CWB’s expending market presence, should support a continued flow of high quality lending opportunities, although loan growth is expected to moderate to more sustainable double-digit levels. Expectations are supported by loan growth targeted at 15%, while ongoing success in expanding internal deposit sources and reduced uncertainty in financial markets will strengthen net interest margin. Credit quality should remain strong and reflect the Bank’s ongoing focus on high quality assets and disciplined credit underwriting. Continued strong growth in credit and retail services fee income is also expected. Both CWT and Valiant have established aggressive performance targets and will continue to make solid contributions toward this segment’s success. CWT is working on further enhancements and expansion of its trust services platform, while Valiant’s plans for fiscal 2008 include opening an office in Toronto. Insurance Highlights of 2007 • • • Net income of $7.8 million, representing a 12% increase. Positive allocation from the Alberta auto insurance risk sharing pools of $1.9 million before tax. Claims loss ratio of 66% and a combined ratio of 93%. Canadian Direct provides auto and home insurance products to more than 164,000 policyholders throughout BC and Alberta. Policy distribution channels currently include two dedicated call centres, the Internet and a pilot project that provides customers the option to purchase Canadian Direct’s BC auto insurance product through a select broker network. Canadian Direct continues to enhance its distribution capabilities with the most recent advance including the electronic delivery of auto insurance policies over the Internet. Canadian Direct’s mission is to provide customers with attractively priced products and a high level of customer service – “better insurance for less money”. The core strategy uses sophisticated underwriting selection criteria to offer more competitively priced insurance to better risk customers. The “Canadian Direct Insurance” brand is marketed through several media channels, including television, radio and newspaper. It has established a very high level of awareness in the BC market and is gaining a growing awareness in Alberta as well. All claims are administered by Canadian Direct’s head office in BC using imaging technology and effective workflow management to maintain a “paperless office” environment. This has enabled CDI to keep its claim expense ratio low without compromising customer satisfaction. CDI currently retains a high percentage of its business on renewal, a measure that helps confirm its success in providing customers with a superior level of service at competitive prices. 46 purpose driven | CWB 2007 AnnuAL reporT Table 24 – Insurance Highlights(1) ($ thousands) Net interest income (teb) .......................................................................................................... $ Other income Net earned premiums .............................................................................................................. Commissions and processing fees ......................................................................................... Net claims and adjustment expenses ..................................................................................... Policy acquisition costs .......................................................................................................... Gains on sale of securities ........................................................................................................... Total revenues (teb) .................................................................................................................... Non–interest expenses ................................................................................................................ Provision for income taxes (teb) ............................................................................................... Net income ................................................................................................................................... $ 2007 Change from 2006 2006 4,792 $ 3,435 40% 94,914 2,751 (62,391) (20,011) 15,263 52 20,107 8,478 3,856 7,773 81,674 4,826 (52,962) (18,334) 15,204 91 18,730 8,338 3,452 6,940 $ 164,263 Policies outstanding at October 31 ........................................................................................... Gross written premiums .............................................................................................................. $ 104,829 Claims loss ratio(2) ........................................................................................................................ 66% Expense ratio(4) ............................................................................................................................. 27 Combined ratio(5) ......................................................................................................................... 93 Alberta automobile insurance Risk Sharing Pools impact on net income before tax ........ $ 1,876 Average total assets(6) .................................................................................................................. 163,858 158,965 $ 100,227 65% 27 92 310 147,389 $ 16 (43) 18 9 – (43) 7 2 12 12% 3% 5 100 bp(3) – 100 505% 11 (1) See page 26 for a discussion of teb and non-GAAP measures. (2) Net claims and adjustment expenses as a percentage of net earned premiums. (3) bp – basis points. (4) Policy acquisition costs and non-interest expenses net of commissions and processing fees as a percentage of net earned premiums. (5) Sum of the claims loss and expense ratios. (6) Average total assets are disclosed on an average daily balance basis as this measure is most relevant to a financial institution and is the measure reviewed by management. Canadian Direct generated net income of $7.8 million, an increase of 12% over 2006. Results reflect 16% growth in net earned premiums due to continued policy growth and good customer retention, as well as the elimination of quota share reinsurance from 10% in November 2006. Unusually high frequency and severity of home claims due to severe BC storm activity in the first quarter largely offset the benefits from growth in net earned premiums, a $1.6 million before tax positive difference in Canadian Direct’s share of the Alberta auto insurance risk sharing pools (the Pools) and a $1.4 million increase in net interest income. The claims loss ratio increased 100 basis points over last year to 66%. The expense ratio of 27% remained unchanged from the previous year due to increased efficiencies and good cost control. Policies outstanding grew by 3%, while the overall policy retention rate improved 100 basis points to 88%. Very good results in Alberta continued to help mitigate ongoing regulatory and competitive challenges experienced in the BC auto product line. The Pools’ results in both 2006 and 2007 reflect a favourable adjustment to unpaid claims reserves based on revised estimated loss assumptions derived by the Pools’ consulting actuary. Outlook for Insurance Operations The outlook for 2008 reflects expectations for modest growth in both policies outstanding and premiums written, while costs are controlled and kept in line with revenue growth. Canadian Direct continues to manage ongoing challenges brought about by the pricing strategies of the Insurance Corporation of British Columbia and plans for the automobile line of business in that province will concentrate on customer retention while considering new opportunities for customer acquisition. In Alberta, the primary challenges will be the regulatory environment and the income volatility added by the Pools’ unpredictable results. There is an ongoing legal challenge in Alberta regarding the amount a claimant may receive in respect of a minor injury suffered in an automobile accident. In 2004, the Government of Alberta legislated a cap on these damages. The Alberta Civil Trial Lawyers Association is challenging this cap under the Canadian Charter of Rights and Freedoms. The outcome of the challenge is uncertain but it could be significant to CDI and other companies offering automobile insurance in Alberta. The 2008 claims loss ratio is targeted at 66%, which is consistent with 2007 claims experience. However, the loss ratio can be negatively impacted by seasonal storm activity, particularly in the winter months. The target for the combined ratio is 93%. Canadian Direct will continue to enhance its Internet-based technology platform, which will facilitate new growth opportunities, including the ability to sell its home product online. purpose driven | CWB 2007 AnnuAL reporT 47 suMMarY of QuarterlY results and fourth Quarter Quarterly results The financial results for each of the last eight quarters are summarized in the following table. In general, CWB’s results reflect a consistent growth pattern although the second quarter contains three fewer revenue earning days. Canadian Direct’s business also exposes the Bank’s quarterly financial results to some fluctuations. CDI is in the property and casualty insurance business, providing personal auto and home insurance to customers in BC and Alberta. Canadian Direct’s operating results, which are primarily reflected in other income (refer to Operating Segment Review – Insurance on page 46), are subject to seasonal weather conditions, including higher claims experience during winter driving months, cyclical patterns of the industry and other unpredictable developments including natural catastrophes. Canadian Direct’s mandatory participation in the Pools can also result in unpredictable quarterly fluctuations. Table 25 – Quarterly Financial Highlights(1) ($ thousands, except per share amounts) 2007 Net interest income (teb) ........... Less teb adjustment ...................... Net interest income per financial statements ........... Other income ................................ Total revenues (teb) .................... Total revenues ............................... Net income .................................... Earnings per common share Q4 Q1 $ 55,995 $ 54,888 $ 50,567 $ 49,209 $ 45,970 $ 42,942 $ 40,058 $ 39,714 872 1,496 1,164 1,327 1,423 1,194 1,039 Q4 973 Q3 Q2 Q2 Q1 2006 Q3 54,499 18,364 74,359 72,863 29,572 53,465 15,777 70,665 69,242 24,033 49,240 16,237 66,804 65,477 22,219 48,045 12,443 61,652 60,488 20,458 44,776 13,595 59,565 58,371 21,209 41,903 13,942 56,884 55,845 17,693 39,085 12,953 53,011 52,038 16,667 38,842 12,596 52,310 51,438 16,438 Basic ............................................ Diluted ........................................ $ 0.47 $ 0.46 $ 0.39 0.37 0.36 $ 0.35 0.33 0.32 $ 0.34 $ 0.33 0.29 $ 0.28 $ 0.27 0.26 0.27 0.26 Return on common shareholders’ equity (ROE) .... 20.1% 17.1% 16.8% 15.4% 16.5% 14.2% 14.3% 14.0% Return on average total assets (ROA) .................... Efficiency ratio (teb) .................... Efficiency ratio .............................. Net interest margin (teb) ............ Net interest margin ....................... Provision for credit losses as a percentage of average loans ......................... 1.29 44.1 45.0 2.43 2.37 1.14 43.6 44.5 2.59 2.53 1.17 45.1 46.1 2.65 2.58 1.10 45.7 46.6 2.65 2.58 1.20 45.0 46.0 2.59 2.53 1.06 45.6 46.4 2.58 2.52 1.10 47.1 47.9 2.64 2.57 1.11 46.5 47.3 2.68 2.63 0.14 0.15 0.16 0.17 0.18 0.19 0.20 0.22 (1) See page 26 for a discussion of teb and non-GAAP measures. fourth Quarter of 2007 CWB achieved record earnings and total revenues, marking its 78th consecutive profitable quarter. Net income of $29.6 million represented a 39% ($8.4 million) increase over the same quarter last year, driven by continued strong operating performance, strong loan growth of 4% in the quarter and 28% over the past year, and a lower effective tax rate. Diluted earnings per share were up 39% to $0.46 ($0.47 basic), from $0.33 ($0.34 basic) in the same quarter last year. Record results reflect a 40% increase in quarterly earnings from core banking and trust operations, to $26.9 million, and a $2.6 million contribution from Canadian Direct. Fourth quarter return on equity was 20.1%, up 360 basis points from 16.5% a year earlier. Return on equity benefited from record operating performance and a more efficient regulatory capital structure. Fourth quarter return on assets was 1.29%, compared to 1.20% in the same time last year. Fourth quarter net interest income (teb) was $56.0 million, representing an increase of 22% ($10.0 million). Higher net interest income was driven by 28% organic loan growth, partially offset by a 16 basis point decline in net interest margin (teb) to 2.43%. Compared to the fourth quarter last year, lower margin reflects higher debenture interest costs from subordinated debentures issued in March 2007 as well as increased funding costs and higher liquidity, both largely related to disrupted financial markets. Net interest margin was further reduced by a change in accounting estimate related to the amortization of premiums on certain securities. Other income of $18.4 million was up 35% ($4.8 million) over the same quarter last year, mainly reflecting a 106% ($2.9 million) increase in trust services fee income. Quarterly growth in trust revenues reflects income related to unusually large trust transactions. Net insurance revenues were up 18% ($0.8 million) over the same quarter last year while foreign exchange gains were $0.5 million higher. Quarterly contributions from credit related and retail services fee income increased 7% ($0.3 million) and 12% ($0.2 million), respectively. Credit quality remained strong with a consistent dollar charge for provisions for credit losses that measured 14 basis points of average loans, compared to 18 basis points one year ago, with the decrease reflecting excellent loan growth. Non-interest expenses of $32.8 million were up 22% ($5.9 million) over the same quarter last year, mainly driven by an increased staff complement, stock-based compensation charges, annual salary increments, and premises and other expenses to manage business growth. Additional expense related to the fourth quarter tax recovery was approximately $0.9 million. CWB’s quarterly efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues, improved 90 basis points over the same quarter last year, to 44.1%. 48 purpose driven | CWB 2007 AnnuAL reporT Fourth quarter net income increased 23% ($5.5 million) over the previous quarter, reflecting a much lower effective tax rate, 16% higher ($2.6 million) other income and 4% loan growth, partially offset by a lower net interest margin and a 6% ($1.9 million) increase in non-interest expenses. Other income benefited from exceptional trust services fee income and a $1.3 million before tax improvement in Canadian Direct’s allocation from the Pools. Lower net interest margin was primarily influenced by increased funding costs and higher liquidity, both largely related to disrupted financial markets. Net interest margin was further reduced by the change in accounting estimate noted above. The increase in non-interest expenses reflects $0.9 million of additional expense related to a fourth quarter tax recovery of $3.5 million, as well as stock-based compensation charges and annual salary increments. accountIng polIcIes and estIMates critical accounting estimates CWB’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 judgments, some of which may relate to matters that are inherently uncertain. Allowance for Credit Losses An allowance for credit losses is maintained to absorb probable credit related losses in the loan portfolio. This allowance reflects management’s estimate of probable losses in the loan portfolio at the balance sheet date. In assessing existing credit losses, management must rely on estimates and exercise judgment 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. Establishing a range for the allowance for credit losses is difficult due to the number of uncertainties involved. The general allowance for credit losses is intended to address this uncertainty. At October 31, 2007, the Bank’s total allowance for credit losses was $63.0 million (2006 – $53.5 million), which included a specific allowance of $7.4 million (2006 – $5.5 million) and a general allowance of $55.6 million (2006 – $48.0 million). 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 this MD&A and Note 1(h) to the consolidated financial statements. This critical accounting estimate relates to CWB’s banking and trust segment. Provision for Unpaid Claims and Adjustment Expenses A provision for unpaid claims is maintained, with the provision representing the amounts needed to provide for the estimated ultimate expected cost of settling claims related to insured events (both reported and unreported) that have occurred on or before each balance sheet date. A provision for adjustment expenses is also maintained, which represents the estimated ultimate expected costs of investigating, resolving and processing these claims. Estimated recoveries of these costs from reinsurance ceded are included in assets. The computation of these provisions takes into account the time value of money using discount rates based on projected investment income from the assets supporting the provisions. The process of determining the provision for unpaid claims and adjustment expenses necessarily involves risks that the actual results will deviate from the best estimates made. These risks vary in proportion to the length of the estimation period and the volatility of each component comprising the liabilities. To recognize the uncertainty in establishing these best estimates and to allow for possible deterioration in experience, actuaries are required to include explicit margins for adverse deviation in assumptions for asset defaults, reinvestment risk, claims development and recoverability of reinsurance balances. All provisions are periodically reviewed and evaluated in light of emerging claims experience and changing circumstances. Changes in circumstances may cause future assessments of unpaid claims and adjustment expenses to be significantly different than current assessments and may require an increase or decrease in the provision. In estimating the provision for unpaid claims and adjustment expenses, a number of uncertainties are taken into account and assumptions made, which makes it difficult to estimate a range for the provision. Further, as noted above, the provision includes a margin for adverse deviations in assumptions. At October 31, 2007, the provision for unpaid claims and adjustment expenses totalled $68.6 million (2006 – $62.6 million). Additional information on the process and methodology for determining the provision for unpaid claims and adjustment expenses can be found in Notes 1(k) and 20 to the consolidated financial statements. This critical estimate relates to CWB’s insurance segment, Canadian Direct. Financial Instruments Measured at Fair Value Cash resources, securities, securities purchased under resale agreements and sold under reverse resale agreements, and derivative financial instruments are reported on the consolidated balance sheet at fair value. In the prior year, all financial instruments were reported at amortized cost. The fair value of a financial instrument on initial recognition is the value of the consideration given or received. Subsequent to initial recognition, financial instruments measured at fair value that are quoted in active markets are based on bid prices for financial assets and offer prices for financial liabilities. For derivative financial instruments where an active market does not exist, fair values are determined using valuation techniques that refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. purpose driven | CWB 2007 AnnuAL reporT 49 The following table summarizes the significant financial assets and liabilities reported at fair value at October 31, 2007. Table 26 – Valuation of Financial Instruments ($ thousands) Quoted Market Valuation Technique Model with Observable Prices Market Data Fair Value Financial assets Cash resources ......................................................................................................................... $ 412,690 1,341,626 Securities................................................................................................................................... Securities repurchased under resale agreements ................................................................ 206,925 Derivative related .................................................................................................................... 1,496 Total .............................................................................................................................................. $ 1,962,737 Financial Liabilities $ 412,690 1,301,268 – – $ 1,713,958 $ – 40,358 206,925 1,496 $ 248,779 Derivative related .................................................................................................................... $ 1,307 $ – $ 1,307 Notes 3, 4, 10 and 27 to the consolidated financial statements provide additional information regarding these financial instruments. This critical accounting estimate relates to both operating segments. CWB has no direct exposure to any troubled non-bank sponsored asset-backed commercial paper, collateralized debt obligations or U.S. subprime mortgages. changes in accounting policies, Including Initial adoption Effective November 1, 2006, the Bank adopted new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): Financial Instruments – Recognition and Measurement, Hedges, Comprehensive Income and Financial Instruments – Disclosure and Presentation. As a result of adopting these standards, a new category, accumulated other comprehensive income (loss), has been added to shareholders’ equity and certain unrealized gains and losses are reported in accumulated other comprehensive income (loss) until realization. As a result of adopting these new accounting standards, certain financial assets and liabilities are measured at fair value with the remainder recorded at amortized cost. The adjustment of the previous carrying amounts to comply with the new standards has been recognized as an adjustment to accumulated other comprehensive income (loss) or retained earnings at November 1, 2006 and prior period consolidated financial statements have not been restated. The significant components of the Bank’s implementation of the standards include a) Cash resources, securities, securities purchased under resale agreements and securities purchased under reverse resale agreements have been designated as available-for-sale and are reported on the balance sheet at fair value with changes in fair value reported in other comprehensive income, net of income taxes. b) Derivative financial instruments are recorded on the balance sheet at fair value as either other assets or other liabilities with changes in fair value related to the effective portion of cash flow interest rate hedges recorded in other comprehensive income, net of income taxes. Changes in fair value related to the ineffective portion of cash flow hedges and all other derivative financial instruments are reported in other income on the consolidated statements of income. Specific accounting policies under the new standards relating to equity contracts that no longer qualify for hedge accounting and embedded derivatives are further described in Note 1(o) to the consolidated financial statements. c) Loans, deposits and subordinated debentures continue to be recorded at amortized cost using the effective interest method. The fair value of a financial instrument on initial recognition is the value of the consideration given or received. Subsequent to initial recognition, financial instruments measured at fair value that are quoted in active markets are based on bid prices for financial assets and offer prices for financial liabilities. For derivative financial instruments where an active market does not exist, fair values are determined using valuation techniques that refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Transition adjustments recorded at November 1, 2006 are detailed in Table 27. Table 27 – Transition Adjustments Recorded at November 1, 2006 ($ thousands) Retained Earnings Fair value of equity derivative contracts no longer designated as hedges....................... $ Cumulative amortization of loan portfolio premium using the effective interest method ................................................................................... Fair value of other derivatives not designated as hedges ................................................... Ineffective portion of fair value of cash flow hedges .......................................................... Accumulated Other Comprehensive Income (Loss) Available-for-sale securities, unrealized gains (losses) ..................................................... Effective portion of fair value of cash flow hedges, unrealized gains (losses) ............... $ $ $ Gross Income Taxes 593 $ (195) $ (271) (563) (6) (247) (589) (1,632) (2,221) $ $ $ 89 185 2 81 193 534 727 $ $ $ Net 398 (182) (378) (4) (166) (396) (1,098) (1,494) 50 purpose driven | CWB 2007 AnnuAL reporT future changes in accounting policies International Financial Reporting Standards The CICA plans to transition Canadian GAAP for public companies to International Financial Reporting Standards (IFRS) over a transition period expected to end in 2011. The impact of the transition to IFRS on the Bank’s consolidated financial statements is not yet determinable. Capital and Financial Instrument Disclosures The CICA issued new accounting standards that require the disclosure of both qualitative and quantitative information that enables financial statement users to evaluate the objectives, policies and processes for managing capital as well as enhanced financial instrument disclosure. These new standards are effective for the Bank beginning November 1, 2007. 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. CWB, like other financial institutions, is exposed to several factors that could adversely affect its business, financial condition or operating results, which may also influence an investor to buy, sell or hold CWB shares. Many of the risk factors are beyond CWB’s direct control. 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; • review and approval of loans in excess of delegated limits; • review and monitoring of impaired and other less than satisfactory loans; and • recommendation of the adequacy of the allowance for credit losses to the Audit Committee. The Asset Liability Committee (ALCO) provides management oversight related to the risks of banking and trust operations, other than credit risk. ALCO is a management committee chaired by the executive with responsibility for Treasury, 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 trust services risk; and • regular meetings to review compliance and discuss strategy respecting diversification of product offerings and management of risks. Asset liability management policies are approved and reviewed at least annually by the Board with quarterly status reporting also provided. The Operations Committee meets regularly, is comprised of supervisory and management personnel from all areas of banking 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 banking operations. The internal audit department performs inspections in all areas of the Bank, including CWT, Valiant and CDI, and reports the results directly to senior management, as well as the Bank’s CEO and Audit Committee. For CDI, inspection results are also reported directly to CDI’s Audit Committee. credit 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 CWB. 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, unless approved by the Board of Directors, to not more than 10% of the Bank’s shareholders’ equity and is presently set at $50 million ($60 million if amount in excess of $50 million is cash secured or CMHC insured). Customers with larger borrowing requirements are accommodated through loan syndications with other financial institutions. 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; purpose driven | CWB 2007 AnnuAL reporT 51 • a standardized credit risk rating classification established for all credits and reviewed not less than annually; • annual reviews of individual credit facilities (excepting consumer loans and single-unit residential mortgages); • 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 and an impaired loan report covering loans which • show impairment to the point where a loss is possible. Environmental Risk 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 cleanup costs. The Bank may become directly liable for cleanup 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 toward 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 customer are important tenets of account management. An appropriate financial return on the level of risk is fundamental. liquidity risk Liquidity risk is the risk that CWB 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 while limiting the opportunity cost of holding short-term assets. Maintenance of a prudent liquidity base also provides flexibility to fund loan growth and react to other market opportunities. Liquidity policies include • 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; • monitoring of wholesale demand and term deposits; • diversification of funding sources; and • an approved contingency plan. Key features of liquidity management are daily monitoring of expected cash inflows and outflows and tracking and forecasting the liquidity position, including the flows from • off-balance sheet items, on a 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. The Bank is currently in the process of stress testing liquidity reserve levels using various event scenarios. New testing methodology will enhance CWB’s ability to ensure current liquidity management practices are in line with industry standards and within the risk tolerance of the Bank. 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. CWB itself does not undertake trading activities and, therefore, does not have risks related to such activities as market making, arbitrage or proprietary trading. CWB’s material market risks are confined to interest rates and foreign exchange as discussed below. 52 purpose driven | CWB 2007 AnnuAL reporT Interest Rate Risk Interest rate risk or sensitivity is 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 reprice earlier than liabilities. The opposite impact will occur when market interest rates fall. CWB’s earnings are affected by the monetary policies of the Bank of Canada. Monetary policy decisions have an impact on the level of interest rates, which can have an impact on earnings. 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, duration analysis 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 26 to the consolidated financial statements shows the gap position at October 31, 2007 for select time intervals. The gap analysis in Note 26 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 to 4.3% from negative 2.3% and the one-month and under gap increased to 3.6% from negative 1.0%. The Bank’s asset/liability position will continue to be managed such that changing interest rates would generally be neutral to net interest income. Interest sensitive assets matched against interest sensitive liabilities are managed on a relatively risk neutral duration basis. Non-interest rate sensitive assets, liabilities and shareholders’ equity are managed at a target duration of between two and three years. Of the $3,707 million in fixed term deposit liabilities maturing within one year from October 31, 2007, approximately $2,807 million (34% of total deposit liabilities) mature by April 30, 2008. The term in which maturing deposits are retained will have an impact on the future asset liability structure and, hence, interest rate sensitivity. Approximately $345 million of the fixed term deposit liabilities maturing within one month are floating rate redeemable deposits redeemable without penalty at any time. The estimated sensitivity of net interest income to a change in interest rates is presented in Table 28. The amounts represent the estimated change in net interest income over the time period shown resulting from a one percentage point change in interest rates. If rates increase, the effect would be an increase in net interest income while the opposite would occur if rates decrease. The estimates are based on a number of assumptions and factors, which include • a constant structure in the asset liability portfolio; interest rate changes affect interest sensitive assets and liabilities by the same amount and are applied at the appropriate • repricing dates; and • no early redemptions. Year-over-year interest sensitivity increased to 2.5% from 0.1% in 2006 as noted in Table 28. Table 28 – Estimated Sensitivity of Net Interest Income as a Result of a One Percentage Point Change in Interest Rates ($ thousands) Period 90 days ........................................................................................................................................................................................ $ 1 year ..................................................................................................................................................................................... 1 year percentage change ................................................................................................................................................... 2007 1,346 5,780 2.5% $ 2006 315 154 0.1% 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 on page 44). Assets and liabilities having a term to maturity in excess of five years are subject to specific review and control and, with the exception of subordinated debentures and the deposit from CWB Capital Trust, were not material. The subordinated debentures, which are typically redeemed (subject to OSFI approval) after five years, and the deposit from CWB Capital Trust are discussed in Notes 13 and 16 to the consolidated financial statements. Foreign Exchange Risk Foreign exchange risk arises when there is a difference between assets and liabilities denominated in a foreign currency. In providing financial services to its customers, the Bank has assets and liabilities denominated in U.S. dollars. At October 31, 2007, assets denominated in U.S. dollars were 1.3% (2006 – 1.4%) of total assets and U.S. dollar liabilities were 1.5% (2006 – 1.3%) of total purpose driven | CWB 2007 AnnuAL reporT 53 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. Policies have been established that include limits on the maximum allowable differences 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. Insurance risk The Bank is exposed to insurance risk through its wholly owned subsidiary, CDI, which offers home and auto insurance to consumers in BC and Alberta. Accordingly, CDI’s operations are subject to the elements of risk associated with these lines of business, which can cause fluctuations and uncertainties in earnings. These elements include cyclical patterns in the industry and unpredictable developments, including weather-related and other natural catastrophes. CDI carries reinsurance coverage as part of its strategy to manage these risks. The industry is also impacted by political, regulatory, legal and economic influences. The insurance business involves various types of insurance related risk; in particular, underwriting risk, pricing risk, claims risk, reinsurance risk and regulatory risk. Policies and procedures have been established to manage insurance related risk, as well as other categories of risk to which CDI is exposed. CDI’s Board of Directors, either directly or through a Board committee, is responsible for reviewing and approving key policies and implementing reporting requirements to monitor compliance over significant areas. Underwriting risk is the risk of financial loss due to inappropriate selection of customers and is reduced through controls built into CDI’s rating and underwriting system. These controls include eligibility audits and a review by senior staff of exceptions. Pricing risk is the risk that products may be inappropriately priced due to actual experience not matching the assumptions made at the time pricing is determined. This is mitigated by regular underwriting reviews of product rate adequacy. Regulatory intervention may also impact rate adequacy. Claims risk includes the risk of financial loss due to adverse deviation in the amount, frequency or timing of claims. Policies and procedures are in place to ensure that trained staff handle claims. However, the process for establishing the provision for unpaid claims may reflect significant judgment and uncertainty, especially with respect to liability claims. Factors such as inflation, claims settlement patterns, legislative activity and litigation trends may impact the actual claims amount as the claims are adjusted over time. The risk that CDI might be exposed to large claims or to an accumulation of claims resulting from a natural catastrophe, such as a weather-related or seismic event, is mitigated by reinsurance treaties that protect CDI from such risks. Reinsurance risk includes the risk that reinsurance counterparties are not financially strong and that underwriting strategies are inappropriately matched with reinsurance programs. CDI’s reinsurance is only purchased from reinsurers meeting a certain minimum security rating. CDI’s reinsurance treaties are matched to underwriting strategies through participation of senior underwriting staff in the process. CDI is dependent on the availability and pricing of its external reinsurance arrangements and this availability and global markets may impact pricing. If CDI is unable to renew such arrangements at favourable rates and to adequate limits, then CDI may need to modify its underwriting practices or commitments. In addition, as the insurance business is heavily regulated, CDI is exposed to regulatory risk. This is evidenced by the provincial government mandated reforms to auto insurance in Alberta. This risk is countered mainly by monitoring current developments and by actively participating in relevant bodies and associations in order to contribute CDI’s perspective. operational risk Operational risk is inherent in all business activities, including banking, trust and insurance operations. 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. CWB is exposed to operational risk from internal business activities, external threats and activities that are outsourced. While operational risk cannot be completely eliminated, proactive operational management is a key strategy to mitigate this risk. The financial measure of operational risk is actual losses incurred. No material losses occurred in 2007 or 2006. Basel II requirements (see further discussion in Capital Management section beginning on page 41 of this MD&A) introduces new capital requirements related to operational risk in the banking and trust operating segment. CWB continues to work closely with OSFI to ensure our approach to operational risk management and Basel II compliance is clearly understood and consistent with regulatory expectations. Strategies to minimize and manage operational risk include a knowledgeable and experienced management team that is committed to the risk management policies and to promoting • an ethical culture; • established whistleblower process and an employee code of conduct; • the adoption of the COSO for Smaller Business framework for internal control assessment; • regular meetings of the Operations Committee, a management committee made up of supervisory and management personnel from all banking 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 banking operations; • regular meetings of ALCO, CDI’s Operational Risk Committee and the risk committees of CWT and Valiant; • communication of the importance of effective risk management to all levels of staff through training and policy implementation; a group-wide Operational Risk Framework that encompasses a common language of risk coupled with enterprise-wide • programs and methodologies for identification, measurement, control, and management of operational risk; • 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; 54 purpose driven | CWB 2007 AnnuAL reporT implementation of policies and procedural controls appropriate to address identified risks and which include segregation • of duties and built-in checks and balances; • use of technology via automated systems with built-in controls; • continual review and upgrade of systems and procedures; and • updated and tested procedures and contingency plans for disaster recovery and business continuity. In addition, the external auditors provide management and the Audit Committee with any recommendations for improvements to internal controls or procedures identified during their annual examination of the consolidated financial statements. CWB also maintains appropriate insurance coverage through a financial institution bond policy. general Business and economic conditions CWB primarily operates in Western Canada. As a result, its earnings are impacted by the general business and economic conditions of the four western provinces. The conditions include short-term and long-term interest rates, resource commodity prices, inflation, exchange rates, consumer, business and government spending, fluctuations in debt and capital markets, as well as the strength of the economies in which CWB and its customers operate. level of competition CWB’s performance is impacted by the level of competition in the markets in which it operates. Each of CWB’s businesses operate in highly competitive markets. Customer retention may be influenced by many factors, including relative service levels, the prices and attributes of products and services, changes in products and services, and actions taken by competitors. regulatory risk The businesses operated by CWB and its subsidiaries are highly regulated through laws and regulations that have been put in place by various federal and provincial governments and regulators. Changes to laws and regulations, including changes in their interpretation or implementation, could affect CWB by limiting the products or services it may provide and increasing the ability of competitors to compete with its products and services. Also, CWB’s failure to comply with applicable laws and regulations could result in sanctions and financial penalties that could adversely impact its earnings and damage its reputation. CWB takes what it believes to be reasonable and prudent measures designed to ensure compliance with governing laws and regulations, including its legislative compliance framework. However, there is no guarantee that it will always be in compliance or deemed to be in compliance. litigation risk It is possible that litigation and, in particular, class action litigation may increase in Canada as a result of changes in Canadian securities laws. Litigation risk is also inherent in each of the business lines of the Bank, including trust services where CWT and Valiant act as trustee. Litigation risk cannot be eliminated, even if there is no legal cause of action. To mitigate litigation risk, the Bank and its subsidiaries continuously monitor and review their processes and procedures. accuracy and completeness of Information on customers and counterparties CWB depends on the accuracy and completeness of information about customers and counterparties. In deciding whether to extend credit or enter into other transactions with customers and counterparties, CWB may rely on information furnished by them, including financial statements, appraisals and other financial information. CWB may also rely on the representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on the reports of auditors. CWB’s financial condition and earnings could be negatively impacted to the extent it relies on financial statements that do not comply with GAAP, that are materially misleading, or that do not fairly present, in all material respects, the financial condition and results of operations of the customers and counterparties. ability to attract and retain Key personnel CWB’s future performance depends to a large extent on its ability to attract and retain key employees. There is intense competition for the best people in the strong western Canadian markets as well as in the financial services sector. Although human resources risk is actively managed, there is no assurance that CWB will be able to continue to attract and retain key personnel. ability to execute growth Initiatives As part of its long-term corporate strategy, CWB intends to continue growing its business through a combination of organic growth and strategic acquisitions. The ability to successfully grow its business will be dependent on a number of factors, including identification of accretive new business or acquisition opportunities, negotiation of purchase agreements on satisfactory terms and prices, approval of acquisitions by regulatory authorities, securing satisfactory regulatory capital and financing arrangements and integration of newly acquired operations into the existing business. All of these activities may be more difficult to implement or may take longer to execute than management anticipates. Further, any significant expansion of the business may increase the operating complexity and divert management’s attention away from established or ongoing business activities. Any failure to manage acquisition strategies successfully could have a material adverse impact on CWB’s business, financial condition and results of operations. Information systems and technology CWB and its subsidiaries’ businesses are highly dependent upon information technology systems. Third parties provide key components of infrastructure, such as Internet connections and access to external networks. Disruptions in the Bank’s information technology systems, whether through internal or external factors, as well as disruptions in Internet, network access or other voice or data communication services provided by these third parties could adversely affect CWB’s ability to deliver products and services to customers and otherwise conduct business. purpose driven | CWB 2007 AnnuAL reporT 55 reputation risk Reputation risk is the risk to earnings and capital from negative public opinion. Negative public opinion can result from actual or alleged conduct in any number of activities, but often involves questions about business ethics and integrity, competence, corporate governance practices, quality and accuracy of financial reporting disclosures, or quality of products and service. Negative public opinion could adversely affect the ability to keep and attract customers and could expose CWB to litigation or regulatory action. other factors CWB cautions that the above discussion of risk factors is not exhaustive. Other factors beyond CWB’s control that may affect future results include changes in tax laws, technological changes, unexpected changes in consumer spending and saving habits, timely development and introduction of new products, and the anticipation of and success in managing the associated risks. updated share InforMatIon As at November 30, 2007, the Bank had 62,901,187 common shares outstanding. In addition, employee stock options have been issued which are, or will be, exercisable for up to 4,833,277 common shares (5,111,359 authorized) for maximum proceeds of $82.8 million. On December 5, 2007, a quarterly cash dividend of $0.10 per share was declared payable on January 3, 2008 to shareholders of record on December 20, 2007. controls and procedures As of October 31, 2007, an evaluation was carried out of the effectiveness of the Bank’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer will certify that the design and operating effectiveness of those disclosure controls and procedures were effective. Also at October 31, 2007, an evaluation was carried out of the design of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and financial statement compliance with GAAP. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer will certify that the design of internal controls over financial reporting was effective. These evaluations were conducted in accordance with the standards of COSO for Smaller Business, a recognized control model, and the requirements of Multilateral Instrument 52-109 of the Canadian Securities Administrators. A Disclosure Committee, comprised of members of senior management, assists the Chief Executive Officer and Chief Financial Officer in their responsibilities. There were no changes in the design of the Bank’s internal controls over financial reporting that occurred during the year ended October 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting. This Management’s Discussion and Analysis is dated as of December 6, 2007. 56 purpose driven | CWB 2007 AnnuAL reporT   FiNANCiAl sTATEMENTs ManageMent’s responsIBIlItY for fInancIal reportIng 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 and fair presentation of the information presented, which includes the consolidated financial statements, Management’s Discussion and Analysis (MD&A) and other information. 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 Office of the Superintendent of Financial Institutions Canada. The MD&A has been prepared in accordance with the requirements of securities regulators, including National Instrument 51-102 of the Canadian Securities Administrators (CSA). The consolidated financial statements, MD&A and related financial information reflect amounts which must, of necessity, be based on informed estimates and judgments 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. Management has designed the accounting system and related internal controls, 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. We, as the Bank’s Chief Executive Officer and Chief Financial Officer, will certify Canadian Western Bank’s annual filings with the CSA as required by Multilateral Instrument 52-109 (Certification of Disclosure in Issuers’ Annual and Interim Filings). 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 Internal Auditor has full and free access to the Audit Committee and to the external auditors. 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 financial statements and annual report, 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 Internal Auditor and the external auditors to discuss the effectiveness of certain internal controls over the financial reporting process and the planning and results of the external audit. The Committee also meets regularly with the Chief Internal Auditor and the external 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 Office of the Superintendent of Financial Institutions Canada, at least once a year, makes such examination and inquiry into the affairs of the Bank and its federally regulated subsidiaries as is deemed necessary or expedient to satisfy that the provisions of the revelant Acts, having reference to the safety of the depositors and policyholders, 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 external 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 November 30, 2007 Tracey C. Ball, FCA Executive Vice President and Chief Financial Officer purpose driven | CWB 2007 AnnuAL reporT 57   AuDiTORs’ REPORT to the shareholders of canadIan Western BanK We have audited the Consolidated Balance Sheets of Canadian Western Bank as at October 31, 2007 and 2006 and the Consolidated Statements of Income, Comprehensive 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, 2007 and 2006 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 November 30, 2007 58 purpose driven | CWB 2007 AnnuAL reporT   CONsOliDATED BAlANCE sHEETs As at October 31 ($ thousands) 2007 2006 assets Cash Resources Cash and non–interest bearing deposits with financial insititutions ............................................. Deposits with regulated financial institutions .....................................................................(Note 3) Cheques and other items in transit ..................................................................................................... Securities (Note 4) Issued or guaranteed by Canada ......................................................................................................... Issued or guaranteed by a province or municipality ........................................................................ Other securities...................................................................................................................................... Securities Purchased Under Resale Agreements ................................................................................ Loans (Note 5) Residential mortgages ........................................................................................................................... Other loans ............................................................................................................................................. Allowance for credit losses .....................................................................................................(Note 6) Other Land, buildings and equipment .............................................................................................(Note 7) Goodwill ...................................................................................................................................(Note 8) Intangible assets .......................................................................................................................(Note 8) Insurance related .....................................................................................................................(Note 9) Derivative related ..................................................................................................................(Note 10) Other assets ............................................................................................................................(Note 11) $ 6,446 $ 405,122 1,122 412,690 630,396 251,418 459,812 1,341,626 206,925 1,780,442 5,688,160 7,468,602 (63,022) 7,405,580 25,736 6,933 2,681 51,744 1,496 69,629 158,219 9,525,040 $ Total Assets ............................................................................................................................................... $ lIaBIlItIes and shareholders’ eQuItY Deposits (Note 12) Payable on demand ............................................................................................................................... Payable after notice ............................................................................................................................... Payable on a fixed date ......................................................................................................................... Deposit from Canadian Western Bank Capital Trust ......................................................(Note 13) Other Cheques and other items in transit ..................................................................................................... Insurance related ...................................................................................................................(Note 14) Derivative related ..................................................................................................................(Note 10) Other liabilities ......................................................................................................................(Note 15) $ 376,488 $ 1,843,799 5,931,631 105,000 8,256,918 22,177 124,480 1,307 134,665 282,629 86,904 350,601 789 438,294 334,379 168,839 382,475 885,693 9,000 1,314,988 4,520,370 5,835,358 (53,521) 5,781,837 24,198 6,933 3,224 57,136 – 62,045 153,536 7,268,360 391,252 1,262,270 4,538,485 105,000 6,297,007 27,474 120,936 – 105,287 253,697 Subordinated Debentures Conventional..........................................................................................................................(Note 16) 390,000 198,126 Shareholders' Equity Retained earnings .................................................................................................................................. Accumulated other comprehensive income (loss) .......................................................................... Capital stock ...........................................................................................................................(Note 17) Contributed surplus .............................................................................................................................. Total Liabilities and Shareholders’ Equity ........................................................................................... Contingent Liabilities and Commitments (Note 19) $ 372,739 (5,931) 219,004 9,681 595,493 9,525,040 $ 297,841 – 215,349 6,340 519,530 7,268,360 Jack C. Donald Chairman Larry M. Pollock President and Chief Executive Officer purpose driven | CWB 2007 AnnuAL reporT 59    CONsOliDATED sTATEMENTs 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 .................................................................................................................................................. Subordinated debentures ..................................................................................................................... Net Interest Income ................................................................................................................................. Provision for Credit Losses ...................................................................................................... (Note 6) Net Interest Income after Provision for Credit Losses ..................................................................... Other Income Credit related ......................................................................................................................................... Insurance, net .........................................................................................................................(Note 20) Trust services ......................................................................................................................................... Retail services ......................................................................................................................................... Foreign exchange gains ........................................................................................................................ Gains on sale of securities .................................................................................................................... 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 .................................................................................................... (Note 22) Net Income ................................................................................................................................................ Earnings Per Common Share(1) (Note 23) Basic ........................................................................................................................................................ Diluted .................................................................................................................................................... $ $ 2007 439,668 $ 45,590 13,677 498,935 275,840 17,846 293,686 205,249 10,200 195,049 22,426 15,263 14,943 7,290 2,159 438 302 62,821 257,870 76,506 20,239 22,780 2,409 121,934 135,936 39,654 96,282 $ 2006 327,588 30,701 11,214 369,503 193,647 11,250 204,897 164,606 10,200 154,406 18,846 15,204 10,809 6,337 1,520 142 228 53,086 207,492 64,759 17,248 18,163 1,879 102,049 105,443 33,436 72,007 1.54 $ 1.50 1.17 1.13 (1) A stock dividend effecting a two-for-one split of the Bank’s common shares was declared and paid during the first quarter of 2007. All prior period common share and per common share information have been restated to reflect this effective split. 60 purpose driven | CWB 2007 AnnuAL reporT  CONsOliDATED sTATEMENTs OF CHANGEs iN sHAREHOlDERs' EQuiTy For the year ended October 31 ($ thousands) Retained Earnings Balance at beginning of year .................................................................................................................... Cumulative effect of adopting new accounting policy.......................................................(Note 2) Net income ............................................................................................................................................. Dividends ................................................................................................................................................ Balance at end of year .............................................................................................................................. $ Accumulated Other Comprehensive Income (Loss) Balance at beginning of year .................................................................................................................... Cumulative effect of adopting new accounting policy.......................................................(Note 2) Other comprehensive income (loss) ................................................................................................. Balance at end of period .......................................................................................................................... Total retained earnings and accumulated other comprehensive income ......................................... Capital Stock (Note 17) Balance at beginning of year ................................................................................................................... Issued on exercise of employee stock options .................................................................................. Transferred from contributed surplus on the exercise or exchange of options ........................... Balance at end of year ............................................................................................................................... Contributed Surplus Balance at beginning of year .................................................................................................................... Amortization of fair value of employee stock options ..................................................... (Note 18) Transferred to capital stock on the exercise or exchange of options ............................................. Balance at end of year ............................................................................................................................... 2007 2006 297,841 $ (166) 96,282 (21,218) 372,739 – (1,494) (4,437) (5,931) 366,808 215,349 2,464 1,191 219,004 6,340 4,532 (1,191) 9,681 241,221 – 72,007 (15,387) 297,841 – – – – 297,841 213,098 1,669 582 215,349 3,671 3,251 (582) 6,340 Total Shareholders' Equity ..................................................................................................................... $ 595,493 $ 519,530 CONsOliDATED sTATEMENTs OF COMPREHENsiVE iNCOME For the year ended October 31 ($ thousands) Net Income ................................................................................................................................................ Other Comprehensive Income (Loss) (Note 2) Available-for-sale securities Losses from change in fair value, net of tax of $2,720 ..................................................................... Reclassification to other income, net of tax of $144 ....................................................................... Derivatives designated as cash flow hedges Losses from change in fair value, net of tax of $197 ......................................................................... Reclassification to net interest income, net of tax of $882 .............................................................. Comprehensive Income for the Year .................................................................................................... $ 2007 $ 96,282 (5,544) (295) (5,839) (403) 1,805 1,402 (4,437) 91,845 purpose driven | CWB 2007 AnnuAL reporT 61  CONsOliDATED sTATEMENTs 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 .................................................................................................. Amortization of fair value of employee stock options .................................................................. Other items, net ................................................................................................................................. Cash Flows from Financing Activities Deposits, net .......................................................................................................................................... Deposit from Canadian Western Bank Capital Trust ...................................................................... Debenture issued ................................................................................................................... (Note 16) Debenture redeemed ............................................................................................................ (Note 16) Common shares issued ......................................................................................................... (Note 17) Dividends ................................................................................................................................................ Cash Flows from Investing Activities Interest bearing deposits with regulated financial institutions, net ............................................... Securities, purchased ............................................................................................................................ Securities, sales proceeds ..................................................................................................................... Securities, matured ................................................................................................................................ Securities purchased under resale agreements, net .......................................................................... Loans, net ............................................................................................................................................... Land, buildings and equipment ........................................................................................................... Change in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year ............................................................................... Cash and Cash Equivalents at End of Year* ......................................................................................... $ 2007 2006 $ 96,282 $ 72,007 10,200 6,017 1,387 (438) 13,287 (1,777) 4,532 13,183 142,673 1,965,953 – 195,000 (3,126) 2,464 (21,218) 2,139,073 (55,550) (2,860,204) 960,350 1,437,710 (197,925) (1,633,943) (7,012) (2,356,574) (74,828) 60,219 (14,609) $ 10,200 5,248 (3,094) (142) 14,869 (5,624) 3,251 22,457 119,172 1,278,700 105,000 70,000 – 1,669 (15,387) 1,439,982 (138,027) (2,107,552) 776,244 1,149,972 27,940 (1,201,774) (9,328) (1,502,525) 56,629 3,590 60,219 *Represented by: Cash and non-interest bearing deposits with financial institutions ............................................... $ Cheques and other items in transit (included in Cash Resources) ............................................... Cheques and other items in transit (included in Other Liabilities) .............................................. Cash and Cash Equivalents at End of Year ........................................................................................... $ 6,446 $ 1,122 (22,177) (14,609) $ 86,904 789 (27,474) 60,219 Supplemental Disclosure of Cash Flow Information Amount of interest paid in the year .................................................................................................... Amount of income taxes paid in the year .......................................................................................... $ 267,963 $ 40,044 182,971 42,154 62 purpose driven | CWB 2007 AnnuAL reporT NOTEs TO CONsOliDATED FiNANCiAl sTATEMENTs October 31, 2007 ($ thousands, except per share amounts) 1. sIgnIfIcant accountIng polIcIes These consolidated financial statements of Canadian Western Bank (CWB or the Bank) 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 (GAAP). 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 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 the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the year. Key areas of estimation where management has made subjective judgments, often as a result of matters that are inherently uncertain, include those relating to the allowance for credit losses, fair value of financial instruments, goodwill and intangible assets, provision for unpaid claims and adjustment expenses, future income tax asset and liability, other than temporary impairment of securities and fair value of employee stock options. Therefore, actual results could differ from these 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 is the beneficial owner. See Note 30 for details of the subsidiaries. b) Business combinations, goodwill and other Intangible assets Business acquisitions are accounted for using the purchase method. Goodwill is the excess of the purchase price paid for the acquisition of a subsidiary over the fair value of the net assets acquired, including identifiable intangible assets. Goodwill and other intangibles with an indefinite life are not amortized, but are subject to a fair value impairment test at least annually. Other intangibles with a finite life are amortized to the statement of income over their expected lives not exceeding 10 years. These intangible assets are tested for impairment whenever circumstances indicate that the carrying amount may not be recoverable. Any impairment of goodwill or other intangible assets will be charged to the consolidated statement of income in the period of impairment. c) consolidation of Variable Interest entities (VIes) Canadian Institute of Chartered Accountants (CICA) Accounting Guideline (AcG-15) provides a framework for identifying VIEs and requires the consolidation of VIEs if the Bank is the primary beneficiary of the VIE. The only special purpose entity in which the Bank participates is Canadian Western Bank Capital Trust (CWB Capital Trust), described in more detail in Note 13. As CWB is not the primary beneficiary of CWB Capital Trust, CWB Capital Trust is not consolidated in these financial statements. d) cash resources Cash resources have been designated as available-for-sale and are reported on the balance sheet at fair value with changes in fair value reported in other comprehensive income, net of income taxes. In the prior year, cash resources were presented at amortized cost. e) securities Securities have been designated as available-for-sale, are accounted for at settlement date and reported on the balance sheet at fair value with changes in fair value reported in other comprehensive income, net of income taxes. In the prior year, debt securities and preferred shares were stated at amortized cost and other equity securities were stated at cost. Securities are purchased with the original intention to hold the securities to maturity or until market conditions render alternative investments more attractive. If an impairment in value is other than temporary, any write-down to net realizable value is reported in the consolidated statements of income. 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 statements of income. Securities designated as held-for-trading, which are purchased for resale over a short period of time, are carried at fair value. Gains and losses realized on disposal and adjustments to fair value are reported in other income in the consolidated statements of income in the period during which they occur. There were no securities designated as held-for-trading at any time during the year. f) securities purchased under resale agreements and securities purchased under reverse resale agreements Securities purchased under resale agreements 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. The difference between the cost of the purchase and the predetermined proceeds to be received on a resale agreement is recorded as securities interest income. Securities purchased under reverse resale agreements represent a sale of Government of Canada securities by the Bank effected with a simultaneous agreement to buy them back at a specified price on a future date, which is generally short term. The difference between the proceeds of the sale and the predetermined cost to be paid on a resale agreement is recorded as deposit interest expense. There were no reverse resale agreements outstanding at year-end. purpose driven | CWB 2007 AnnuAL reporT 63 Securities purchased under resale agreements and securities purchased under reverse resale agreements have been designated as available-for-sale and are reported on the consolidated balance sheet at fair value with changes in fair value reported in other comprehensive income, net of income taxes. In the prior year, securities purchased under resale agreements and securities sold under reverse resale agreements were carried at cost. Interest earned or paid is recorded in interest income or expense as earned. g) loans Loans are stated net of unearned income, unamortized premiums and an allowance for credit losses (Note 1(h)). Interest income is recorded using the effective interest method 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 is of the opinion that the loan should be regarded as impaired. An exception may be made where management determines that the loan is well secured and in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to a current status within 180 days from the date the payment went in arrears. All loans are classified as impaired when a payment is 180 days in arrears other than loans guaranteed or insured for both principal and interest by the Canadian government, the provinces or a Canadian government agency. These loans are classified as impaired when payment is 365 days in arrears. Impairment is measured as the difference between the carrying value of the loan at the time it is classified as impaired and the present value of the expected cash flows (estimated realizable amount), using the interest rate inherent in the loan at the date the loan is classified as impaired. When the amounts and timing of future cash flows cannot be reliably estimated, either the fair value of the security underlying the loan, net of any expected realization costs, or the current market price for the loan may be used to measure the estimated realizable amount. At the time a loan is classified as impaired, interest income will cease to be recognized in accordance with the loan agreement, and any uncollected but accrued interest will be added to the carrying value of the loan, together with any unamortized premiums, discounts or loan fees. Subsequent payments received on an impaired loan are recorded as a reduction of the recorded investment in the loan. Impaired loans are returned to performing status when the timely collection of both principal and interest is reasonably assured and all delinquent principal and interest payments are brought current and all charges for loan impairment have been reversed. Loan fees, net of directly related costs, are amortized to interest income over the expected term of the loan. Premiums paid on the acquisition of loan portfolios are amortized to interest income over the expected term of the loans. h) allowance for credit losses An allowance for credit losses is maintained which, in the Bank’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 outstanding 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 statements 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. i) 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 – three to five years, and leasehold improvements – term of the lease. Gains and losses on disposal are recorded in other income in the year of disposal. Land, building and equipment, if no longer in use or considered impaired, are written down to the fair value. j) financing costs Financing costs relating to the issuance of debentures and other financial instruments are amortized over the expected life of the related instrument using the effective interest method. k) Insurance operations Premiums Earned and Deferred Policy Acquisition Costs Insurance premiums are included in other income on a daily pro rata basis over the terms of the underlying insurance policies. Unearned premiums represent the portion of premiums written that relate to the unexpired term of the policies in force and are included in other liabilities. Policy acquisition costs are those expenses incurred in the acquisition of insurance business. Acquisition costs comprise advertising and marketing expenses, insurance advisor salaries and benefits, premium taxes and other expenses directly attributable to the production of business. Policy acquisition costs related to unearned premiums are only deferred, and included in other assets, to the extent that they are expected to be recovered from unearned premiums and are amortized to income over the periods in which the premiums are earned. If the unearned premiums are not sufficient to pay expected claims and expenses (including policy maintenance expenses and unamortized policy acquisition costs), a premium deficiency is said to exist. Anticipated investment income is considered in determining whether a premium deficiency exists. Premium deficiencies are recognized by writing down the deferred policy acquisition cost asset. 64 purpose driven | CWB 2007 AnnuAL reporT Unpaid Claims and Adjustment Expenses The provision for unpaid claims represents the amounts needed to provide for the estimated ultimate expected cost of settling claims related to insured events (both reported and unreported) that have occurred on or before each balance sheet date. The provision for adjustment expenses represents the estimated ultimate expected costs of investigating, resolving and processing these claims. These provisions are included in other liabilities and their computation takes into account the time value of money using discount rates based on projected investment income from the assets supporting the provisions. All provisions are periodically reviewed and evaluated in light of emerging claims experience and changing circumstances. The resulting changes in estimates of the ultimate liability are recorded as incurred claims in the current period. Reinsurance Ceded Earned premiums and claims expenses are recorded net of amounts ceded to, and recoverable from, reinsurers. Estimates of amounts recoverable from reinsurers on unpaid claims and adjustment expenses are recorded in other assets and are estimated in a manner consistent with the liabilities associated with the reinsured policies. l) 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. m) share Incentive plan 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. In accordance with GAAP, no expense is recognized for options granted prior to November 1, 2002. When options are exercised, the proceeds received and the applicable amount, if any, in contributed surplus are credited to capital stock. n) 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, except for unrealized foreign exchange gains and losses on available-for-sale securities that are included in other comprehensive income. o) derivative financial Instruments Interest rate, foreign exchange and equity contracts such as futures, options, swaps, floors and rate locks 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 primarily used to reduce the impact of fluctuating interest rates. Equity contracts are used to economically 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 certain derivative financial instruments as either a hedge of the fair value of recognized assets or liabilities or firm commitments (fair value hedges), or a hedge of highly probable future cash flows attributable to a recognized asset or liability or a forecasted transaction (cash flow hedges). The Bank has designated all interest rate swaps as cash flow hedges. In the prior year, the Bank designated each interest rate or equity-based derivative financial instrument as a hedge of identified assets and liabilities, firm commitments or forecasted transactions. Under the new accounting requirements for hedges effective November 1, 2006 (refer to Note 2), the Bank’s equity contracts no longer qualify for hedge accounting. 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. Effective November 1, 2006, certain derivatives embedded in other financial instruments, such as the return on fixed term deposits that are linked to a stock index, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the combined contract is not carried at fair value. As permitted by the transition provisions, embedded derivatives identified in contracts entered into after November 1, 2002 have been separated from the host contract and are recorded at fair value. Interest income received or interest expense paid on derivative financial instruments is accounted for on the accrual basis and 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 other income. Derivative financial instruments are recorded on the balance sheet at fair value as either other assets or other liabilities with changes in fair value related to the effective portion of cash flow interest rate hedges recorded in other comprehensive income, net of income taxes. Changes in fair value related to the ineffective portion of cash flow hedges and all other derivative financial instruments are reported in other income on the consolidated statement of income. In the prior year, the fair value of derivative financial instruments that qualified for hedge accounting were not recorded on the balance sheet. purpose driven | CWB 2007 AnnuAL reporT 65 p) fair Value of financial Instruments The fair value of a financial instrument on initial recognition is the value of the consideration given or received. Subsequent to initial recognition, financial instruments measured at fair value that are quoted in active markets are based on bid prices for financial assets and offer prices for financial liabilities. For certain securities and derivative financial instruments where an active market does not exist, fair values are determined using valuation techniques that refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The fair value of financial assets recorded on the consolidated balance sheet at fair value (cash, securities, securities purchased under resale agreements and derivatives) was determined using published market prices quoted in active markets for 87% of the portfolio and estimated using a valuation technique based on observable market data for 13% of the portfolio. The fair value of liabilities recorded on the consolidated balance sheet at fair value (derivatives) was determined using a valuation technique based on observable market data. q) employee future Benefits All employee future benefits are accounted for on an accrual basis. The Bank’s contributions to the group retirement savings plan and employee share purchase plan totalled $4,876 (2006 – $4,261). r) 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. s) operating leases The total cost related to operating leases, including free rent periods and step-rent increases, are recognized on a straight-line basis over the lease term. 2. change In accountIng polIcIes – fInancIal InstruMents Effective November 1, 2006, the Bank adopted new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): Financial Instruments – Recognition and Measurement, Hedges, Comprehensive Income and Financial Instruments – Disclosure and Presentation. As a result of adopting these standards, a new category, accumulated other comprehensive income (loss), has been added to shareholders’ equity and certain unrealized gains and losses are reported in accumulated other comprehensive income (loss) until realization. As a result of adopting these new accounting standards, certain financial assets and liabilities are measured at fair value with the remainder recorded at amortized cost. The adjustment of the previous carrying amounts to comply with the new standards has been recognized as an adjustment to accumulated other comprehensive income (loss) or retained earnings at November 1, 2006 and prior period consolidated financial statements have not been restated. The significant components of the Bank’s implementation of the standards include a) Cash resources, securities, securities purchased under resale agreements and securities purchased under reverse resale agreements have been designated as available-for-sale and are reported on the balance sheet at fair value with changes in fair value reported in other comprehensive income, net of income taxes. b) Derivative financial instruments are recorded on the balance sheet at fair value as either other assets or other liabilities with changes in fair value related to the effective portion of cash flow interest rate hedges recorded in other comprehensive income, net of income taxes. Changes in fair value related to the ineffective portion of cash flow hedges and all other derivative financial instruments are reported in other income on the consolidated statement of income. Specific accounting policies under the new standards relating to equity contracts that no longer qualify for hedge accounting and embedded derivatives are further described in Note 1(o). c) Loans, deposits and subordinated debentures continue to be recorded at amortized cost using the effective interest method. Information regarding the calculation of the fair value of financial instruments is further described in Note 1(p). Transition adjustments recorded at November 1, 2006 include Retained Earnings Fair value of equity derivative contracts no longer designated as hedges..................... Cumulative amortization of loan portfolio premium using the effective interest method .................................................................................................. Fair value of other derivatives not designated as hedges ................................................. Ineffective portion of fair value of cash flow hedges ........................................................ Accumulated Other Comprehensive Income (Loss) Available-for-sale securities, unrealized gains (losses) .................................................... Effective portion of fair value of cash flow hedges, unrealized gains (losses) .............. Gross Income Taxes $ 593 $ (195) $ (271) (563) (6) (247) (589) (1,632) (2,221) $ $ $ $ $ $ 89 185 2 81 193 534 727 $ $ $ Net 398 (182) (378) (4) (166) (396) (1,098) (1,494) 66 purpose driven | CWB 2007 AnnuAL reporT 3. cash resources Included in deposits with regulated financial institutions are available-for-sale financial instruments reported on the consolidated balance sheet at the fair value of $362,849, which is $1,070 lower than the amortized cost. In the prior year, these instruments were reported at amortized cost, which was $293 higher than fair value. 4. securItIes The analysis of securities at carrying value, by type and maturity, is as follows: Maturities Within 1 Year Over 1 to 3 Years Over 3 to 5 Years Over 5 Years 2007 Total Carrying 2006 Total Carrying Value(1) Value Securities Issued or guaranteed by Canada .... $ 518,700 Issued or guaranteed by a province or municipality .................... Other debt securities ........................... Equity securities 156,283 148,760 Preferred shares ................................ Other equity ...................................... 41,588 – Total(2) ................................................... $ 865,331 $ 104,608 $ – $ 7,088 $ 630,396 $ 334,379 77,121 48,969 54,239 – $ 284,937 $ 10,897 23,450 74,373 – 108,720 $ 7,117 15,076 51,678 1,679(3) 82,638 251,418 236,255 221,878 1,679 $ 1,341,626 $ 168,839 188,044 191,581 2,850 885,693 (1) As discussed in Note 2, securities are reported on the consolidated balance sheet at fair value. In the prior year, securities were reported at amortized cost. (2) All securities have been designated as available-for-sale. (3) Includes securities with no specific maturity. The analysis of unrealized gains and losses on securities is as follows: 2007(1) Amortized Cost Unrealized Gains Unrealized Losses Fair Amortized Unrealized Unrealized Losses Gains Cost Value 2006 Fair Value Securities issued or guaranteed by Canada ................................ $ 630,270 $ A province or municipality 251,432 Other debt securities ............. 237,958 Equity securities Preferred shares .................. Other equity ........................ 227,331 2,850 Total ......................................... $ 1,349,841 $ 415 $ 260 160 34 – 869 $ 289 $ 630,396 $ 334,379 $ 168,839 274 188,044 251,418 236,255 1,863 129 $ 209 288 393 $ 334,115 168,694 354 187,363 969 221,878 5,487 1,679 1,171 9,084 $ 1,341,626 $ 885,693 $ 191,581 2,850 2,107 – 2,733 $ 764 549 192,924 2,301 3,029 $ 885,397 (1) As discussed in Note 2, securities are reported on the consolidated balance sheet at fair value. In the prior year, securities were reported at amortized cost. The securities portfolio is primarily comprised of high quality debt instruments and preferred shares that are not held for trading purposes and are typically held until maturity. Fluctuations in value are generally attributed to changes in interest rates and shifts in the interest rate curve. Unrealized losses at year-end are considered to be temporary in nature. purpose driven | CWB 2007 AnnuAL reporT 67 5. loans Outstanding gross loans and impaired loans, net of allowances for credit losses, are as follows: Gross Amount Gross Impaired Specific Amount Allowance 2007 Net Impaired Loans Gross Amount Gross Impaired Specific Amount Allowance Consumer and personal ....... $ 1,062,898 $ Real estate(1) ............................. Industrial ................................... Commercial .......................... Total ....................................... General allowance(2) ............ Net impaired loans after 2,887,822 1,325,431 2,192,451 $ 7,468,602 $ general allowance ............. 2,878 $ 1,098 11,261 5,867 21,104 $ 351 $ 896 2,550 3,617 7,414 $ 202 2,527 $ 787,628 $ 2,179,430 8,711 1,115,678 2,250 1,752,622 13,690 $ 5,835,358 $ 1,580 $ 693 3,006 5,124 10,403 $ 314 $ 693 585 3,892 5,484 $ (55,608) $ (41,918) 2006 Net Impaired Loans 1,266 – 2,421 1,232 4,919 (48,037) $ (43,118) (1) Multi-family residential mortgages are presented as real estate loans in this table. (2) The general allowance for credit risk is available for the total loan portfolio. (3) There are no foreclosed real estate assets held for sale. The gross amount of loans includes other past due loans, which are loans where payment of interest or principal is contractually 90 to 180 days in arrears or government insured loans where payment of interest or principal is contractually not more than 365 days in arrears but are not classified as impaired, because they are well secured and considered fully collectible. There are $1,100 (2006 – $nil) outstanding other past due loans. During the year, interest recognized as income on impaired loans totalled $414 (2006 – $447). 6. alloWance for credIt losses The following table shows the changes in the allowance for credit losses during the year: 2007 General Allowance for Credit Losses $ 48,037 7,571 – – Specific Allowance 5,484 $ 2,629 (786) 87 $ Total 53,521 10,200 (786) 87 Specific Allowance $ 6,058 (1,375) (1,274) 2,075 General Allowance for Credit Losses 36,462 11,575 – – $ $ 2006 Total 42,520 10,200 (1,274) 2,075 Balance at beginning of year ........... Provision for credit losses ................ Write-offs ............................................ Recoveries .......................................... Balance at end of year ...................... $ 7,414 $ 55,608 $ 63,022 $ 5,484 $ 48,037 $ 53,521 7. land, BuIldIngs and eQuIpMent $ Accumulated Depreciation and Amortization – 2,897 9,360 17,219 10,307 39,783 $ $ 2007 Net Book Value 2,783 1,669 4,521 5,688 11,075 25,736 $ 2006 Net Book Value 2,783 1,809 5,361 4,092 10,153 24,198 $ $ Land ........................................................................................................... $ Buildings .................................................................................................... Computer equipment .............................................................................. Office equipment and furniture ............................................................. Leasehold improvements ........................................................................ Total ........................................................................................................... $ Cost 2,783 4,566 13,881 22,907 21,382 65,519 Depreciation and amortization for the year amounted to $5,474 (2006 – $4,706). 68 purpose driven | CWB 2007 AnnuAL reporT 8. goodWIll and IntangIBle assets Goodwill .................................................................................................... Identifiable intangible assets .................................................................. Customer relationships ..................................................................... Trademark ........................................................................................... Others .................................................................................................. Total ........................................................................................................... $ Cost 6,933 $ Accumulated Amortization – $ 2007 Net Book Value 6,933 $ 2006 Net Book Value 6,933 $ 3,950 300 330 4,580 11,513 1,645 – 254 1,899 1,899 $ 2,305 300 76 2,681 9,614 $ 2,775 300 149 3,224 10,157 $ Amortization of customer relationships and other intangible assets for the year amounted to $543 (2006 – $542). The trademark has an indefinite life and is not subject to amortization. Goodwill includes $3,679 related to the banking and trust segment and $3,254 related to the insurance segment. There were no writedowns of goodwill or intangible assets due to impairment. 9. InsuRAnce related other assets Instalment premiums receivable........................................................................................................................................... $ Reinsurers' share of unpaid claims and adjustment expenses ........................................................................................ Deferred policy acquisition costs .......................................................................................................................................... Recoverable on unpaid claims............................................................................................................................................... Due from reinsurers ............................................................................................................................................................ Reinsurers' share of unearned premiums ......................................................................................................................... Total ............................................................................................................................................................................ $ 2007 22,803 10,915 8,626 7,257 2,143 – 51,744 $ $ 2006 21,343 14,906 8,110 7,163 730 4,884 57,136 10. derIVatIVe fInancIal InstruMents The Bank enters into derivative financial instruments for risk management purposes. Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity or commodity instrument or index. Derivative financial instruments primarily used by the Bank include interest rate swaps, which are agreements where two counterparties exchange a series of payments based on different interest rates • applied to a notional amount; equity swap contracts, which are agreements where one counterparty agrees to pay or receive from the other cash flows based on • changes in the value of an equity index as well as a designated interest rate applied to a notional amount; and foreign exchange forwards and futures, which are contractual obligations to exchange one currency for another at a specified price for • settlement at a predetermined future date. Interest rate swaps and other instruments are used as hedging devices to control interest rate risk. The Bank enters into these interest rate derivative instruments only 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. The Asset Liability Committee (ALCO) of the Bank establishes and monitors approved counterparties (including assessments of credit worthiness) and maximum notional limits. Approved counterparties are limited to rated financial institutions or their associated parent/affiliate with a minimum rating of A high or equivalent. Foreign exchange transactions are undertaken only for the purposes of meeting the 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 financial position. The following table summarizes the derivative 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 sheets. 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 41 of Management’s Discussion and Analysis. purpose driven | CWB 2007 AnnuAL reporT 69 2007 Credit Replace- Future Credit Risk Exposure Equivalent Notional ment Amount Cost Interest rate swaps ............... $ 482,000 $ 946 $ 1,010 $ 1,956 $ Equity contracts ................... 6,000 Foreign exchange contracts 3,405 Total ....................................... $ 491,405 $ 1,496 $ 1,524 $ 3,019 $ 995 68 480 34 515 35 Risk- weighted Balance 391 199 14 604 Replace- ment Cost 2006 Credit Future Credit Risk Exposure Equivalent 98 $ 1,937 $ 2,035 $ 1,359 766 593 24 215 191 715 $ 2,894 $ 3,609 $ Risk- weighted Balance 407 272 43 722 Notional Amount $ 618,500 $ 9,570 19,084 $ 647,154 $ As at October 31, 2007, the fair value of derivative financial instruments are reported on the consolidated balance sheet (see Note 2). Fair values at October 31, 2006 were not reflected on the consolidated balance sheet. The following table shows the derivative financial instruments split between those contracts that have a positive fair value (favourable contracts) and those that have a negative fair value (unfavourable contracts). 2007 2006(1) Interest rate swaps ................. $ 273,000 $ Equity contracts ..................... Foreign exchange contracts ... Embedded derivatives in 6,000 2,594 equity linked deposits ...... Other forecasted transactions Total ....................................... $ 281,594 $ n/a – Favourable Contracts Notional Amount Fair Value Favourable Contracts Notional Amount Unfavourable Contracts Fair Value (498) $ – (63) 946 $ 209,000 $ 515 35 – 811 Notional Amount 75,000 $ 9,570 18,368 Fair Value Unfavourable Contracts Fair Value (1,734) – (7) Notional Amount 98 $ 543,500 $ 593 24 – 716 – – n/a – 1,496 $ 209,811 $ (746) – (1,307) $ – – 102,938 $ – – 715 $ – – 544,216 $ – – (1,741) (1) In the prior year, the fair value of the Bank’s derivative financial instruments were not reported on the consolidated balance sheet. The aggregate contractual or notional amount of the derivative 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 derivative financial instruments on hand during the year are set out in the following table. Favourable derivative financial instruments (assets) ............................................................................................... $ Unfavourable derivative financial instruments (liabilities) ................................................................................ $ 2007 867 1,124 $ $ 2006 1,172 2,902 The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on contracts. 2007 Maturity 2006 Maturity 1 Year or Less More than 1 Year 1 Year or Less More than 1 Year Notional Amount Contractual Interest Rate Notional Amount Contractual Interest Rate Contractual Notional Amount Interest Notional Amount Rate Contractual Interest Rate Interest Rate Contracts Interest rate swaps– receive fixed amounts(1) .... $ 394,000 Equity Contracts(2) ............... 1,600 Foreign Exchange Contracts(3) 3,405 Total ........................................ $ 399,005 4.82% $ $ 88,000 4,400 – 92,400 4.83% $ 504,500 3,570 19,084 $ 527,154 4.33% $ 114,000 6,000 – $ 120,000 4.33% (1) The Bank pays floating interest amounts based on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps mature between January 2008 and March 2012. (2) The Bank receives amounts based on the specified equity index and pays amounts based on the one-month (30-day) Canadian Bankers’ Acceptance rate. Equity contracts mature between February 2008 and March 2011. (3) The contractual interest rate is not meaningful for foreign exchange contracts. Foreign exchange contracts mature between November 2007 and February 2008. 70 purpose driven | CWB 2007 AnnuAL reporT For the year ended October 31, 2007, a net unrealized after tax gain of $1,402 was recorded in other comprehensive income for changes in fair value of the effective portion of derivatives designated as cash flow hedges and $nil was recorded in other income for changes in fair value of the ineffective portion of derivatives classified as cash flow hedges. Amounts accumulated in other comprehensive income are reclassified to net income in the same period that interest on certain floating rate loans (i.e. the hedged items) affect income. A net loss of $2,687 before tax was reclassified to net income. A net loss of $68 before tax recorded in accumulated other comprehensive income (loss) as at October 31, 2007 is expected to be reclassified to net income in the next 12 months and will offset variable cash flows from floating rate loans. There were no forecasted transactions that failed to occur. 11. other assets Accrued interest receivable .................................................................................................................................................... $ Future income tax asset ..........................................................................................................................................(Note 22) Financing costs(1) ..................................................................................................................................................................... Accounts receivable ................................................................................................................................................................. Prepaid expenses ...................................................................................................................................................................... Other ........................................................................................................................................................................... Total ............................................................................................................................................................................ $ 2007 39,245 16,944 4,667 3,550 2,589 2,634 69,629 $ $ 2006 26,809 15,561 3,771 5,910 8,697 1,297 62,045 (1) Amortization for the year amounted to $839 (2006 – $428). 12. deposIts Payable on demand .................................................................................. Payable after notice .................................................................................. Payable on a fixed date ........................................................................... Deposit from CWB Capital Trust(1) ...................................................... Total ........................................................................................................... $ Individuals 15,873 788,199 3,909,616 – $ 4,713,688 Payable on demand .................................................................................. $ Payable after notice .................................................................................. Payable on a fixed date ............................................................................ Deposit from CWB Capital Trust(1) ...................................................... Total ........................................................................................................... Individuals 13,765 426,546 3,138,917 – $ 3,579,228 Business and Government 360,615 $ 1,055,600 2,012,015 105,000 $ 3,533,230 $ Business and Government 377,487 835,724 1,381,605 105,000 $ 2,699,816 Financial Institutions 2007 Total 376,488 1,843,799 5,931,631 105,000 $ 8,256,918 – $ – 10,000 – 10,000 Financial Institutions 2006 Total 391,252 1,262,270 4,538,485 105,000 $ 6,297,007 – $ – 17,963 – 17,963 $ $ $ $ (1) The senior deposit note of $105 million from CWB Capital Trust is reflected as a Business and Government deposit payable on a fixed date. This senior deposit note bears interest at an annual rate of 6.199% until December 31, 2016 and, thereafter, at the CDOR 180-day Bankers’ Acceptance rate plus 2.55%. This note is redeemable at the Bank’s option, in whole or in part, on and after December 31, 2011, or earlier in certain specified circumstances, both subject to the approval of OSFI. Each one thousand dollars of WesTS principal is convertible at any time into 40 non– cumulative redeemable CWB First Preferred Shares Series 1 of the Bank at the option of CWB Capital Trust. CWB Capital Trust will exercise this conversion right in circumstances in which holders of CWB Capital Trust Capital Securities Series 1 (WesTS) exercise their holder exchange rights. See Note 13 for more information on WesTS and CWB Capital Trust. 13. trust capItal securItIes In the prior year, the Bank arranged for the issuance of innovative capital instruments, CWB Capital Trust Capital Securities Series 1 (WesTS), through Canadian Western Bank Capital Trust (CWB Capital Trust), a special purpose entity. CWB Capital Trust, an open-end trust, issued non-voting WesTS and the proceeds were used to purchase a senior deposit note from CWB. CWB Capital Trust is a variable interest entity under Accounting Guideline AcG-15. Although CWB owns the unit holder’s equity and voting control of CWB Capital Trust through Special Trust Securities, the Bank is not exposed to the majority of any CWB Capital Trust losses and is, therefore, not the primary beneficiary under AcG-15. Accordingly, CWB does not consolidate CWB Capital Trust and the WesTS issued by CWB Capital Trust are not reported on the consolidated balance sheets, but the senior deposit note is reported in deposits (see Note 12) and interest expense is recognized on the senior deposit note. Holders of WesTS are eligible to receive semi-annual non-cumulative fixed cash distributions. No cash distributions will be payable by CWB Capital Trust on WesTS if CWB fails to declare regular dividends on its preferred shares or, if no preferred shares are outstanding, on its common shares. In this case, the net distributable funds of CWB Capital Trust will be distributed to the Bank as holder of the residual interest in CWB Capital Trust. Should CWB Capital Trust fail to pay the semi–annual distributions in full, CWB has contractually agreed not to declare dividends of any kind on any of the preferred or common shares for a specified period of time. purpose driven | CWB 2007 AnnuAL reporT 71 The following information presents the outstanding WesTS: Issuance date Distribution dates Annual yield Earliest date redeemable at the option of the issuer Earliest date exchangeable at the option of the holder Trust capital securities outstanding Principal amount August 31, 2006 June 30, December 31 6.199% December 31, 2011 Anytime 105,000 $105,000 The significant terms and conditions of the WesTS are 1) 2) 3) 4) 5) 6) 7) Subject to the approval of OSFI, CWB Capital Trust may, in whole (but not in part), on the redemption date specified above, and on any distribution date thereafter, redeem the WesTS without the consent of the holders. Subject to the approval of OSFI, upon occurrence of a special event as defined, prior to the redemption date specified above, CWB Capital Trust may redeem all, but not part, of the WesTS without the consent of the holders. The WesTS may be redeemed for cash equivalent to (i) the early redemption price if the redemption occurs prior to December 31, 2016 or (ii) the redemption price if the redemption occurs on or after December 31, 2016. Redemption price refers to an amount equal to one thousand dollars plus the unpaid distributions to the redemption date. Early redemption price refers to an amount equal to the greater of (i) the redemption price and (ii) the price calculated to provide an annual yield, equal to the yield on a Government of Canada bond issued on the redemption date with a maturity date of December 31, 2016, plus 0.50%. Holders of WesTS may, at any time, exchange each one thousand dollars of principal for 40 First Preferred Shares Series 1 of the Bank. CWB’s First Preferred Shares Series 1 pay semi-annual non-cumulative cash dividends with an annual yield of 4.00% and will be redeemable at the option of the Bank, with OSFI approval, on or after December 31, 2011, but not at the option of the holders. This exchange right will be effected through the conversion by CWB Capital Trust of the corresponding amount of the deposit note of the Bank. The WesTS exchanged for the Bank’s First Preferred Shares Series 1 will be cancelled by CWB Capital Trust. Each WesTS will be exchanged automatically without the consent of the holders for 40 non–cumulative redeemable CWB First Preferred Shares Series 2 upon occurrence of any one of the following events: (i) proceedings are commenced for the winding up of the Bank, (ii) OSFI takes control of the Bank, (iii) the Bank has a Tier 1 capital ratio of less than 5% or Total capital ratio of less than 8%, or (iv) OSFI has directed the Bank to increase its capital or provide additional liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction. Following the occurrence of an automatic exchange, the Bank would hold all of the Special Trust Securities and all of the WesTS, and the primary asset of CWB Capital Trust would continue to be the senior deposit note. The Bank’s First Preferred Shares Series 2 pay semi–annual non–cumulative cash dividends with an annual yield of 5.25% and will be redeemable at the option of the Bank, with OSFI approval, on or after December 31, 2011, but not at the option of the holders. For regulatory capital purposes, WesTS are included in Tier 1 capital to a maximum of 15% of net Tier 1 capital with the remainder included in Tier 2 capital. At October 31, 2007, all (2006 – $91,032) of the outstanding WesTS amount was included in Tier 1 capital and the remainder of $nil (2006 – $13,968) was included in Tier 2 capital. The non-cumulative cash distribution on the WesTS will be 6.199% paid semi-annually until December 31, 2016 and, thereafter, at CDOR 180-day Bankers’ Acceptance rate plus 2.55%. 14. InsuRAnce related other lIaBIlItIes Unpaid claims and adjustment expenses ............................................................................................................................ $ Unearned premiums ............................................................................................................................................................... Unearned reinsurance commissions .............................................................................................................................................. Due to insurance companies and policyholders ................................................................................................... Total ..................................................................................................................................................................................... $ 15. other lIaBIlItIes Accrued interest payable ........................................................................................................................................................ $ Accounts payable ..................................................................................................................................................................... Taxes payable...................................................................................................................................................................................... Deferred revenue ..................................................................................................................................................................... Leasehold inducements ................................................................................................................................................................... Future income tax liability ....................................................................................................................................(Note 22) Other ..................................................................................................................................................................................... Total ........................................................................................................................................................................... $ 2007 68,561 $ 54,537 824 558 124,480 $ $ 2007 97,869 26,265 4,455 2,570 1,588 1,550 368 134,665 $ 2006 62,630 51,679 2,206 4,421 120,936 2006 72,146 21,313 6,232 1,710 1,968 1,686 232 105,287 72 purpose driven | CWB 2007 AnnuAL reporT 16. 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. Interest Rate 5.660%(1) 5.960%(1) 5.550%(2) 5.426%(3) 5.070%(4) 5.571%(5) 6.850%(6) Maturity Date July 7, 2013 October 24, 2013 November 19, 2014 November 21, 2015 March 21, 2017 March 21, 2022 June 30, 2012 Earliest Date Redeemable by CWB at Par July 8, 2008 October 25, 2008 November 20, 2009 November 22, 2010 March 22, 2012 March 22, 2017 June 30, 2007 $ 2007 30,000 35,000 60,000 70,000 120,000 75,000 – $ 390,000 $ 2006 30,000 35,000 60,000 70,000 – – 3,126 $ 198,126 (1) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 175 basis points. (2) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 160 basis points. (3) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 180 basis points. (4) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 155 basis points. Of the $125,000 debentures issued, $5,000 were acquired by Canadian Direct Insurance Incorporated, a wholly owned subsidiary, and have been eliminated on consolidation. (5) These conventional debentures have a 15-year term with a fixed interest rate for the first ten years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus 180 basis points. (6) This conventional debenture had a 10-year term with a fixed interest rate for the first five years. The debenture was redeemed by the Bank at face value on June 30, 2007. 17. 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; and 25,000,000 first preferred shares without nominal or par value, issuable in series, of which 4,200,000 first preferred shares Series 1 and 4,200,000 first preferred shares Series 2 have been reserved (see Note 13). Issued and fully paid: Common shares(1) Outstanding at beginning of year .................................................... Issued on exercise or exchange of options ..................................... Transferred from contributed surplus on exercise or exchange of options .......................................................................... Outstanding at end of year .................................................................. Number of Shares 2007 Amount Number of Shares 2006 Amount 61,936,260 899,929 $ 215,349 2,464 61,227,268 708,992 $ 213,098 1,669 – 62,836,189 1,191 $ 219,004 – 61,936,260 582 $ 215,349 (1) A stock dividend effecting a two-for-one split of the Bank’s common shares was declared and paid during 2007. All prior period common share information has been restated to reflect this effective split. 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. In addition, should CWB Capital Trust fail to pay the semi-annual distributions in full on the CWB Capital Trust Securities Series 1 (see Note 13), the Bank has contractually agreed to not declare dividends on any of its common and preferred shares for a specified period of time. These limitations do not restrict the current level of dividends. purpose driven | CWB 2007 AnnuAL reporT 73 18. share IncentIVe plan A stock dividend effecting a two-for-one split of the Bank’s common shares was declared and paid during 2007. All prior period common share and per common share information has been restated to reflect this effective split. The Bank has authorized 5,176,357 common shares (2006 – 5,395,784) for issuance under the share incentive plan. Of the amount authorized, options exercisable into 4,911,277 shares (2006 – 5,030,040) 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 date. All options expire within 10 years of date of grant. Outstanding options expire on dates ranging from December 2007 to July 2013. The details of, and changes, in the issued and outstanding options follow: Options Balance at beginning of year ................................................................... Granted ..................................................................................................... Exercised or exchanged ........................................................................... Forfeited .................................................................................................... Balance at end of year ............................................................................. Number of Options 5,030,040 1,118,000 (1,122,863) (113,900) 4,911,277 2007 Weighted Average Exercise Price 13.07 25.49 7.61 20.98 16.96 $ $ 2006 Weighted Average Exercise Price 9.78 21.29 6.31 13.43 13.07 Number of Options 4,780,024 $ 1,181,000 (893,984) (37,000) 5,030,040 $ Exercisable at end of year ....................................................................... 1,656,077 $ 9.30 1,336,940 $ 7.04 Further details relating to stock options outstanding and exercisable follow: Range of exercise prices $4.78 to $8.33 ............................................................... $10.00 to $10.84 .......................................................... $11.18 to $17.58 .......................................................... $19.16 to $21.46 .......................................................... $22.29 to $28.11 .......................................................... Total ............................................................................... Number of Options 536,327 1,119,750 1,093,100 1,066,000 1,096,100 4,911,277 Options Outstanding Average Remaining Contractual Life (years) 0.6 1.7 2.8 4.1 4.3 2.9 $ $ Weighted Average Exercise Price 7.66 10.08 15.71 21.44 25.44 16.96 Options Exercisable Weighted Average Exercise Price 7.66 10.08 – – – 9.30 Number of Options 536,327 $ 1,119,750 – – – 1,656,077 $ The terms of the share incentive plan allow the holders of vested options a cashless settlement alternative whereby the option holder can either (a) elect to receive shares by delivering cash to the Bank in the amount of the option exercise price or (b) elect to receive the number of shares equivalent to the excess of the market value of the shares under option, determined at the exercise date, over the exercise price. Of the 1,122,863 (2006 – 893,984) options exercised or exchanged, option holders exchanged the rights to 796,213 (2006 – 630,784) options and received 572,777 (2006 – 445,792) shares in return under the cashless settlement alternative. Salary expense of $4,532 (2006 – $3,251) was recognized relating to the estimated fair value of options granted since November 1, 2002. 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 4.2% (2006 – 4.3%), (ii) expected option life of 4.0 (2006 – 4.5) years, (iii) expected volatility of 19% (2006 – 19%), and (iv) expected dividends of 1.3% (2006 – 1.1%). The weighted average fair value of options granted was estimated at $4.94 (2006 – $4.33) per share. During the year, $1,191 (2006 – $582) was transferred from contributed surplus to share capital, representing the estimated fair value recognized for 795,863 (2006 – 431,200) options granted after November 1, 2002 and exercised during the year. 19. contIngent lIaBIlItIes 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 sheets. These items are reported below and are expressed in terms of the contractual amount of the related commitment. 2007 2006 Credit Instruments Guarantees and standby letters of credit ...................................................................................................................... $ Commitments to extend credit ................................................................................................................................... 147,339 1,954,200 Total ................................................................................................................................................................................... $ 2,569,409 $ 2,101,539 202,194 $ 2,367,215 74 purpose driven | CWB 2007 AnnuAL reporT 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 $800,301 (2006 – $782,848) and recently authorized but unfunded loan commitments of $1,566,915 (2006 – $1,171,352). 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. Revolving credit authorizations are subject to repayment which, on a pooled basis, also decreases liquidity risk. b) lease commitments The Bank has obligations under long-term non-cancellable operating leases for the rental of premises. Minimum future lease commitments for each of the five succeeding years and thereafter are as follows: 2008 ......................................................................................................................................................................................... 2009 ......................................................................................................................................................................................... 2010 ......................................................................................................................................................................................... 2011 ......................................................................................................................................................................................... 2012 ......................................................................................................................................................................................... 2013 and thereafter .............................................................................................................................................................. Total ...................................................................................................................................................................................... $ $ 6,883 7,102 6,890 6,659 6,386 32,723 66,643 c) guarantees 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 predetermined 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 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. At year-end, the total approved business credit card limit was $9,728 (2006 – $8,291) and the balance outstanding was $2,238 (2006 – $1,883). No amounts are reflected in the consolidated financial statements related to these guarantees and indemnifications. d) legal proceedings In the ordinary course of business, the Bank and its subsidiaries are party to legal proceedings. Based on current knowledge, the Bank does not expect the outcome of any of these proceedings to have a material effect on the consolidated financial position or results of operations. 20. InsuRAnce opeRAtIons a) Insurance Income Insurance income reported in other income on the consolidated statements of income is presented net of claims, adjustment expenses and policy acquisition costs. Net earned premiums ............................................................................................................................................................. $ Commissions and processing fees ........................................................................................................................................ Net claims and adjustment expenses ................................................................................................................................... Policy acquisition costs ................................................................................................................................................. Insurance revenues, net ........................................................................................................................................... $ 2007 94,914 2,751 (62,391) (20,011) 15,263 $ $ 2006 81,674 4,826 (52,962) (18,334) 15,204 purpose driven | CWB 2007 AnnuAL reporT 75 b) unpaid claims and adjustment expenses (i) Nature of Unpaid Claims The establishment of the provision for unpaid claims and adjustment expenses and the related reinsurers’ share is based on known facts and interpretation of circumstances and is, therefore, a complex and dynamic process influenced by a large variety of factors. These factors include experience with similar cases and historical trends involving claim payment patterns, loss payments, pending levels of unpaid claims, product mix or concentration, claims severity, and claims frequency patterns. Other factors include the continually evolving and changing regulatory and legal environment, actuarial studies, professional experience and expertise of the claims department personnel and independent adjusters retained to handle individual claims, quality of the data used for projection purposes, existing claims management practices, including claims handling and settlement practices, effect of inflationary trends on future claims settlement costs, investment rates of return, court decisions, economic conditions and public attitudes. In addition, time can be a critical part of the provision determination since, the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tailed claims, such as property claims, tend to be more reasonably predictable than long–tailed claims, such as liability claims. Consequently, the establishment of the provision for unpaid claims and adjustment expenses relies on the judgment and opinions of a large number of individuals, on historical precedent and trends, on prevailing legal, economic, social and regulatory trends and on expectations as to future developments. The process of determining the provisions necessarily involves risks that the actual results will deviate, perhaps substantially, from the best estimates made. ii) Provision for Unpaid Claims and Adjustment Expenses An annual evaluation of the adequacy of unpaid claims is completed at the end of each financial year. This evaluation includes a re-estimation of the liability for unpaid claims relating to each preceding financial year compared to the liability that was originally established. The results of this comparison and the changes in the provision for unpaid claims and adjustment expenses follow: Unpaid claims and adjustment expenses, net, beginning of year .............................................................................. $ Claims incurred In the current year ............................................................................................................................................... In prior periods .................................................................................................................................................... Claims paid during the year ............................................................................................................................................. Unpaid claims and adjustment expenses, net, end of year ................................................................................................. Reinsurers’ share of unpaid claims and adjustment expenses ........................................................................................... Recoverable on unpaid claims ......................................................................................................................................... Unpaid claims and adjustment expenses, net, end of year ................................................................................... $ 2007 40,561 $ 2006 30,297 62,406 (15) (52,563) 50,389 10,915 7,257 68,561 $ 53,400 (438) (42,698) 40,561 14,906 7,163 62,630 The provision for unpaid claims and adjustment expenses and related reinsurance recoveries are discounted using rates based on the projected investment income from the assets supporting the provisions, and reflecting the estimated timing of payments and recoveries. The investment rate of return used for all cash flow periods and all lines of business was 4.3% (2006 – 4.1%). However, that rate was reduced by a 1% (2006 – 1%) provision for adverse deviation in discounting the provision for unpaid claims and adjustment expenses and related reinsurance recoveries. The impact of this provision for adverse deviation results in an increase of $821 (2006 – $667) in unpaid claims and adjustment expenses and related reinsurance recoveries. Policy balances, included in insurance related other assets and other liabilities, analyzed by major lines of business are as follows: Unpaid claims and adjustment expenses .............................................. Reinsurers’ share of unpaid claims and adjustment expenses ........... Unearned premiums ................................................................................ Reinsurers’ share of unearned premiums ............................................. c) underwriting policy and reinsurance ceded Automobile 59,379 $ 10,904 40,741 – $ 2007 Home 9,182 11 13,796 – $ Automobile 55,817 $ 14,851 39,227 3,639 2006 Home 6,813 55 12,452 1,245 Reinsurance contracts with coverage up to maximum policy limits are entered into to protect against losses in excess of certain amounts that may arise from automobile, personal property and liability claims. Reinsurance with a limit of $180,000 (2006 – $160,000) is obtained to protect against certain catastrophic losses. Retention on catastrophic events and property and liability risks is generally $1,000 (2006 – $1,000). Retentions are further reduced by quota share reinsurance and, for the British Columbia automobile insurance product, by the underlying mandatory coverage provided by the provincially governed Crown corporation. Due to the geographic concentration of the business, management believes earthquakes and windstorms are its most significant exposure to catastrophic losses. Utilizing sophisticated computer modelling techniques developed by independent consultants to quantify the estimated exposure to such losses, management believes there is sufficient catastrophe reinsurance protection. There was no quota share agreement in effect for the year. The previous quota share agreement, ceding 10% of gross retention, expired October 31, 2006. 76 purpose driven | CWB 2007 AnnuAL reporT At October 31, 2007, $10,915 (2006 – $14,906) of unpaid claims and adjustment expenses were recorded as recoverable from reinsurers. Failure of a reinsurer to honour its obligation could result in losses. The financial condition of reinsurers is regularly evaluated to minimize the exposure to significant losses from reinsurer insolvency. The amounts shown in other income are net of the following amounts relating to reinsurance ceded to other insurance companies: Premiums earned reduced by ................................................................................................................................ $ Claims incurred reduced by .................................................................................................................................. 2007 7,057 1,466 $ 2006 14,812 8,059 21. dIsclosures on RAte regulatIon Canadian Direct Insurance Incorporated (Canadian Direct), a wholly owned subsidiary, is licensed under insurance legislation in the provinces in which it conducts business. Automobile insurance is a compulsory product and is subject to different regulations across the provinces in Canada, including those with respect to rate setting. Rate setting mechanisms vary across the provinces, but they generally fall under three categories: use and file, file and use, and file and approve. Under use and file, rates are filed following use. Under file and use, insurers file their rates with the relevant authorities and wait for a prescribed period of time and then implement the proposed rates. Under file and approve, insurers must wait for specific approval of filed rates before they may be used. The authorities that regulate automobile insurance rates, in the provinces in which Canadian Direct is writing that business, are listed below. Automobile direct written premiums in these provinces totalled $71,700 in 2007 (2006 – $69,200) and represented 100% (2006 – 100%) of direct automobile premiums written. Province Alberta Rate Filing Regulatory Authority File and approve or Alberta Automobile Insurance Rate Board File and use British Columbia File and use British Columbia Utilities Commission Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory asset or liability. At October 31, 2007, there was no regulatory asset or liability. 22. IncoMe taxes The provision for income taxes consists of the following: Current ....................................................................................................................................................................... $ Future ......................................................................................................................................................................... Provision for income taxes ............................................................................................................................................. $ 2007 38,267 1,387 39,654 $ $ 2006 36,530 (3,094) 33,436 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 statements of income follows: Combined Canadian federal and provincial income taxes and statutory tax rate ................................................... $ 44,832 33.0% $ 35,410 Increase (decrease) arising from: Tax-exempt income ............................................................................. Income tax recovery .............................................................................. Future federal and provincial tax rate reductions(1) ......................... Stock-based compensation .................................................................. Other ....................................................................................................... Provision for income taxes and effective tax rate ............................ $ (4,124) (3,495) – 1,486 955 39,654 (3.0) (2.6) – 1.1 0.7 29.2% (2,427) (2,000) 1,200 1,085 168 33,436 $ 2007 2006 33.6% (2.3) (1.9) 1.1 1.0 0.2 31.7% (1) Future federal and provincial tax rate reductions represent the revaluation of future income tax assets to reflect corporate income tax rate reductions enacted for accounting purposes. purpose driven | CWB 2007 AnnuAL reporT 77 Future income tax balances are comprised of the following: Net future income tax assets Allowance for credit losses ..................................................................................................................................................... $ Other temporary differences ................................................................................................................................... Net future income tax liabilities Intangible assets ....................................................................................................................................................................... $ Allowance for credit losses ..................................................................................................................................................... Other temporary differences ................................................................................................................................... $ $ 2007 2006 $ 16,235 709 16,944 $ 923 $ (729) 1,356 1,550 $ 14,528 1,033 15,561 1,110 (513) 1,089 1,686 The Bank has approximately $11,140 (2006 – $11,140) of capital losses that 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. 23. earnIngs per coMMon share The calculation of earnings per common share follows: Numerator Net income – basic and diluted .............................................................................................................................. $ 2007 2006 96,282 $ 72,007 Denominator Weighted average of common shares outstanding – basic ......................................................................................... 62,354,101 Dilutive instruments: Employee stock options(2)................................................................................................. 1,897,449 Weighted average number of common shares outstanding – diluted ................................................................ 64,251,550 61,514,674 2,086,280 63,600,954 Earnings per Common Share Basic ........................................................................................................................................................................................ $ Diluted.................................................................................................................................................................................... 1.54 $ 1.50 1.17 1.13 (1) A stock dividend effecting a two-for-one split of the Bank’s common shares was declared and paid during 2007. All prior period common share and per common share information has been restated to reflect this effective split. (2) At October 31, the denominator excludes 365,000 (2006 – 1,127,000) employee stock options with an average adjusted exercise price of $31.38 (2006 – $25.12) where the exercise price, adjusted for unrecognized stock-based compensation, is greater than the average market price. 24. trust assets under adMInIstRAtIon Trust assets under administration of $4,283,900 (2006 – $3,344,414) represent assets held for personal and corporate clients, administered by subsidiaries, and are kept separate from the subsidiaries’ own assets. Trust assets under administration are not reflected in the consolidated balance sheets and relate to the banking and trust segment. 25. related partY tRAnsactIons The Bank makes loans, primarily residential mortgages, to its officers and employees at various preferred rates and terms. The total amount outstanding for these types of loans is $56,045 (2006 – $37,043). The Bank offers deposits, primarily fixed term deposits to its officers, employees and their immediate family at preferred rates. The total amount outstanding for these types of deposits is $102,776 (2006 – $79,513). 26. Interest RAte sensItIVItY The Bank is exposed to interest rate risk as a result of a difference, or gap, between the maturity or repricing behaviour of interest sensitive assets and liabilities. The interest rate gap is managed by forecasting core balance trends. The repricing profile of these assets and liabilities has been incorporated in the table below showing the gap position at October 31 for select time intervals. Figures in brackets represent an excess of liabilities over assets or a negative gap position. 78 purpose driven | CWB 2007 AnnuAL reporT Asset Liability Gap Positions ($ millions) October 31, 2007 Assets Cash resources ......................... Securities .................................. Loans ......................................... Other assets .............................. Derivative financial instruments(1) ....... Total .......................................... Liabilities and Equity ............. Deposits .................................... Other liabilities ........................ Debentures ............................... Shareholders’ equity ............... Derivative financial instruments(1) ...... Total .......................................... Interest Rate Sensitive Gap Cumulative Gap ...................... Cumulative Gap as a Percentage of Total Assets Floating Rate and Within 1 Month 1 to 3 Months 3 Months to 1 Year Total Within 1 Year 1 Year to More than 5 Years 5 Years Non- interest Sensitive Total $ $ 166 325 3,886 – – 4,377 3,524 2 – – 13 64 383 – 92 552 687 5 – – $ $ 139 679 746 – 318 1,068 5,015 – $ 93 350 2,387 – 304 1,868 396 6,797 91 2,921 1,580 21 65 – 5,791 28 65 – 2,360 28 250 – $ – $ 127 68 – – 195 106 13 75 – 2 $ 4 (64) 158 413 1,549 7,406 158 – 100 – 214 – 596 487 10,013 8,257 283 390 596 487 4,013 364 364 $ $ $ $ – 692 (140) 224 $ $ – 1,666 202 426 $ $ 487 6,371 426 426 $ $ – 2,638 283 709 $ $ – 194 1 710 $ $ – 810 (710) – $ $ 487 10,013 – – 3.6% 2.2% 4.3% 4.3% 7.1% 7.1% – – October 31, 2006 Total assets ............................... Total liabilities and equity ..... Interest Rate Sensitive Gap ... $ Cumulative Gap ...................... $ Cumulative Gap as a $ Percentage of Total Assets $ 3,210 3,289 (79) $ $ (79) 391 609 (218) (297) $ 1,400 1,281 119 (178) $ $ $ $ $ 5,001 5,179 (178) (178) $ 2,495 1,889 606 428 $ $ $ $ $ 183 117 66 494 $ $ $ 217 711 (494) – $ $ $ 7,896 7,896 – – (1.0)% (3.8)% (2.3)% (2.3)% 5.4% 6.3% – – (1) Derivative financial instruments are included in this table at the notional amount. (2) Accrued interest is excluded in calculating interest sensitive assets and liabilities. (3) 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. The effective, weighted average interest rates for each class of financial asset and liability are shown below. Weighted Average Effective Interest Rates (%) October 31, 2007 Assets Cash resources ............................................ Securities ..................................................... Loans ............................................................ Derivative financial instruments .............. Total ............................................................. Liabilities Deposits ....................................................... Debentures .................................................. Derivative financial instruments .............. Total ............................................................. Interest Rate Sensitive Gap ...................... October 31, 2006 Total assets .................................................. Total liabilities ............................................ Interest Rate Sensitive Gap ...................... Floating Rate and Within 1 to 3 1 Month Months Total 3 Months Within 1 Year to to 1 Year 1 Year 5 Years More than 4.6% 4.4 6.9 – 6.6 3.8 – 4.8 3.9 2.7% 6.6% 3.6 3.0% 4.4% 4.3 5.6 4.0 5.2 4.4 – – 4.4 0.8% 4.6% 4.0 0.6% 4.4% 4.5 6.2 4.5 5.2 4.2 5.8 – 4.3 0.9% 4.9% 3.8 1.1% 4.5% 4.5 6.7 4.4 6.1 4.0 5.8 4.8 4.1 2.1% 6.0% 3.7 2.3% 4.6% 5.0 6.2 4.8 5.9 4.2 5.3 – 4.2 1.7% 5.8% 3.9 1.9% 5 Years Total 5.5% 5.6 5.9 – 5.7 6.4 5.6 – 5.6 0.1% 5.7% 5.7 0.0% 4.6% 4.7 6.5 4.5 6.0 4.1 5.4 4.8 4.1 1.9% 5.9% 3.8 2.1% purpose driven | CWB 2007 AnnuAL reporT 79 27. 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 fair value of a financial instrument on initial recognition is normally the transaction price (i.e. the value of the consideration given or received). Subsequent to initial recognition, financial instruments measured at fair value on the consolidated balance sheet that are quoted in active markets are based on bid prices for financial assets and offer prices for financial liabilities. For certain securities and derivative financial instruments where an active market does not exist, fair values are determined using valuation techniques that refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Several of the Bank’s significant financial instruments, such as loans and deposits, 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 loans, deposits and subordinated debentures are 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 table below sets out the fair values of financial instruments (including certain derivatives) 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. 2007 Book Value Fair Value Fair Value Over(Under) Book Value Book Value 2006 Fair Value Over(Under) Book Value Fair Value $ 412,690 1,341,626 $ 412,690 1,341,626 $ $ – – 438,294 885,693 $ 438,001 885,397 $ (293) (296) Assets Cash resources .................(Note 3) Securities...........................(Note 4) Securities purchased under resale agreements ...................... Loans(1) ........................................... Other assets(2) ................................ Derivative related .......................... 206,925 7,406,733 77,573 1,496 Liabilities Deposits(1) ....................................... Other liabilities(3) ........................... Subordinated debentures ............. Derivative related .......................... 8,256,918 215,798 390,000 1,307 206,925 7,325,340 77,573 1,496 8,219,463 215,798 386,690 1,307 – (81,393) – – (37,455) – (3,310) – 9,000 5,781,810 63,252 – 9,000 5,736,638 63,252 – 6,297,007 188,216 198,126 – 6,274,816 188,216 198,041 – – (45,172) – – (22,191) – (85) – (1) Loans and deposits exclude deferred premiums and deferred revenue, which are not financial instruments. (2) Other assets exclude land, buildings and equipment, goodwill and other intangible assets, reinsurers’ share of unpaid claims and adjustment expenses, future income tax asset, prepaid and deferred expenses, financing costs and other items that are not financial instruments. (3) Other liabilities exclude future income tax liability, deferred revenue, unearned insurance premiums and other items that are not financial instruments. (4) For further information on interest rates associated with financial assets and liabilities, including derivative instruments, refer to Note 26. The methods and assumptions used to estimate the fair values of financial instruments are as follows: cash resources and securities are reported on the consolidated balance sheet at the fair value disclosed in Notes 3 and 4. These values • are based on quoted market prices, if available. Where a quoted market price is not readily available, other valuation techniques are based on observable market rates used to estimate fair value; loans reflect changes in the general level of interest rates that 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; other assets and other liabilities, with the exception of derivative financial instruments, are assumed to approximate their carrying • values due to their short-term nature; for derivative financial instruments where an active market does not exist, fair values are determined using valuation techniques that • refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. 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 judgment and, as such, may not be reflective of future fair values. 80 purpose driven | CWB 2007 AnnuAL reporT 28. rIsK ManageMent As part of the Bank’s risk management practices, the risks that are significant to the business are identified, monitored and controlled. The most significant risks include credit risk, liquidity risk, market risk, insurance risk, operational risk and litigation risk. The nature of these risks and how they are managed is provided in the commentary on pages 51 to 56 of the MD&A. Information on specific measures of risk, including the allowance for credit losses, derivative financial instruments, interest rate sensitivity, fair value of financial instruments and liability for unpaid claims are included elsewhere in these notes to the consolidated financial statements. 29. segMented InforMatIon The Bank operates principally in two industry segments – banking and trust, and insurance. These two segments differ in products and services but are both within the same geographic region. The banking and trust segment provides services to personal clients and small-to-medium sized commercial business clients primarily in Western Canada. The insurance segment provides home and automobile insurance to individuals in Alberta and British Columbia. Net interest income (teb)(1) ............ Less teb adjustment .......................... Net interest income per financial statements ....................... Other income(2) ................................. Total revenues .................................. Provision for credit losses ................ Non-interest expenses(3) .................. Provision for income taxes ............... Net income ........................................ Total average assets ($ millions)(4) Banking and Trust 2007 $ 205,867 5,023 2006 $ 165,249 3,845 200,844 47,506 248,350 10,200 113,456 36,185 $ 88,509 8,014 $ 161,404 37,791 199,195 10,200 93,711 30,217 65,067 6,287 $ $ $ $ $ Insurance 2007 4,792 387 $ 2006 3,435 233 $ 4,405 15,315 19,720 – 8,478 3,469 7,773 164 $ $ 3,202 15,295 18,497 – 8,338 3,219 6,940 147 $ $ Total 2007 210,659 $ 5,410 205,249 62,821 268,070 10,200 121,934 39,654 96,282 8,178 $ $ 2006 168,684 4,078 164,606 53,086 217,692 10,200 102,049 33,436 72,007 6,434 (1) Taxable Equivalent Basis (teb) – 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 statements of income) includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends 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. The taxable equivalent basis does not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks. (2) Other income for the insurance segment is presented net of claims, adjustment costs and policy acquisition costs (see Note 20) and also includes the gain on the sale of securities. (3) Amortization of intangible assets of $293 (2006 – $292) is included in the banking and trust segment and $250 (2006 – $250) in the insurance segment. Amortization of land, buildings and equipment total $4,365 (2006 – $3,683) for the banking and trust segment and $1,109 (2006 – $1,023) for the insurance segment while additions amounted to $6,010 (2006 – $7,957) for the banking and trust segment and $1,002 (2006 – $1,371) for the insurance segment. Goodwill of $3,679 (2006 – $3,679) is allocated to the banking and trust segment and $3,254 (2006 – $3,254) to the insurance segment. (4) Assets are disclosed on an average daily balance basis as this measure is most relevant to a financial institution and is the measure reviewed by management. (5) Transactions between the segments are reported at the exchange amount, which approximates fair market value. 30. suBsIdIarIes Canadian Western Bank Subsidiaries(1) (annexed in accordance with subsection 308 (3) of the Bank Act) October 31, 2007 Canadian Western Trust Company Canadian Direct Insurance Incorporated Valiant Trust Company Canadian Western Financial Ltd. Canadian Western Bank Capital Trust(3) Address of Head Office Suite 2300, 10303 Jasper Avenue Edmonton, Alberta Suite 600, 750 Cambie Street Vancouver, British Columbia Suite 310, 606 4th St. S.W. Calgary, Alberta Suite 2300, 10303 Jasper Avenue Edmonton, Alberta Suite 2300, 10303 Jasper Avenue Edmonton, Alberta Carrying Value of Voting Shares Owned by the Bank (2) $ 37,960 47,698 12,859 893 1,000 (1) The Bank owns 100% of the voting shares of each entity. (2) The carrying value of voting shares is stated at the Bank’s equity in the subsidiaries. (3) In accordance with accounting standards, this entity is not consolidated as the Bank is not the primary beneficiary. purpose driven | CWB 2007 AnnuAL reporT 81 31. future accountIng changes International Financial Reporting Standards The CICA plans to transition Canadian GAAP for public companies to International Financial Reporting Standards (IFRS) over a transition period expected to end in 2011. The impact of the transition to IFRS on the Bank’s consolidated financial statements is not yet determinable. Capital and Financial Instrument Disclosures The CICA issued new accounting standards that require the disclosure of both qualitative and quantitative information that enables financial statement users to evaluate the objectives, policies and processes for managing capital as well as enhanced disclosure regarding financial instruments. These new standards are effective for the Bank beginning November 1, 2007. 32. coMpaRAtIVe fIgures The October 31, 2006 balance sheet was adjusted to correct the classification of certain amounts within deposit liabilities. As a result of this correction, deposits payable after notice increased $45,582 and deposits payable on demand decreased $45,582. Certain other comparative figures have been reclassified to conform to the current period’s presentation. 82 purpose driven | CWB 2007 AnnuAL reporT Board of Directors and Senior Officers senior officers Executive Officers Larry M. Pollock President and Chief Executive Officer William J. Addington Executive Vice President Commercial and Retail Banking William A. Book Vice President and Regional Manager, Northern Alberta Region Tracey C. Ball Executive Vice President and Chief Financial Officer James o. Burke Vice President, Equipment Financing Group randy W. garvey Executive Vice President, Corporate Support Brian J. young Executive Vice President Chris H. fowler Senior Vice President, Credit Risk Management Jack C. Wright Senior Vice President Corporate Office Lars K. Christensen Vice President and Chief Internal Auditor richard r. gilpin Vice President, Credit Risk Management ricki L. golick Treasurer Carolyn J. graham Vice President and Chief Accountant gail L. Harding, Q.C. Vice President, General Counsel and Corporate Secretary uve Knaak Vice President, Human Resources Peter K. Morrison Vice President, Marketing and Product Development david r. Pogue Vice President, Corporate Development Michael vos Chief Technology Officer Michael N. Halliwell Vice President and Regional Manager, Prairies gregory J. Sprung Vice President and Regional Manager, British Columbia Canadian Western Trust Company Adrian M. Baker Vice President and Chief Operating Officer Trust Services Canadian Direct Insurance Incorporated Brian J. young President and Chief Executive Officer Susannah M. Bach Vice President, Corporate and Strategic Operations Colin g. Brown Chief Operating Officer Michael Martino Chief Financial Officer vince M. Muto Vice President, Claims Valiant Trust Company Matt K. Colpitts General Manager Ombudsman r. graham gilbert purpose driven | CWB 2007 AnnuAL reporT 83 Back row: (L – R) Larry Pollock, Arnold Shell, Gerald McGavin, Alan Rowe, Robert Phillips, Robert Manning Front row: Charles Allard, Albrecht Bellstedt, Jack Donald, Wendy Leaney, Allan Jackson, Howard Pechet board of directors Charles R. Allard President Rosedale Meadows Development Inc. Edmonton, Alberta Howard E. Pechet President Mayfield Consulting Inc. La Jolla, California, USA Albrecht W.A. Bellstedt, Q.C. President A.W.A. Bellstedt Professional Corporation Canmore, Alberta Jack C. Donald (Chairman) President and Chief Executive Officer Parkland Properties Ltd. Red Deer, Alberta Allan W. Jackson President and Chief Executive Officer 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, O.B.C. President McGavin Properties Ltd. Vancouver, British Columbia Robert L. Phillips President R.L. Phillips Investments Inc. Vancouver, British Columbia Larry M. Pollock President and Chief Executive Officer Canadian Western Bank Edmonton, Alberta Alan M. Rowe Partner Crown Capital Partners Inc. and Crown Realty Partners Toronto, Ontario Arnold J. Shell President Arnold J. Shell Consulting Inc. Calgary, Alberta direCTorS eMeriTuS John goldberg Jordan L. golding Arthur g. Hiller Peter M.S. Longcroft Alma M. McConnell dr. Maurice W. Nicholson eugene i. Pechet dr. Maurice M. Pechet 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.cwbankgroup.com Subsidiary Regional Office Canadian Western Trust Company Suite 600, 750 Cambie Street Vancouver, BC v6B 0A2 Telephone: (800) 663-1124 Fax: (604) 669-6069 Website: www.cwt.ca Canadian Direct Insurance Incorporated Suite 600, 750 Cambie Street Vancouver, BC v6B 0A2 Telephone: (604) 699-3678 Fax: (604) 699-3851 Website: www.canadiandirect.com Valiant Trust Company Suite 310, 606 – 4th Street S.W. Calgary, Alberta T2p 1T1 Telephone: (403) 233-2801 Fax: (403) 233-2857 Website: www.valianttrust.com Stock Exchange Listing The Toronto Stock Exchange Share Symbol: CWB Transfer Agent and Registrar Mailing Address valiant Trust Company Suite 310, 606 – 4th Street S.W. Calgary, Alberta T2p 1T1 Telephone: (866) 313-1872 Fax: (403) 233-2857 Corporate Secretary Gail L. Harding, Q.C. Vice President, General Counsel and Corporate Secretary Canadian Western Bank Suite 200, 606 – 4th Street S.W. Calgary, Alberta T2p 1T1 Telephone: (403) 268-7829 Fax: (403) 264-1619 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 Senior Manager, Investor and Public Relations. Annual Meeting The annual meeting of the common shareholders of Canadian Western Bank will be held on March 6, 2008 at the Delta Bessborough Hotel, Saskatoon, Saskatchewan, at 3:00 p.m. Central Time (2:00 p.m. MT). Investor Relations For further financial information, contact: Kirby Hill Senior Manager, Investor and Public Relations Canadian Western Bank Toll-free: (800) 836-1886 Fax: (780) 423-8899 E-mail: InvestorRelations@cwbank.com or visit our website at www.cwbankgroup.com Online Investor Information Additional investor information, including supplemental financial information and a corporate presentation, is available on our website at www.cwbankgroup.com Complaints or Concerns regarding Accounting, Internal Accounting Controls or Auditing Matters Please contact either: Tracey C. Ball Executive 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 The Management's Discussion and Analysis as well as the Financial Statements of this Annual Report were printed on 100% post-consumer paper, certified Ecologo, Processed Chlorine Free, FSC Recycled and manufactured using biogas energy. 84 purpose driven | CWB 2007 AnnuAL reporT five year financial summary performance targets ($ thousands, except per share amounts) Results of Operations Net interest income (teb) (1) ............................................ $ Less teb adjustment .......................................................... Net interest income per financial statements ............... Other income ..................................................................... Total revenues (teb) ......................................................... Total revenues ................................................................... Net income ........................................................................ Return on common shareholders’ equity (2) .................. Return on average total assets (3) ..................................... Per Common Share (4) Average common shares outstanding (thousands) ..... Earnings per share Basic ............................................................................... $ Diluted .......................................................................... Dividends (5) ....................................................................... Book value .......................................................................... Market price ....................................................................... High ............................................................................... Low ................................................................................ Close .............................................................................. 1.54 1.50 0.3400 9.48 30.86 20.78 30.77 Balance Sheet and Off-Balance Sheet Summary Assets .................................................................................. $ 9,525,040 1,961,241 Cash resources, securities and repurchase agreements ..... 7,405,580 Loans ................................................................................... 8,256,918 Deposits .............................................................................. 390,000 Subordinated debentures ................................................. 595,493 Shareholders’ equity ......................................................... Assets under administration ............................................ 4,283,900 Capital Adequacy Tangible common equity to risk-weighted assets (6) .......... Tier 1 ratio (7) ..................................................................... Total ratio (7) ...................................................................... Other Information Efficiency ratio (teb) (8) .................................................... Efficiency ratio ................................................................... Net interest margin (teb) (9) ............................................ Net interest margin ........................................................... Provision for credit losses 44.6% 45.5 2.58 2.51 7.7% 9.1 13.7 as a percentage of average loans ................................ Net impaired loans as a percentage of total loans ........ Number of full-time equivalent staff (10) ........................ Number of bank branches ............................................... 0.16 (0.57) 1,185 35 2007 2006 2005 2004 2003 210,659 5,410 205,249 62,821 273,480 268,070 96,282 $ 168,684 4,078 164,606 53,086 221,770 217,692 72,007 $ 140,320 3,975 136,345 45,561 185,881 181,906 54,391 $ 117,236 3,898 113,338 35,052 152,288 148,390 44,161 $ 107,655 2,992 104,663 25,326 132,981 129,989 38,193 17.4% 1.18 14.8% 1.12 12.7% 1.03 12.9% 0.97 12.9% 0.95 62,354 61,514 60,394 53,564 51,232 $ 1.17 1.13 0.2500 8.39 22.78 16.64 21.15 $ 7,268,360 1,332,987 5,781,837 6,297,007 198,126 519,530 3,344,414 $ 0.90 0.87 0.1900 7.48 20.35 11.04 17.60 $ 5,705,028 976,000 4,590,263 4,913,307 128,126 457,990 2,649,065 $ 0.83 0.75 0.1875 6.73 12.07 9.57 11.92 $ 0.75 0.67 0.1150 6.08 10.00 5.82 9.99 $ 4,918,895 848,179 3,930,114 4,267,788 110,600 367,589 1,759,473 $ 4,343,972 766,699 3,529,003 3,819,750 121,951 316,231 1,474,964 8.6% 10.1 13.7 46.0% 46.9 2.62 2.56 0.20 (0.75) 1,097 33 9.7% 9.7 12.4 48.6% 49.7 2.66 2.59 0.24 (0.68) 999 31 9.0% 9.0 11.8 49.5% 50.8 2.57 2.48 0.25 (0.36) 936 29 8.9% 8.9 13.1 46.3% 47.4 2.68 2.60 0.25 (0.37) 632 27 (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 statements 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. The taxable equivalent basis does not have a standardized meaning prescribed by generally accepted accounting principles (GAAP) and, therefore, may not be comparable to similar measures presented by other banks. (2) Return on shareholders’ equity is calculated as net income divided by average shareholders’ equity. (3) Return on assets is calculated as net income divided by average total assets. (4) Stock dividends effecting a two-for-one split of the Bank’s common shares were paid in 2005 and 2007. All prior period common share and per common share information has been restated to reflect these effective splits. (5) The dividend policy was amended to be quarterly instead of semi-annually during the first quarter of fiscal 2004. The dividend rate for fiscal 2004 appears unusually high as it includes the last semi-annual dividend of $0.0750 per share paid in the first quarter and quarterly dividends of $0.0375 paid in subsequent quarters. (6) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less trust subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI). (7) Tier 1 and total capital adequacy ratios are calculated in accordance with guidelines issued by OSFI. (8) Efficiency ratio is calculated as non-interest expenses divided by total revenues. (9) Net interest margin is calculated as net interest income divided by average total assets. (10) The increase in staff in 2004 reflects the acquisitions of Canadian Direct Insurance Incorporated and Valiant Trust Company. Canadian Western Bank (CWB or the Bank) surpassed all fiscal 2007 performance targets by considerable margins. Record earnings benefited from excellent loan growth of 28% and reflect the ongoing success of every business within the CWB Group. Performance targets for fiscal 2008 reflect expectations for continued strong results supported by the Bank’s expanding market presence and ongoing economic strength in CWB’s chosen markets. Management will maintain its disciplined approach to growth and plans to deliver continued strong financial performance for shareholders by taking care of what matters most: customers and employees. Net income growth Total revenue (teb) growth Loan growth 2007 Target 20% 15% 14% Provision for credit losses as a percentage of average loans 0.20% or less Efficiency ratio (teb) Return on equity Return on assets Highlights of 2007 46% 15% 1.10% 2007 Performance 34% 23% 28% 0.16% 44.6% 17.4% 1.18% 2008 Target 15% 17% 15% 0.15% 45% 17% 1.10% • Achieved organic loan growth of 28%, marking the Bank’s 18th consecutive year of double-digit loan growth. Increased net income 34% to a record $96 million and a corresponding improvement in return on equity (ROE) of 260 • basis points to 17.4%. • • • • • • Opened new branches in Abbotsford, British Columbia and Medicine Hat, Alberta. Established a new benchmark efficiency ratio, which measures non-interest expenses against total revenues, of 44.6%. Surpassed $9.5 billion in total assets and $4.0 billion in trust assets under administration. Named one of the “50 Best Employers in Canada”, as recognized by the Globe & Mail Report on Business magazine. Celebrated the 20th anniversary of Canadian Western Trust. Expanded Internet service capabilities for Canadian Direct Insurance. Locations Canadian Western Bank REGIONAL OFFICES BRItISh COLumBIA 22nd Floor, 666 Burrard Street Vancouver (604) 669-0081 Greg Sprung NORthERN ALBERtA 2300, 10303 Jasper Avenue Edmonton (780) 423-8888 Bill Book PRAIRIES 606 – 4 Street S.W. Calgary (403) 262-8700 Michael Halliwell EquIPmENt FINANCING #300, 5222 – 130 Avenue S.E. Calgary (403) 257-8235 Jim Burke ALBERtA EDmONtON Edmonton main 11350 Jasper Avenue (780) 424-4846 Keith Wilkes 103rd Street 10303 Jasper Avenue (780) 423-8801 Jake Muntain Old Strathcona 7933 – 104 Street (780) 433-4286 Donna Austin South Edmonton Common 2142 – 99 Street (780) 988-8607 Wayne Dosman St. Albert 300 – 700 St. Albert Road (780) 458-4001 Jeff Suggitt West Point 17603 – 100 Avenue (780) 484-7407 Kevin MacMillen CALGARY Calgary main 606 – 4 Street S.W. (403) 262-8700 Doug Crook Calgary Chinook 6606 MacLeod Trail S.W. (403) 252-2299 Lew Christie Calgary Foothills 6127 Barlow Trail S.E. (403) 269-9882 Chris Minke Calgary Northeast 2810 – 32 Avenue N.E. (403) 250-8838 June Lavigueur Calgary South trail Crossing #300, 5222 – 130 Avenue S.E. (403) 257-8235 Glen Eastwood GRANDE PRAIRIE 11226 – 100 Avenue (780) 831-1888 David Hardy LEthBRIDGE 744 – 4 Avenue South (403) 328-9199 Don Grummett mEDICINE hAt 102, 1111 Kingsway Avenue S.E. (403) 527-7321 Les Erickson RED DEER 4822 – 51 Avenue (403) 341-4000 Don Odell BRItISh COLumBIA VANCOuVER Kitsilano 3190 West Broadway (604) 732-4262 Paul Cheng Park Place Suite 100, 666 Burrard Street (604) 688-8711 Rob Berzins Vancouver Real Estate 22nd Floor, 666 Burrard Street (604) 669-0081 Bob Wigmore West Broadway Suite 110, 1333 West Broadway (604) 730-8818 Jules Mihalyi ABBOtSFORD #100, 2548 Clearbrook Road (604) 855-4941 Rick Howard COquItLAm 310, 101 Schoolhouse Street (604) 540-8829 Ron Baker COuRtENAY Unit 200, 470 Puntledge Road (250) 334-8888 Alan Dafoe CRANBROOK 2nd Floor, 828A Baker Street (250) 426-1140 Mike Eckersley KELOWNA Kelowna 1674 Bertram Street (250) 862-8008 Grant Fletcher Kelowna Equipment Financing Centre #101 – 1505 Harvey Avenue (250) 860-0088 Jim Kitchin KAmLOOPS Unit 112, 300 Columbia Street (250) 828-1070 Hugh Sutherland LANGLEY 100, 19915 – 64 Avenue (604) 539-5088 Craig Martin NANAImO 101, 6475 Metral Drive (250) 390-0088 Russ Burke PRINCE GEORGE 300 Victoria Street (250) 612-0123 David Duck SuRREY 1, 7548 – 120 Street (604) 591-1898 Bob Duffield VICtORIA 1201 Douglas Street (250) 383-1206 Bob Granger SASKAtChEWAN REGINA #100, 1881 Scarth Street The Hill Center Tower II (306) 757-8888 Kelly Dennis SASKAtOON 244 – 2 Avenue S. (306) 477-8888 Ron Kowalenko YORKtON 45, 277 Broadway Street East (306) 782-1002 Barb Apps mANItOBA WINNIPEG 230 Portage Avenue (204) 956-4669 Robert Bean Canadian Western Financial Ltd. EDmONtON Suite 2300, 10303 Jasper Avenue (780) 423-8888 m o c . c d n o i s i v . w w w s n o i t a c i n u m m o C n g i s e D n o i s i V Canadian Western Trust Company VANCOuVER Suite 600, 750 Cambie Street (604) 685-2081 BuRLINGtON 201A-3190 Harvester Road (905) 631-5342 CALGARY Suite 200, 606 4 St. S.W. (403) 717-3145 WINNIPEG 230 Portage Avenue (204) 956-4669 REAL EStAtE LENDING 22nd Floor, 666 Burrard Street Vancouver (604) 669-0081 OPtImum mORtGAGE Edmonton Suite 2300, 10303 Jasper Avenue (780) 423-9748 Calgary 2810 – 32 Avenue N.E. (403) 720-8958 Coquitlam 310, 101 Schoolhouse Street (604) 523-5250 Park Place Suite 100 – 666 Burrard Street (604) 602-2773 Canadian Direct Insurance Inc. VANCOuVER Suite 600 – 750 Cambie Street (604) 699-3678 EDmONtON 11th Floor, 10250 – 101 Street (780) 413-5933 Valiant Trust Company CALGARY 310, 606 4 Street S.W. (403) 233-2801 EDmONtON Suite 2300, 10303 Jasper Avenue (780) 423-8888 VANCOuVER Suite 600, 750 Cambie Street (604) 699-4880 purpose driven | cwb 2007 annual report 85 canadian western bank 2007 annual report c a n a d i a n w e s t e r n b a n k 2 0 0 7 a n n u a l r e p o r t p u r p o s e d r i v e n our history of financial performance (cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:34)(cid:84)(cid:84)(cid:70)(cid:85)(cid:84)(cid:1)(cid:9)(cid:5)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:10) (cid:53)(cid:80)(cid:85)(cid:66)(cid:77)(cid:1)(cid:45)(cid:80)(cid:66)(cid:79)(cid:84)(cid:1)(cid:9)(cid:5)(cid:1)(cid:78)(cid:74)(cid:77)(cid:77)(cid:74)(cid:80)(cid:79)(cid:84)(cid:10) (cid:10)(cid:12)(cid:6)(cid:3)(cid:6) (cid:23)(cid:12)(cid:18)(cid:22)(cid:24) (cid:21)(cid:12)(cid:23)(cid:16)(cid:21) (cid:20)(cid:12)(cid:25)(cid:17)(cid:25) (cid:20)(cid:12)(cid:19)(cid:20)(cid:20) (cid:18)(cid:16)(cid:16)(cid:19) (cid:18)(cid:16)(cid:16)(cid:20) 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