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CANADIAN
WESTERN
BANK GROUP
BANK · TRUST · INSURANCE
CCWWBB
CANADIAN WESTERN BANK GROUP
BANK · TRUST · INSURANCE
CCWWBB
2008 annual report
25
25
YEARS
YEARS
AGO...
AGO...
...we made a promise to western
...we made a promise to western
Canadians: we will invest our allegiance,
Canadians: we will invest our allegiance,
our resources and our future in Western
our resources and our future in Western
Canada; we will support the endeavours
Canada; we will support the endeavours
of individuals and businesses in the west;
of individuals and businesses in the west;
we will work diligently to win the trust
we will work diligently to win the trust
and loyalty of our employees, customers
and loyalty of our employees, customers
and shareholders; we will create ongoing
and shareholders; we will create ongoing
opportunities for all stakeholders.
opportunities for all stakeholders.
OUR HISTORY OF FINANCIAL PERFORMANCE
FIVE YEAR FINANCIAL SUMMARY
total assets ($ millions)
total loans ($ millions)
12,000
10,000
8,000
6,000
4,000
4,919
5,705
10,601
9,525
7,268
2004
2005
2006
2007
2008
10,000
8,000
6,000
4,000
2,000
0
8,624
7,406
5,782
4,590
3,930
2004
2005
2006
2007
2008
total revenues (teb) ($ millions)
net income ($ millions)
299
273
222
186
152
2004
2005
2006
2007
2008
provision for credit losses
(as a percentage of average loans)
0.25% 0.24%
0.20%
0.16%
0.15%
2004
2005
2006
2007
2008
120
100
80
60
40
20
0
100
75
50
25
0
102
96
72
54
44
2004
2005
2006
2007
2008
efficiency ratio (teb)
(expenses to revenues)
49.5% 48.6% 46.0% 44.6%
45.2%
2004
2005
2006
2007
2008
2,000
0
300
250
200
150
100
50
0
1.00
0.75
0.50
0.25
0.00
($ thousands, except per share amounts)
($ 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
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and repurchase agreements
Loans
Deposits
Subordinated debentures
Shareholders’ equity
Assets under administration
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
as a percentage of average loans
Net impaired loans as a percentage of total loans
Number of full-time equivalent staff
Number of bank branches
$
$
2008
2007
2006
2005
2004
$
228,617
5,671
222,946
70,240
298,857
293,186
102,019
$
$
$
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
15.9%
1.03
17.4%
1.18
14.8%
1.12
12.7%
1.03
12.9%
0.97
$
63,214
1.61
1.58
0.4200
10.70
32.20
14.67
18.44
62,354
61,514
60,394
53,564
$
1.54
1.50
0.3400
9.48
30.86
20.78
30.77
$
1.17
1.13
0.2500
8.39
22.78
16.64
21.15
$
0.90
0.87
0.1900
7.48
20.35
11.04
17.60
0.83
0.75
0.1875
6.73
12.07
9.57
11.92
$ 10,600,732
1,798,137
8,624,069
9,245,719
375,000
679,148
4,347,723
$ 9,525,040
1,961,241
7,405,580
8,256,918
390,000
595,493
4,283,900
$ 7,268,360
1,332,987
5,781,837
6,297,007
198,126
519,530
3,344,414
$ 5,705,028
976,000
4,590,263
4,913,307
128,126
457,990
2,649,065
$ 4,918,895
848,179
3,930,114
4,267,788
110,600
367,589
1,759,473
7.7%
8.9
13.5
45.2%
46.1
2.30
2.25
0.15
0.19
1,284
36
7.7%
9.1
13.7
44.6%
45.5
2.58
2.51
0.16
(0.57)
1,185
35
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
(1) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividend received is significantly lower than would apply to a loan or security of the same amount. The adjustment
to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. 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 $0.0375 paid in subsequent quarters.
(6) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less trust subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the
Superintendent of Financial Institutions Canada (OSFI). As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is now managed and reported in accordance with those
requirements. Prior year ratios have been calculated using the previous framework.
(7) Tier 1 and total capital adequacy ratios are calculated in accordance with guidelines issued by OSFI. As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is now managed
and reported in accordance with those requirements. Prior year ratios have been calculated using the previous framework.
(8) Efficiency ratio is calculated as non-interest expenses divided by total revenues.
(9) Net interest margin is calculated as net interest income divided by average total assets.
The front end of this annual report was printed on TopKote
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DESIGNED BY VISION CREATIVE INC. WWW.VISIONCREATIVEINC.COM
OUR HISTORY OF FINANCIAL PERFORMANCE
FIVE YEAR FINANCIAL SUMMARY
total assets ($ millions)
total loans ($ millions)
12,000
10,000
8,000
6,000
4,000
4,919
5,705
10,601
9,525
7,268
2004
2005
2006
2007
2008
10,000
8,000
6,000
4,000
2,000
0
8,624
7,406
5,782
4,590
3,930
2004
2005
2006
2007
2008
total revenues (teb) ($ millions)
net income ($ millions)
299
273
222
186
152
2004
2005
2006
2007
2008
provision for credit losses
(as a percentage of average loans)
0.25% 0.24%
0.20%
0.16%
0.15%
2004
2005
2006
2007
2008
120
100
80
60
40
20
0
100
75
50
25
0
102
96
72
54
44
2004
2005
2006
2007
2008
efficiency ratio (teb)
(expenses to revenues)
49.5% 48.6% 46.0% 44.6%
45.2%
2004
2005
2006
2007
2008
2,000
0
300
250
200
150
100
50
0
1.00
0.75
0.50
0.25
0.00
($ thousands, except per share amounts)
($ 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
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and repurchase agreements
Loans
Deposits
Subordinated debentures
Shareholders’ equity
Assets under administration
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
as a percentage of average loans
Net impaired loans as a percentage of total loans
Number of full-time equivalent staff
Number of bank branches
$
$
2008
2007
2006
2005
2004
$
228,617
5,671
222,946
70,240
298,857
293,186
102,019
$
$
$
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
15.9%
1.03
17.4%
1.18
14.8%
1.12
12.7%
1.03
12.9%
0.97
$
63,214
1.61
1.58
0.4200
10.70
32.20
14.67
18.44
62,354
61,514
60,394
53,564
$
1.54
1.50
0.3400
9.48
30.86
20.78
30.77
$
1.17
1.13
0.2500
8.39
22.78
16.64
21.15
$
0.90
0.87
0.1900
7.48
20.35
11.04
17.60
0.83
0.75
0.1875
6.73
12.07
9.57
11.92
$ 10,600,732
1,798,137
8,624,069
9,245,719
375,000
679,148
4,347,723
$ 9,525,040
1,961,241
7,405,580
8,256,918
390,000
595,493
4,283,900
$ 7,268,360
1,332,987
5,781,837
6,297,007
198,126
519,530
3,344,414
$ 5,705,028
976,000
4,590,263
4,913,307
128,126
457,990
2,649,065
$ 4,918,895
848,179
3,930,114
4,267,788
110,600
367,589
1,759,473
7.7%
8.9
13.5
45.2%
46.1
2.30
2.25
0.15
0.19
1,284
36
7.7%
9.1
13.7
44.6%
45.5
2.58
2.51
0.16
(0.57)
1,185
35
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
(1) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividend received is significantly lower than would apply to a loan or security of the same amount. The adjustment
to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. 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). As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is now managed and reported in accordance with those
requirements. Prior year ratios have been calculated using the previous framework.
(7) Tier 1 and total capital adequacy ratios are calculated in accordance with guidelines issued by OSFI. As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is now managed
and reported in accordance with those requirements. Prior year ratios have been calculated using the previous framework.
(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.
The front end of this annual report was printed on TopKote
ISO 14001 certified, Manufactured using primarily renewable energy sources, Contains
20-30% Pre-consumer waste, Alternative Fiber: 75% Eucalyptus and 15% Acacia, Acid Free,
Elemental Chlorine Free
The MD&A and the Financial Statements of this annual report were printed on Synergy
Elemental Chlorine Free, Archival, Acid Free, 100% Post-consumer waste, Elemental Chlorine Free
DESIGNED BY VISION CREATIVE INC. WWW.VISIONCREATIVEINC.COM
c
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CANADIAN
WESTERN
BANK GROUP
BANK · TRUST · INSURANCE
CCWWBB
CANADIAN WESTERN BANK GROUP
BANK · TRUST · INSURANCE
CCWWBB
2008 annual report
25
25
YEARS
YEARS
AGO...
AGO...
...we made a promise to western
...we made a promise to western
Canadians: we will invest our allegiance,
Canadians: we will invest our allegiance,
our resources and our future in Western
our resources and our future in Western
Canada; we will support the endeavours
Canada; we will support the endeavours
of individuals and businesses in the west;
of individuals and businesses in the west;
we will work diligently to win the trust
we will work diligently to win the trust
and loyalty of our employees, customers
and loyalty of our employees, customers
and shareholders; we will create ongoing
and shareholders; we will create ongoing
opportunities for all stakeholders.
opportunities for all stakeholders.
Lisa Juba, Administrative
Assistant, CWB (4 years)
1
Realizing Our Promise
2 Message to Shareholders
5
6
8
Today...
People
Infrastructure
10 Process
12 Business Enhancement
14 Community Investment
17 Corporate Governance
22 Management’s Discussion
and Analysis
61
Financial Statements
92 Board of Directors
92 Senior Officers
93 Shareholder Information
94 Locations
REALIZING OUR PROMISE
That fundamental promise made by our founders was at the core of their vision. First and
foremost, they chose a western niche that was underserved and undervalued by eastern-
based competitors.
Moreover, they dreamed of creating a friendly bank with an
unwavering focus on customer service. It would be nimble
and non-bureaucratic with local decision-making based on
prudence and common sense. Employees would be given the
incentives and opportunities to succeed along with the Bank
and its customers. The long-term reward for shareholders
would be one of stability and reliable profitability. The overall
goal… consistent, sustainable growth.
Canadian Western Bank (CWB) came into being in 1984
when a group of determined western Canadians set their
forward-looking promise into motion.
WINNING THE WEST
The West responded with a resounding “Yes!” The little bank
grew steadily through double-digit organic growth, acquisitions
and amalgamations to become the largest publicly traded
Schedule I bank headquartered in Western Canada.
As we celebrate 25 years of success, we offer services in ways
our founders could never have imagined (paperless account
statements, web-based trust accounts, online delivery of
auto insurance policies). And just as they chose a niche
market, we choose to capitalize on opportunities in
new markets and business lines today.
But some things will not change. We continually raise the
standard of what it takes to win the West and have based
our strategic plan on four critical areas of success: People,
Infrastructure, Process and Business Enhancement.
We will work hard to earn the continued loyalty of
our employees, clients and shareholders.
We know what it takes to win. And, as we enter our second
quarter-century, we promise to stay on that winning path.
WINNING THE WEST CWB 2008 ANNUAL REPORT 1
2008 MESSAGE TO SHAREHOLDERS
We are pleased to report that Canadian Western Bank (CWB or the Bank) posted record
annual profits in 2008, surpassing a milestone $100 million of net earnings.
While notable itself, this accomplishment came in the
midst of unprecedented turmoil in global financial and
credit markets, which further highlights the benefits of
our conservative growth strategies and disciplined credit
practices. It also reflects the strong talent and unwavering
commitment of our employees, who continue to demonstrate
they are second-to-none. CWB finished the year with its 82nd
consecutive profitable quarter and had no direct exposure to
any troubled asset-backed commercial paper, collateralized
debt obligations, credit default swaps, U.S. subprime
mortgages or monoline insurers. We surpassed our fiscal
2008 loan growth target, which pushed total assets over
$10 billion and marked nineteen consecutive years of
double-digit loan growth. Despite constrained revenues
due to a significantly lower net interest margin, CWB
also maintained its enviable efficiency ratio.
While there were many successes in 2008, CWB was not
immune to unfavourable spinoff effects related to global
market turmoil. The significant impact on net interest
margin – due to a combination of increased deposit costs,
a declining prime lending interest rate and the retention of
high liquidity levels in response to market events – constrained
overall profitability and resulted in lower than anticipated
total revenues, return on equity and return on assets. These
circumstances, coupled with lower commodity prices and
comparatively slower economic growth, also had consequence,
particularly as it related to our share price. CWB shares
closed at $18.44 on October 31, 2008, compared to
$30.77 a year earlier.
Our 2009 performance targets reflect expectations for
continued solid loan growth and good overall performance
relative to adverse market conditions and a very uncertain
global economic outlook. Fiscal 2009 will mark CWB’s
25th anniversary and key objectives for this momentous year
include extending the Bank’s long history of profitability and
double-digit loan growth, while building on our strong credit
discipline and proven fiscal responsibility. In December 2008,
we were very pleased to complete our previously announced
deal to acquire majority ownership of Edmonton-based
Adroit Investment Management Ltd. (Adroit). The addition
of Adroit, along with its entire team of professionals, is
expected to be an excellent strategic fit with existing banking
and trust operations. The acquisition will fill an existing
product gap and should provide a solid base to facilitate
future growth of this business.
The theme of the 2008 annual report is “Winning the
West”, a phrase that captures our history, culture and
successes, both current and future. Through this theme we
demonstrate our ongoing commitment to maximize value for
all CWB stakeholders. As in prior years, our focus will remain
centred on four pillars of influence that encompass the main
elements of our strategic direction: People, Infrastructure,
Process and Business Enhancement.
BANKING SERVICES
Very strong loan growth of 16% surpassed our annual target.
CWB remains committed to partnering with businesses and
individuals within our geographic focus, and we capitalized
on numerous high quality lending opportunities that
were partially aided by the continued exit of foreign-based
competitors from our markets. We expect market share
gains will continue through 2009 and will diligently work
to further enhance awareness of the Bank’s competitive
advantages focused on superior service delivery, financial
stability and offering customers a local, relationship-based
banking alternative.
2 WINNING THE WEST CWB 2008 ANNUAL REPORT
Overall credit quality remained sound and provisions for
credit losses were maintained in line with the fiscal 2008
target of fifteen basis points of average loans. While
gross impaired loans increased notably compared to the
exceptionally low levels experienced in the previous two
years, they remained within expectations in view of elevated
uncertainties and slower economic activity. All current
identified losses are reflected in the specific provisions for
credit losses. The amount of gross impaired loans fluctuates
up or down depending on general economic conditions,
but actual write-offs remained low. This not only reflects the
Bank’s secured lending practices, but also our long-standing
commitment to maintain disciplined underwriting practices.
Our strategies to increase funding sources showed good
results with 12% growth in total deposits. Fierce competition
sparked by persistent turmoil in global financial markets made
this success even more meaningful, as we were able to build
liquidity without pressures to forgo any preferred lending
or other high quality growth opportunities. Total deposits
raised in the branch network and Canadian Western Trust
Company (CWT) increased 10%, while the demand and
notice component within branch-raised deposits was up 8%.
We introduced an Internet-based division of the Bank in
the fourth quarter named Canadian Direct Financial™
(www.canadiandirectfinancial.com). This platform offers
a high-interest savings account and term deposits directly
to customers who are not served by our branch network.
Enhancing the Bank’s retail deposit base will remain a
key strategic focus as success in this area diversifies funding
sources and provides additional flexibility to capitalize on
new opportunities.
In line with our infrastructure strategy, we opened a new
branch in Leduc, Alberta (AB) and completed numerous other
expansions and upgrades. Infrastructure initiatives confirmed
for 2009 include further expansion of the branch network
and ongoing improvements to existing premises.
Optimum Mortgage (Optimum), our alternative mortgage
business, continued to perform well, producing very strong
returns on a solid overall risk profile. Optimum’s portfolio
increased 25% this year to comprise approximately 5% of total
loans. One of our growth initiatives for this business included
extending Optimum’s geographic focus into select Ontario
markets.
TRUST SERVICES
Trust services made a strong earnings contribution and
continued to provide valued diversification and new growth
opportunities. CWT marked several notable accomplishments,
including the successful implementation of its next-generation
Internet query tool, CWeb. Customers provided very positive
feedback on this new technology and we now have more than
3,000 clients using this enhanced web-based service. Valiant
Trust Company (Valiant) also performed well, particularly in
view of a marked reduction in capital markets activity related
to ongoing uncertainties and generally slower economic
activity. Valiant obtained its federal trust license and expanded
operations with the mid-year opening of a share transfer
services office in Toronto.
INSURANCE
Canadian Direct Insurance Incorporated (CDI) posted
record earnings as we continued to increase brand awareness
throughout Alberta and British Columbia (BC). Gross written
premiums exceeded $107 million reflecting growth in both the
home and auto product lines. CDI launched the service phase
of its Internet-based technology platform which provides for
a more efficient means of administering customer policies.
The number of auto policies sold online continues to grow
as customers choose to buy over the Internet to save more
money. Online sales accounted for over 40% of all new auto
policies sold in 2008. Insurance operations provide a solid
WINNING THE WEST CWB 2008 ANNUAL REPORT 3
MESSAGE TO SHAREHOLDERS CONTINUED
platform for continued growth and support the Bank’s key
objectives to further diversify revenues and increase return
on equity.
THINK WESTERN®
We were very pleased to be recognized for a second straight
year as one of the “50 Best Employers in Canada”. The best
employers list is based on employee responses to a confidential
opinion survey that measures factors such as leadership,
managerial support, recognition and opportunities for
learning and development. We responded to a number of
topics identified by our employees in last year’s survey and
will make additional positive changes next year as we look to
further enhance our position as an employer of choice. Our
outstanding people drive CWB’s success and we will continue
to do everything we can to offer a rewarding work experience
that enables and challenges everyone to achieve their full
potential.
GOVERNANCE
A primary goal of our Board of Directors and senior
management is to implement strategies that promote
the collective best interests of all CWB stakeholders.
We continually evaluate changing standards and best
practices of corporate governance and remain committed
to developing the best business decisions for the Bank
within this framework.
OUTLOOK
The Bank’s strategies for sustained, responsible growth
remain evident as record annual earnings and revenues in
volatile markets substantiate CWB’s growing market position
and strong risk profile. Maintaining the Bank’s disciplined
underwriting practices will remain top of mind as we continue
to work through the challenges associated with ongoing
market turmoil and a very uncertain global economic outlook.
We are well positioned to manage through this credit cycle
and actual loan losses are expected to remain within
the Bank’s long-term historic range. Western Canada’s
economic fundamentals should remain sound relative to
the rest of Canada, notwithstanding increased challenges in
some sectors related to an overall slowing of the economy.
We are also determined to improve net interest margin over
time, and to date, have had good success in meeting our
pricing targets for new and renewal loans. We will continually
enhance our credit and price discipline as we work to unlock
the significant future profits embedded in our portfolio.
Our efficient capital position will support ongoing growth
and we believe we are well situated to manage future
unexpected events.
While strong fiscal responsibility will be maintained,
effective execution of CWB’s strategic focus on people,
process, infrastructure and business enhancement will
require increased expenditures in areas mainly supporting
the Bank’s growth initiatives, including plans for further
expansion of the branch network in 2009. Ongoing
development of trust, insurance, wealth management
and other complementary businesses also remains a key
strategy and supports our objectives to increase the proportion
of non-interest income to total revenues over time. If the
right strategic opportunity arises, the Bank will also look
to support its growth and diversification objectives via
acquisition. Management is committed to maximize
shareholder value over the long term and our strategic
initiatives represent essential steps towards meeting this
objective. We will celebrate the Bank’s 25th year of success
in fiscal 2009 and look forward to capitalizing on CWB’s
extraordinary potential – while managing related challenges –
as we commence our next quarter century.
Jack C. Donald
Chairman
Larry M. Pollock
President and CEO
4 WINNING THE WEST CWB 2008 ANNUAL REPORT
Canadian Western Bank Place
10303 Jasper Avenue, Edmonton
TODAY...
Canadian Western Bank Group (CWB Group) comprises 36 bank branches, 7 trust locations, 2
insurance call centres and 1 investment management office, with combined assets of over $10 billion,
assets under administration of more than $4 billion and assets under management of nearly $1 billion.
CANADIAN WESTERN BANK (CWB)
VALIANT TRUST (VALIANT)
provides a full range of business and personal banking
services at 36 locations across the four western provinces.
CWB is the largest Schedule I bank headquartered in
Western Canada and is respected as a leader in mid-
market commercial lending. We continue to attract
individuals and businesses in the west who appreciate
friendly, relationship-based banking.
CANADIAN WESTERN TRUST (CWT)
offers profitable solutions for retirement, trustee and
custodial financial needs. With over twenty years of
mindful service and $4 billion of assets under administration,
CWT has become a highly trusted name for a growing
base of satisfied customers.
specializes in corporate trust, stock transfer and employee
plan services for public and private corporations and income
trusts. Valiant has a reputation for getting things done.
CANADIAN DIRECT INSURANCE (CDI)
provides auto and home insurance at competitive rates for
residents of AB and BC. CDI offers customers friendly and
informed service via the telephone or Internet and through
select auto insurance brokers in BC.
ADROIT INVESTMENT MANAGEMENT (ADROIT)
focuses on wealth management for individuals, corporations
and institutional clients. Founded in 1993, Adroit’s business
success is built on the highest ethical standards, conservative
growth principles and strong investment performance.
WINNING THE WEST CWB 2008 ANNUAL REPORT 5
Al Govenlock
Phoenix Fence
(Client for 22 years)
Marlene Sarafinchan
Receptionist, CWB (13 years)
Our company has a long-term relationship
with CWB… we like them, they like us.
Other banks have knocked on our doors,
but CWB has always provided great
service. Their decision-making is right
here and they take the time to get to
know our business.
AL GOVENLOCK
6 WINNING THE WEST CWB 2008 ANNUAL REPORT
WHAT IT TAKES TO WIN
PEOPLE
From day one, CWB Group has been defined by our culture which fosters a strong mutual respect
for our employees, customers and shareholders. You could call it a win/win/win situation.
WE INVEST IN OUR EMPLOYEES...
CWB Group provides a positive and rewarding work
environment that offers every employee the incentive,
training and tools to be successful: comprehensive benefits,
competitive compensation, lifetime career opportunities
and ongoing training and educational opportunities. Our
cwbalance® program encourages a strong work/life balance,
cultivates a healthy work environment and nurtures employee
morale. The SPICE (Staff Participating In Creating Excellence)
program rewards employees with additional monetary
compensation for their ideas and contributions on how
to improve our businesses. Everyone has a vested interest
in the Bank’s success, as currently over 90% of employees
are CWB shareholders.
OUR EMPLOYEES PROVIDE SUPERIOR SERVICE...
An engaged and empowered employee who is treated
with respect and fairness is motivated to connect with
customers and provide friendly, highly personalized service.
Knowledgeable and enthusiastic CWB employees will
go out of their way to offer clients helpful advice and
specialized attention.
Customers are impressed by great personal service and delighted
by our people-friendly environment. Strong employee/client
relationships are formed… customer loyalty ensues.
Employees grow and prosper along with customers, and will
ultimately lead CWB Group and its clients into a secure and
profitable future.
SHAREHOLDERS GAIN VALUE AND STABILITY...
Over the past 25 years, our small-bank agility combined with
prudent management and disciplined lending practices have
served us well in all financial environments. We achieved
record earnings in 2008, arguably one of the most difficult
years in history for the global financial services sector as a
whole. It is often said that the best predictor of a successful
future is a proven, reliable past. Our ongoing commitment to
shareholders is to consistently add value to their investments
over time.
Everyone wins.
WINNING THE WEST CWB 2008 ANNUAL REPORT 7
To retain good people, we
need an environment that
respects their well-being.
At CDI Edmonton, our
employees value their new
home and know it was
created for them.
SANDY SCHULTZ
Jhoana Go
Service Advisor, CDI (1 year)
Sandy Schultz
Senior Manager, CDI (7 years)
8 WINNING THE WEST CWB 2008 ANNUAL REPORT
8 WINNING THE WEST CWB 2008 ANNUAL REPORT
WHAT IT TAKES TO WIN
INFRASTRUCTURE
Premises, technology, capital and brand are the essential components of our infrastructure:
elements that support business activities and underpin our successes.
PREMISES
We continually invest in new and expanded spaces to
accommodate our growing needs and goals. In 2008, we
· opened a new bank branch in Leduc, AB
· confirmed plans for new bank branches in Sherwood
Park, AB; Kamloops, BC; Surrey, BC; and Saskatoon,
Saskatchewan
· opened a Valiant Trust office in Toronto, Ontario
· proceeded with expansion at CWB corporate
office to support ongoing growth
· relocated CDI Edmonton to larger and
improved premises
TECHNOLOGY
ability to deliver auto insurance quotes and policies online,
and the introduction of an Internet-based division of the
Bank named Canadian Direct Financial™.
CAPITAL
Our strong balance sheet continues to support growth,
while prudent management policies help guard us from
unexpected pitfalls. Our strategy of not investing in things
outside our expertise has served stakeholders very well. In
addition to growing retained earnings with strong profitability,
we utilize other efficient sources of capital, including innovative
Tier 1 and subordinated debentures. Our solid capital position,
in combination with conservative liquidity management, allows
us to react quickly to new opportunities that arise.
Last year, we commenced a three-year systems review to
source proven technologies to help maximize resources,
diversify service offerings, improve product delivery and
enhance customer convenience.
Improvements in 2008 included: paperless account statements,
cheque imaging technology, Group-wide efficiency upgrades,
new CWBdirect® account opening features, improvements
to CWT’s popular CWeb service platform, CDI’s enhanced
BRAND
We know that brand is more than a logo, a marketing
campaign or a mission statement. It reflects the beliefs
and actions of an organization and the individuals within
it. CWB Group has earned the reputation as a profitable,
common sense-based company that delivers services in a
friendly and straightforward manner.
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WINNING THE WEST CWB 2008 ANNUAL REPORT 9
If it doesn’t reflect our Think
Western culture we won’t get
employee buy-in, so our solutions
have to be customer-friendly and
they have to make sense.
DIANE DAVIES
Diane Davies, Assistant Vice President
BPIT, CWB (17 years)
David Parkatti, Senior Analyst
BPIT, CWB (1 year)
Roy Jefferson, Senior Manager
BPIT, CWB (21 years)
10 WINNING THE WEST CWB 2008 ANNUAL REPORT
10 WINNING THE WEST CWB 2008 ANNUAL REPORT
WHAT IT TAKES TO WIN
PROCESS
An ongoing focus on improving processes allows us to streamline operations and more
effectively build on our competitive advantages.
By necessity, CWB Group processes are extensive. They must
comply with strict policies and regulations, while adjusting to
our expanding operations and diverse procedures. If processes
are inflexible, it can inhibit growth and mire an organization in
bureaucracy. An ongoing focus on process improvement helps
optimize our conservative risk profile, control larger numbers
of transactions and realize our promise to
· improve efficiencies
· simplify and enhance customer convenience
· maintain a disciplined credit culture
. diversify delivery of services
· increase operating capacity
· build compliance into every process
· maximize Group-wide resources
· eliminate redundancy
· optimize resource sharing and cross-selling
Consecutive years of controlled, responsible growth have
required new people, expanded workspaces, higher volumes
of transactions and increased workloads. It is recognized
that we must constantly revisit our processes to ensure we
are getting things done in the most effective and efficient
way possible. While this objective remains a key responsibility
for everyone throughout the Group, our Business Process
Improvement Team (BPIT) has a specific mandate to
identify processes that are no longer efficient and work
to find better solutions. “Our job is to find the right steps,
the best technology and the ideal mix of people to get
the job done,” says Roy Jefferson, Senior Manager. David
Parkatti, Senior Analyst, adds “It’s not about pointing out
things people are doing wrong, it’s about working together
to make everyone’s job easier.”
“Our strategies and processes helped CWB avoid direct exposure to
any of the troubled asset-backed commercial paper, collateralized
debt obligations, credit default swaps, U.S. subprime mortgages, or
monoline insurers that cluttered the financial landscape in 2008.”
– Larry Pollock, President and CEO, CWB Group
WINNING THE WEST CWB 2008 ANNUAL REPORT 11
WINNING THE WEST CWB 2008 ANNUAL REPORT 11
Ryan understands iron and he knows
what it takes to get the job done. I can
call him any time and he’ll be there for
us. CWB still has that do-anything-for-
you, small-bank attitude.
BRIAN STEWART
Brian Stewart, President
Westex Construction Corp.
(Client for 12 years)
Ryan Pearson, Assistant Vice
President & Manager, Equipment
Financing Group, CWB (14 years)
12 WINNING THE WEST CWB 2008 ANNUAL REPORT
WHAT IT TAKES TO WIN
BUSINESS ENHANCEMENT
Winning requires preparation. Expansion takes planning. Profitable growth calls for continuous
improvements. As in past years, we will be proactive on all fronts.
We will continue to grow and add value for our stakeholders
by employing the prudence, common sense and agility that
have contributed to our success throughout the Bank’s history.
Staying true to the path we know and understand proved
successful again in 2008.
OUR BUSINESS ENHANCEMENT FORMULA IN ACTION
Insurance
CDI maintained solid earnings growth and reinforced
its commitment to deliver high levels of customer service
and superior claims experience, as well as new and/or
enhanced product delivery channels. We also launched
the new CDI Worldpoints® MasterCard®.
Banking
The Bank realized strong growth and low loan losses
supported by a continued focus on niche areas of commercial
and personal banking, real estate lending, energy lending and
equipment financing. We increased brand awareness, secured
new funding sources, extended our ABM network, added
online banking options and utilized technology to manage
growth. We further enhanced our deposit gathering capability
with the introduction of Canadian Direct Financial™.
Trust
CWT increased its national presence, launched fresh products
(e.g. a new low-cost Group RSP) and used technology to
streamline operations and enhance services. Valiant became
a federal trust company this year and expanded with the
opening of an office in Toronto.
Looking forward
We will continue on this proven path in the coming year to
· further diversify funding and revenue sources
· enhance products and improve distribution
· expand geographically
· increase market presence and brand awareness
· minimize risk while ensuring a fair and profitable
return on investment
· optimize our client base through effective cross-promotion
· capitalize on strategic partnerships and acquisition
opportunities
· explore new lines of business
WINNING THE WEST CWB 2008 ANNUAL REPORT 13
WINNING THE WEST CWB 2008 ANNUAL REPORT 13
Louise Hovelson
Opportunity Manager, YESS
Kate Denis
Marketing Project Coordinator
CWB Group (2 years)
A number of new sponsors came on board
because of CWB’s involvement with our
Homeless For A Night event. Participants
and sponsors doubled, and donations
tripled! About a dozen CWB Group staff
came out to show their support and spent
the night with us, sleeping on the grass
in the rain.
LOUISE HOVELSON
14 WINNING THE WEST CWB 2008 ANNUAL REPORT
WHAT IT TAKES TO WIN
COMMUNITY INVESTMENT
An important part of our Think Western culture involves supporting and strengthening the
communities that our customers and employees call home.
THE MORE WE GROW, THE MORE WE GIVE.
Since 2005 CWB has donated close to $2 million in financial
and in-kind contributions to the regions we serve. But our
community investment program goes far beyond donating
funds. Employees dedicate time and expertise to form working
partnerships that help support a wide range of needs and
initiatives. We also encourage branches and subsidiaries
to respond to priorities in their own regions.
CWB invests in local kids
This past summer, CWB offered The Greater Interest GIC™
and paid a percentage of amounts invested back to the
communities where the deposits were made. Through
this initiative, CWB donated $106,000 to child and
youth charities: Youth Emergency Shelter Society (YESS)
in Edmonton, Canuck Place Children’s Hospice in BC,
and local Big Brothers and Big Sisters organizations in
our other markets.
The Western Way
Community involvement is an important and ever-growing
part of our responsibility as good corporate citizens, and
we have an obligation to ensure our efforts have the greatest
impact possible. Our community investment focuses on
the following important areas:
· health, wellness and caregiving
· education
· community and civic services
Western Spirit Program
Our people are active community members who are
passionate about their chosen causes. In recognition of
this, CWB Group employees who volunteer their time
to improve our communities can request a $250 grant
to a registered Canadian charity of their choice.
WINNING THE WEST CWB 2008 ANNUAL REPORT 15
IN MEMORY
EUGENE PECHET
September 22, 1916 – August 23, 2008
With sadness, we mark the passing and celebrate the life of
an exceptional individual who played a vital part in both the
beginning and subsequent success of the CWB Group.
Eugene Pechet was known by many as a successful, hard-working
hotelier – often referred to as the best in the business – but at CWB,
he will also be remembered for his vision, integrity and unwavering
commitment to the Bank’s success. Eugene played a key role in
starting the Bank and was one of the founding Directors of CWB
(or the Bank of Alberta, as it was originally known). He also agreed
to act as a sponsoring shareholder – effectively, Eugene paid start-up
costs and provided working capital until the Bank was operational.
In fact, a boardroom in one of his Edmonton hotels served as home
base for CWB’s first employees.
Eugene retired from CWB’s Board of Directors in 1992, but
remained active as a consultant to the Loans Committee until 2001.
He subsequently retained the title of Director Emeritus and continued
to instill the organization with his unique insights and strong Think
Western values. No matter what role or title he was asked to accept,
he did it humbly, with joy and pride – always demonstrating his
superb business acumen and contagious enthusiasm. His influence
remains with us, as do the memories of his invaluable contributions.
AWARD OF EXCELLENCE RECIPIENTS FOR 2008
Awards of Excellence recognize employees who display qualities for which CWB is known and
are inherent in our Think Western culture. 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 organization. They are reliable,
respectful and responsive to both customers and co-workers.
Almas Bhimani
CWB Calgary Main
Blair Himmelreich
CWB Corporate Office
Eric Liaw, CWT Vancouver
Eresha Nanayakkara
CWB Corporate Office
Fran Goplin, CDI Edmonton
Heather Colton, CDI Vancouver
Jason White, CWB Coquitlam
Lindsay Prokop, CWB Langley
Pam Perera, CWB Old Strathcona
Sherree Bunker
Optimum Mortgage, Edmonton
Tara Bouchard, Valiant, Calgary
Vanessa Laroque
CWB West Point Branch
16 WINNING THE WEST CWB 2008 ANNUAL REPORT
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
the responses 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 held four regular meetings and one special meeting during fiscal 2008. At the end of every regularly scheduled Board meeting
a session was held without any management, including the CEO, present.
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;
WINNING THE WEST CWB 2008 ANNUAL REPORT 17
· 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;
· 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 by-laws 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 2008, quarterly presentations
were made to the Board on the liquidity and market issues associated with the disruption in the financial markets. The Board also reviewed the
Bank’s people strategy.
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 2008 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 may be made.
The Bank has adopted a corporate disclosure policy which is reviewed annually. Quarterly and annual financial documents 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 at least 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.
18 WINNING THE WEST CWB 2008 ANNUAL REPORT
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”. In fiscal 2008, the Board was comprised of 12 directors, which was
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. The Committee has developed a
written matrix to assist it in its analysis. 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.
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 the position descriptions for the executive officers of the Bank and approve changes;
· establish (a) an executive compensation structure for the CEO; and (b) in conjunction with the CEO of the Bank, an executive compensation
structure for all other executive officers of the Bank and Canadian Direct Insurance Incorporated;
· ensure an annual performance appraisal is completed for the President and CEO and that it is reviewed with him by the Chairman of the Board;
· review and approve any employment related contract entered into between the Bank, or one of its subsidiaries, and an executive level officer
(equivalent to Executive Vice President within the Bank, or higher);
· review the Succession Plans for the Bank and its subsidiaries, which will include all critical positions as well as all officers in each of the companies;
· establish, amend, monitor and, where appropriate, terminate all compensation plans and arrangements for executive officers, officers and
employees of the Bank and its affiliates, including:
pension and retirement programs;
cash-based incentive compensation plans and other bonus arrangements; and
share incentive plans and other equity-based arrangements;
-
-
-
· award grants of options under any share incentive plan, subject to applicable regulatory and shareholder approval; and
· review the annual report on executive compensation and review with the Board of Directors before approval is given.
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 by-laws. Any
increase to this total amount requires shareholder approval.
The Corporate Governance & Human Resources Committee has the responsibility and authority to retain consultants, including compensation
consultants or advisors, as the Committee may determine necessary or advisable to carry out its responsibilities. During the year ended October
31, 2008, Mercer (Canada) was engaged by the Committee to obtain compensation information on a specified comparator group. Due to
limited participation from the targeted comparator group the Committee terminated the engagement.
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
WINNING THE WEST CWB 2008 ANNUAL REPORT 19
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;
· 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.
20 WINNING THE WEST CWB 2008 ANNUAL REPORT
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.
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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 21
MANAGEMENT’S DISCuSSION AND ANALySIS
table of contents
22 business profile and strategy
24 group finanCial perforManCe
24 Overview
27 Net Interest Income
28 Other Income
30 Non-Interest Expenses
and Efficiency
Income and Capital Taxes
31
32 Comprehensive Income
32 Cash and Securities
32 Loans
34 Credit Quality
38 Deposits
39 Other Assets and Other
Liabilities
39 Liquidity Management
42 Contractual Obligations
42 Capital Management
46 Financial Instruments
and Other Instruments
46 Acquisitions
47 Off-Balance Sheet
Arrangements
47 operating segMent review
47 Banking and Trust
49
Insurance
51
suMMary of Quarterly
results and fourth Quarter
51 Quarterly Results
51 Fourth Quarter of 2008
52 aCCounting poliCies and estiMates
52 Critical Accounting Estimates
53 Changes in Accounting Policies,
Including Initial Adoption
54
Future Changes in Accounting Policies
54 risk ManageMent
54 Overview
55 Credit Risk
56 Liquidity Risk
Insurance Risk
56 Market Risk
57
58 Operational Risk
59 General Business and
Economic Conditions
59 Level of Competition
59 Regulatory and Legal Risk
59 Accuracy and Completeness of
Information on Customers and
Counterparties
59 Ability to Attract and Retain Key
Personnel
59 Ability to Execute Growth
60
Initiatives
Information Systems and
Technology
60 Reputation Risk
60 Other Factors
60 updated share inforMation
60 Controls and proCedures
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 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 subsidiaries, Canadian Western Trust Company (CWT), Valiant
Trust Company (Valiant), Canadian Western Financial Ltd. (CWF), Adroit Investment Management Ltd. (Adroit) and Canadian Direct
Insurance Incorporated (Canadian Direct or CDI), currently operates in all four 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. Adroit specializes in wealth management for individuals, corporations and
institutional clients. 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 (AB).
In 2008, CWB continued its long history of strong financial performance and growth. This year marked many milestones, including record
earnings and revenues, as well as the Bank’s 19th 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 commercial and individual 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:
· maintain a conservative risk profile while ensuring growth is focused, strategic and accretive for shareholders;
· reinforce leadership in cost efficiency and low credit losses by enhancing service delivery capabilities and maintaining strong discipline in
managing the Bank’s lending portfolio;
· leverage core profitability and further diversify funding sources with ongoing generation of internal deposits raised through the branch
network, CWT and over the Internet;
· improve CWB’s revenue diversification by further developing non-interest revenue sources in banking, trust, insurance and wealth
management operations through internal growth as well as strategic acquisitions;
22 WINNING THE WEST CWB 2008 ANNUAL REPORT
· increase ROE by maintaining strong operating performance, an efficient capital structure, and continued diversification into businesses with
lower capital requirements, including residential mortgages, insurance, trust services and wealth management. Organic growth and resulting
benefits to ROE may be accelerated by acquisitions that are both accretive and a good strategic fit with current operations;
· develop and recruit high quality employees who embrace the Bank’s culture and Think Western® attitude by offering a rewarding work
environment that includes comprehensive employee benefits, career growth opportunities, strong work/life balance and competitive
compensation packages. CWB believes that such employees are critical to build brand recognition through personal, responsive and friendly
customer service; 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, is available on SEDAR at www.sedar.com and on the Bank’s website at www.cwbankgroup.com.
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, general business and economic conditions in Canada including, the volatility and lack of liquidity in financial markets,
fluctuations in interest rates and currency values, changes in monetary policy, changes in economic and political conditions, regulatory and
legal developments, the level of competition in the Bank’s markets, the occurrence of weather-related and other natural catastrophes, changes in
accounting standards and policies, 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. It is important to note that 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 as a number of important factors could cause the Bank’s actual results to differ materially from the expectations expressed in such
forward-looking statements. Unless required by securities law, the Bank does not undertake to update any forward-looking statement, whether
written or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy in 2009 and how it will affect CWB’s businesses are material factors the Bank
considers when setting its objectives. In setting performance target ranges for fiscal 2009, management’s expectations assume
· prolonged economic uncertainty that includes significantly challenged global economies and troubled markets;
· moderated economic activity in Western Canada;
· a declining interest rate environment supported by stable inflation, partially attributed to lower energy and commodity prices;
· sound credit quality with actual losses remaining within the Bank’s historic range of acceptable levels; and
· a compressed net interest margin consistent with elevated deposit costs, reduced prime lending rates, comparatively lower investment returns
reflecting high quality assets held in the securities portfolio and the Bank’s higher liquidity levels maintained in response to disruptions in
financial markets; partially offset by expectations for higher credit spreads and a corresponding increase in loan yields on both new lending
facilities and renewal accounts.
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 $5.7 million (2007 – $5.4 million) increases interest income and the provision for income taxes to what they would
WINNING THE WEST CWB 2008 ANNUAL REPORT 23
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 subsidiary goodwill divided by risk-weighted assets, calculated in
accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI). As of November 1, 2007
(as described on page 43 in the Capital Management section of the Management’s Discussion and Analysis), OSFI adopted a new capital
management framework called Basel II and capital is now managed and reported in accordance with those requirements. Prior year ratios
have been calculated using the previous framework;
· Tier 1 and total capital adequacy ratios – in accordance with guidelines issued by OSFI. As of November 1, 2007 on page 43 in the Capital
Management section of the Management’s Discussion and Analysis), OSFI changed their methodology and capital is now managed and
reported in accordance with the requirements of Basel II. Prior year ratios have been calculated using the previous framework.
· 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.
group financial performance
Overview
Highlights of 2008
· Record net income of $102.0 million, an increase of 6%. Diluted earnings per share of $1.58, up 5%.
· Record total revenues (teb) of $298.9 million, up 9%.
· Increased domestic and global demand for liquidity, which caused a compressed net interest margin that significantly constrained
revenue and profit growth due to the higher cost of deposits.
· Very strong loan growth of 16%, driving total assets to more than $10.6 billion.
· Sound credit quality.
· Return on equity of 15.9%, 150 basis points lower than 2007.
· Efficiency ratio (teb) of 45.2%, a 60 basis point deterioration reflecting constrained growth in net interest income (teb).
· Acquired 72.5% ownership position in Adroit Investment Management Ltd., subsequent to year end.
· Opened a new full-service commercial and retail banking centre in Leduc, AB.
· Opened a Valiant Trust office in Toronto.
· Cash dividends paid to shareholders increased 24%.
· No direct exposure to any troubled asset-backed commercial paper, collateralized debt obligations, credit default swaps, U.S. subprime
mortgages or monoline insurers.
24 WINNING THE WEST CWB 2008 ANNUAL REPORT
table 1 – select annual financial information(1)
($ 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
Net interest margin (teb)
Net interest margin
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)
Total revenues
Total assets
Subordinated debentures
Dividends
2008
2007
2006
$
Change from 2007
$
102,019
$
96,282
$
72,007
$
5,737
1.61
1.58
1.54
1.50
1.17
1.13
0.07
0.08
%
6%
5
5
0.15%
0.16%
0.20%
(1)bp(3)
2.30
2.25
45.2
46.1
15.9
1.03
2.58
2.51
44.6
45.5
17.4
1.18
2.62
2.56
46.0
46.9
14.8
1.12
$
298,857
$
273,480
$
221,770
$
293,186
10,600,732
375,000
0.42
268,070
9,525,040
390,000
0.34
217,692
7,268,360
198,126
0.25
25,377
25,116
1,075,692
(15,000)
0.08
(28)
(26)
60
60
(150)
(15)
9%
9
11
(4)
24
(1) See page 23 and page 24 for a discussion of teb and non-GAAP measures.
(2) A stock dividend effecting a two-for-one split of the Bank’s common shares was paid during 2007. All prior period common share and per common share information has been restated to
reflect this effective split.
(3) bp – basis points.
(4) A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
Net income surpassed the $100 million milestone to reach $102.0 million, a 6% ($5.7 million) increase over 2007. Increased market presence
and expanded infrastructure combined with relatively strong economic conditions across Western Canada were primary factors contributing
to solid financial results in a very difficult market for the global financial sector. Annual total revenues (teb) grew 9% to reach $298.9 million
reflecting very strong 16% ($1,218 million) growth in total loans and a 12% ($7.4 million) increase in other income, partially offset by the
impact of a significantly lower net interest margin. The margin compression reflects increased deposit costs related to ongoing disruptions
in financial and credit markets, consecutive reductions in the prime lending interest rate and high liquidity levels maintained in response to
market uncertainties. Credit quality remained sound and the provision for credit losses as a percentage of average loans was 15 basis points,
compared to 16 basis points in 2007 and an average of 20 basis points over the past five years. CWB’s efficiency ratio (teb), which measures
non-interest expense as a percentage of total revenues (teb), deteriorated 60 basis points from last year to 45.2%. The moderate deterioration
in the efficiency ratio (teb) reflects constrained growth in net interest income due to margin compression and an 11% increase in non-interest
expenses mainly resulting from continued business growth and investment in future development initiatives, partially offset by the positive
earnings impact of strong loan growth and higher other income. Diluted earnings per share of $1.58 increased 5% from $1.50 a year earlier.
Return on shareholders’ equity of 15.9% was down 150 basis points compared to 2007 while return on assets decreased 15 basis points
to 1.03%. Margin compression was also the main factor contributing to the year-over-year reduction in key profitability ratios. Total cash
dividends paid to shareholders grew 24% as a result of two increases in the quarterly dividend rate.
Total assets increased 11% to reach $10,601 million, driven by very strong loan growth of 16%. Loan growth reflects excellent double-digit
performance in the real estate, general commercial and personal lending sectors, partially offset by negative growth in both the equipment
financing and energy lending sectors. Loans grew at double-digit levels across all four western provinces, with activity in BC providing the
strongest annual contributions in both dollar and percentage terms. Loans in the Bank’s alternative residential mortgage business, Optimum
Mortgage, increased 25% in the year and comprised approximately 5% of total loans at fiscal year end.
Ongoing strategies to increase internal funding sources showed good results, with 10% growth in total branch-generated deposits. The demand
and notice component within branch-raised deposits increased 8% to comprise 26% of total deposits, compared to 27% in 2007. A portion of
growth in demand and notice deposits reflects the success of CWB’s high-interest Summit Savings Account ®. In response to events in financial
markets that commenced in the summer of 2007, additional insured fixed rate retail deposits have been raised through the deposit broker
network to augment the Bank’s liquidity position. This higher liquidity is reflected in the slight decrease in branch-generated deposits as a
percentage of total deposits, which was 63%, down from 64% in 2007.
WINNING THE WEST CWB 2008 ANNUAL REPORT 25
During 2008, CWB completed a $50 million issue of subordinated debentures to support continued loan growth and help offset the impact of
$65 million of subordinated debentures that were redeemed during the year. The success of this issue in volatile markets underscores ongoing
confidence in CWB and was consistent with the Bank’s objective to maintain a strong and efficient capital base.
table 2 – performance targets
The performance targets established for the 2008 fiscal year, together with actual performance, and new target ranges for fiscal 2009 are
presented below:
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
Outlook for Overall Financial Performance
2008
Target
15%
17%
15%
0.15%
45%
17%
1.10%
2008
2009
Performance
Target Ranges
6%
9%
16%
0.15%
45.2%
15.9%
1.03%
2 to 5%
5 to 8%
10%
0.15 to 0.18%
46 to 49%
14 to 16%
0.90 to 1.05%
Expected growth in both total revenues and net income in 2009 is supported by another year of double-digit loan growth and ongoing
solid contributions from insurance and trust services, offset by a further decline in net interest margin. There are also expectations for
a period of prolonged uncertainty brought about by significantly challenged economies, troubled markets and a very uncertain global
economic outlook. Economic activity in Western Canada is expected to moderate further compared to recent prior periods, but should
remain sound relative to the rest of Canada. On a further positive note, there has been unprecedented co-operation and actions taken
by governments and central bankers worldwide to help alleviate some economic stress and uncertainty. Although the recent reduction
in energy and other commodity prices will slow growth in parts of the Bank’s chosen markets, it will also provide much-needed cost
relief for consumers and businesses in Canada and globally. Fiscal flexibility associated with consecutive years of government surpluses,
combined with generally favourable tax regimes and a low interest rate environment, also supports increased business activity in times of
heightened economic challenges.
There should be ongoing quality lending opportunities in real estate and construction markets, although activity in these areas has
moderated considerably from highs observed over the past several years, and pay downs from interim construction loans will have an
increased relative impact on growth. A continued reduction in activity for lending areas related to forestry and natural gas markets is also
apparent. Despite an increase in gross impaired loans in 2008, actual write-offs are expected to remain within the Bank’s historic range
of acceptable levels. CWB will maintain its disciplined, secured underwriting practices and continue to monitor the credit environment
very closely for signs for further material shifts in economic fundamentals. The credit focus will remain centred on funding quality assets
that offer a fair and profitable return. Management is continually implementing revised pricing objectives for all new and renewal lending
facilities, which should help ease pressures on the Bank’s net interest margin over time. High liquidity levels will be maintained until
elevated market uncertainties subside. 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. Pressures on net interest
margin are expected to continue until overall deposit costs ease and market spreads return to more normal levels.
With its strong balance sheet and quality loan portfolio, the Bank remains well positioned to manage through the current credit cycle.
Management is also looking 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 the insurance segment are
expected to further strengthen the Bank’s ability to grow and increase market recognition. Newly acquired, Edmonton-based Adroit
Investment Management Ltd. is expected to have a modest positive impact on earnings in fiscal 2009.
26 WINNING THE WEST CWB 2008 ANNUAL REPORT
Net Interest Income
Highlights of 2008
· Net interest income (teb) was a record $228.6 million, up 9%.
· Net interest margin (teb) was 2.30%, down 28 basis points from 2.58% in 2007.
Net interest income is the difference between interest and dividends earned on assets and interest expensed on deposits and other liabilities,
including debentures. Net interest margin is net interest income as a percentage of average total assets.
table 3 – net interest income (teb)(1)
($ thousands)
Assets
Cash, securities and deposits with
2008
2007
Average
Balance
Mix
Interest
Rate
Interest
Average
Balance
Mix
Interest
Rate
Interest
regulated financial institutions $ 1,684,982
17% $
70,485
4.18% $ 1,404,004
17% $
62,404
4.44%
172,347
1,924,444
5,985,897
7,910,341
9,767,670
163,093
$ 9,930,763
5,961
3.46
51,657
115,168
376,824
491,992
99
568,438
–
100% $ 568,438
1
5.98
6.30
6.22
5.82
1,561,866
5,008,165
6,570,031
8,025,692
151,853
0.00
5.72% $ 8,177,545
1
19
61
80
98
2
2,274
4.40
97,014
342,653
439,667
504,345
–
6.21
6.84
6.69
6.28
0.00
100% $ 504,345
6.17%
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
105,000
Other liabilities
Subordinated debentures
Shareholders’ equity
8,598,807
291,533
396,953
643,470
Total Liabilities and Equity
$ 9,930,763
$ 369,276
4% $
2,033,863
6,090,668
–
53,593
257,210
6,751
317,554
–
4
22,267
–
100% $ 339,821
7
0.00% $ 361,526
1,494,823
2.64
4.22
6.43
3.69
0.00
5.61
5,088,457
105,000
7,049,806
259,741
315,776
552,222
0.00
3.42% $ 8,177,545
2.30% $ 8,177,545
5% $
–
0.00%
18
62
1
86
3
4
7
45,611
223,481
6,748
275,840
–
17,846
–
100% $ 293,686
$ 210,659
3.05
4.39
6.43
3.91
0.00
5.65
0.00
3.59%
2.58%
Total Assets/Net Interest Income $ 9,930,763
$ 228,617
(1) See page 23 and page 24 for a discussion of teb and other non-GAAP measures.
Net interest income (teb) increased 9% ($18.0 million) in the year, driven by 22% growth in average interest bearing assets, largely offset by the
significant negative impact of a 28 basis point decline in net interest margin (teb) to 2.30%. The lower net interest margin compared to 2007
mainly reflects increased deposit costs related to ongoing disruptions in global financial and credit markets, consecutive reductions in the prime
lending interest rate and higher liquidity levels maintained through the year in response to market uncertainties. Reductions in the prime lending
rate have a temporary negative impact on net interest income as the Bank’s loan portfolio reprices more quickly than its deposit liabilities. The
opposite effect occurs on net interest margin when interest rates rise. The incremental margin earned on lower cost notice and demand deposits
also reduces as the prime rate decreases to historically low levels. Illustrating the significant impact of ongoing market turmoil on CWB’s overall
financial performance, based on average total assets at year end, it is estimated that every one basis point improvement in net interest margin
WINNING THE WEST CWB 2008 ANNUAL REPORT 27
2
20
60
80
20
61
1
86
3
(teb) would increase annual net interest income (teb) by approximately $1.0 million, all else being equal; the opposite effect would occur on
annual net interest income (teb) when net interest margin declines by one basis point. CWB’s net interest margin (teb) in the fiscal year ended
October 31, 2007 was 2.58%. The Bank’s average net interest margin (teb) over the past ten years, including fiscal 2008, was 2.59%.
The average balance of demand and notice deposits increased 29% to comprise 24% of average funding sources (liabilities and equity),
compared to 23% in 2007.
The prime rate averaged 5.21%, compared to 6.08% last year and had declined to 4.00% at October 31, 2008.
Outlook for Net Interest Income
Fiscal 2009 net interest income is expected to increase with targeted loan growth of 10%, but net interest margin compression will
continue to constrain associated revenue growth. Management continues to implement revised pricing objectives for new and renewal
lending facilities, which should help offset higher deposit costs over time, but pressures are expected to continue until elevated
uncertainties in financial and credit markets subside. Higher liquidity strengthens the Bank’s overall financial position, but has a negative
effect on net interest margin as only a nominal spread is earned on investment. Management expects further decreases in the prime
lending interest rate, which will also have a negative impact on net interest margin as the Bank’s loan portfolio reprices more quickly than
its deposit liabilities. In addition, the yield on government quality investment securities has declined significantly as a result of ongoing
uncertainty and central bank policies to lower interest rates.
Other Income
Highlights of 2008
· Other income increased 12% ($7.4 million).
· Other income represented 24% of total revenues (teb), compared to 23% in 2007, reflecting comparatively slower growth in net interest
income due to a compressed net interest margin.
table 4 – other income
($ thousands)
Insurance
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
Net insurance revenues
Credit related
Trust services
Retail services
Gains on sales of securities, net
Foreign exchange
Other(1)
Total Other Income
2008
2007
$
Change from 2007
$
97,943
$
94,914
$
2,876
(64,380)
(20,573)
15,866
26,998
13,299
7,689
4,725
1,225
438
2,751
(62,391)
(20,011)
15,263
22,426
14,943
7,290
438
2,159
302
$
70,240
$
62,821
$
3,029
125
(1,989)
(562)
603
4,572
(1,644)
399
4,287
(934)
136
7,419
%
3%
5
3
3
4
20
(11)
5
979
(43)
45
12%
(1) Includes changes in fair value related to derivative financial instruments not accounted for as hedges, gains/losses on land, buildings and equipment disposals, and other miscellaneous
non-interest revenues.
28 WINNING THE WEST CWB 2008 ANNUAL REPORT
Other income of $70.2 million represented a 12% ($7.4 million) increase over 2007. Credit related fee income increased 20% ($4.6 million)
while combined gains on securities sales and other were up $4.4 million in the aggregate. The increase in credit related fee income was primarily
driven by very strong lending activity while higher gains on securities sales mainly resulted from transactions related to favourable pricing observed
on certain high quality, short-term debt investments. Foreign exchange income was $0.9 million lower than 2007 due to an unrealized loss on
a U.S. dollar net liability position held at year end. Trust services fee income declined 11% ($1.6 million) reflecting the combination of income
earned from unusually large trust transactions that occurred late in fiscal 2007 and a marked reduction in overall capital markets activity in 2008.
Retail service fees primarily reflect volume-driven commercial account transaction fees and growth in mutual fund fees and commissions, as well
as increased brand awareness relating to CWB’s expanded suite of financial products and services. Net insurance revenues were 4% ($0.6 million)
higher than last year reflecting continued business growth, largely offset by a $2.8 million negative before tax change in Canadian Direct’s share of
the Alberta auto risk sharing pools (the Pools). The Pools’ results in 2008 reflect a $1.0 million before tax loss due to an unfavourable adjustment
to unpaid claims reserves based on revised loss assumptions derived by the Pools’ consulting actuary. The adjustment was specifically attributed
to the impact of a decision rendered on February 8, 2008 by the Court of Queen’s Bench of Alberta that resulted in the lifting of the cap on
the amount a claimant may receive in respect of minor injuries suffered in an automobile accident. In fiscal 2007, the Pools’ contribution was
a positive $1.9 million before tax. Absent the Pools’ impact in both years, net insurance revenues increased 26% ($3.5 million) over 2007.
Other income as a percentage of total revenues (net interest income and other income) increased slightly to 24%, compared to 23% in the
prior year. This change was mainly attributed to comparatively slower growth in net interest income, as the positive impact of very strong
loan volume was significantly offset by the compressed net interest margin.
Outlook for Other Income
Solid growth in other income is expected to continue in fiscal 2009. The Bank will maintain its focus on enhancing transactional services
with an objective to increase fee income through ongoing generation of new business, increased market presence and expanded product
offerings, including wealth management services provided by Adroit, CWB’s newly acquired subsidiary. This strategy is supported by
confirmed plans for a continued expansion of the branch network and further development of existing premises. Trust services also
expects solid growth resulting from increased market share, enhanced product offerings and ongoing business development in both core
western markets and select areas in Ontario. Net insurance revenues should benefit from ongoing policy growth supported by Canadian
Direct’s enhanced distribution capabilities, which will include ongoing development of its Internet-based technology platform and an
expanded broker network in BC. Shifts in the interest rate curve and market spread fluctuations may also provide opportunities to realize
further gains on the sale of certain high quality debt investments.
WINNING THE WEST CWB 2008 ANNUAL REPORT 29
Non-Interest Expenses and Efficiency
Highlights of 2008
· An efficiency ratio (teb) of 45.2%, a 60 basis point deterioration, primarily reflecting constrained growth in net interest income from
margin compression.
· Non-interest expenses were up 11% ($13.2 million) over 2007, largely driven by increased costs related to continued business growth.
table 5 – non-interest expenses and efficiency ratio
($ thousands)
2008
2007
$
Change from 2007
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
Communications
General insurance
Regulatory costs
Other
Total Non-Interest Expenses
Efficiency Ratio (teb)(1)
$
72,558
$
64,130
$
15,102
87,660
10,402
2,279
1,698
14,379
4,069
3,912
7,981
4,386
3,285
2,633
2,280
2,143
1,441
1,090
1,081
1,066
5,741
25,146
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
938
1,054
979
5,106
25,189
8,428
2,726
11,154
600
215
3
818
659
644
1,303
(933)
57
(73)
(445)
372
78
152
27
87
635
(43)
%
13%
22
15
6
10
0
6
19
20
20
(18)
2
(3)
(16)
21
6
16
3
9
12
0
$
135,166
$ 121,934
$
13,232
45.2%
44.6%
11%
(60)bp(2)
(1) Non-interest expenses as a percentage of total revenues (net interest income (teb) plus other income). See page 24 for a discussion of non-GAAP measures.
(2) bp – basis points.
Total non-interest expenses of $135.2 million increased 11% ($13.2 million) over 2007. Higher non-interest expenses mainly reflect an
increased staff complement, with full-time equivalent employees growing 8% from October 31, 2007. Other factors include annual salary
increments, additional premises costs related to a 5% increase in total square footage, a $0.5 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 $5.8 million, compared to $4.5 million in 2007), partially offset by the absence of $0.9 million professional fees incurred in
the prior year related to a 2007 income tax recovery and lower capital taxes. Other increases in non-interest expenses mainly reflect costs to
manage business growth, including inflationary pressures related to Western Canada’s relatively robust economic activity.
Growth in non-interest expenses surpassed growth in total revenues (teb), leading to an efficiency ratio (teb) of 45.2%, a 60 basis point
deterioration compared to the prior year. Non-interest expenses as a percentage of average assets decreased to 1.4% from 1.5% in 2007.
30 WINNING THE WEST CWB 2008 ANNUAL REPORT
Outlook for Non-Interest Expenses and Efficiency
Constrained growth in total revenues (teb) attributed to margin compression had a substantial negative impact on the efficiency ratio in
2008, and most of this pressure is expected to remain due to the unprecedented events in financial markets. Management has assumed
that market uncertainties will persist throughout 2009. While strong fiscal responsibility will be maintained, continued effective execution
of CWB’s strategic focus on people, process, infrastructure and business enhancement will require increased spending in areas mainly
correlated with enhancements to the Bank’s growth platform, including additional staff complement, ongoing premises and equipment
upgrades, and plans for additional new Bank branches. These initiatives are an integral part of management’s commitment to maximize
shareholder value over the long-term and are expected to provide significant benefits in future periods, despite the short-term consequence
as it relates to the efficiency ratio (teb) in the presence of compressed net interest margins. Building on CWB’s position as an employer of
choice is also a key priority and annual salary increments and further enhancements to the Bank’s benefit plan are anticipated. Although
a reduction in energy and other commodity prices will likely slow economic growth in parts of CWB’s chosen markets, it will also
provide much-needed cost relief across many areas of the Bank’s businesses. Further reductions in provincial capital taxes should also
provide moderate relief as it relates to total non-interest expenses. Overall, CWB expects to maintain its efficiency ratio (teb) within a
range of 46% – 49% in fiscal 2009.
Income and Capital Taxes
The provision for income taxes (teb) was 32.7%, up from 31.9% in the prior year. The current year’s provision includes $1.0 million of additional
tax expense resulting from the write-down of future tax assets to reflect lower future federal corporate income tax rates. The prior year’s provision
included a tax benefit recognized from prior period transactions that reduced income taxes by $3.5 million and the effective tax rate by 260
basis points. The provision before the teb adjustment was 30.1%, compared to 29.2% in the previous year. Lower statutory income tax rates resulted
in a 130 basis point reduction in the provision for current income taxes compared to 2007. Lower effective tax rates mainly reflect reductions in
federal corporate income tax rates. Effective July 1, 2008, the corporate provincial income tax rates in British Columbia (BC), Saskatchewan
and Manitoba each decreased 100 basis points to 11%, 12% and 13%, respectively, and will benefit after tax earnings in future periods.
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 (2007 – $11.1 million) are available to apply against future capital gains and have no expiry date. The tax
benefit of these capital losses has not been recognized.
table 6 – capital taxes
($ thousands)
British Columbia
Alberta
Saskatchewan
Manitoba
Total Capital Taxes
Capital
Capital
Tax Rate
Allocation
0.81%(1)
n/a
0.70%
3.00%
$
27%
68%
4%
1%
2008
1,469
–
283
249
–
267
395
–
16
(146)
(408)
$
2,001
$
2,409
$
Change from 2007
2007
$
$
1,747
$
(278)
%
(16)%
–
6
(37)
(17)%
(1) The BC capital tax rate decreased from 1.00% to 0.67% effective April 1, 2008. The above table reflects the blended rate for 2008.
Capital taxes for 2008 totaled $2.0 million, representing a 17% decline from 2007. Lower capital taxes are mainly attributed to a 2008 decrease
in the capital tax rate in BC, partially offset by increased capital associated with the retention of earnings and additional subordinated
debentures. BC capital taxes are expected to be completely eliminated by April 1, 2010.
Outlook
The effective tax rate (teb) is anticipated to be approximately 30.5% in 2008. Provincially levied capital taxes are expected to decline in
conjunction with the above-mentioned rate reductions, partially offset by the ongoing retention of earnings.
WINNING THE WEST CWB 2008 ANNUAL REPORT 31
Comprehensive Income
Comprehensive income is composed of net income and other comprehensive income (OCI). CWB’s OCI includes unrealized gains and losses
on available-for-sale cash and securities, and derivative instruments designated as cash flow hedges, all net of tax.
table 7 – comprehensive income
($ thousands)
Net Income
Other Comprehensive Income (Loss)
Available-for-sale securities
Losses from change in fair value, net of tax
Reclassification to other income, net of tax
Derivatives designated as cash flow hedges
Gain (Losses) from change in fair value, net of tax
Reclassification to net interest income, net of tax
Reclassification to other liabilities for derivatives terminated prior to maturity, net of tax
Total Comprehensive Income
Cash and Securities
2008
102,019 $
2007
96,282
$
(2,631)
(3,271)
(5,902)
9,341
(1,773)
(938)
6,630
728
102,747 $
(5,544)
(295)
(5,839)
(403)
1,805
–
1,402
(4,437)
91,845
$
Cash and securities were held above normal historic levels since late in fiscal 2007 and will be maintained until ongoing turmoil in financial
and credit markets subsides. This strategy has a negative effect on net interest margin as only a nominal spread is earned on investment, but
is consistent with the Bank’s conservative risk tolerance and augments its strong position to manage future unexpected events. Cash resources,
securities, and securities purchased under resale agreements totaled $1,798 million at year end, compared to $1,961 million last year and
$1,333 million at October 31, 2006. The year-over-year decrease reflects strong loan demand, a revised methodology for measuring and
monitoring liquidity and the decision to modestly reduce liquidity from the very high level held at the end of last year. Enhanced liquidity and
deposit monitoring has enabled the Bank to assess risks under various scenarios and to decrease the levels of liquid asset coverage on a general
basis. The Bank has no direct exposure to any troubled asset-backed commercial paper, collateralized debt obligations, credit default swaps,
U.S. subprime lending or monoline insurers.
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, 2008 was $17.8 million,
compared to an unrealized loss as at October 31, 2007 of $9.3 million. The cash and securities portfolio is primarily comprised of high quality
debt instruments and preferred shares that are not held for trading purposes. Where applicable, all securities are typically held until maturity.
Fluctuations in fair value are generally attributed to changes in interest rates, market spreads and shifts in the interest rate curve. See Table 27 –
Valuation of Financial Instruments on page 53 of this MD&A for additional information.
Cash and securities are managed in conjunction with CWB’s overall liquidity and additional information is included in the Liquidity
Management discussion beginning on page 39 of this MD&A.
Loans
Highlights of 2008
· Very strong loan growth of 16%, marking nineteen consecutive years of double-digit loan growth.
· Growth in construction and real estate loans of 33%.
· Growth in commercial loans of 24%.
· Growth in personal loans and residential mortgages, including Optimum Mortgage, of 21%.
· Decline of 7% in equipment financing loans.
· Decline of 55% in energy loans.
32 WINNING THE WEST CWB 2008 ANNUAL REPORT
The shaded areas of this MD&A represent a discussion of risk management policies and procedures relating to credit, market and liquidity
risks as required under the Canadian Institute of Chartered Accountants (CICA) Handbook Financial Instruments – Disclosures and
Presentation, which permits these specific disclosures to be included in the MD&A. Therefore, the shaded areas presented on page 33 and
pages 54 to 57 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2008.
table 8 – outstanding loans by type and by provincial location of security
($ millions)
British
Composition
Columbia
Alberta
Saskatchewan
Manitoba
Other
Total(1)
Percentage
October 31, 2008
Loans to Individuals
Residential mortgages(2)
Other loans
Loans to Businesses(3)
Commercial
Construction and real estate(4)
Equipment financing
Energy
$
1,034
$
868
$
115
$
62
$
51
$
2,130
110
1,144
710
911
338
–
1,959
205
1,073
1,201
1,344
815
156
3,516
24
139
86
73
39
–
198
3
65
83
62
13
–
158
1
52
220
144
32
–
396
343
2,473
2,300
2,534
1,237
156
6,227
8,700
Total Loans
$
3,103
$
4,589
$
337
$
223
$
448
$
Composition Percentage
36%
53%
4%
2%
5%
100%
October 31, 2007
Loans to Individuals
Residential mortgages(2)
$
889
$
720
$
80
$
48
$
45
$
1,782
Other loans
Loans to Businesses(3)
Commercial
Construction and real estate(4)
Equipment financing
Energy
Total Loans
Composition Percentage
79
968
596
688
365
22
1,671
157
877
970
1,069
891
322
3,252
18
98
76
65
39
–
4
52
68
57
16
–
180
141
1
46
138
31
16
–
185
$
2,639
$
4,129
$
278
$
193
$
231
$
259
2,041
1,848
1,910
1,327
344
5,429
7,470
35%
55%
4%
3%
3%
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%
4
28
27
29
14
2
72
100%
24%
3
27%
25
25
18
5
73
100%
Total loans, excluding the allowance for credit losses, increased 16% ($1,218 million) to total $8,624 million at year end. Each lending sector
achieved very strong double-digit growth with the exception of equipment financing and energy loans. CWB’s increased market presence,
customer appreciation of the Bank’s Think Western® service commitment and relatively robust economic conditions contributed to this
accomplishment. Year-over-year reductions in the equipment financing and energy lending sectors were primarily attributed to challenges
related to softness in the forestry and natural gas services industries.
The mix of loan type shifted during the year (see Figure 1 on page 34) with the level of growth in real estate project loans, residential
mortgages, corporate loans, commercial mortgages and general commercial loans offsetting a decrease in oil and gas production loans and
equipment financing. The geographic distribution of loans (see Figure 3 on page 37) also changed slightly year-over-year reflecting very strong
lending activity in BC. Based on the location of security, AB and BC, respectively, represented 53% and 36% of total loans at year end.
WINNING THE WEST CWB 2008 ANNUAL REPORT 33
The Bank’s alternative residential mortgage business, Optimum Mortgage, showed very strong results and ended the year with total loans of
$469 million, up 25%, to comprise approximately 5% of the total loan portfolio. Total deal activity surpassed prior years by a considerable
margin and the overall outlook is relatively positive despite moderated residential sales activity and some softness in resale prices. This business
continues to provide ample opportunities to produce strong returns while maintaining an acceptable risk profile. To date, actual losses in this
portfolio have been minimal. Optimum’s loan book is entirely comprised of conventional residential first mortgages carrying a weighted average
underwritten loan-to-value ratio at initiation of approximately 70%. The vast majority of these mortgages carry a fixed interest rate with the
principal amortized over 25 years or less. Optimum began underwriting residential mortgages in certain targeted regions of Ontario in late 2008
and, while in its infancy, this initiative has potential to provide notable opportunities for further growth and diversification of this portfolio.
Corporate loans are centrally sourced and administered through a designated lending group and include participation in select syndications
structured and led primarily by the major Canadian banks. At October 31, 2008, this portfolio totaled $729 million (2007 – $477 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
(October 31, 2007 in brackets)
General
Commercial 20% (19%)
Personal Loans
& Mortgages 13% (13%)
Corporate
Loans 7% (6%)
Oil & Gas
Production 2% (5%)
Commercial
Mortgages 21% (19%)
Equipment
Financing 14% (18%)
Real Estate
Project Loans 23% (20%)
Outlook for Loans
CWB’s fiscal 2009 loan growth target of 10% reflects expectations for solid performance relative to ongoing turmoil in financial and
credit markets, in addition to a very uncertain global economic outlook. We expect economic activity in Western Canada will moderate
compared to recent prior periods, but will continue to perform well relative to the rest of Canada. CWB’s increased market presence and
visibility, ongoing branch development and reduced competition in some business areas should further support the achievement of the
Bank’s double-digit loan growth target. Expected paybacks from real estate project (interim construction) lending is expected to moderate
overall growth compared to prior years, reflecting both reduced activity and the relatively short duration of loans in this portfolio.
Credit Quality
Highlights of 2008
· Credit quality remained sound.
· Provision for credit losses was $12.0 million and represented 15 basis points of average loans, consistent with the fiscal 2008 target.
· Gross impaired loans were within expectations in view of elevated uncertainties and slower economic growth and represented 106 basis
points of total loans at October 31, 2008, compared to a historically low 28 basis points at the end of fiscal 2007.
Impaired Loans
As shown in Table 9 on page 35, gross impaired loans totaled $91.6 million and represented 106 basis points of outstanding loans. Fluctuations
in the level of impaired loans are expected within normal operation of the loan portfolio and the level remains within the Bank’s historic 10-year
range measured against average loans. Systemic softness in the forestry industry was apparent throughout fiscal 2008, mainly attributed to the
economic slowdown in the U.S. construction industry and the appreciation of the Canadian currency. Total exposure to this industry remains
low at approximately 2% of the portfolio. Natural gas prices were volatile, with exploration activity continuing to fall below the record levels
seen several years ago. The impact of a rapid rise and recent decline of oil prices during the year is uncertain, but may also have an impact on
conventional oil exploration activities. Non-conventional oil sands activities have long planning horizons, with a current backlog of capital
34 WINNING THE WEST CWB 2008 ANNUAL REPORT
investment. While impaired loans in the real estate sector are partially due to moderated residential sales activity in Western Canada, the dollar
increase mainly represents a few isolated interim construction accounts that are not considered to be the result of systemic industry issues. The
presence of other lenders with charges subordinated to CWB on certain lending facilities classified as impaired could potentially extend the time
frame required to recover outstanding balances.
table 9 – change in gross impaired loans
($ 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
Change from
2008
2007
$
21,104
$
10,403
$
70,016
516
11,400
(699)
$
91,636
$
21,104
$
2007
10,701
58,616
1,215
70,532
1.06%
0.28%
0.78%
The provision for credit losses of $12.0 million increased $1.8 million over the previous year and represented 15 basis points of average loans,
compared to 16 basis points in 2007. At October 31, 2008, gross impaired loans exceeded the total allowance for credit losses by $16.1 million,
representing 19 basis points (2007 – negative 57 basis points) of net loans outstanding (see Figure 2). In the five years prior to fiscal 2008,
relatively consistent dollar provisions for credit losses together with an exceptionally low level of impaired loans had resulted in the total allowance
for credit losses exceeding gross impaired loans. The general allowance represented 70 basis points of risk-weighted assets at year end (2007 – 72
basis points). The allowance for credit losses as a percentage of gross impaired loans (coverage ratio) decreased to 82% (2007 – 299%).
figure 2 – net impaired loans as a percentage of net loans outstanding
(0.57%)
(0.75%)
(0.68%)
(0.36%)
(0.36%)
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0.19%
0.13%
0.25%
0.17%
0.54%
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 fluctuates over time within the Bank’s range of acceptable levels as loans become impaired and
are subsequently resolved. Gross impaired loans represented 106 basis points of total loans at October 31, 2008. The 10-year average
for gross impaired loans measured against total loans is 83 basis points, with a high of 169 basis points in 1999 and a low of 18 basis
points in 2006. The absolute dollar level of gross impaired loans does not accurately identify the dollar amount of expected write-offs
given tangible security held against the Bank’s lending positions. Existing loans classified as impaired are well structured and all current
loss estimates are reflected in the specific provisions for credit losses. Overall credit quality is expected to remain sound and actual losses
should be within CWB’s historic range of acceptable levels. It is anticipated that gross impaired loans will return to more normal levels
over time once realization objectives are attained. The presence of other lenders with charges subordinated to CWB on certain lending
facilities classified as impaired could potentially extend the time frame required to recover outstanding balances. Overall lending exposures
will continue to be closely monitored and management remains confident in the strength, diversity and the underwriting structure of the
loan portfolio.
WINNING THE WEST CWB 2008 ANNUAL REPORT 35
Allowance for Credit Losses
Table 10 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 10 – allowance for credit losses
($ thousands)
Specific Provisions
Commercial
Real estate
Industrial
Consumer and personal
General Allowance
Total
(1) Recoveries in 2008 totaled $3,093 (2007 – $87).
2008
Write-Offs,
Opening
net of
Balance
Recoveries(1)
Provision
for Credit
Losses
$
3,617
$
(1,509)
$
896
2,550
351
7,414
55,608
63,022
$
–
767
226
(516)
–
$
985
2,052
3,864
180
7,081
4,919
$
(516) $
12,000
$
2008
Ending
Balance
6,111
2,948
5,647
305
15,011
60,527
75,538
The allowance for credit losses is maintained to absorb both identified and unidentified losses in the loan portfolio and, at October 31, 2008,
consisted of $15.0 million in specific allowances and $60.5 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 70 basis points of gross outstanding loans (2007 – 75 basis points) and 70
basis points of risk-weighted assets (2007 – 72 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 15 basis points of average loans in 2008 (see Table 11), a decrease from the five- and ten-year averages
of 20 basis points and 21 basis points, respectively. The decrease in the provision as a percentage of average loans reflects relatively consistent
dollar provisions coupled with robust asset growth. Net new specific provisions represented nine basis points of average loans in 2008. These
results compare to the five- and ten-year trend when the net new specific provision for credit losses averaged eight basis points and 13 basis
points of average loans, respectively. The credit quality of the portfolio resulted in 41% of the current year’s provision for credit losses being
allocated to the general allowance for credit losses. The allowance at year end reflects $3.1 million of recoveries on loans written off in prior
years. The Bank has a long history of strong credit quality and low loan losses, both of which compare very favourably to the Canadian banking
industry. External factors that may impact Western Canada and the sectors in which the Bank’s customers operate are continually analyzed.
36 WINNING THE WEST CWB 2008 ANNUAL REPORT
table 11 – provision for credit losses
($ thousands)
Provision for credit losses(1)
Net new specific provisions (net recovery)(2)
General allowance
Coverage ratio(3)
2008
0.15%
0.09
2007
0.16%
0.04
2006
0.20%
(0.03)
2005
0.24%
0.06
2004
0.25%
0.22
$
60,527
$
55,608
$
48,037
$
36,462
$
28,816
82%
299%
514%
370%
158%
(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 in 2009 is expected to fall in a range between 15 – 18 basis points of average loans. The provision reflects
an assessment of the current economic outlook, expected growth, the overall quality of the portfolio and its underlying security, as well as
the adequacy of the general allowance for credit losses. This assessment will continue to be reviewed on a quarterly basis.
Diversification of Portfolio
Total Advances Based on Location of Security
(see also Table 8 on page 33)
The following table illustrates the diversification in lending operations
by standard industry sectors.
figure 3 – geographical distribution of loans(1)
(October 31, 2007 in brackets)
table 12 – total advances based on industry sector(1)
% at October 31
British Columbia 36% (35%)
Construction
Alberta 53% (55%)
Real estate operations
Consumer loans and residential mortgages(2)
Transportation and storage
Saskatchewan 4% (4%)
Manitoba 2% (3%)
Other 5% (3%)
(1) Includes letters of credit.
Oil and gas (service)
Health and social services
Hotel/motel
Oil and gas (production)
Manufacturing
Other services
Finance and insurance
Logging/forestry
Retail trade
Wholesale trade
All other
Total
2008
24%
22
13
2007
24%
20
14
6
4
4
4
3
3
3
3
2
2
2
5
100%
7
6
1
4
4
4
4
3
3
2
2
2
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 specified tolerance levels. The portfolio is well diversified with a mix of commercial and personal business. 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 geography is expected to remain consistent with prior years. Opportunities in interim construction lending
have moderated compared to recent prior years and portfolio diversification by industry sector is expected to reflect slower growth in this
area.
WINNING THE WEST CWB 2008 ANNUAL REPORT 37
Deposits
Highlights of 2008
· Personal deposits, which include the Bank’s lowest cost source of funding, increased 14%.
· Business and government deposits increased 10%.
· Branch and trust generated deposits were 63% of total deposits, down from 64% a year earlier, reflecting higher liquidity raised through
the broker deposit network.
table 13 – deposits
($ thousands)
Personal
Business and government
Deposit taking institutions
Deposit from CWB Capital Trust(1)
Total Deposits
% of Total
Personal
Business and government
Deposit taking institutions
Deposit from CWB Capital Trust(1)
Total Deposits
% of Total
Demand
Notice
Term
2008
Total
$
16,071
$
732,630
$
4,601,439
$
5,350,140
367,012
1,277,409
2,136,158
3,780,579
–
–
–
–
10,000
105,000
10,000
105,000
$
383,083
$
2,010,039
$
6,852,597
$
9,245,719
4%
22%
74%
100%
% of
Total
58%
41
–
1
100%
Demand
Notice
Term
2007
Total
% of
$
15,873
$
788,199
$
3,909,616
$
4,713,688
360,615
1,055,600
2,012,015
3,428,230
–
–
–
–
10,000
105,000
10,000
105,000
$
376,488
$
1,843,799
$
6,036,631
$
8,256,918
5%
22%
73%
100%
Total
57%
42
–
1
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 conver-
sion right in circumstances in which holders of WesTS exercise their holder exchange right. See the Capital Management discussion on page 42 of this MD&A or Note 14 to the consolidated
financial statements for more information on WesTS and CWB Capital Trust.
Total deposits at year end of $9,246 million increased 12% ($989 million) over 2007, driven by 14% growth in personal and 10% growth in
business and government deposits. Reflecting the Bank’s commercial focus, a considerable portion of the year-over-year growth in total branch
deposits includes larger relationship-based commercial and wholesale balances that can be subject to greater fluctuation. (See the Liquidity
Management section on page 39 of this MD&A.)
table 14 – deposits by source
(as a percentage of total deposits at October 31)
Branches
Deposit brokers
Corporate wholesale
Deposit from CWB Capital Trust
Total
2008
63%
34
2
1
100%
2007
64%
2006
66%
33
2
1
30
2
2
2005
2004
67%
32
1
–
57%
42
1
–
100%
100%
100%
100%
Deposits are primarily generated from the branch network (including CWT) and a deposit broker network. Increasing the level of retail
deposits is an ongoing focus as success in this area provides the most reliable and stable source of funding. CWB’s high-interest Summit Savings
Account ® continued to be well received, with the total dollar value of deposits from this source growing $293 million in the year to reach $461
million. This product has proven to be a good tool to further expand the Bank’s customer base and increase brand awareness. CWB introduced
an Internet-based division of the Bank named Canadian Direct Financial TM (www.canadiandirectfinancial.com) late in 2008 that offers a
high-interest savings account and term deposits directly to customers who are not served by the branch network. Canadian Direct Financial TM
was launched as a pilot initiative and is thought to have potential to provide a valued and diversified source of funding in the future. Insured
38 WINNING THE WEST CWB 2008 ANNUAL REPORT
deposits raised through deposit brokers also remain a valuable funding source. Although these funds are subject to commissions, this cost is
countered by a reduced dependence on a more extensive branch network and the benefit of generating insured fixed term retail deposits over
a wide geographic base. 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 was 10%. The demand and notice component within branch-raised deposits
increased 8% to comprise 26% of total deposits, down from 27% in the previous year. At October 31, 2008, branch and trust generated
deposits comprised 63% of total deposits, compared to 64% in the previous year. This decrease mainly reflects additional insured deposits
raised through the deposit broker network to fund strong loan demand while maintaining higher than normal liquidity levels in response to
financial market uncertainties, as 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 2009, with particular emphasis on the demand
and notice component, which is often lower cost and provides associated transactional fee income. CWB’s improved market presence
and planned additions to the existing branch network also support objectives to generate branch-raised deposits. Further diversifying
the deposit base via new product offerings and through Canadian Direct FinancialTM are ongoing initiatives. The Bank’s deposit broker
network also remains a very valuable source for raising insured fixed-term retail deposits and has proven to be an extremely effective way
to access liquidity over a wide geographic base.
Other Assets and Other Liabilities
At October 31, 2008, other assets totaled $179 million (2007 – $158 million). Insurance related other assets were $53 million (2007 – $52
million) and consisted primarily of instalment premiums receivable as well as the reinsurers’ share of unpaid claims. Other assets at October 31,
2008 also include goodwill and intangible assets of $6.9 million and $2.2 million, respectively.
Other liabilities totaled $301 million at October 31, 2008 (2007 – $283 million). Insurance related other liabilities were $135 million (2007 –
$124 million) and consisted primarily of provisions for unpaid claims and adjustment expenses and unearned premiums.
Liquidity Management
Highlights of 2008
· Strong liquidity position and conservative investment profile.
· Enhanced liquidity management in response to disruptions in financial markets.
· No direct exposure to troubled asset classes.
A schedule outlining the consolidated securities portfolio at October 31, 2008 is provided in Note 4 to the consolidated financial statements.
A conservative investment profile is maintained by ensuring:
· all investments, other than preferred shares and those securities categorized as “other marketable securities”, are limited to high quality debt
securities and short-term money market instruments;
· specific investment criteria and procedures are in place to manage the securities portfolio;
· regular review, monitoring and approval of investment policies by the Asset Liability Committee (ALCO); and
· quarterly reporting to Board of Directors on the composition of the securities portfolio supported by an annual review and approval by the
Board of Directors.
The Bank has no direct exposure to any troubled non-bank sponsored asset-backed commercial paper, collateralized debt obligations, credit
default swaps, U.S. subprime mortgages or monoline insurers. The Bank’s liquidity management was enhanced in 2008 with the following
initiatives:
· increased monitoring of liquidity reserve levels;
· operating micro- and macro-scenario stress testing;
· maintenance of a shortened duration in the liquidity portfolio;
· enhanced credit profile of the liquidity portfolio; and
· strengthened deposit monitoring and market surveillance.
WINNING THE WEST CWB 2008 ANNUAL REPORT 39
table 15 – liquid assets
($ 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
2008
2007
$
8,988
$
6,446
$
Change from
464,193
18,992
492,173
77,000
214,482
167,683
417,657
256,232
405,122
1,122
412,690
206,925
332,358
332,721
216,735
221,878
236,256
2007
2,542
59,071
17,870
79,483
(129,925)
(117,876)
(165,038)
200,922
34,354
(64,585)
Government of Canada, provincial and municipal bonds, term to maturity 1 year or less
Government of Canada, provincial and municipal bonds, term to maturity more than 1 year
Preferred shares
Other marketable securities
Total Securities Purchased Under Resale Agreements and Marketable Securities
Total Liquid Assets
Total Assets
Liquid Assets as a Percentage of Total Assets
Total Deposit Liabilities
Liquid Assets as a Percentage of Total Deposit Liabilities
171,671
1,304,725
$
1,796,898
$
1,546,873
(242,148)
1,959,563
$
(162,665)
$ 10,600,732
$
9,525,040
$
1,075,692
17%
$
9,245,719
$
21%
(4)%
8,256,918
$
988,801
19%
24%
(5)%
As shown in Table 15, liquid assets comprised of cash, interbank deposits, securities purchased under resale agreements and marketable
securities totaled $1,797 million at October 31, 2008, a decrease of $163 million compared to a year earlier. The decrease reflects strong loan
demand, a revised methodology for measuring and monitoring liquidity and the decision to modestly reduce liquidity from the very high levels
held at the end of last year. Enhanced liquidity and deposit monitoring has enabled the Bank to assess risks under various micro- and macro-
scenarios and to decrease the levels of liquid asset coverage on a general basis. Despite a reduction in liquidity compared to the end of last year,
based on current models, the Bank continues to carry more liquidity than it would in more normal market conditions and a stable economic
environment. Liquid assets represented 17% (2007 – 21%) of total assets and 19% (2007 – 24%) of total deposit liabilities at year end.
Highlights of the composition of liquid assets at October 31, 2008 are as follows:
· maturities within one year decreased to 47% (2007 – 69%) of liquid assets, or $836 million (2007 – $1,354 million);
· Government of Canada, provincial and municipal debt securities remained unchanged at 45% (2007 – 45%) of liquid assets;
· deposits with regulated financial institutions, including Bankers’ Acceptances, increased to 26% (2007 – 21%) of liquid assets;
· preferred shares increased to 14% (2007 – 11%) of liquid assets; and
· other marketable securities decreased to 10% of liquid assets (2007 – 12%).
Included in liquid assets are securities purchased under resale agreements. These are short-term advances, typically no more than a few days
in duration, to securities dealers and require the dealer to repurchase the securities, which are comprised of treasury bills or other high quality
liquid securities.
Short-term uncommitted facilities have been arranged with a number of financial institutions. The government insured/guaranteed mortgage
portfolios held by the Bank also represent a potential source of liquidity. CWB may enter into reverse repurchase agreements as a source of
short-term liquidity, which are short-term borrowings from securities dealers that require subsequent repurchase of the securities given as
collateral, typically within a few days.
A significant portion of branch-generated deposits are generated from corporate clients, who tend to hold larger balances than personal retail
clients. Although these deposits may be subject to more volatility, to date, this funding source has proven to be reliable and stable.
The primary source of new funding is the issuance of deposit instruments. A summary of outstanding deposits by contractual maturity date is
presented in Tables 16 and 17.
40 WINNING THE WEST CWB 2008 ANNUAL REPORT
table 16 – deposit maturities within one year
($ millions)
October 31, 2008
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
October 31, 2007 Total
table 17 – total deposit maturities
($ millions)
October 31, 2008
Demand deposits
Notice deposits
Deposits payable on a fixed date
Note to CWB Capital Trust
Total
October 31, 2007 Total
$
$
Within
1 to 3
3 Months
Cumulative
1 Month
Months
to 1 Year Within 1 Year
$
$
$
383 $
2,010
1,302
3,695 $
– $
–
870
870 $
– $
–
1,916
1,916 $
3,660 $
687 $
1,580 $
Within
1 Year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5
More than
Years
5 Years
$
383
$
2,010
4,088
–
– $
–
$
–
–
1,205
663
–
–
– $
–
520
–
– $
–
272
–
– $
–
–
105
6,481
$
1,205 $
663
$
520 $
272
$
105 $
9,246
5,927
$
1,012 $
546
$
282 $
385
$
105 $
8,257
383
2,010
4,088
6,481
5,927
Total
383
2,010
6,748
105
A breakdown of deposits by source is provided in Table 14 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 increase, particularly in times of elevated 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 deposits generated through the deposit broker network. At October 31, 2008, CWT’s notice account balances totaled
$429 million (2007 – $368 million).
In addition to deposit liabilities, CWB has subordinated debentures outstanding that are presented in the table below.
table 18 – subordinated debentures outstanding
($ thousands)
Interest
Rate
5.550%(1)
5.426%(2)
5.070%(3)
5.571%(4)
5.950%(5)
5.660%(6)
5.960%(6)
Total
Earliest Date
Maturity
Redeemable by
Date
CWB at Par
November 19, 2014
November 21, 2015
March 21, 2017
March 21, 2022
June 27, 2018
July 7, 2013
October 24, 2013
November 20, 2009 $
November 22, 2010
March 22, 2012
March 22, 2017
June 27, 2013
July 8, 2008
October 25, 2008
2008
60,000 $
70,000
120,000
75,000
50,000
–
–
2007
60,000
70,000
120,000
75,000
–
30,000
35,000
$
375,000
$
390,000
(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 160 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 180 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 155 basis points. Of the $125,000 debentures issued, $5,000 were acquired by Canadian Direct Insurance Incorporated, a wholly owned subsidiary, and have
been eliminated on consolidation.
(4) These conventional debentures have a 15-year term with a fixed interest rate for the first ten years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 180 basis points.
(5) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 302 basis points.
(6) These conventional debentures had a 10-year term with a fixed interest rate for the first five years and were redeemed by the Bank at face value on July 8 and October 25, 2008, respectively.
WINNING THE WEST CWB 2008 ANNUAL REPORT 41
Outlook for Liquidity Management
The Bank expects elevated uncertainties and resulting volatility in financial markets will continue into fiscal 2009. In response, a
conservative risk profile will be maintained, supported by liquidity reserves above normal targeted levels.
Contractual Obligations
In addition to the obligations related to deposits and subordinated debentures discussed in the Deposits and Liquidity Management sections on
pages 38 and 39 of this MD&A, as well as Notes 13, 17 and 28 of the consolidated financial statements, the following contractual obligations
are outstanding at October 31, 2008:
table 19 – contractual obligations
($ thousands)
Lease commitments
Purchase obligations for capital expenditures
October 31, 2008
October 31, 2007
Capital Management
Highlights of 2008
Within
1 Year
8,036 $
280
8,316 $
7,852 $
$
$
$
1 to 3 Years
4 to 5 Years
15,609 $
14,689 $
–
15,609 $
13,992 $
–
14,689 $
13,045 $
More than
5 Years
28,873 $
–
28,873 $
32,723 $
Total
67,207
280
67,487
67,612
· Maintained solid Total and Tier 1 capital adequacy ratios of 13.5% and 8.9%, respectively.
· Increased the quarterly cash dividend 11% in December 2007 to $0.10 per common share and a further 10% in July 2008 to $0.11 per
common share.
· Issued $50 million of conventional subordinated debentures in June 2008.
Subsequent Highlights
In December 2008, the Bank declared a quarterly cash dividend of $0.11 per common share, unchanged from the previous quarterly cash
dividend and a 10% increase over the quarterly cash dividend declared one year earlier.
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 150% 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 typical 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-weighted 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 a prescribed regulatory maximum) and any innovative capital not included in Tier 1.
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.
42 WINNING THE WEST CWB 2008 ANNUAL REPORT
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 dividends. Note 19 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.
Basel II Capital Adequacy Accord
Effective November 1, 2007, OSFI required Canadian financial institutions to manage and report regulatory capital in accordance with a new
capital management framework, commonly called Basel II. Basel II introduced several significant changes to the risk-weighting of assets and the
calculation of regulatory capital. The Bank has implemented the standardized approach to calculating risk-weighted assets for both credit and
operational risk. Changes for CWB under Basel II include a reclassification into lower risk-weight categories for residential mortgages and loans
to small-to-medium sized enterprises, as well as a new capital requirement related to operational risk.
Basel II had a modest positive impact on the overall required level of regulatory capital for CWB. New procedures and system enhancements
were developed to conform to the new framework including the formalization of internal capital adequacy assessment processes.
During the year the Bank complied with all internal and external capital requirements.
table 20 – capital structure and regulatory ratios at year end
($ thousands)
Tier 1 Capital
Retained earnings
Accumulated other comprehensive income, net of tax(2)
Capital stock
Contributed surplus
Innovative capital instrument(3)
Less goodwill of subsidiairies(4)
Total
Tier 2 Capital
General allowance for credit losses (Tier A)(5)
Subordinated debentures (Tier B)(6)
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(7)
2008(1)
Change from
2007
2007
$
448,203
$
372,739
$
(6,973)
221,914
14,234
105,000
(6,933)
775,445
60,527
380,000
440,527
(47,700)
(1,741)
219,004
9,681
105,000
(3,679)
701,004
55,627
350,502
406,129
(47,864)
75,464
(5,232)
2,910
4,553
–
(3,254)
74,441
4,900
29,498
34,398
164
$
1,168,272
$
1,059,269
$
109,003
8.9%
5.1%
(0.5)%
13.5%
9.2
9.1%
5.3%
(0.7)%
13.7%
9.1
(0.2)%
(0.2)%
0.2%
(0.2)%
0.1
(1) Regulatory capital and capital ratios are calculated in accordance with the requirements of the Office of the Superintendent of Financial Institutions. Beginning in 2008, capital is managed
and reported in accordance with the requirements of the Basel II Capital Adequacy Accord (Basel II). Prior year ratios have been calculated using the previous framework.
(2) Accumulated other comprehensive income related to unrealized losses on certain available-for-sale equity securities, net of tax, reduces Tier 1 capital.
(3) 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.
(4) Beginning in 2008 with Basel II, goodwill related to the Bank’s trust and insurance subsidiaries is deducted from Tier 1 capital. Prior to 2008, goodwill related to the insurance subsidiary
was deducted from total capital.
(5) Banks are allowed to include their general allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2A capital. At October 31, 2008, the Bank’s general
allowance represented 0.70% (2007 – 0.72%) of risk-weighted assets.
(6) 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, 2008,
$nil (2007 – $44,498) of subordinated debentures exceed the Tier 2B threshold.
(7) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital.
WINNING THE WEST CWB 2008 ANNUAL REPORT 43
table 21 – risk-weighted assets
($ thousands)
Corporate
Sovereign
Bank
Retail residential mortgages
Other retail
Excluding small business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Other
As at October 31, 2008(1)
Cash,
Securities
and Reverse
Repurchase
Agreements
Loans
2008
Risk
Weighted
Total
Assets
Other
Items
$
130,681 $
6,649,466 $
– $
6,780,147 $
6,703,219
783,281
774,297
3,626
44,800
–
1,122,530
174,618
714,705
–
81,970
–
–
1,238
–
–
–
–
–
–
–
–
–
–
786,907
819,097
1,122,530
174,618
714,705
1,238
81,970
35,634
12,904
228,056
420,262
128,054
546,984
1,238
78,282
445,423
114,754
–
35,634
50,069
159,060
209,129
$
1,689,497 $
8,841,784 $
194,694 $
10,725,975 $
8,679,176
Cash,
Securities
and Reverse
Repurchase
Agreements
Loans
2007
Risk
Weighted
Total
Assets
Other
Items
As at October 31, 2007(1)
$
1,864,232 $
7,665,620 $
99,186 $
9,629,038 $
7,724,030
(1) Risk-weighted assets ratios are calculated in accordance with the requirements of the Office of the Superintendent of Financial Institutions. As of November 1, 2007, capital
is managed and reported in accordance with the requirements of the Basel II Capital Adequacy Accord (Basel II). The Bank has adopted the standardized approach for both credit
and operational risk under Basel II and does not make use of balance sheet netting. Prior year figures have been calculated using the previous framework.
44 WINNING THE WEST CWB 2008 ANNUAL REPORT
table 22 – risk-weight category
($ thousands)
2008
Risk-
Corporate
Sovereign
Bank
Retail residential
mortgages
Other retail
0%
20%
35%
50%
75%
100%
150%
Balance Weighted
$
29,167
$ 35,890
$
722,387
64,520
2,036
685,567
–
–
–
$ 67,210
$
–
$ 6,618,764
$ 29,116
$ 6,780,147
$ 6,703,219
–
81,102
–
–
–
50,392
–
786,907
12,904
–
819,097
228,056
122,958
–
830,118
–
158,933
10,521
–
1,122,530 420,262
Excluding small
business entities
Small business entities
Equity
Undrawn commitments
Operational risk
1,155
2,678
3,765
3,307
–
–
–
–
–
–
Other
67,953
31,113
–
–
–
–
–
–
–
169,662
–
36
174,618
128,054
–
659,948
43,593
5,179
714,705
546,984
–
–
–
–
–
1,238
–
1,238
1,238
14,753
67,217
–
81,970
78,282
–
–
35,634
35,634
445,423
6,126
103,937
–
209,129
114,754
As at October 31, 2008(1)
$ 948,334
$ 824,162
$ 830,118
$ 148,312
$ 1,009,422
$ 6,895,662
$ 69,965
$ 10,725,975
$8,679,176
0%
20%
50%
100%
Balance Weighted
2007
Risk-
Cash, securities and
reverse repurchase
agreements
$ 1,059,903 $ 400,675 $
–
$ 403,654
$ 1,864,232 $ 483,789
Loans
Other
129,895
83
765,860 6,769,782 7,665,620 7,152,729
8,872
1,601
3,041
85,672
99,186
87,512
As at October 31, 2007(1)
$ 1,198,670 $ 402,359
$ 768,901
$ 7,259,108
$9,629,038
$7,724,030
(1) Risk-weighted assets ratios are calculated in accordance with the requirements of the Office of the Superintendent of Financial Institutions. As of November 1, 2007, capital
is managed and reported in accordance with the requirements of the Basel II Capital Adequacy Accord (Basel II). The Bank has adopted the standardized approach for both credit and
operational risk and does not make use of balance sheet netting. Prior year figures have been calculated using the previous framework.
At October 31, 2008, the total capital adequacy ratio was 13.5% (2007 – 13.7%), of which 8.9% (2007 – 9.1%) was Tier 1 capital. Total
regulatory capital increased $109 million over 2007, primarily from the combination of:
· earnings, net of dividends, of $75 million;
· the issue of $50 million of subordinated debentures;
· the inclusion of $45 million of existing subordinated debentures that were in excess of the Tier 2B capital threshold in the prior year;
· an increase in the general allowance for credit losses of $5 million;
· an increase of $6 million related to the expensing of stock-based compensation;
· a $5 million dividend declared and paid by CDI to the Bank; partially offset by
· the redemption of $30 million and $35 million of subordinated debentures in July and October 2008, respectively;
· a $5 million increase in the capital deduction attributed to unrealized after-tax losses in the Bank’s preferred share securities portfolio; and
· a $3 million increase in the deduction for goodwill of subsidiaries.
In December 2007, the quarterly dividend was increased to $0.10 per common share, reflecting an increase of 11%. The quarterly dividend
was increased a further 10% to $0.11 per share in July 2008.
WINNING THE WEST CWB 2008 ANNUAL REPORT 45
Outlook for Capital Management
CWB expects to remain well capitalized in 2009, with organic earnings growth supporting the anticipated achievement of all 2009
performance targets. Maintaining a solid return on equity in the presence of continued pressures on the Bank’s net interest margin (teb)
and a very uncertain global economic outlook will be achieved through execution of CWB’s key business strategies while maintaining an
efficient capital structure.
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 54 to 60 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 53.
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 11 to CWB’s consolidated financial statements.
The notional amounts of derivative financial instruments are not reflected on the consolidated balance sheets.
table 23 – derivative financial instruments
($ thousands)
Notional Amounts
Interest rate contracts(1)
Equity contracts(2)
Foreign exchange contracts(3)
Total
2008
2007
$
$
593,000 $
4,400
2,600
600,000 $
482,000
6,000
3,405
491,405
(1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between December 2008 and January 2013. The total gross positive
replacement cost of interest rate contracts was $9,978 (2007 – $946). 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
2009 and March 2011. The total gross positive replacement cost was $nil (2007 – $515).
(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, 2008, there were $2,424 U.S. (2007 –
$3,408 U.S.) of forward foreign exchange contracts outstanding that mature between January 2009 and May 2009.
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
On October 20, 2008 CWB announced a definitive agreement to acquire for cash, 72.5% ownership of Adroit Investment Management
Ltd. (Adroit), an Edmonton-based firm specializing in wealth management for individuals, corporations and institutional clients. Adroit’s
financial products and services are an excellent strategic fit with CWB’s existing banking and trust operations. This transaction was finalized
on December 1, 2008 and is expected to provide a modest positive earnings impact at the onset. It also supports a key strategic objective to
enhance the Bank’s revenue diversification and earnings growth. Management expects the ownership transition will be essentially seamless with
no disruption to customers or employees. Adroit’s executive management remains committed to continue building this business and will retain
a minority ownership in the company. Specific financial details were not released. Estimated goodwill from the transaction has a minor impact
on the Bank’s overall regulatory capital position.
46 WINNING THE WEST CWB 2008 ANNUAL REPORT
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 20 to CWB’s consolidated financial statements for 2008.
operating segment review
CWB operates in two business segments: 1) banking and trust, and 2) insurance. Segmented information is also provided in Note 32 of the
audited consolidated financial statements.
Banking and Trust
Highlights of 2008
· Realized record net income of $93.6 million, an increase of 6% ($5.1 million).
· Constrained revenue and earnings growth due to significant and ongoing compression of net interest margin.
· Achieved organic loan growth of 16%, marking nineteen consecutive years of double-digit growth.
· Maintained sound and consistent credit quality.
· Grew branch and trust generated deposits 10%, with the demand and notice component up 8%.
· Achieved an efficiency ratio (teb) of 45.4%, a deterioration of 60 basis points.
· Opened a new branch in Leduc, AB and continued with further upgrades to existing premises.
· Valiant Trust was continued as a federal trust company and opened an office in Toronto.
· Agreed to acquire a 72.5% ownership of Adroit Investment Management Ltd.
The operations of the banking and trust segment include commercial and retail banking services, personal and corporate trust services provided
through the Bank’s subsidiaries, CWT and Valiant, and the offering of third party mutual funds through CWF. Reflecting CWB’s acquisition
of Adroit, which was finalized December 1, 2008, the banking and trust segment in fiscal 2009 will also include investment management
services. 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 and individuals across Western
Canada. The Bank 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 through a network of 36 client-focused branches in select
locations across the four western provinces. Internet and telephone banking services are also offered. Canadian Direct Financial TM (www.
canadiandirectfinancial.com) is an Internet-based division of the Bank that offers a high-interest savings account and term deposits directly to
customers who are not served by the branch network. 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. Adroit is an Edmonton-
based firm specializing in wealth management for individuals, corporations and institutional clients.
WINNING THE WEST CWB 2008 ANNUAL REPORT 47
table 24 – banking and trust highlights(1)
($ thousands)
Net interest income (teb)
Other income
Total revenues (teb)
Provision for credit losses
Non-interest expenses
Provision for income taxes (teb)
Net Income
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Average loans ($ millions)(3)
Average assets ($ millions)(3)
2008
2007
$
222,837
$
205,867
54,338
277,175
12,000
125,748
45,780
$
93,647
$
47,506
253,373
10,200
113,456
41,208
88,509
Change from
2007
8%
14
9
18
11
11
6%
45.4%
44.8%
60bp(2)
46.2
2.29
2.23
7,910
9,747
$
45.7
2.57
2.51
6,570
8,014
$
50
(28)
(28)
20%
22
(1) See page 23 and 24 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 $93.6 million, up 6% ($5.1 million) on 9% ($23.8 million) growth in total revenues (teb), partially
offset by an 11% ($12.3 million) increase in non-interest expenses. Growth in total revenues (teb) reflected very strong 16% loan growth and
a 14% ($6.8 million) increase in other income, largely offset by a significant 28 basis point decline in net interest margin (teb). Other income
benefited from a 20% ($4.6 million) increase in credit related fee income and gains on securities sales, foreign exchange and other, which were
up $3.5 million in the aggregate. The increase in gains on the sale of securities mainly resulted from transactions related to favourable pricing
observed on certain high quality, short-term debt investments. Trust services fee income declined 11% ($1.6 million) reflecting income from
unusually large trust transactions in the fourth quarter of 2007. Retail services fee income increased 5% ($0.4 million). Higher non-interest
expenses compared to last year mainly reflect salary and benefit costs related to increased staff complement and annual salary increments, as
well as premises and equipment expenses to facilitate business growth. Growth in non-interest expenses exceeded total revenue growth as
evidenced by a 60 basis point deterioration in this segment’s efficiency ratio (teb), to 45.4%.
Net interest margin (teb) in the year was 2.29%, down 28 basis points as a result of increased deposit costs related to ongoing market disruptions,
consecutive reductions in the prime lending rate and high liquidity levels maintained in response to market uncertainties. Growth in total
branch and trust deposits increased 10%, while the demand and notice component of branch and trust deposits was up 8%. Growth in branch
generated deposits reflects CWB’s ongoing retail strategy, including the success of its high interest Summit Savings Account ®.
Fiscal 2008 banking and trust earnings include $0.9 million of additional tax expense due to the write-down of future tax assets to reflect
lower future federal corporate income tax rates. For comparison purposes, fiscal 2007 earnings included 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.
Significant infrastructure initiatives completed in 2008 included a new full-service branch in Leduc, AB, the opening of a Valiant Trust office
in Toronto and further upgrades and expansions to existing premises.
Combined assets under administration in CWT and Valiant grew 1% ($64 million) in the year to total $4,348 million at October 31, 2008.
Assets under administration are not reflected in the consolidated balance sheets (see Note 26 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 42,402 (2007 – 37,473), an increase of 13% from one year ago.
Figure 4 – Number of CWT Investment Accounts
2008
2007
2006
2005
2004
42,402
37,473
31,716
24,943
18,803
48 WINNING THE WEST CWB 2008 ANNUAL REPORT
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 solid performance relative
to ongoing margin compression associated with turmoil in financial and credit markets and a very uncertain global economic outlook.
Management has implemented enhanced pricing methodologies for all new loans and renewal facilities that will help ensure the Bank earns
a fair and profitable return on its loan portfolio, particularly in the presence of increased funding costs. Net interest margin is expected
to return to more normal historic levels over time as disruptions in financial markets subside, but a specific recovery time frame cannot
yet be reasonably estimated. Economic fundamentals in Western Canada are expected to remain sound relative to the rest of Canada,
notwithstanding increased challenges in some sectors. CWB’s expanding market presence and commitment to relationship-based banking
should also support a continued flow of quality lending opportunities. The Bank will maintain its focus on disciplined credit underwriting
and loan growth for fiscal 2009 is targeted at 10%. Gross impaired loans increased in 2008, but the Bank’s portfolio is very well structured
and actual losses are expected to remain within CWB’s historic range of acceptable levels. Continued strong growth in credit and retail
services fee income is also expected. CWT has established aggressive performance targets for 2009 and should make solid contributions
toward this segment’s success. Valiant’s business will continue to develop, but its operations are impacted by the marked reduction in
capital markets activity. Newly acquired Adroit is expected to make a modest positive earnings contribution in fiscal 2009 and provides
a solid platform for future growth in investment management services. While strong fiscal responsibility will be maintained, effective
execution of CWB’s strategic focus on people, process, infrastructure and business enhancement will require increased spending in areas
mainly correlated with enhancements to the Bank’s growth platform, including plans in 2009 for ongoing expansion of the branch network.
While these initiatives will have short-term consequence as it relates to the efficiency ratio (teb), they are an integral part of management’s
commitment to maximize shareholder value over the long-term and are expected to provide significant benefits in future periods.
Insurance
Highlights of 2008
· Record net income of $8.4 million, representing an 8% increase.
· Claims loss ratio of 66% and a combined ratio of 93%.
· More than 40% of all new auto policies sold in 2008 purchased over the Internet.
· Before tax loss of $1.0 million from Canadian Direct’s share of the Alberta auto risk sharing pools.
Canadian Direct provides auto and home insurance products in BC and AB and has more than 168,000 policies outstanding. Policy
distribution channels include two dedicated call centres, the Internet and, for customers in BC, the option to purchase auto insurance through
select broker networks. Offering enhanced electronic fulfilment of CDI’s products and services is an important part of the overall business
strategy, and continued development of this technology will remain a key priority.
Canadian Direct’s mission is to provide customers with attractively priced products and a high level of customer service – “better insurance
for less money.” The core strategy uses sophisticated underwriting selection criteria to offer more competitively priced insurance to better risk
customers. The “Canadian Direct Insurance” brand is marketed through several media channels, including television, radio, newspapers and
over the Internet. It has established a very high level of awareness in the BC market and the level of awareness in AB continues to grow. All
claims are administered by Canadian Direct’s head office in BC using imaging technology and effective workflow management to maintain
a “paperless office” environment. This has enabled CDI to maintain a low claims expense ratio without compromising customer satisfaction.
CDI currently retains a high percentage of its business on renewal, a measure that helps confirm its success in providing customers with quality
service at competitive prices.
WINNING THE WEST CWB 2008 ANNUAL REPORT 49
table 25 – insurance highlights(1)
($ 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
Policies outstanding at October 31
Gross written premiums
Claims loss ratio(2)
Expense ratio(4)
Combined ratio(5)
2008
$
5,780
$
Change from
2007
2007
4,792
21%
97,943
2,876
(64,380)
(20,573)
15,866
36
21,682
9,418
3,892
8,372
168,071
$
$
$
107,054
$
66%
27
93
94,914
2,751
(62,391)
(20,011)
15,263
52
20,107
8,478
3,856
7,773
164,263
104,829
3
5
3
3
4
(31)
8
11
1
8%
2%
2
66%
–bp(3)
27
93
1,876
163,858
–
–
(152)%
12
Alberta automobile insurance Risk Sharing Pools impact on net income before tax
$
(973)
$
Average total assets(6)
183,892
(1) See page 23 and page 24 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 record net income of $8.4 million, an increase of 8% over 2007. Results mainly reflect continued business growth
and a $1.0 million increase in net interest income (teb), partially offset by a $1.0 million before tax loss on Canadian Direct’s share of the
Alberta auto risk sharing pools (the Pools). The Pools’ results for 2008 include an unfavourable adjustment to unpaid claims reserves based
on revised loss assumptions derived by the Pools’ consulting actuary. This adjustment was specifically attributed to the impact of a decision
rendered on February 8, 2008 by the Court of Queen’s Bench of Alberta that resulted in the lifting of the cap on the amount a claimant may
receive in respect of minor injuries suffered in an automobile accident. In 2007, Canadian Direct benefited from a favourable adjustment in
unpaid claims reserves from the Pools that increased before tax earnings by $1.9 million. Absent the Pools’ impact on results for both years, net
income was up 39% ($2.5 million). Improved profitability in the auto lines of business due to strong underwriting results contributed to this
increase. The claims ratio and combined ratio remained consistent with last year at 66% and 93%, respectively. Policies outstanding grew by
2%, while the overall policy retention rate declined 1% to 86%.
Outlook for Insurance Operations
The outlook for 2009 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. In Alberta, ongoing challenges include the regulatory environment and
income volatility added by the Pools’ unpredictable results.
The 2009 claims loss ratio is expected to be within a range of 65% – 67%, which is consistent with 2008 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. CDI’s expanded broker distribution network in BC should also provide
opportunities for future growth.
50 WINNING THE WEST CWB 2008 ANNUAL REPORT
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 performance reflects a
consistent growth trend, although the second quarter contains three fewer revenue-earning days, or two fewer days in a leap year such as 2008.
The Bank’s quarterly financial results are subject to some fluctuation due to its exposure to property and casualty insurance. Insurance
operations, which are primarily reflected in other income (refer to Operating Segment Review – Insurance on page 49), are subject to seasonal
weather conditions, including higher claims experience during winter driving months, cyclical patterns of the industry and natural catastrophes.
Mandatory participation in the Alberta auto risk sharing pools can also result in unpredictable quarterly fluctuations.
Quarterly results can also fluctuate due to the recognition of periodic income tax items. Net income in the first quarter of 2008 included $1.0
million ($0.01 per diluted share) of tax expense resulting from the write-down of future tax assets to reflect lower future federal corporate
income tax rates. The fourth quarter of 2007 included the recognition of previously unrecorded tax benefits related to certain prior period
transactions that increased net income in that period by $2.9 million ($0.04 per diluted share).
table 26 – quarterly financial highlights(1)
($ thousands, except per share amounts)
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
Basic
Diluted
Return on common
shareholders’ equity (ROE)
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
2008
2007
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$ 58,622
$ 57,290
$ 55,659
$ 57,046
$ 55,995
$ 54,888
$ 50,567
$ 49,209
1,540
1,442
1,352
1,337
1,496
1,423
1,327
1,164
57,082
15,437
74,059
72,519
24,485
55,848
54,307
19,085
76,375
74,933
26,327
18,095
73,754
72,402
25,302
$
0.39
$
0.42
$
0.40
$
0.38
0.41
0.39
55,709
17,623
74,669
73,332
25,905
0.41
0.40
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
$
0.47
$
0.39
$
0.36
$
0.46
0.37
0.35
48,045
12,443
61,652
60,488
20,458
0.33
0.32
14.4%
16.0%
16.1%
16.9%
20.1%
17.1%
16.8%
15.4%
0.96
47.7
48.8
2.30
2.24
1.03
45.2
46.1
2.25
2.19
1.04
45.4
46.2
2.28
2.22
1.07
42.6
43.4
2.36
2.30
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
0.15%
0.15%
0.15%
0.15%
0.14%
0.15%
0.16%
0.17%
(1) See page 23 and page 24 for a discussion of teb and non-GAAP measures.
Fourth Quarter of 2008
CWB reported good fourth quarter performance in volatile markets marking its 82nd consecutive profitable quarter. Net income of $24.5
million was down 17% compared to last year, which included an income tax benefit that increased net earnings in that period by $2.9 million
($0.04 per diluted share). Net income before taxes was 10% lower than a year earlier as the positive impact from very strong loan growth of
6% in the quarter and 16% for the year was more than offset by constrained revenues and profitability due to a significantly lower net interest
margin. Pressures on net interest margin resulted from increased deposit costs related to ongoing market disruptions, consecutive reductions
in the prime lending rate and high liquidity levels maintained in response to market uncertainties. Diluted earnings per share of $0.38 ($0.39
basic) declined from $0.46 ($0.47 basic) in the same quarter last year. Results reflect a 17% decrease (8% decrease before tax) in quarterly
earnings from core banking and trust operations as the positive earnings impact from very strong loan growth was more than offset by the
compressed net interest margin. Fourth quarter net income from insurance operations of $2.2 million represented a 17% decline compared to
a year earlier reflecting a $1.0 million before tax loss attributed to Canadian Direct’s share of the Alberta auto risk sharing pools. Absent the
Pools’ impact on fourth quarter results for both 2008 and 2007, net income from insurance operations was up 58% ($1.1 million).
WINNING THE WEST CWB 2008 ANNUAL REPORT 51
Quarterly return on equity was 14.4%, down 570 basis points from 20.1% a year earlier. Return on assets was 0.96%, compared to 1.29%
in the same period last year. Compared to one year ago, lower profitability ratios were primarily due to margin compression combined with
the above-mentioned 2007 income tax benefit and unusually high trust services fee income realized in the fourth quarter last year. CWB has no
direct exposure to any troubled asset-backed commercial paper, collateralized debt obligations, credit default swaps, U.S. subprime mortgages
or monoline insurers.
Quarterly net interest income (teb) of $58.6 million increased 5% ($2.6 million) over the same period in 2007 driven by strong loan growth,
partially offset by a 13 basis point decline in net interest margin (teb) to 2.30%. Net interest margin was mainly affected by increased deposit
costs related to ongoing disruptions in financial markets and consecutive reductions in the prime lending rate, partially offset by lower average
liquidity balances compared to the fourth quarter last year. Reductions in the prime interest rate negatively impact net interest margin because
deposits do not reprice as quickly as prime-based loans.
Other income of $15.4 million was down 16% ($2.9 million) from a year earlier mainly due to a 41% ($2.3 million) decrease in trust services
fee income. Net insurance revenues in the quarter decreased 22% ($1.1 million) from last year due to the Pools’ impact. Credit related fee
income increased 6% ($0.3 million) while retail services fee income was up 7% ($0.1 million). Gains on securities sales were $0.9 million,
compared to nil last year, resulting from transactions mainly related to favourable pricing observed on certain high quality, short-term debt
investments.
Overall credit quality remained sound and within expectations in view of elevated uncertainties, slower economic activity and moderated
residential sales activity. While gross impaired loans increased compared to the exceptionally low levels experienced in prior periods, they
remained within the Bank’s historic range of acceptable levels. All current estimated losses from identified impaired accounts are reflected
in the specific allowance for credit losses.
Non-interest expenses of $35.4 million increased 8% ($2.6 million) over the same quarter last year mainly reflecting salary and benefit costs
related to increased staff complement and annual salary increments, as well as premises and equipment expenses to facilitate business growth.
CWB’s quarterly efficiency ratio (teb), which measures non-interest expenses as a percentage of total revenues, deteriorated 360 basis points
compared to the same quarter last year, to 47.7%. The negative change in the efficiency ratio (teb) was mainly impacted by constrained growth
in total revenues (teb) due to margin compression.
Consolidated net income declined 7% ($1.8 million) compared to the prior quarter as the positive impact of very strong quarterly loan growth
and a five basis point improvement in net interest margin (teb) was more than offset by a 19% ($3.6 million) decrease in other income and
slightly higher non-interest expenses. The decrease in other income was mainly due to $2.7 million lower credit related fee income and $0.8
million reduction in net insurance revenues, which again reflected the Pools’ impact.
accounting policies and estimates
Critical Accounting Estimates
CWB’s significant accounting policies are outlined in Note 1 and with related financial note disclosures by major caption in 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, 2008, the Bank’s total allowance for credit losses was $75.5 million (2007 – $63.0
million), which included a specific allowance of $15.0 million (2007 – $7.4 million) and a general allowance of $60.5 million (2007 – $55.6
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 7 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
52 WINNING THE WEST CWB 2008 ANNUAL REPORT
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, 2008, the provision for unpaid claims and adjustment expenses totaled $76.2 million (2007 – $68.6 million). Additional information
on the process and methodology for determining the provision for unpaid claims and adjustment expenses can be found in Note 21 to the
consolidated financial statements. This critical estimate relates to CWB’s insurance segment, Canadian Direct.
Financial Instruments Measured at Fair Value
Cash resources, securities, securities purchased under resale agreements and sold under reverse resale agreements, and derivative financial
instruments are reported on the consolidated balance sheets at fair value.
The fair value of a financial instrument on initial recognition is the value of the consideration given or received. Subsequent to initial
recognition, financial instruments measured at fair value that are quoted in active markets are based on bid prices for financial assets and
offer prices for financial liabilities. For derivative financial instruments where an active market does not exist, fair values are determined using
valuation techniques that refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation
techniques commonly used by market participants.
The following table summarizes the significant financial assets and liabilities reported at fair value at October 31, 2008.
table 27 – valuation of financial instruments
($ thousands)
Financial Assets
Cash resources
Securities
Securities repurchased under resale agreements
Derivative related
October 31, 2008
October 31, 2007
Financial Liabilities
Derivative related
October 31, 2008
October 31, 2007
Valuation Technique
Quoted
Market
Model with
Observable
Prices
Market Data
Fair
Value
$
492,173 $
492,173 $
1,228,964
1,173,064
77,000
9,980
–
–
1,808,117 $
1,926,737 $
1,665,237 $
1,713,958 $
163 $
163 $
1,307 $
– $
– $
– $
$
$
$
$
$
–
55,900
77,000
9,980
142,880
248,779
163
163
1,307
Notes 3, 4, 5, 11 and 29 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 obligation, credit default
swaps, U.S. subprime mortgages or monoline insurers.
Changes in Accounting Policies, Including Initial Adoption
Effective November 1, 2007, the Bank adopted new accounting standards issued by the CICA: Financial Instruments – Disclosure and
Presentation and Capital Disclosures. The new standards require additional disclosures regarding financial instruments and capital management
practices. As a result of adopting these standards, new or enhanced disclosure is provided in Note 2 Financial Instruments, Note 6 Loans and
Note 31 Capital Management.
In addition, as permitted by the CICA, certain of the required disclosure is provided in the Management’s Discussion and Analysis (MD&A).
The relevant MD&A sections (pages 54 to 57) are identified by shading, and shaded areas form an integral part of these audited consolidated
financial statements.
WINNING THE WEST CWB 2008 ANNUAL REPORT 53
Future Changes in Accounting Policies
International Financial Reporting Standards
The CICA will transition Canadian generally accepted accounting principles for publicly accountable entities to International Financial
Reporting Standards (IFRS). The Bank’s consolidated financial statements will be prepared in accordance with IFRS for the fiscal year
commencing November 1, 2011.
The Bank has embarked on a project to identify and evaluate the impact of the implementation of IFRS on the consolidated financial
statements and to develop a plan to complete the transition. The impact of the transition to IFRS on the Bank’s consolidated financial
statements is not yet determinable. Additional information on the Bank’s transition plan and the expected impact of the transition will be
provided commencing in the quarterly reports for 2009, the third fiscal year prior to transition.
risk management
The shaded areas of this MD&A represent a discussion of risk management policies and procedures relating to credit, market and liquidity
risks as required under the Canadian Institute of Chartered Accountants (CICA) Handbook Financial Instruments – Disclosures and
Presentation, which permits these specific disclosures to be included in the MD&A. Therefore, the shaded areas presented on page 33 and
pages 54 to 57 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2008.
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) meets monthly and provides management oversight related to the risks of banking and trust
operations, other than credit risk. ALCO is a senior management committee chaired by the executive with responsibility for Treasury,
with the President and Chief Executive Officer (CEO) and other senior executives as members. ALCO is responsible for
· ensuring that risks other than credit risk are identified and assessed and that 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
· overseeing compliance and 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 audits 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, internal audit results are also reported directly to CDI’s Audit
Committee.
54 WINNING THE WEST CWB 2008 ANNUAL REPORT
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 the 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;
· a standardized credit risk rating classification established for all credits and reviewed not less than annually;
· annual reviews of individual credit facilities (except 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 an appropriate financial return;
· 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 that 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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 55
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;
· scenario testing in the operating, micro, and macro environments;
· diversification of funding sources; and
· an approved contingency plan.
Key features of liquidity management are:
· daily monitoring of expected cash inflows and outflows;
· tracking and forecasting the liquidity position, including the flows from off-balance sheet items, on a forward four-month rolling basis;
· consideration of the term structure of assets and liabilities, with emphasis on deposit maturities, as well as expected loan fundings and
other commitments to provide funds when determining required levels of liquidity; and
· separate management of the liquidity position of the Bank and CWT to ensure compliance with related party and other regulatory tests.
Market Risk
Market risk is the impact on earnings resulting from changes in financial market variables such as interest rates and foreign exchange
rates. Market risk arises when making loans, taking deposits and making investments. 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.
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 28 to the consolidated financial statements shows the gap position at October 31, 2008 for select time intervals.
The gap analysis in Note 28 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.
56 WINNING THE WEST CWB 2008 ANNUAL REPORT
During the year, the one-year and under cumulative gap decreased to 2.1% from 4.3% and the one-month and under gap increased to 9.5%
from 3.6%. To the extent possible within the Bank’s acceptable parameters for risk, the 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 $4,088 million in fixed term deposit liabilities maturing within one year from October 31, 2008, approximately $2,702 million (29%
of total deposit liabilities) mature by April 30, 2009. The term in which maturing deposits are retained will have an impact on the future asset
liability structure and, hence, interest rate sensitivity. Approximately $261 million of the fixed term deposit liabilities maturing within one
month are floating rate redeemable deposits redeemable without penalty at any time.
The estimated sensitivity of net interest income to a change in interest rates is presented in Table 28. The amounts represent the estimated
change in net interest income over the time period shown resulting from a one percentage point change in interest rates. If rates increase, the
effect would be an increase in net interest income, while the opposite would occur if rates decrease. The estimates are based on a number of
assumptions and factors, which include
· a constant structure in the asset liability portfolio;
· interest rate changes affect interest sensitive assets and liabilities by the same amount and are applied at the appropriate repricing dates; and
· no early redemptions.
Year-over-year interest sensitivity increased to 4.8% from 2.5% in 2007 as noted in Table 28.
table 28 – estimated sensitivity of net interest income as a result of a one percentage point change in interest rates
($ thousands)
Period
90 days
1 year
1 year percentage change
2008
$
3,180
$
10,324
4.8%
2007
1,346
5,780
2.5%
Based on the current interest rate gap position, it is estimated that a one-percentage point increase in all interest rates would decrease annual
other comprehensive income by $20 million, net of tax.
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 46). 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 14 and 17 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, 2008, assets
denominated in U.S. dollars were 1.2% (2007 – 1.3%) of total assets and U.S. dollar liabilities were 1.3% (2007 – 1.5%) of total
liabilities. Currencies other than U.S. dollars are not bought or sold other than to meet specific customer needs and, therefore, the Bank
has virtually no exposure to currencies other than U.S. dollars.
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 AB. 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
WINNING THE WEST CWB 2008 ANNUAL REPORT 57
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 and these ratings are monitored on a regular
basis. 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 2008 or 2007.
The adoption of the new Basel II framework (see further discussion in Capital Management section beginning on page 42 of this MD&A)
introduced 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
Management:
· a knowledgeable and experienced management team that is committed to the risk management policies and to promoting an ethical culture;
· clear communication of “Tone at the Top”, which supports effective risk management reporting;
· a flat organization structure with management close to their operations, which facilitates effective internal communication;
· communication of the importance of effective risk management to all levels of staff through training and policy implementation; and
· a management team that is well versed on the Bank’s operational risk tolerance and appetite.
Framework and supporting policies:
· 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;
· implementation of policies and procedural controls appropriate to address identified risks and which include segregation of duties and built-
in checks and balances;
· the adoption of the COSO for Smaller Business framework for internal control assessment;
· regular meetings of ALCO, CDI’s Operational Risk Committee and the risk committees of CWT and Valiant;
· 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;
58 WINNING THE WEST CWB 2008 ANNUAL REPORT
· established “whistleblower” process and an employee code of conduct;
· operational risk assessments conducted by business managers closest to the identified risks;
· regular internal audits for compliance and the effectiveness of procedural controls by a strong, independent internal audit team;
· centralized reporting of operating losses for risk assessment to senior management and the Board;
· maintenance of a group-wide outsourcing risk management program;
· use of technology via automated systems with built-in controls and effective change management process;
· 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 operates 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 and Legal 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 adversely affect CWB. CWB’s failure to comply with applicable laws, regulations, industry codes or regulatory
expectations could result in sanctions, financial penalties and costs associated with litigation that could adversely impact its earnings and
damage its reputation. Although it is not possible to completely eliminate regulatory and legal risk, 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.
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 strong competition for the best
people in the 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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 59
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.
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, 2008, the Bank had 63,467,908 common shares outstanding. In addition, employee stock options have been issued which
are, or will be, exercisable for up to 5,184,882 common shares (5,494,638 authorized) for maximum proceeds of $108 million.
On December 3, 2008, a quarterly cash dividend of $0.11 per share was declared payable on January 2, 2009 to shareholders of record on
December 18, 2008.
controls and procedures
As of October 31, 2008, 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, 2008, 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,
2008 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 December 5, 2008.
60 WINNING THE WEST CWB 2008 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 relevant 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.
KPMG 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 24, 2008
Tracey C. Ball, FCA
Executive Vice President and Chief Financial Officer
WINNING THE WEST CWB 2008 ANNUAL REPORT 61
AuDITORS’ REPORT
to the shareholders of canadian western bank
We have audited the Consolidated Balance Sheet of Canadian Western Bank as at October 31, 2008 and the Consolidated Statements of
Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flow for the year 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 audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Bank as at October
31, 2008 and the results of its operations and its cash flow for the year then ended in accordance with Canadian generally accepted accounting
principles.
The consolidated financial statements as at October 31, 2007 and for the year then ended were audited by other auditors, who expressed an
opinion without reservation on these statements in their report dated November 30, 2007.
KPMG LLP
Chartered Accountants
Edmonton, Alberta
November 24, 2008
62 WINNING THE WEST CWB 2008 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
for the year ended october 31
($ thousands)
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions
Deposits with regulated financial institutions
Cheques and other items in transit
Securities
Issued or guaranteed by Canada
Issued or guaranteed by a province or municipality
Other securities
Securities Purchased Under Resale Agreements
Loans
Residential mortgages
Other loans
Allowance for credit losses
Other
Land, buildings and equipment
Goodwill
Intangible assets
Insurance related
Derivative related
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Deposits
Payable on demand
Payable after notice
Payable on a fixed date
Deposit from Canadian Western Bank Capital Trust
Other
Cheques and other items in transit
Insurance related
Derivative related
Other liabilities
Subordinated Debentures
Conventional
Shareholders’ Equity
Retained earnings
Accumulated other comprehensive income (loss)
Capital stock
Contributed surplus
Total Liabilities and Shareholders’ Equity
Contingent Liabilities and Commitments
2008
2007
$
(Note 3)
$
8,988
464,193
18,992
492,173
6,446
405,122
1,122
412,690
(Note 4)
(Note 5)
(Note 6)
(Note 7)
(Note 8)
(Note 9)
(Note 9)
(Note 10)
(Note 11)
(Note 12)
(Note 13)
(Note 14)
(Note 15)
(Note 11)
(Note 16)
347,777
452,045
429,142
1,228,964
77,000
2,134,327
6,565,280
8,699,607
(75,538)
8,624,069
$
$
31,893
6,933
2,155
52,943
9,980
74,622
178,526
10,600,732
383,083
2,010,039
6,747,597
105,000
9,245,719
29,036
134,769
163
136,897
300,865
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
376,488
1,843,799
5,931,631
105,000
8,256,918
22,177
124,480
1,307
134,665
282,629
$
$
(Note 17)
375,000
390,000
448,203
(5,203)
221,914
14,234
679,148
10,600,732
$
372,739
(5,931)
219,004
9,681
595,493
9,525,040
(Note 18)
$
(Note 20)
Jack C. Donald
Chairman
Larry M. Pollock
President and Chief Executive Officer
WINNING THE WEST CWB 2008 ANNUAL REPORT 63
2008
2007
$
491,991 $
52,929
17,847
562,767
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
438
2,159
302
62,821
257,870
76,506
20,239
22,780
2,409
121,934
135,936
39,654
96,282
317,554
22,267
339,821
222,946
12,000
210,946
26,998
15,866
13,299
7,689
4,725
1,225
438
70,240
281,186
87,660
22,360
23,145
2,001
135,166
146,020
44,001
102,019 $
1.61 $
1.58
1.54
1.50
(Note 7)
(Note 21)
(Note 24)
(Note 25)
$
$
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
Net Interest Income after Provision for Credit Losses
Other Income
Credit related
Insurance, net
Trust services
Retail services
Gains on sale of securities
Foreign exchange gains
Other
Net Interest and Other Income
Non-Interest Expenses
Salaries and employee benefits
Premises and equipment
Other expenses
Provincial capital taxes
Net Income before Provision for Income Taxes
Provision for Income Taxes
Net Income
Earnings Per Common Share
Basic
Diluted
64 WINNING THE WEST CWB 2008 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
for the year ended october 31
($ thousands)
Retained Earnings
Balance at beginning of year
Net income
Dividends
Balance at end of year
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year
Other comprehensive income (loss)
Balance at end of year
Total retained earnings and accumulated other comprehensive income
Capital Stock
Balance at beginning of year
Issued on exercise of employee stock options
Transferred from contributed surplus on the exercise or exchange of options
(Note 18)
Balance at end of year
Contributed Surplus
Balance at beginning of year
Amortization of fair value of employee stock options
(Note 19)
Transferred to contributed surplus on the exercise or exchange of options
Balance at end of year
Total Shareholders’ Equity
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the year ended october 31
($ thousands)
Net Income
Other Comprehensive Income (Loss), net of tax
Available-for-sale securities
Losses from change in fair value(1)
Reclassification to other income(2)
Derivatives designated as cash flow hedges
Gains (losses) from change in fair value(3)
Reclassification to net interest income(4)
Reclassification to other liabilities for derivatives terminated prior to maturity(5)
Comprehensive Income for the Year
$
(1) Net of income tax benefit of $1,170 (2007 – tax benefit of $2,720).
(2) Net of income tax benefit of $1,454 (2007 – tax benefit of $144).
(3) Net of income tax expense of $4,104 (2007 – tax benefit of $197).
(4) Net of income tax benefit of $775 (2007 – tax expense of $882).
(5) Net of income tax benefit of $429 (2007 – $nil).
2008
2007
372,739 $
102,019
(26,555)
448,203
(5,931)
728
(5,203)
443,000
219,004
1,646
1,264
221,914
9,681
5,817
(1,264)
14,234
679,148 $
297,675
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
595,493
$
$
2008
102,019 $
2007
96,282
$
(2,631)
(3,271)
(5,902)
9,341
(1,773)
(938)
6,630
728
102,747 $
(5,544)
(295)
(5,839)
(403)
1,805
–
1,402
(4,437)
91,845
WINNING THE WEST CWB 2008 ANNUAL REPORT 65
(Note 17)
(Note 17)
(Note 18)
2008
2007
$
102,019
$
96,282
12,000
6,896
276
(4,725)
2,719
(454)
5,817
(5,164)
119,384
988,801
50,000
(65,000)
1,646
(26,555)
948,892
(57,057)
(2,609,432)
1,303,698
1,421,159
129,925
(1,230,489)
(12,527)
(1,054,723)
13,553
(14,609)
(1,056) $
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)
$
8,988
18,992
(29,036)
(1,056) $
6,446
1,122
(22,177)
(14,609)
$
336,106
44,179
267,963
40,044
$
$
$
$
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
Debentures issued
Debentures redeemed
Common shares issued
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 *
* 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
Supplemental Disclosure of Cash Flow Information
Amount of interest paid in the year
Amount of income taxes paid in the year
66 WINNING THE WEST CWB 2008 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
october 31, 2008
($ thousands, except per share amounts)
1.
basis of presentation
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 and in the following notes. 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 34 for details of the subsidiaries and affiliate.
b)
Business Combinations
Business acquisitions are accounted for using the purchase method.
c)
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.
d)
Specific Accounting Policies
To facilitate a better understanding of the Bank’s consolidated financial statements, the significant accounting policies are disclosed in the
notes, where applicable, with related financial disclosures by major caption:
Note Topic
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Financial instruments
Cash resources
Securities
Securities purchased under resale agreements and securities purchased under reverse resale agreements
Loans
Allowance for credit losses
Land, buildings and equipment
Goodwill and intangible assets
Insurance related other assets
Derivative financial instruments
Other assets
Deposits
Trust capital securities
Insurance related other liabilities
Other liabilities
Subordinated debentures
Capital stock
Share incentive plan
Contingent liabilities and commitments
Insurance operations
Disclosures on rate regulation
Employee future benefits
Income taxes
WINNING THE WEST CWB 2008 ANNUAL REPORT 67
Note Topic
25
26
27
28
29
30
31
32
33
34
Earnings per common share
Trust assets under administration
Related party transactions
Interest rate sensitivity
Fair value of financial instruments
Risk management
Capital management
Segmented information
Subsequent event
Subsidiaries and affiliate
e)
Change in Accounting Policies
Effective November 1, 2007, the Bank adopted new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA):
Financial Instruments – Disclosure and Presentation and Capital Disclosures. The new standards require additional disclosures regarding financial
instruments and capital management practices. As a result of adopting these standards, new or enhanced disclosure is provided in Note 2
Financial Instruments, Note 6 Loans and Note 31 Capital Management.
In addition, as permitted by the CICA, certain of the required disclosure is provided in the Management’s Discussion and Analysis (MD&A).
The relevant MD&A sections are identified by shading and shaded areas form an integral part of these audited consolidated financial
statements.
f)
Future Accounting Changes
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable entities to International Financial Reporting Standards (IFRS). The Bank’s
consolidated financial statements will be prepared in accordance with IFRS for the fiscal year commencing November 1, 2011.
The Bank has embarked on a project to identify and evaluate the impact of the implementation of IFRS on the consolidated financial
statements and to develop a plan to complete the transition. The impact of the transition to IFRS on the Bank’s consolidated financial
statements is not yet determinable. Additional information on the Bank’s transition plan and the expected impact of the transition will be
provided commencing in the quarterly reports for 2009, the third fiscal year prior to transition.
2.
financial instruments
As a financial institution, most of the Bank’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 risks. A discussion of how these are managed can be found in
the Risk Management section of the 2008 Annual Report beginning on page 54.
Income and expenses are classified as to source, either securities or loans for income, and deposits or subordinated debentures for expense.
Gains on the sale of securities, net, are shown separately in other income.
3.
4.
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.
Included in deposits with regulated financial institutions are available-for-sale financial instruments reported on the consolidated balance sheets
at the fair value of $459,875 (2007 – $362,849), which is $940 higher (2007 – $1,070 lower) than amortized cost.
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.
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.
68 WINNING THE WEST CWB 2008 ANNUAL REPORT
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 2007 and 2008.
The analysis of securities at carrying value, by type and maturity, is as follows:
Within
Over 1
Over 3
Over 5
Maturities
2008
Total
Carrying
1 Year
to 3 Years
to 5 Years
Years
Value
Securities issued or guaranteed by
Canada
$
246,395
$
91,116
$
10,266
$
–
$
347,777
$
A province or municipality
Other debt securities
Equity securities
Preferred shares
Other equity
Total(1)
135,770
59,745
43,352
–
260,642
62,471
53,442
35,464
2,191
11,027
452,045
168,707
49,023
137,684
–
–
26,173
4,203(2)
256,232
4,203
$
485,262
$
463,252
$
236,856
$
43,594
$
1,228,964
$
1,341,626
(1) All securities have been designated as available-for-sale.
(2) Includes securities with no specific maturity.
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
2008
2007
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair Amortized Unrealized Unrealized
Losses
Gains
Cost
Value
Fair
Value
2007
Total
Carrying
Value
630,396
251,418
236,255
221,878
1,679
Securities issued or
guaranteed by
Canada
A province or
municipality
$
346,360 $
1,417 $
– $
347,777 $
630,270 $
415 $
289 $
630,396
Other debt securities
170,665
450,831
1,442
686
228
2,644
452,045
168,707
251,432
237,958
Equity securities
Preferred shares
Other equity
274,061
5,802
–
49
Total
$ 1,247,719 $
3,594 $
17,829
256,232
4,203
1,648
22,349 $ 1,228,964 $ 1,349,841 $
227,331
2,850
260
160
34
–
274
251,418
1,863
236,255
5,487
221,878
1,171
1,679
869 $
9,084 $ 1,341,626
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, market spreads and shifts in the
interest rate curve. Unrealized losses at year-end are considered to be temporary in nature.
5.
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.
Securities purchased under resale agreements have been designated as available-for-sale and are reported on the consolidated balance sheets at
fair value with changes in fair value reported in other comprehensive income, net of income taxes.
Interest earned or paid is recorded in interest income or expense as earned.
WINNING THE WEST CWB 2008 ANNUAL REPORT 69
6.
loans
Loans are recorded at amortized cost and are stated net of unearned income, unamortized premiums and an allowance for credit losses (Note 7).
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.
Outstanding gross loans and impaired loans, net of allowances for credit losses, are as follows:
2008
Gross
Gross
Impaired
Specific
Amount
Amount
Allowance
Consumer and personal
$ 1,288,160
$
11,462
$
305
$
3,673,158
1,391,287
2,347,002
51,909
20,456
7,809
2,948
5,647
6,111
$ 8,699,607
$
91,636
$
15,011
Real estate(1)(3)
Industrial
Commercial
Total
General allowance(2)
Net impaired loans after
general allowance
Net
Impaired
2007
Gross
Net
Gross
Impaired
Specific
Impaired
Loans Amount
$ 1,062,898
11,157
48,961
14,809
2,887,822
1,325,431
1,698
2,192,451
$ 7,468,602
76,625
(60,527)
Amount
Allowance
Loans
$
2,878
$
351
$
2,527
1,098
11,261
5,867
$
21,104
$
896
2,550
3,617
7,414
202
8,711
2,250
13,690
(55,608)
$
16,098
$
(41,918)
(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) Foreclosed real estate assets with a carrying value of $901 (2007 – $nil) are held for sale. Foreclosed real estate assets are generally liquidated quickly to repay the outstanding loan.
Outstanding impaired loans, net of allowance for credit losses, by provincial location of security, are as follows:
2008
Gross
Impaired
Specific
Amount
Allowance
48,436 $
40,656
2,155
389
9,204 $
4,626
792
389
$
$
91,636 $
15,011
Net
Impaired
Loans
39,232 $
36,030
1,363
-
76,625 $
(60,527)
2007
Gross
Net
Impaired
Specific
Impaired
Amount
Allowance
9,163 $
3,927 $
8,864
3,061
16
21,104 $
2,013
1,458
16
7,414
Loans
5,236
6,851
1,603
–
13,690
(55,608)
$
16,098
$
(41,918)
Alberta
British Columbia
Saskatchewan
Manitoba
Total
General allowance(1)
Net impaired loans after
general allowance
(1) The general allowance for credit risk is not allocated by province.
70 WINNING THE WEST CWB 2008 ANNUAL REPORT
During the year, interest recognized as income on impaired loans totaled $360 (2007 – $414).
Gross impaired loans exclude certain past due loans, which are loans where payment of interest or principal is contractually in arrears but which
are not classified as impaired. Details of such past due loans that have not been included in the gross impaired amount are as follows:
As at October 31, 2008
Residential mortgages
Other loans
1 - 30 days
31 - 60 days
61 - 90 days
$
$
7,217 $
11,732
8,550 $
4,010
18,949 $
12,560 $
347 $
342
689 $
More than
90 days
– $
–
– $
Total
16,114
16,084
32,198
Certain process changes were required to compile the above information and comparative figures are not available.
7.
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 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.
The following table shows the changes in the allowance for credit losses during the year:
2008
General
Allowance
2007
General
Allowance
Specific
for Credit
Specific
for Credit
Allowance
Losses
Total
Allowance
Losses
Balance at beginning of year
$
7,414 $
55,608 $
Provision for credit losses
Write-offs
Recoveries
7,081
(2,577)
3,093
4,919
–
–
Balance at end of year
$
15,011 $
60,527 $
63,022 $
12,000
(2,577)
3,093
75,538 $
5,484 $
48,037 $
2,629
(786)
87
7,571
–
–
Total
53,521
10,200
(786)
87
7,414 $
55,608 $
63,022
WINNING THE WEST CWB 2008 ANNUAL REPORT 71
8.
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.
Operating leases primarily comprise branch and office premises and are not capitalized. Total costs, including free rent periods and step-rent
increases, are expensed on a straight-line basis over the lease term.
Land
Buildings
Computer equipment
Office equipment and furniture
Leasehold improvements
Total
$
Accumulated
Depreciation and
Cost Amortization
2,783 $
5,337
25,490
15,776
28,165
– $
3,090
19,897
10,450
12,221
$
77,551 $
45,658 $
2008
Net Book
Value
2,783 $
2,247
5,593
5,326
15,944
31,893 $
2007
Net Book
Value
2,783
1,669
5,688
4,521
11,075
25,736
Depreciation and amortization for the year amounted to $6,370 (2007 – $5,474).
9.
goodwill and intangible assets
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.
Goodwill
Identifiable intangible assets
Customer relationships
Trademark
Others
Total
Accumulated
Cost Amortization
$
6,933 $
– $
3,950
300
330
4,580
$
11,513 $
2,115
–
310
2,425
2,425 $
2008
Net Book
Value
6,933 $
1,835
300
20
2,155
9,088 $
2007
Net Book
Value
6,933
2,305
300
76
2,681
9,614
Amortization of customer relationships and other intangible assets for the year amounted to $526 (2007 – $543). 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.
10.
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
Total
72 WINNING THE WEST CWB 2008 ANNUAL REPORT
2008
24,333 $
11,561
8,924
6,939
1,186
52,943 $
2007
22,803
10,915
8,626
7,257
2,143
51,744
$
$
11.
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. 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.
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. 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.
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
an assessment 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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 73
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 42 of Management’s Discussion and Analysis.
2008
2007
Replace-
Future
Credit
Risk-
Replace-
Future
Credit
Risk-
Notional
Amount
Interest rate swaps
$ 593,000 $
4,400
Credit
Risk Weighted Notional
ment
Cost Exposure Equivalent Balance Amount
2,361 $ 482,000 $
6,000
1,825 $ 11,803 $
9,978 $
304
304
61
–
ment
Credit
Risk Weighted
Cost Exposure Equivalent Balance
946 $
1,010 $
1,956 $
515
480
995
2,600
2
26
28
14
3,405
35
34
68
$ 600,000 $
9,980 $
2,155 $ 12,135 $
2,436 $ 491,405 $
1,496 $
1,524 $
3,019 $
Equity contracts
Foreign exchange
contracts
Total
391
199
14
604
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).
2008
2007
Favourable Contracts
Unfavourable Contracts
Favourable Contracts
Unfavourable Contracts
Notional
Fair Notional
Fair Notional
Fair Notional
Amount
Value
Amount
Value
Amount
Value
Amount
Fair
Value
$ 593,000 $
9,978 $
– $
–
–
4,400
– $ 273,000 $
6,000
(139)
946 $ 209,000 $
(498)
515
–
–
1,300
2
1,300
(175)
2,594
35
811
(63)
n/a
151
n/a
–
–
–
–
–
n/a
–
n/a
(746)
–
–
–
–
$
594,300 $
10,131 $
5,700 $
(314) $ 281,594 $
1,496 $
209,811 $
(1,307)
Interest rate swaps
Equity contracts
Foreign exchange
contracts
Embedded derivatives in
equity linked deposits
Other forecasted
transactions
Total
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)
2008
4,094 $
322 $
2007
867
1,124
$
$
74 WINNING THE WEST CWB 2008 ANNUAL REPORT
The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on
contracts.
2008
Maturity
2007
Maturity
1 Year or Less
More than 1 Year
1 Year or Less
More than 1 Year
Contractual
Contractual
Contractual
Contractual
Notional
Interest Notional
Interest Notional
Interest Notional
Interest
Amount
Rate
Amount
Rate
Amount
Rate
Amount
Rate
Interest Rate Contracts
Interest rate swaps –
receive fixed amounts(1) $ 228,000
2.98% $ 365,000
2.89% $ 394,000
4.82% $
88,000
4.83%
Equity Contracts(2)
Foreign Exchange
Contracts(3)
2,400
2,600
2,000
–
Total
$ 233,000
$ 367,000
1,600
4,400
3,405
$ 399,005
–
92,400
$
(1) The Bank pays floating interest amounts based on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps mature between December 2008 and January 2013.
(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 2009 and March 2011.
(3) The contractual interest rate is not meaningful for foreign exchange contracts. Foreign exchange contracts mature between January 2009 and May 2009.
During the year, a net unrealized after tax gain of $9,341 (2007 – $403 after tax loss) was recorded in other comprehensive income for changes
in fair value of the effective portion of derivatives designated as cash flow hedges and $nil (2007 – $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
gain after tax of $1,773 (2007 – $1,805 net loss after tax) was reclassified to net income. During the year, $938 after tax (2007 – $nil) was
reclassified to other liabilities for derivatives terminated prior to maturity and the deferred balance will be amortized into net income over the
original hedged period. A net gain of $2,432 (2007 – $68 net loss) after tax recorded in accumulated other comprehensive income (loss) as at
October 31 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.
12.
other assets
Accrued interest receivable
Future income tax asset
Financing costs(1)
Accounts receivable
Prepaid expenses
Taxes receivable
Other
Total
(1) Amortization for the year amounted to $1,037 (2007 – $839).
$
(Note 24)
$
2008
40,241 $
16,142
4,636
6,004
3,520
1,259
2,820
74,622 $
2007
39,245
16,944
4,667
3,550
2,589
–
2,634
69,629
WINNING THE WEST CWB 2008 ANNUAL REPORT 75
13.
deposits
Deposits are accounted for on an amortized cost basis. Costs relating to the issuance of fixed term deposits are amortized over the expected life
of the deposit using the effective interest method.
Payable on demand
Payable after notice
Payable on a fixed date
Deposit from CWB Capital Trust(1)
Total
Payable on demand
Payable after notice
Payable on a fixed date
Deposit from CWB Capital Trust(1)
Total
Business and
Financial
Individuals Government
Institutions
2008
Total
$
16,071 $
367,012 $
732,630
1,277,409
– $
–
383,083
2,010,039
4,601,439
2,136,158
10,000
6,747,597
–
105,000
–
105,000
$
5,350,140 $
3,885,579 $
10,000 $
9,245,719
Business and
Financial
Individuals Government
Institutions
2007
Total
$
15,873 $
360,615 $
788,199
1,055,600
– $
–
376,488
1,843,799
3,909,616
2,012,015
10,000
5,931,631
–
105,000
–
105,000
$
4,713,688 $
3,533,230 $
10,000 $
8,256,918
(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 14 for more information on WesTS and CWB Capital Trust.
14.
trust capital securities
In 2006, 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.
Canadian Institute of Chartered Accountants (CICA) Accounting Guideline (AcG-15) provides a framework for identifying Variable Interest
Entities (“VIEs”) and requires the consolidation of a VIE if the Bank is the primary beneficiary of the VIE. The only special purpose entity in
which the Bank participates is CWB Capital Trust. 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 13) 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.
76 WINNING THE WEST CWB 2008 ANNUAL REPORT
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)
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.
2)
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.
3)
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%.
4)
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.
5)
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.
6)
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. All of the outstanding WesTS amount are currently included in Tier 1 capital.
7)
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%.
15.
insurance related other liabilities
Unpaid claims and adjustment expenses
Unearned premiums
Due to insurance companies and policyholders
Unearned reinsurance commissions
Total
2008
76,176 $
56,799
987
807
134,769 $
2007
68,561
54,537
558
824
124,480
$
$
WINNING THE WEST CWB 2008 ANNUAL REPORT 77
16.
other liabilities
Accrued interest payable
Accounts payable
Taxes payable
Deferred revenue
Leasehold inducements
Future income tax liability
Other
Total
2008
101,584 $
24,895
5,260
2,485
1,373
1,300
–
136,897 $
2007
97,869
26,265
4,455
2,570
1,588
1,550
368
134,665
$
$
(Note 24)
17.
subordinated debentures
Financing costs relating to the issuance of subordinated debentures are amortized over the expected life of the related subordinated debenture
using the effective interest method.
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
5.550%(1)
5.426%(2)
5.070%(3)
5.571%(4)
5.950%(5)
5.660%(6)
5.960%(6)
Maturity
Earliest Date
Redeemable
Date
by CWB at Par
March 21, 2017
November 19, 2014 November 20, 2009 $
November 21, 2015 November 22, 2010
March 22, 2012
March 22, 2017
June 27, 2013
July 8, 2008
October 25, 2008
October 24, 2013
March 21, 2022
June 27, 2018
July 7, 2013
$
2008
60,000 $
70,000
120,000
75,000
50,000
–
–
375,000 $
2007
60,000
70,000
120,000
75,000
–
30,000
35,000
390,000
(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 160 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 180 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 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.
(4) These conventional debentures have a 15-year term with a fixed interest rate for the first 10 years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 180 basis points.
(5) 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 302 basis points.
(6) These conventional debentures had a 10-year term with a fixed interest rate for the first five years and were redeemed by the Bank at face value on July 8 and October 25, 2008, respectively.
78 WINNING THE WEST CWB 2008 ANNUAL REPORT
18.
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 14).
Issued and fully paid:
Common Shares
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
2008
2007
Number of Shares
Amount Number of Shares
Amount
62,836,189 $
620,953
219,004
1,646
61,936,260 $
215,349
899,929
2,464
–
63,457,142 $
1,264
221,914
–
1,191
62,836,189 $
219,004
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
14), 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.
19.
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.
The Bank has authorized 5,505,404 common shares (2007 – 5,176,357) for issuance under the share incentive plan. Of the amount
authorized, options exercisable into 5,204,882 shares (2007 – 4,911,277) 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 eight years of date of grant. Outstanding options expire on dates ranging from December 2008 to September 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
Exercisable at end of year
2008
2007
Weighted
Average
Exercise
Price
16.96
28.39
8.98
24.26
20.83
Number
of Options
4,911,277 $
1,249,032
(838,177)
(117,250)
5,204,882 $
Number
of Options
5,030,040 $
1,118,000
(1,122,863)
(113,900)
4,911,277 $
1,870,500 $
13.10
1,656,077 $
Weighted
Average
Exercise
Price
13.07
25.49
7.61
20.98
16.96
9.30
WINNING THE WEST CWB 2008 ANNUAL REPORT 79
Further details relating to stock options outstanding and exercisable follow:
Options Outstanding
Weighted
Average
Weighted
Remaining
Average
Options Exercisable
Number of
Contractual
Exercise
Number of
Options
863,800
Life (years)
$
0.7
Price
10.08
Options
$
863,800
1,052,700
1,068,290
1,640,500
579,592
5,204,882
1.8
3.1
3.8
4.1
2.8
$
15.77
21.45
25.68
31.15
20.83
1,006,700
–
–
–
1,870,500
$
13.10
Weighted
Average
Exercise
Price
10.08
15.69
–
–
–
Range of Exercise Prices
$10.00 to $10.84
$11.18 to $17.58
$19.16 to $21.46
$22.29 to $26.38
$28.11 to $31.18
Total
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 838,177
(2007 – 1,122,863) options exercised or exchanged, option holders exchanged the rights to 651,727 (2007 – 796,213) options and received
434,503 (2007 – 572,777) shares in return under the cashless settlement alternative.
Salary expense of $5,817 (2007 – $4,532) 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 3.8% (2007 – 4.2%), (ii) expected option life of 4.0 (2007 – 4.0) years, (iii) expected volatility of 23% (2007 – 19%), and (iv)
expected dividends of 1.49% (2007 – 1.31%). The weighted average fair value of options granted was estimated at $5.84 (2007 – $4.94) per
share.
During the year, $1,264 (2007 – $1,191) was transferred from contributed surplus to share capital, representing the estimated fair value
recognized for 804,177 (2007 – 795,863) options granted after November 1, 2002 and exercised during the year.
20.
a)
contingent liabilities and commitments
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.
Credit Instruments
Guarantees and standby letters of credit
Commitments to extend credit
Total
2008
2007
$
$
232,649 $
3,190,420
3,423,069 $
202,194
2,367,215
2,569,409
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 $931,957 (2007 – $800,301) and recently authorized but unfunded loan commitments of $2,258,463
(2007 – $1,566,915). 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.
80 WINNING THE WEST CWB 2008 ANNUAL REPORT
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:
2009
2010
2011
2012
2013
2014 and thereafter
Total
c)
Guarantees
$
$
8,036
7,931
7,678
7,355
7,334
28,873
67,207
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 $11,503 (2007 – $9,728), and the balance outstanding was $2,778 (2007 – $2,238).
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.
21.
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.
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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 81
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.
a)
Insurance Revenues, Net
Insurance revenues, net 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
b)
unpaid Claims and Adjustment Expenses
2008
97,943 $
2,876
(64,380)
(20,573)
15,866 $
2007
94,914
2,751
(62,391)
(20,011)
15,263
$
$
(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
2008
50,389 $
$
67,457
(3,077)
(57,093)
57,676
11,561
6,939
76,176 $
2007
40,561
62,406
(15)
(52,563)
50,389
10,915
7,257
68,561
Unpaid claims and adjustment expenses, net, end of year
$
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 4.1% (2007 – 4.3%). However, that rate was reduced by a 1% (2007 –
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 $850 (2007 – $821) in unpaid claims and adjustment expenses and
related reinsurance recoveries.
82 WINNING THE WEST CWB 2008 ANNUAL REPORT
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
2008
Automobile
$
64,181 $
11,561
40,886
Home
11,995 $
–
15,913
2007
Automobile
59,379 $
10,904
40,741
Home
9,182
11
13,796
c)
underwriting Policy and Reinsurance Ceded
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 (2007 – $180,000) is obtained to protect against certain catastrophic losses. Retention on catastrophic
events and property and liability risks is generally $1,000 (2007 – $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 past two years. The previous quota share agreement, ceding 10% of gross retention,
expired October 31, 2006.
At October 31, 2008, $11,561 (2007 – $10,915) 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
$
2008
6,849 $
2,987
2007
7,057
1,466
22.
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 totaled $71,300 in 2008 (2007 – $71,700) and represented 100% (2007 – 100%) of
direct automobile premiums written.
Province
Alberta
British Columbia
Rate Filing
File and approve or
File and use
File and use
Regulatory Authority
Alberta Automobile Insurance Rate Board
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, 2008, there was no regulatory asset or liability.
23.
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 totaled $6,183 (2007 – $4,876).
WINNING THE WEST CWB 2008 ANNUAL REPORT 83
24.
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.
The provision for income taxes consists of the following:
Consolidated statements of income
Current
Future
Shareholders’ equity
Future income tax expense related to:
Unrealized losses on available-for-sale securities
Gains on derivatives designated as cash flow hedges
Total
2008
2007
43,725 $
276
44,001
(2,624)
2,900
276
44,277 $
38,267
1,387
39,654
(2,864)
685
(2,179)
37,475
$
$
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
Increase (decrease) arising from:
Tax-exempt income
Stock-based compensation
Future federal and provincial tax rate reductions(1)
Income tax recovery
Other
2008
2007
$
44,536
30.5% $
44,832
(3,579)
1,774
999
–
271
(2.5)
1.2
0.7
–
0.2
30.1% $
(4,124)
1,486
–
(3,495)
955
39,654
33.0%
(3.0)
1.1
–
(2.6)
0.7
29.2%
Provision for income taxes and effective tax rate
$
44,001
(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.
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
2008
2007
$
$
$
16,103
$
39
16,142
$
742
$
(845)
1,403
$
1,300
$
16,235
709
16,944
923
(729)
1,356
1,550
The Bank has approximately $11,140 (2007 – $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.
84 WINNING THE WEST CWB 2008 ANNUAL REPORT
25.
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.
The calculation of earnings per common share follows:
Numerator
Net income - basic and diluted
Denominator
Weighted average of common shares outstanding - basic
Dilutive instruments:
Employee stock options(1)
Weighted average number of common shares outstanding - diluted
Earnings per Common Share
Basic
Diluted
2008
2007
$
102,019 $
96,282
63,214,117
62,354,101
1,227,017
64,441,134
1,897,449
64,251,550
$
1.61 $
1.58
1.54
1.50
(1) At October 31, the denominator excludes 3,334,382 (2007 – 365,000) employee stock options with an average adjusted exercise price of $27.45 (2007 – $31.38) where the exercise price,
adjusted for unrecognized stock-based compensation, is greater than the average market price.
26.
27.
28.
trust assets under administration
Trust assets under administration of $4,347,723 (2007 – $4,283,900) represent the fair value of 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.
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 $64,836 (2007 – $56,045). 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 $127,219 (2007 – $102,776).
interest rate sensitivity
The Bank is exposed to interest rate risk as a result of a difference, or gap, between the maturity or repricing behaviour of interest sensitive
assets and liabilities. The interest rate gap is managed by forecasting core balance trends. The repricing profile of these assets and liabilities has
been incorporated in the table following showing the gap position at October 31 for select time intervals. Figures in brackets represent an excess
of liabilities over assets or a negative gap position.
WINNING THE WEST CWB 2008 ANNUAL REPORT 85
asset liability gap positions
($ millions)
October 31, 2008
1 Month
Months
to 1 Year
1 Year
5 Years
5 Years
Sensitive
Total
Floating Rate
and Within
1 to 3
3 Months
Within
1 Year to
More than
Interest
Total
Non-
Assets
Cash resources and securities
Loans
Other assets
Derivative financial instruments(1)
Total
Liabilities and Equity
Deposits
Other liabilities
Debentures
Shareholders’ equity
Derivative financial instruments(1)
Total
$
176
$
220
$
339
$
735
$
921
$
46
$
4,964
–
–
5,140
484
–
80
784
774
–
150
6,222
2,461
–
230
–
367
1,263
7,187
3,749
3,472
883
3
–
–
597
4,072
1,967
25
–
–
–
6
–
–
–
889
1,992
6,322
2,832
34
–
–
597
6,953
33
300
–
–
3,165
95
–
–
141
105
9
75
–
–
189
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
$
$
1,068
$
(105) $
(729) $
1,068
$
963
$
234
$
234
$
234
$
584
$
818
$
(48) $
(770) $
770
$
–
$
Percentage of Total Assets
9.5%
8.6%
2.1%
2.1%
7.3%
6.9%
–
18
$
(77)
179
–
120
1,720
8,701
179
597
11,197
(14)
9,245
225
–
679
–
890
301
375
679
597
11,197
–
–
–
October 31, 2007
Total assets
$
4,377
$
552
$
1,868
$
6,797
$
2,921
$
195
$
100
$
10,013
Total liabilities and equity
4,013
692
1,666
6,371
2,638
194
810
10,013
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
$
$
364
$
364
$
(140) $
224
$
202
$
426
$
426
$
426
$
283
$
709
$
1
$
(710) $
710
$
–
$
Percentage of Total Assets
3.6%
2.2%
4.3%
4.3%
7.1%
7.1%
–
–
–
–
(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.
86 WINNING THE WEST CWB 2008 ANNUAL REPORT
The effective, weighted average interest rates for each class of financial asset and liability are shown below.
weighted average effective interest rates
(%)
October 31, 2008
1 Month
Months
to 1 Year
Floating Rate
and Within
1 to 3
3 Months
Total
Within
1 Year
1 Year to
More than
5 Years
5 Years
Total
Assets
Cash resources and securities
Loans
Derivative financial instruments
Total
Liabilities
Deposits
Debentures
Derivative financial instruments
Total
2.7%
3.0%
3.2%
3.0%
4.4%
5.8%
3.8%
4.8
–
4.7
2.1
–
2.9
2.2
4.7
4.1
4.2
3.6
–
–
3.6
6.2
3.7
5.1
4.0
–
–
4.0
5.0
3.8
4.8
2.9
–
2.9
2.9
6.1
3.5
5.4
4.2
5.4
–
4.2
5.9
–
5.8
6.4
5.6
–
5.7
5.3
3.6
5.0
3.3
5.4
2.9
3.4
Interest Rate Sensitive Gap
2.5%
0.6%
1.1%
1.9%
1.2%
0.1%
1.6%
October 31, 2007
Total assets
Total liabilities
Interest Rate Sensitive Gap
6.6%
3.9
2.7%
5.2%
4.4
0.8%
5.2%
4.3
0.9%
6.1%
4.1
2.0%
5.9%
4.2
1.7%
5.7%
5.6
0.1%
6.0%
4.1
1.9%
Based on the current interest rate gap position, it is estimated that a one-percentage point increase in all interest rates would increase net
interest income by approximately 4.8% (2007 – 2.5%) and decrease other comprehensive income by $19,982, net of tax. A one-percentage
point decrease in all interest rates would decrease net interest income and increase other comprehensive income by a similar amount.
Information on the estimated change in other comprehensive income at October 2007 is not readily available.
29.
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
sheets at fair value (cash, securities, securities purchased under resale agreements and derivatives) was determined using published market prices
quoted in active markets for 92% (2007 – 87%) of the portfolio and estimated using a valuation technique based on observable market data
for 8% (2007 – 13%) of the portfolio. The fair value of liabilities recorded on the consolidated balance sheets at fair value (derivatives) was
determined using a valuation technique based on observable market data.
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 sheets 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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 87
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.
2008
2007
Fair Value
Over (Under)
Fair Value
Over (Under)
Book Value
Fair Value
Book Value
Book Value
Fair Value
Book Value
Assets
Cash resources
Securities
(Note 3)
$
492,173
$
492,173
$
(Note 4)
1,228,964
1,228,964
$
412,690
$
412,690
$
1,341,626
1,341,626
Securities purchased under
resale agreements
Loans(1)
Other assets(2)
Derivative related
Liabilities
Deposits(1)
Other liabilities(3)
Subordinated debentures
Derivative related
77,000
77,000
206,925
8,700,672
8,635,811
(64,861)
7,406,733
82,782
9,980
82,782
9,980
–
–
77,573
1,496
206,925
7,325,340
77,573
1,496
9,258,776
9,247,017
(11,759)
8,256,918
8,219,463
232,678
375,000
163
232,678
387,774
163
–
12,774
–
215,798
390,000
1,307
215,798
386,690
1,307
–
–
–
(81,393)
–
–
(37,455)
–
(3,310)
–
–
–
–
–
(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 28.
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 sheets 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 value, 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.
88 WINNING THE WEST CWB 2008 ANNUAL REPORT
30.
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 54 to 57 of the MD&A.
As permitted by the CICA, certain of the risk management disclosure related to risks inherent with financial instruments is in the Management
Discussion & Analysis (MD&A). The relevant MD&A sections are identified by shading and the shaded areas form an integral part of these
audited consolidated financial statements.
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.
31.
capital management
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 150% 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) and any innovative capital not included in Tier 1.
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 19 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.
Basel II Capital Adequacy Accord
Effective November 1, 2007, the Office of the Superintendent of Financial Institutions (OSFI) required Canadian financial institutions to
manage and report regulatory capital in accordance with a new capital management framework, commonly called Basel II. Basel II introduced
several significant changes to the risk-weighting of assets and the calculation of regulatory capital. The Bank has implemented the standardized
approach to calculating risk-weighted assets for both credit and operational risk. Changes for CWB under Basel II include a reclassification
into lower risk-weight categories for residential mortgages and loans to small- to medium-sized enterprises, as well as a new capital requirement
related to operational risk.
Basel II had a modest positive impact on the overall required level of regulatory capital for CWB. New procedures and system enhancements
were developed to conform to the new framework, including the formalization of internal capital adequacy assessment processes.
During the year, the Bank complied with all internal and external capital requirements.
WINNING THE WEST CWB 2008 ANNUAL REPORT 89
capital structure and regulatory ratios at year-end
($ thousands)
Tier 1 Capital
Retained earnings
Accumulated other comprehensive income, net of tax(2)
Capital stock
Contributed surplus
Innovative capital instrument(3)
Less goodwill of subsidiaries(7)
Total
Tier 2 Capital
General allowance for credit losses (Tier A)(4)
Subordinated debentures (Tier B)(5)
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(6)
2008(1)
2007
$
448,203
$
372,739
(6,973)
221,914
14,234
105,000
(6,933)
775,445
60,527
380,000
440,527
(47,700)
(1,741)
219,004
9,681
105,000
(3,679)
701,004
55,627
350,502
406,129
(47,864)
$
1,168,272
$
1,059,269
8.9%
5.1%
(0.5)%
13.5%
9.2
9.1%
5.3%
(0.7)%
13.7%
9.1
(1) Regulatory capital and capital ratios are calculated in accordance with the requirements of the Office of the Superintendent of Financial Institutions. Beginning in 2008, capital is managed
and reported in accordance with the requirements of the Basel II Capital Adequacy Accord (Basel II). Prior year ratios have been calculated using the previous framework.
(2) Accumulated other comprehensive income related to unrealized losses on certain available-for-sale equity securities, net of tax, reduces Tier 1 capital.
(3) 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.
(4) Banks are allowed to include their general allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2A capital. At October 31, 2008, the Bank’s general
allowance represented 0.70% (2007 – 0.72%) of risk-weighted assets.
(5) 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, 2008,
$nil (2007 – $44,498) of subordinated debentures exceed the Tier 2B threshold and are available for inclusion in the future.
(6) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital.
(7) Beginning in 2008 with Basel II, goodwill related to the Bank’s trust and insurance subsidiaries is deducted from Tier 1 capital. Prior to 2008, goodwill related to the insurance subsidiary was
deducted from total capital.
90 WINNING THE WEST CWB 2008 ANNUAL REPORT
32.
segmented information
The Bank operates principally in two industry segments – banking and trust, and insurance. These two segments differ in products and services
but are both within the same geographic region.
The banking and trust segment provides services to personal clients and small- to medium-sized commercial business clients primarily in
Western Canada. The insurance segment provides home and automobile insurance to individuals in Alberta and British Columbia.
Net interest income (teb)(1)
Less teb adjustment
Net interest income per financial statements
Other income(2)
Total revenues
Provision for credit losses
Non-interest expenses(3)
Provision for income taxes
Net Income(5)
Total Average Assets ($ millions)(4)
Banking and Trust
2008
$
222,837
2007
205,867
$
$
Insurance
2008
$
5,780
5,191
217,646
54,338
271,984
12,000
125,748
40,589
93,647
9,747
$
$
$
$
5,023
200,844
47,506
248,350
10,200
113,456
36,185
88,509
8,014
$
$
480
5,300
15,902
21,202
–
9,418
3,412
8,372
184
$
$
2007
4,792 $
387
4,405
15,315
19,720
–
8,478
3,469
7,773 $
164 $
Total
2008
$
228,617
5,671
222,946
70,240
293,186
12,000
135,166
44,001
102,019
9,931
$
$
2007
210,659
5,410
205,249
62,821
268,070
10,200
121,934
39,654
96,282
8,178
(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 21) and also includes the gain on the sale of securities.
(3) Amortization of intangible assets of $276 (2007 – $293) is included in the banking and trust segment and $250 (2007 – $250) in the insurance segment. Amortization of land, buildings and
equipment total $5,040 (2007 – $4,365) for the banking and trust segment and $1,330 (2007 – $1,109) for the insurance segment while additions amounted to $10,552 (2007 – $6,010) for
the banking and trust segment and $1,975 (2007 – $1,002) for the insurance segment. Goodwill of $3,679 (2007 – $3,679) is allocated to the banking and trust segment and $3,254 (2007 –
$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.
33.
subsequent event
On December 1, 2008, the Bank acquired 72.5% ownership of Adroit Investment Management Ltd. with an effective date of November
1, 2008. Adroit Investment Management Ltd. is an Edmonton, Alberta based firm specializing in wealth management for individuals,
corporations and institutional clients.
34.
subsidiaries and affiliate
canadian western bank subsidiaries(1)
(annexed in accordance with subsection 308(3) of the Bank Act)
October 31, 2008
Canadian Direct Insurance Incorporated
Canadian Western Trust Company
Valiant Trust Company
Canadian Western Financial Ltd.
Canadian Western Bank Capital Trust(3)
Address of
Head Office
Suite 600, 750 Cambie Street
Vancouver, British Columbia
Suite 2300, 10303 Jasper Avenue
Edmonton, Alberta
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
(2)
by the Bank
$
50,820
45,879
13,982
1,334
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.
WINNING THE WEST CWB 2008 ANNUAL REPORT 91
BOARD OF DIRECTORS AND SENIOR OFFICERS
SENIOR OFFICERS
EXECUTIVE OFFICERS
Larry M. Pollock
President and
Chief Executive Officer
William J. Addington, FCMA
Executive Vice President
Tracey C. Ball, FCA
Executive Vice President
and Chief Financial Officer
Chris H. Fowler
Executive Vice President
Randy W. Garvey, FCMA
Executive Vice President
Brian J. young
Executive Vice President
CORPORATE OFFICE
Lars K. Christensen
Vice President and
Chief Internal Auditor
Dennis Crough
Vice President
Credit Risk Management
Richard R. Gilpin
Senior Vice President
Credit Risk Management
Ricki L. Golick
Senior Vice President
and Treasurer
Carolyn J. Graham
Vice President and
Chief Accountant
Gail L. Harding, Q.C.
Vice President
General Counsel and
Corporate Secretary
Blair Himmelreich
Acting Vice President
Finance
Darrell Jones
Vice President and
Chief Information Officer
uve Knaak
Senior Vice President
Human Resources
Peter K. Morrison
Vice President
Marketing and Product
Development
David R. Pogue
Vice President
Corporate Development
COMMERCIAL AND
RETAIL BANKING
James O. Burke
Vice President
Equipment Financing Group
Michael N. Halliwell
Senior Vice President and
Regional General Manager
Gregory J. Sprung
Senior Vice President and
Regional General Manager
Jack C. Wright
Senior Vice President and
Regional General Manager
CANADIAN
WESTERN TRUST
Adrian M. Baker
Vice President and
Chief Operating Officer
Trust Services
Scott Scobie
General Manager
CANADIAN
DIRECT INSURANCE
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
Adrian M. Baker
President
Matt K. Colpitts
General Manager
OMBUDSMAN
R. Graham Gilbert
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
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
Dr. Maurice M. Pechet
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
Howard E. Pechet
President
Mayfield Consulting Inc.
Rancho Mirage, California, USA
92 WINNING THE WEST CWB 2008 ANNUAL REPORT
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, FCA
Executive Vice President
and Chief Financial Officer
Canadian Western Bank
Telephone: (780) 423–8855
Fax: (780) 423–8899
Email: tracey.ball@cwbank.com
or
Robert A. Manning
Chairman of the Audit Committee
Canadian Western Bank
c/o 210 – 5324 Calgary Trail
Edmonton, Alberta T6H 4J8
Telephone: (780) 438–2626
Fax: (780) 438–2632
Email: rmanning@shawbiz.ca
SHAREHOLDER INFORMATION
Canadian Western
Bank & Trust
Head Office
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
600, 750 Cambie Street
Vancouver, B.C. V6B 0A2
Toll-free: (800) 663–1124
Fax: (604) 669–6069
Website: www.cwt.ca
Canadian
Direct Insurance
600, 750 Cambie Street
Vancouver, B.C. V6B 0A2
Telephone: (604) 699–3678
Fax: (604) 699–3851
Website: www.canadiandirect.com
Valiant Trust
310, 606 – 4th Street S.W.
Calgary, Alberta T2P 1T1
Telephone: (403) 233–2801
Fax: (403) 233–2857
Website: www.valianttrust.com
Adroit Investment
Management Ltd.
2020 Scotia Place
10060 Jasper Avenue
Edmonton, Alberta T5J 3R8
Phone: (780) 429–3500
Fax: (780) 429–9680
Stock Exchange Listing
The Toronto Stock Exchange
Share Symbol: CWB
Transfer Agent and
Registrar Mailing Address
Valiant Trust
310, 606 – 4th Street S.W.
Calgary, Alberta T2P 1T1
Toll-free: (866) 313-1872
Fax: (403) 233–2857
Corporate Secretary
Gail L. Harding, Q.C.
Vice President
General Counsel and Corporate Secretary
2300, Canadian
Western Bank Place
10303 Jasper Avenue
Edmonton, Alberta T5J 3X6
Telephone: (780) 969–1525
Fax: (780) 423–8899
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 Assistant Vice President,
Investor and Public Relations.
Annual Meeting
The annual meeting of the common
shareholders of Canadian Western
Bank will be held on March 5th, 2009
at the Westin Hotel in Edmonton, AB at
3:00 p.m. MT (1:00 p.m. ET).
Investor Relations
For further financial information, contact:
Kirby Hill
Assistant Vice President
Investor and Public Relations
Canadian Western Bank
Toll-free: (800) 836–1886
Fax: (780) 423–8899
Email: InvestorRelations@cwbank.com
or visit our website at
www.cwbankgroup.com
Recycled an
WINNING THE WEST CWB 2008 ANNUAL REPORT 93
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
Jack Wright
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
Mike McInnis
103 Street
10303 Jasper Avenue
(780) 423–8801
Gary Mitchell
Old Strathcona
7933 – 104 Street
(780) 433–4286
Donna Austin
South Edmonton
Common
2142 – 99 Street
(780) 988–8607
Wayne Dosman
West Point
17603 – 100 Avenue
(780) 484–7407
David Hardy
CALGARY
Calgary Main
606 – 4 Street S.W.
(403) 262–8700
Glen Eastwood
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
Jay Neubauer
GRANDE PRAIRIE
11226 – 100 Avenue
(780) 831–1888
Todd Kramer
LEDUC
5407 Discovery Way
(780) 986–9858
Terry Gould
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
ST. ALBERT
300, 700 St. Albert Road
(780) 458–4001
Jeff Suggitt
BRITISH COLUMBIA
VANCOUVER
Kitsilano
3190 West Broadway
(604) 732–4262
Demetra Papaspyros
Park Place
100, 666 Burrard Street
(604) 688–8711
Rob Berzins
Vancouver Real Estate
22nd Floor
666 Burrard Street
(604) 669–0081
Kenneth Cutting
West Broadway
110, 1333 West Broadway
(604) 730–8818
Jules Mihalyi
VICTORIA
1201 Douglas Street
(250) 383–1206
Bob Granger
COQUITLAM
310, 101
Schoolhouse Street
(604) 523–5250
ABBOTSFORD
100, 2548 Clearbrook Road
(604) 855–4941
Rick Howard
COQUITLAM
310, 101
Schoolhouse Street
(604) 540–8829
Ron Baker
COURTENAY
200, 470 Puntledge Road
(250) 334–8888
Alan Dafoe
CRANBROOK
2nd Floor, Suite A
828 Baker Street
(250) 426–1140
Mike Eckersley
KAMLOOPS
112, 300 Columbia Street
(250) 828–1070
Hugh Sutherland
KELOWNA
Kelowna
1674 Bertram Street
(250) 862–8008
Grant Fletcher
Kelowna Industrial
101, 1505 Harvey Avenue
(250) 860–0088
Jim Kruiper
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
SASKATCHEWAN
REGINA
100, 1881 Scarth Street
The Hill Center Tower II
(306) 757–8888
Kelly Dennis
SASKATOON
244 – 2 Avenue
(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 Trust
VANCOUVER
600, 750 Cambie Street
(604) 685–2081
Real Estate Lending
22nd Floor
666 Burrard Street
(604) 669–0081
BURLINGTON
201A, 3190
Harvester Road
(905) 631–5342
CALGARY
200, 606 – 4 Street S.W.
(403) 717–3145
Optimum Mortgage
EDMONTON
2300, 10303
Jasper Avenue
(780) 423–9748
CALGARY
300, 5222 – 130
Avenue S.E.
(403) 726–8239
VANCOUVER
100, 666 Burrard Street
(604) 602–2773
WINNIPEG
230 Portage Avenue
(204) 926–1547
Canadian
Direct Insurance
VANCOUVER
600, 750 Cambie Street
(604) 699–3678
EDMONTON
500, 10115 – 100A Street
(780) 413–5933
Valiant Trust
CALGARY
310, 606 – 4 Street S.W.
(403) 233–2801
EDMONTON
2300, 10303
Jasper Avenue
(780) 423–8888
TORONTO
2950, 130 King
Street West
P.O. Box 34
(416) 360–1481
VANCOUVER
600, 750 Cambie Street
(604) 699–4880
Canadian
Western Financial
EDMONTON
2300, 10303
Jasper Avenue
(780) 423–8888
Canadian
Direct Financial
EDMONTON
2300, 10303
Jasper Avenue
1–877–441–2249
94 WINNING THE WEST CWB 2008 ANNUAL REPORT
OUR HISTORY OF FINANCIAL PERFORMANCE
FIVE YEAR FINANCIAL SUMMARY
total assets ($ millions)
total loans ($ millions)
12,000
10,000
8,000
6,000
4,000
4,919
5,705
10,601
9,525
7,268
2004
2005
2006
2007
2008
10,000
8,000
6,000
4,000
2,000
0
8,624
7,406
5,782
4,590
3,930
2004
2005
2006
2007
2008
total revenues (teb) ($ millions)
net income ($ millions)
299
273
222
186
152
2004
2005
2006
2007
2008
provision for credit losses
(as a percentage of average loans)
0.25% 0.24%
0.20%
0.16%
0.15%
2004
2005
2006
2007
2008
120
100
80
60
40
20
0
100
75
50
25
0
102
96
72
54
44
2004
2005
2006
2007
2008
efficiency ratio (teb)
(expenses to revenues)
49.5% 48.6% 46.0% 44.6%
45.2%
2004
2005
2006
2007
2008
2,000
0
300
250
200
150
100
50
0
1.00
0.75
0.50
0.25
0.00
($ thousands, except per share amounts)
($ 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
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and repurchase agreements
Loans
Deposits
Subordinated debentures
Shareholders’ equity
Assets under administration
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
as a percentage of average loans
Net impaired loans as a percentage of total loans
Number of full-time equivalent staff
Number of bank branches
$
$
2008
2007
2006
2005
2004
$
228,617
5,671
222,946
70,240
298,857
293,186
102,019
$
$
$
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
15.9%
1.03
17.4%
1.18
14.8%
1.12
12.7%
1.03
12.9%
0.97
$
63,214
1.61
1.58
0.4200
10.70
32.20
14.67
18.44
62,354
61,514
60,394
53,564
$
1.54
1.50
0.3400
9.48
30.86
20.78
30.77
$
1.17
1.13
0.2500
8.39
22.78
16.64
21.15
$
0.90
0.87
0.1900
7.48
20.35
11.04
17.60
0.83
0.75
0.1875
6.73
12.07
9.57
11.92
$ 10,600,732
1,798,137
8,624,069
9,245,719
375,000
679,148
4,347,723
$ 9,525,040
1,961,241
7,405,580
8,256,918
390,000
595,493
4,283,900
$ 7,268,360
1,332,987
5,781,837
6,297,007
198,126
519,530
3,344,414
$ 5,705,028
976,000
4,590,263
4,913,307
128,126
457,990
2,649,065
$ 4,918,895
848,179
3,930,114
4,267,788
110,600
367,589
1,759,473
7.7%
8.9
13.5
45.2%
46.1
2.30
2.25
0.15
0.19
1,284
36
7.7%
9.1
13.7
44.6%
45.5
2.58
2.51
0.16
(0.57)
1,185
35
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
(1) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement and comparison of net interest income. Net interest income (as presented in the consolidated statement of income)
includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividend received is significantly lower than would apply to a loan or security of the same amount. The adjustment
to taxable equivalent basis increases interest income and the provision for income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. 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). As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is now managed and reported in accordance with those
requirements. Prior year ratios have been calculated using the previous framework.
(7) Tier 1 and total capital adequacy ratios are calculated in accordance with guidelines issued by OSFI. As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is now managed
and reported in accordance with those requirements. Prior year ratios have been calculated using the previous framework.
(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.
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CANADIAN
WESTERN
BANK GROUP
BANK · TRUST · INSURANCE
CCWWBB
CANADIAN WESTERN BANK GROUP
BANK · TRUST · INSURANCE
CCWWBB
2008 annual report
25
25
YEARS
YEARS
AGO...
AGO...
...we made a promise to western
...we made a promise to western
Canadians: we will invest our allegiance,
Canadians: we will invest our allegiance,
our resources and our future in Western
our resources and our future in Western
Canada; we will support the endeavours
Canada; we will support the endeavours
of individuals and businesses in the west;
of individuals and businesses in the west;
we will work diligently to win the trust
we will work diligently to win the trust
and loyalty of our employees, customers
and loyalty of our employees, customers
and shareholders; we will create ongoing
and shareholders; we will create ongoing
opportunities for all stakeholders.
opportunities for all stakeholders.