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Fundamentals
{ principles for success }
C A NA DI A N W E S T E R N BA N K GROU P
2 0 0 9 A N N U A L R E P O R T
9
2008 annual report
Our History of Financial Performance
TOTAL ASSETS ($ MILLIONS)
TOTAL LOANS ($ MILLIONS)
11,636
10,601
9,525
7,268
5,705
2005
2006
2007
2008
2009
9,236
8,624
7,406
5,782
10,000
8,000
6,000
4,000
4,590
2,000
0
2005
2006
2007
2008
2009
TOTAL REVENUES (teb) ($ MILLIONS)
NET INCOME ($ MILLIONS)
328
299
273
222
186
2005
2006
2007
2008
2009
PROVISION FOR CREDIT LOSSES
(AS A PERCENTAGE OF AVERAGE LOANS)
0.24%
0.20%
0.16%
0.15%
0.15%
2005
2006
2007
2008
2009
120
100
80
60
40
20
0
100
75
50
25
0
102
106
96
72
54
2005
2006
2007
2008
2009
EFFICIENCY RATIO (teb)
(EXPENSES TO REVENUES)
48.6% 46.0% 44.6% 45.2%
48.2%
2005
2006
2007
2008
2009
12,000
10,000
8,000
6,000
4,000
2,000
0
350
300
250
200
150
100
50
0
1.00
0.75
0.50
0.25
0.00
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Fundamentals
{ principles for success }
C A NA DI A N W E S T E R N BA N K GROU P
2 0 0 9 A N N U A L R E P O R T
9
2008 annual report
Our History of Financial Performance
TOTAL ASSETS ($ MILLIONS)
TOTAL LOANS ($ MILLIONS)
11,636
10,601
9,525
7,268
5,705
2005
2006
2007
2008
2009
9,236
8,624
7,406
5,782
10,000
8,000
6,000
4,000
4,590
2,000
0
2005
2006
2007
2008
2009
TOTAL REVENUES (teb) ($ MILLIONS)
NET INCOME ($ MILLIONS)
328
299
273
222
186
2005
2006
2007
2008
2009
PROVISION FOR CREDIT LOSSES
(AS A PERCENTAGE OF AVERAGE LOANS)
0.24%
0.20%
0.16%
0.15%
0.15%
2005
2006
2007
2008
2009
120
100
80
60
40
20
0
100
75
50
25
0
102
106
96
72
54
2005
2006
2007
2008
2009
EFFICIENCY RATIO (teb)
(EXPENSES TO REVENUES)
48.6% 46.0% 44.6% 45.2%
48.2%
2005
2006
2007
2008
2009
12,000
10,000
8,000
6,000
4,000
2,000
0
350
300
250
200
150
100
50
0
1.00
0.75
0.50
0.25
0.00
Five Year Financial Summary
Performance Targets
($ thousands, except per share amounts)
Results of Operations
Net interest income (teb)(1)
Less teb adjustment
Net interest income per financial statements
Other income
Total revenues (teb)
Total revenues
Net income
Return on common shareholders’ equity(2)
Return on average total assets(3)
Per Common Share(4)
Average common shares outstanding (thousands)
Earnings per share
Basic
Diluted
Dividends
Book value
Market price
High
Low
Close
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and resale agreements
Loans
Deposits
Subordinated debentures
Shareholders’ equity
Assets under administration
Assets under management
Capital Adequacy
Tangible common equity to risk-weighted assets(5)
Tier 1 ratio(6)
Total ratio(6)
Other Information
Efficiency ratio (teb)(7)
Efficiency ratio
Net interest margin (teb)(8)
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
$
$
2009
2008
2007
2006
2005
$
$
236,354
7,847
228,507
91,612
327,966
320,119
106,285
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
13.2%
0.86
15.9%
1.03
17.4%
1.18
14.8%
1.12
12.7%
1.03
63,613
63,214
62,354
61,514
60,394
$
1.51
1.47
0.44
12.16
23.00
7.52
21.38
$
1.61
1.58
0.42
10.70
32.20
14.67
18.44
$
1.54
1.50
0.34
9.48
30.86
20.78
30.77
$
1.17
1.13
0.25
8.39
22.78
16.64
21.15
0.90
0.87
0.19
7.48
20.35
11.04
17.60
$ 11,635,872
2,188,513
9,236,193
9,617,238
375,000
986,499
5,467,447
878,095
$ 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
1,649,065
—
—
—
—
8.0%
11.3
15.4
48.2%
49.4
2.10
2.03
0.15
0.68
1,339
37
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
(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 common shareholders’ equity is calculated as net income after preferred share dividends divided by average common shareholders’ equity.
(3) Return on assets is calculated as net income after preferred share dividends 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) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the Super-
intendent of Financial Institutions Canada (OSFI). As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is managed and reported in accordance with those requirements.
Prior year ratios have been calculated using the previous framework.
(6) 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 managed and
reported in accordance with those requirements. Prior year ratios have been calculated using the previous framework.
(7) Efficiency ratio is calculated as non-interest expenses divided by total revenues.
(8) Net interest margin is calculated as net interest income divided by average total assets.
When this past fiscal year began, everyone in the financial services
industry – including Canadian Western Bank Group – was braced for
a downturn. While the extent of the downturn was unknown, we knew
challenging market and economic conditions would have an ongoing
impact, and that related issues such as lower interest rates and a higher
level of impaired loans would be reflected in our overall performance.
We are pleased to report that Canadian Western
Bank Group achieved or surpassed four out of seven
of our 2009 performance target ranges despite
the foregoing uncertainty. Annual performance
highlights included record earnings and revenues,
and an industry-best provision for credit losses
measured as a percentage of average loans.
In the coming year, while we are still uncertain
about the timing and strength of an economic
recovery, our minimum performance targets reflect
ongoing confidence in our business strategies and
the strength of our core western Canadian markets.
Net income growth
Total revenue (teb) growth
Loan growth
2009
Target Ranges
2009
2010
Performance Minimum Targets
2 to 5%
5 to 8%
10%
4%
10%
7%
12%
12%
10%
Provision for credit losses as a percentage of average loans
0.15 to 0.18%
0.15%
0.15 to 0.20%
Efficiency ratio (teb)
Return on common shareholders’ equity
46 to 49%
14 to 16%
48.2%
13.2%
48%
13%
Return on assets
0.90 to 1.05%
0.86%
0.90%
Eco Audit
This annual report uses paper that comes from
well-managed forests, certified in accordance with
the international standards of the Forest Stewardship
Council (FSC). The paper used for the report cover
contains 30% Post Consumer Recycled (PCR) and
the paper used for the report contains 100% PCR
fibre instead of virgin paper. As a result, the following
savings to our natural resources were realized:
TREES SAVED
215
WOOD SAVED
30 TONNES
ENERGY NOT CONSUMED
68 (Million BTUs)
NET GREENHOUSE GASES PRE VENTED
20,449(lbs. Co2 Equiv.)
WASTE WATER
98,486 (Water Saved Gallons)
SOLID WASTE
5,980 (Landfill Reduced lbs.)
Above information is based on use of the following products:
155,000 sheets of 23 x 35, Envirographic 100, 60lb Text, 102M
8,500 sheets of 26 x 40, Via Felt, 80lb Cover, 320M
Data research provided by www.environmentaldefence.org
Designed by Vision Creative Inc. www.visioncreativeinc.com
Five Year Financial Summary
Performance Targets
($ thousands, except per share amounts)
Results of Operations
Net interest income (teb)(1)
Less teb adjustment
Net interest income per financial statements
Other income
Total revenues (teb)
Total revenues
Net income
Return on common shareholders’ equity(2)
Return on average total assets(3)
Per Common Share(4)
Average common shares outstanding (thousands)
Earnings per share
Basic
Diluted
Dividends
Book value
Market price
High
Low
Close
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and resale agreements
Loans
Deposits
Subordinated debentures
Shareholders’ equity
Assets under administration
Assets under management
Capital Adequacy
Tangible common equity to risk-weighted assets(5)
Tier 1 ratio(6)
Total ratio(6)
Other Information
Efficiency ratio (teb)(7)
Efficiency ratio
Net interest margin (teb)(8)
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
$
$
2009
2008
2007
2006
2005
$
$
236,354
7,847
228,507
91,612
327,966
320,119
106,285
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
13.2%
0.86
15.9%
1.03
17.4%
1.18
14.8%
1.12
12.7%
1.03
63,613
63,214
62,354
61,514
60,394
$
1.51
1.47
0.44
12.16
23.00
7.52
21.38
$
1.61
1.58
0.42
10.70
32.20
14.67
18.44
$
1.54
1.50
0.34
9.48
30.86
20.78
30.77
$
1.17
1.13
0.25
8.39
22.78
16.64
21.15
0.90
0.87
0.19
7.48
20.35
11.04
17.60
$ 11,635,872
2,188,513
9,236,193
9,617,238
375,000
986,499
5,467,447
878,095
$ 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
1,649,065
—
—
—
—
8.0%
11.3
15.4
48.2%
49.4
2.10
2.03
0.15
0.68
1,339
37
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
(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 common shareholders’ equity is calculated as net income after preferred share dividends divided by average common shareholders’ equity.
(3) Return on assets is calculated as net income after preferred share dividends 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) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the Super-
intendent of Financial Institutions Canada (OSFI). As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is managed and reported in accordance with those requirements.
Prior year ratios have been calculated using the previous framework.
(6) 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 managed and
reported in accordance with those requirements. Prior year ratios have been calculated using the previous framework.
(7) Efficiency ratio is calculated as non-interest expenses divided by total revenues.
(8) Net interest margin is calculated as net interest income divided by average total assets.
When this past fiscal year began, everyone in the financial services
industry – including Canadian Western Bank Group – was braced for
a downturn. While the extent of the downturn was unknown, we knew
challenging market and economic conditions would have an ongoing
impact, and that related issues such as lower interest rates and a higher
level of impaired loans would be reflected in our overall performance.
We are pleased to report that Canadian Western
Bank Group achieved or surpassed four out of seven
of our 2009 performance target ranges despite
the foregoing uncertainty. Annual performance
highlights included record earnings and revenues,
and an industry-best provision for credit losses
measured as a percentage of average loans.
In the coming year, while we are still uncertain
about the timing and strength of an economic
recovery, our minimum performance targets reflect
ongoing confidence in our business strategies and
the strength of our core western Canadian markets.
Net income growth
Total revenue (teb) growth
Loan growth
2009
Target Ranges
2009
2010
Performance Minimum Targets
2 to 5%
5 to 8%
10%
4%
10%
7%
12%
12%
10%
Provision for credit losses as a percentage of average loans
0.15 to 0.18%
0.15%
0.15 to 0.20%
Efficiency ratio (teb)
Return on common shareholders’ equity
46 to 49%
14 to 16%
48.2%
13.2%
48%
13%
Return on assets
0.90 to 1.05%
0.86%
0.90%
Eco Audit
This annual report uses paper that comes from
well-managed forests, certified in accordance with
the international standards of the Forest Stewardship
Council (FSC). The paper used for the report cover
contains 30% Post Consumer Recycled (PCR) and
the paper used for the report contains 100% PCR
fibre instead of virgin paper. As a result, the following
savings to our natural resources were realized:
TREES SAVED
215
WOOD SAVED
30 TONNES
ENERGY NOT CONSUMED
68 (Million BTUs)
NET GREENHOUSE GASES PRE VENTED
20,449(lbs. Co2 Equiv.)
WASTE WATER
98,486 (Water Saved Gallons)
SOLID WASTE
5,980 (Landfill Reduced lbs.)
Above information is based on use of the following products:
155,000 sheets of 23 x 35, Envirographic 100, 60lb Text, 102M
8,500 sheets of 26 x 40, Via Felt, 80lb Cover, 320M
Data research provided by www.environmentaldefence.org
Designed by Vision Creative Inc. www.visioncreativeinc.com
Table of Contents
1
2
Fundamentals
Canadian Western Bank Group
4 Q&A with the President and CEO
8 Message from the Chairman
10 Canadian Western Bank
12 Canadian Direct Financial
13 Canadian Western Financial
14 Canadian Western Trust
15 Optimum Mortgage
16 Valiant Trust
17 Canadian Direct Insurance
18 Adroit Investment Management
19 Corporate Social Responsibility
22 Corporate Governance
24 Management’s Discussion & Analysis
Fundamentals
It all begins with the fundamentals. Defining what you do, why you
do it, and the best way to get it done is essential to business success. It helps
you chart growth, explore new opportunities and adapt to changing
customer needs. It also helps you stay focused when challenges arise.
66 Financial Statements
101 Glossary of Key Terms
102 Board of Directors
102 Senior Officers
At Canadian Western Bank Group, we’ve built our reputation and success on our
fundamental commitment to providing superior customer experiences. We listen to our
customers and endeavor to create products and services focused on their needs, while
maintaining our commitment to sensible and prudent business practices. Sticking to what
we know is key to our success, as is our common sense approach to growing our businesses.
We work constantly to build long-lasting relationships with our clients, employees and
other stakeholders.
These fundamentals have guided our development for more than a quarter century and
will help us emerge from current challenges poised for continued growth. In the following
pages, you’ll learn more about the fundamentals that guide Canadian Western Bank Group
– our strategies, our business lines and our priorities – and how those fundamentals shape
both who we are and who we will become.
103 Shareholder Information
103 Award of Excellence Recipients
104 Locations
Number of truly successful banks from Western Canada (CWB)
p 1
www.cwbankgroup.com
Canadian Western Bank Group
We’ve come a long way from our humble beginnings in 1984, when
we started with our first employee and the goal of creating a bank that
would invest its expertise and resources in the West. Today, more than
25 years later, Canadian Western Bank (CWB) is the largest Canadian
bank headquartered in Western Canada. CWB and its subsidiaries,
which, together comprise Canadian Western Bank Group (CWB Group)
now includes 37 banking branches, eight trust locations, two insurance
service centres and one wealth management location. We have combined
balance sheet assets of nearly $12 billion, trust assets under administration
of more than $5 billion and assets under management approaching
$1 billion. We employ more than 1,400 people in nearly 50 communities.
And, our first employee is still with us today.
Fig. 1.0
Principles for success
The corporate headquarters of the
Canadian Western Bank Group is located
in Edmonton, Alberta.
Fig. 1.1
Each figure represents 100 employees
of the Canadian Western Bank Group.
ALBERTA - 802
BRITISH COLUMBIA - 573
MANITOBA -18
SASKATCHEWAN - 51
ONTARIO - 7
Although we’ve grown significantly, the main principles for our success have not changed:
we focus on the needs of Western Canada, offer exceptional customer service and adhere
to a common sense approach to doing business. We maintain our commitment to local
decision making and continue to build on our disciplined strategies for ongoing growth
and diversification. CWB's subsidiaries include Canadian Western Trust Company, Valiant
Trust Company, Canadian Direct Insurance Incorporated, Adroit Investment Management
Ltd. and Canadian Western Financial Ltd. Canadian Direct Financial is a division of CWB,
while Optimum Mortgage is a division of Canadian Western Trust Company.
At Canadian Western Bank Group, we are proud of what we’ve accomplished and of our
ability to stay true to our fundamentals, both in the best of times and in very challenging
times such as this past year. We continued to grow and support our customers, achieved
record annual earnings and revenues, and marked our 86th consecutive profitable quarter,
all amidst the most uncertain operating and economic environment in decades, particularly
for financial institutions. Both our employees and clients rose to the challenges that were
presented this past year, and Canadian Western Bank Group has emerged much stronger
for the experience.
“Canadian Western Bank has built a very impressive balance sheet over the
years, but people by far represent our most valued asset. It’s the tremendous
commitment and talent of our staff that really underpin CWB Group’s
ongoing success and growth.”
Tracey Ball
Executive Vice President and Chief Financial Officer
Canadian Western Bank Group
2 f Number of new CWB branches opened in 2009
Canadian Western Bank Group
Canadian Western Bank, along with its
subsidiaries and operating divisions, together
comprises Canadian Western Bank Group
Subsidiary Company
Operating Division
† Includes both full and part time employees
Canadian Western
Bank Group
Employees†: 1,400+
Clients: 500,000+
Total Assets:
$11.6 billion+
President & CEO:
Larry M. Pollock
Chairman:
Jack C. Donald
Canadian
Western Bank
Employees†: 1,005
Consecutive
Profitable Quarters:
86
Total Branches : 37
Canadian Direct
Insurance
Employees†: 272
Insurance Policies
Outstanding (#):
175,000+
Gross Written
Premiums:
$116 million+
Valiant Trust
Employees†: 42
Appointments in
2009 (#): 468
Number of Clients:
260+
Canadian
Western Trust
Employees†: 79
Investment Accounts
(#): 42,000+
Total Assets Under
Administration:
$5,400 million+
Adroit Investment
Management
Employees†: 12
Total Assets Under
Management:
$878 million+
Number of Client
Relationships: 312
Optimum
Mortgage
Employees†: 34
Total Mortgages:
$561 million
Client Mortgages (#):
2,200+
Canadian
Direct Financial
Established: 2008
Deposits:
$60 million+
Provinces in Canada
Where CDF Products
Are Offered (#): 9
Canadian
Western Financial
Mutual Fund
Representatives (#):
95
Client Mutual
Funds:
$95 million
Number of CEOs throughout CWB’s history
p 3
An Interview with Larry M. Pollock,
President and CEO
Q: How did CWB Group perform in fiscal 2009?
A: Under normal conditions, I would have considered our performance good,
but considering the market turmoil and recessionary environment we were up
against, I think we performed very well. Of course, none of us knew exactly what
to expect at the beginning of the year, but we put strategies in place to help mitigate
most of the issues we could foresee – lack of liquidity in the markets, ongoing margin
compression and higher impaired loans. Although we were braced for difficult operating
conditions, it turned out to be a much more challenging environment than we initially
expected. But at the end of the day, we achieved our best year ever for earnings and
revenues, and marked our 86th consecutive profitable quarter.
Q: How did CWB Group avoid the pitfalls so many other financial
institutions experienced?
A: One of the problems that contributed to the global crisis in the first place is that
many financial institutions became very aggressive in their lending practices.
We never did that. We maintained our credit discipline, even if we did less business
because of it. We have a practice of not investing in things we don’t understand, which
meant we were never as vulnerable as some financial institutions. We had no exposure
to troubled asset-backed commercial paper, collateralized debt obligations, or any
of the other toxic assets that became headlines over the past couple of years.
Our geographic position in Western Canada also helped us. Western Canada’s
entrepreneurial spirit and resiliency in the face of economic challenges is very much
in sync with our own corporate culture. Looking forward, we also believe Western
Canada is poised to realize a solid economic recovery once major global economies
begin to grow.
Q: What specific things were done at CWB Group to help mitigate the impact
of the financial crisis and the recessionary environment that followed?
A: We decided from the start that it would be business as usual, because we
have the view that if you tear your organization apart to reduce costs, it’s simply
not a sustainable business model. We decided to keep things intact, including
expenditures tied to our longer-term growth and development plans, even if it meant
we would report lower earnings for a period of time.
We also made a concerted effort to maintain good communication with our
employees, keeping them up-to-date on what we were doing and what we weren’t
doing. Our employees could go home at night knowing that their jobs were safe; it gave
them security, and helped them become even more committed to CWB Group.
Fig. 1.2
Larry M. Pollock, President and CEO
of Canadian Western Bank
4 f Number of times CWB Group has been recognized as one of the 50 Best Employers in Canada (2007-2010)
An Interview with Larry M. Pollock,
President and CEO
“Western Canada’s entrepreneurial
spirit and resiliency in the face
of economic challenges is very much
in sync with our own corporate
culture. Looking forward, we also
believe Western Canada is poised
to realize a solid economic recovery
once major global economies
begin to grow.”
In the fall of 2008, we saw that markets were becoming very tight, so we decided
to carry much more liquidity than we normally would. We took a proactive stance and
raised additional deposits at the end of fiscal 2008 and early in fiscal 2009 to ensure
we would continue to meet the needs of our customers.
We also increased our capital base by completing preferred unit offerings in March
2009. We already had solid capital ratios and some questioned our intent for doing
this, but being perceived as having too much capital during the most uncertain
economic environment in decades is a pretty good problem to have. We expect the
preferred unit capital will benefit all CWB shareholders in the future, as the Bank
is very well positioned to capitalize on new growth opportunities.
Q: What were you particularly proud of during the year?
A: By far, it was the dedication of our employees. I thought with everything that was
going on they might get overly concerned and worry about what comes next. But they
didn’t. In fact, many of our employees were angry, angry that the market had brought
the value of a CWB share down from $31 to $7 in just one year. We posted very good
financial results despite the challenges, and continued to grow and develop – something
we were really proud of. To see our share price drop, it felt like the market was punishing
us for doing things right. That motivated us to work even harder. We said now’s a great
opportunity, while everyone else is looking over their shoulder, we’ll look ahead and see
how to better our organization. And that’s what we did.
I was also very proud of how well Canada’s banking industry as a whole performed
during the crisis. Compared to the rest of the world, our regulatory system and Bank Act
have all sorts of checks and balances to prevent banks from becoming overly aggressive
during the good times. Imposing constraints on how much leverage banks can carry
on their balance sheets is an effective way to control against undue risk-taking, and our
regulators in Canada figured this out long before the financial crisis began.
Q: With the benefit of hindsight, is there anything you would have
done differently?
A: Not a lot. We have strong discipline embedded in our business model and a lot of
experience among our senior people; it’s just a fundamental part of who we are. I knew
if we continued to do what we’ve always done, we’d come through it. And we have.
Sometimes we’re criticized for the way we do things, but we don’t manage our
businesses to satisfy the flavour of the week. We’ve never done that. In the past, some
people have underestimated us, and I expect some will underestimate our future
potential as well. We are building our businesses for the long-term, not attempting
to push each quarter so we look good temporarily.
Q: What are your thoughts on the economic environment going forward?
A: We’re starting to see some real activity. Although we’re not completely out of
the woods from an economic standpoint, things are moving again, and that’s good.
Real estate markets in Canada have shown surprising resilience, and we expect
employment levels will start to pick up again in 2010. There are still some storm
clouds ahead, but we definitely see light on the horizon.
The current number of CWB branches in Edmonton, AB
p 5
We also think that Western Canada, with its strong resource base, is likely to
experience a strong recovery once global demand starts to pick up. And we’ll be here
to help that recovery along, just like we were here in the midst of the crisis.
Q: Have any new opportunities arisen over the past year?
A: One of the biggest problems we experienced during the past year was compression
of our net interest margin. Half of our loans are prime-based, and when the benchmark
rate went from almost six per cent in 2008 to two and a quarter per cent this year,
our profit margins fell significantly. The opportunity now is to build back reasonable
margins, which includes negotiating fair lending rates that are satisfactory for
both our clients and our shareholders. Overall deposit costs have come down quite
a bit now too, which we expect will provide a further significant boost for margins
going forward.
We’ve also seen a reduction in the number of foreign competitors in our markets.
It appears a number of them are licking their wounds and going home. This has
provided a real opportunity for us to increase our market presence, and we plan
to take advantage of this. The benefits of this should be amplified once the economic
recovery kicks in.
Q: What are the main factors that have contributed to CWB Group’s history of success?
A: I would say there are five factors that have contributed to our history of success.
First of all, we’re conservative; second, we’re well capitalized; and third, we surround
ourselves with good people that work well as a team. The remaining two factors relate
to our culture. We’re not greedy, so if we see an opportunity we try to be fair – we
always remain mindful of the tradeoff between potential returns and corresponding
risks. And finally, we communicate, listen and work hard. I’ve said for years that
“I might not outsmart you, but I’ll probably outwork you.” In the end, hard work
is what gets it done.
You can also never underestimate how much integrity is worth. I worked for someone
once who said “out of trust, out of business,” and by that he meant that you should
never work with anyone you didn’t trust. I think the personality of our executive group
permeates throughout the organization, and integrity really defines who we are.
Our clients know they can trust us, and in the end that’s what relationships are built on.
Q: You’ve been President and CEO for almost 20 years; how long do you plan
to continue leading CWB Group?
A: I’m still as fired up and optimistic about where we can take Canadian Western
Bank Group as I ever was. I really enjoy what I’m doing and once you go through
a firestorm like we did this past year, is that the time you want to say goodbye? Not a
chance. My employment agreement was recently extended, so I expect to be around
for awhile yet.
Fig. 1.3
Larry M. Pollock receiving an honorary degree
from the Northern Alberta Institute of
Technology (NAIT) this year.
“I’m still as fired up and optimistic
about where we can take
Canadian Western Bank Group
as I ever was. I really enjoy what
I’m doing... so I expect to be
around for awhile yet.”
6 f Current trust assets under administration, in $ billions
That being said, we have a very strong and experienced executive team and any one
of our five executive vice presidents would be capable of taking the reins in my absence.
We have lots of internal talent and plenty of people who share my commitment
to CWB Group.
Q: What are CWB Group’s top priorities for 2010?
A: We’re looking to continue our organic growth strategy for the Bank. There are still
lots of opportunities to further build and develop in our western Canadian markets.
We opened two new full service branches in 2009, and expect to open two additional
branches in 2010. Our objective is to grow across all of our lending areas, with perhaps
an increased emphasis on building our residential mortgage and equipment financing
portfolios. We will also continue to develop our deposit gathering capabilities with
a focus on diversification and increasing our base of lower cost retail deposits.
All of our subsidiaries have very strong growth potential. We’re aiming to double our
net income in each of these businesses over the next five years, which I don’t think
is too much of a stretch. Canadian Western Trust showed great performance this
past year and is starting to gain some real momentum. Valiant Trust also shows
excellent potential despite a difficult year in 2009 due to challenging capital market
conditions. Both of our trust businesses now have offices in Toronto, and there
are lots of opportunities to increase our presence in that market. Canadian Direct
Insurance just came off a record year in 2009, and we expect ongoing development
in this business as well. We are exceptionally good at underwriting auto and home
insurance and will continue to concentrate on further enhancing our distribution
capabilities. We acquired Adroit Investment Management in the first quarter of fiscal
2009, and it’s a good complement to our existing businesses. We will look to increase
our presence in wealth management services moving forward.
As far as making new acquisitions, on December 9th, subsequent to year end, we were
very pleased to announce our intent to acquire National Leasing Group Inc. Based
out of Winnipeg, Manitoba, we believe this to be the premier small ticket leasing
company in Canada, and expect the acquisition will provide significant future growth
and diversification. We also remain well positioned to move on other opportunities
if they meet our criteria of being both strategic and accretive.
Q: What about further ahead – what might CWB Group look like five
years from now?
A: Simply put, we expect to become larger, better diversified and more profitable.
Our five-year strategic vision is to reach $20 billion in total assets and surpass
$200 million in net income. These targets are admittedly aggressive, and it will be
challenging to reach them within our stated timeframe, but we’ve done it before.
Some people have already questioned our capacity to achieve these objectives,
but like always, we thrive on proving the doubters wrong.
Fig. 1.4
5 FACTORS IN THE HISTORY
OF OUR SUCCESS
1. We’re conservative
2. We’re well capitalized
3. We have a team of great people
4. We’re not greedy
5. We communicate, listen and work hard
“We expect to become larger,
better diversified and more
profitable. Our five-year strategic
vision is to reach $20 billion
in total assets and surpass $200
million in net income.”
Days per week that customers can access bank, insurance and trust services online
p 7
A Message from Jack C. Donald,
Chairman of the Board
Success in a difficult year
I’m very proud to report that Canadian Western Bank Group had a remarkably successful
year, in the midst of very difficult conditions. Over the course of the past year, we saw
unprecedented volatility in commodity prices and real estate values, and witnessed a global
financial crisis that hampered virtually every sector of the economy. And through it all,
Canadian Western Bank Group continued to grow and succeed, a true testament to its
strength of culture and strategy.
Working with our customers
CWB Group works to support people in our own communities. And at the same time,
we protect the interests of our depositors and shareholders by maintaining common sense
business practices. We work and invest where we live, and this is a very important principle
for our success, both in the past and as we look to the future.
The right leadership
Much of our success is because of Canadian Western Bank Group’s management team.
They do a superb job managing the growth and development of CWB’s businesses, while
also ensuring they stay true to the fundamentals that have guided the Bank from the start.
Canadian Western Bank Group is very fortunate to have Larry Pollock, who has an
incredible ability to read people. The Bank has come a very long way, and much of that
growth and success is because of Larry and the great team of people he’s surrounded
himself with. Our entire executive team and all our staff have risen to the challenge
of growing a small financial institution into what CWB Group is today. CWB has made
history as the first truly successful bank from Western Canada.
Changes to the Board of Directors (Board)
Although most members of our Board have been with us for many years, there were some
important changes this year. We were very pleased to add Raymond Protti − who was
previously President and CEO of the Canadian Bankers Association − and welcome his
experience and guidance. At the same time, we bid farewell to a long time Board member,
Charles Allard, whose father was one of our founding members. Charles made the decision
to focus on other business interests and we wish him well, and thank him for his invaluable
contributions through more than 20 years of service with our Board.
Corporate Governance
As always, our Board remained committed to sound corporate governance and to provide
CWB Group’s management team with advice and insight. We’re fortunate to have a very
strong Board of Directors that has expertise in the fields in which we operate. I believe the
experience of our Board was particularly helpful in dealing with increased challenges over
the past year.
Fig. 1.5
Chairman of Canadian Western Bank,
Jack C. Donald
“As always, our Board remained
committed to sound corporate
governance and to provide CWB
Group’s management team with
advice and insight.”
8 f Number of CWB preferred shares (CWB.PR.A) outstanding, in millions
A Message from Jack C. Donald,
Chairman of the Board
We continually evaluate changing standards and best practices
of corporate governance, and we remain committed to making
the best business decisions for the Bank within this framework.
A primary goal of our Board of Directors, along with the Bank’s
senior management, is to implement strategies that are in the
collective best interests of all CWB stakeholders. In line with
our commitment to current practices, we will be transitioning
to independent voting for our Board beginning in 2010.
Looking ahead
With my own view towards retirement, this annual report represents
my twentieth and final year as Chairman of the Board for CWB.
When I look back on where we began, I am truly amazed at what
we’ve done. The growth we’ve achieved, the team we’ve built, the
support we’ve given to western Canadian businesses, the ability to
solicit deposits and make sensible loans, the jobs we’ve created and
the fact that we’ve kept our head office right here in Western Canada
are each tremendous accomplishments and represent great sources
of pride for me.
My deepest thanks to the Board, which is one of the finest I’ve
ever worked with in terms of knowledge, strength and teamwork.
Over the years, I’ve learned more than I’ve given and I’m a better
person for it. Thanks also to Larry Pollock and the entire CWB
Group team for their unwavering commitment and integrity.
Most importantly, I would like to thank our shareholders and
clients for their ongoing faith in us.
As I prepare to hand the reigns over to our incoming chairman,
Allan Jackson, I know Canadian Western Bank Group will
continue to grow and prosper. Western Canada is a great place to
do business and there are still an incredible amount of opportunities
for entrepreneurs who are willing to work hard. Canadian Western
Bank Group will be right there beside them to help them achieve
their goals.
Jack C. Donald
Chairman
T H A N K Y O U
In March 2010, at the Bank's 26th annual shareholders'
meeting, our Chairman, Jack Donald, will retire from the
Board of Directors after 26 years of strong stewardship
and unfailing commitment to CWB Group. Jack first
demonstrated his support as a founding shareholder and
director, several months before the Bank obtained its charter
on March 22, 1984. In 1990, he was appointed Chairman
when the Bank separated the roles of Chairman and Chief
Executive Officer for the first time.
Jack, please accept our highest praise for your many years
of dedication and service – your "Tone at the Top" exemplifies
everything an organization could hope for. Your guidance
will be missed, but your spirit is forever embedded in our
culture; for that, we are truly thankful.
Jack, together with his wife Joan, are very proud but
humble Albertans who have made the City of Red Deer
their home since the mid-sixties. In 2007, the Donald
School of Business was founded at Red Deer College.
In honour of Jack's services as a CWB director and our
Chairman, we recently established two scholarships
in his name to further the Donalds' legacy at the College
and in their community.
Number of languages in which CDI provides services to its customers
p 9
www.cwbank.com
Canadian Western Bank
Canadian Western Bank is the largest Canadian bank headquartered in Western Canada,
and the seventh largest Schedule I bank in Canada, measured by market capitalization.
With 37 client focused branches located across the four western provinces, business
and personal banking continue to comprise the bulk of CWB Group's operations.
In 2009, net interest income, or spread income, accounted for approximately 71 per cent
of consolidated total revenues.
Business banking is our focus
Business banking is at the core of what we do, and CWB is the only Canadian bank
that primarily focuses on the unique needs of small to medium-sized western Canadian
businesses. About 84 per cent of our loan portfolio is comprised of business loans, and
we specialize in commercial real estate and construction financing, energy lending,
and large-scale equipment financing and leasing. We work hard to understand the unique
opportunities and challenges our customers face and are able to make tailored lending
decisions quickly, efficiently and locally. We also offer a complete range of personal
banking services that meet the needs of business owners and their employees, as well
as individual savers/investors.
Fig. 1.6
Challenges and successes
Loan portfolio by lending sector
(as of Oct. 31, 2009)
COMMERCIAL MORTGAGES - 22%
GENERAL COMMERCIAL - 21%
REAL ESTATE PROJECT LOANS - 19%
PERSONAL LOANS & MORTGAGES - 16%
EqUIPMENT FINANCING - 13%
CORPORATE LOANS - 7%
OIL & GAS PRODUCTION - 2%
“We are a business bank and
proud of it. I believe it’s our
passion and expertise in this area
that really sets us apart from many
of our competitors.”
Randy Garvey
Executive Vice President
Canadian Western Bank
The challenges we faced this past year due to difficult operating conditions were not
unique, but our strategy for mitigating them was – in fact, we took a largely “business as
usual” approach. We focused on our commitment to superior customer service and our
sensible lending strategies. We mitigated elevated market and economic uncertainties
by strengthening our capital position and increasing our liquidity. We worked closely
with our customers to introduce interest floors on floating rate loans that helped offset
CWB’s compressed net interest margins created by quickly falling interest rates.
We protected the interests of our clients and shareholders by maintaining strong credit
discipline and increasing our resources dedicated to managing impaired loans. These
strategies also positioned us to take advantage of opportunities that arose, giving us
flexibility to grow our business, particularly as many other lenders exited our markets.
And through it all, we worked to increase communication with our employees to clarify
our approach, our optimism and our plans for the future.
What we didn’t do was equally important. We never got involved in any of the risky
products or ventures that contributed to market problems in the first place, because
we stick with what we know and what we’re good at. When the crisis hit, we didn’t panic.
We continued to make sensible loans to our customers and offer them competitive
deposit products. We continued to provide outstanding personal service and to focus
on the needs of western Canadians. And we never forgot that our success is built
on the efforts of our employees and the ongoing confidence and trust of our clients
and investors.
10 f CWB’s total revenue growth percentage in fiscal 2009
The results speak for themselves
Our strategy worked. CWB continued to develop and grow and posted record annual
earnings and revenues. It’s clear that what could have been a dismal year was anything
but. We finished the year with better results than most people expected, and emerged
ready to pursue new opportunities. This past year has proven that our focus on Western
Canada and our commitment to customer service is a winning strategy, even in the most
challenging of environments.
{ Provisions for Credit Loss (as a % of average loans) }
Canadian bank average (6 largest banks)
CWB
Fig. 1.7
CWB’s new branch in Saskatoon. This Saskatoon
branch is our second in that city and one of two
new branches opened this fiscal year.
2004
2005
2006
2007
2008
2009
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Fig. 1.8
Total Loans
by Location of Security
(as of Oct. 31, 2009)
“Western Canada is where we
live and where we do business.
We work hard to understand
the needs of our customers, and
we appreciate both the unique
opportunities and challenges
of doing business in the West.”
Chris Fowler
Executive Vice President
Canadian Western Bank
Number of independent directors on CWB’s Board of Directors
p 11
BC35%AB50%SK5%MB3%ON (and other)7% Canadian Direct Financial
Canadian Direct Financial (CDF), a division of CWB, is a relatively new addition to the CWB
Group. Launched in September 2008, CDF offers Internet-based accounts to customers
who do not have convenient access to an existing CWB branch, or those who choose to do
their banking online. CDF allows CWB to reach beyond its branch network, in an efficient,
cost-effective way, while giving all Canadians the opportunity to take advantage of our
high interest savings accounts, chequing accounts and competitive Guaranteed Investment
Certificates (GICs).
{ Client & Deposit Growth Trends }
Client Growth Trend
Deposit Growth Trend
www.canadiandirectfinancial.com
“CDF gives people more saving
and investment options, and makes
it easier for all Canadians to enjoy
a piece of what CWB has to offer.”
Peter Morrison
Vice President, Marketing
Canadian Western Bank
Sept.
08
Oct.
08
Nov.
08
Dec.
08
Jan.
09
Feb.
09
Mar.
09
April
09
May
09
June
09
July
09
Aug.
09
Sept.
09
Oct.
09
Meeting a need
On the surface, launching a new Internet-based banking division in the midst of an uncertain
environment may seem strange. But CWB doesn’t do anything without a plan or a purpose, and
CDF was very much a part of the Bank’s overall strategy to diversify and build deposits, while
providing customers with new service options. At a time when interest rates dropped to record
lows, CDF’s high interest savings account and competitively priced GICs offered customers
a way to earn more money on their deposits, while having the confidence and security that
comes from dealing with a federally regulated Canadian bank.
Looking ahead
In developing CDF, it was critical to ensure that customers would receive outstanding
service, online or on the phone. The solution was to create a scalable technology platform that
included an intuitive, easy-to-navigate website, and pair it with a dedicated customer
support team ready to personally assist clients when required. CDF is now working to expand
its online banking services to include Registered Retirement Savings Plans (RRSP) and
Tax-Free Savings Accounts (TFSA).
CDF offers Internet-based deposit accounts to
customers who don’t have access to a branch
Fig. 1.9
12 f Total assets, in $ billions, of CWB Group
Canadian Western Financial
Canadian Western Financial Ltd. (CWF) was established in 1999 to offer CWB customers
access to third-party mutual funds. Today, CWF offers customers a wide-range of mutual
fund investment choices through CWB branches across Western Canada.
Giving customers more options
CWF was created specifically to give existing CWB customers more investment options
with access to licensed mutual fund advisors through our branch network. CWB clients
often require investment choices beyond the Bank’s typical GIC and deposit products,
and CWF advisors are able to help them find the right mix of mutual funds for their needs.
Challenges and successes
CWF showed positive growth in 2009 and continued to demonstrate its value as part of the
Bank’s retail investment services. In general, investment returns were very volatile over the
past year and CWF’s success during this period was largely due to relatively conservative
investment strategies. We strive to recommend investments that will meet our clients’
long-term goals with the least amount of risk possible. While most investments lost value
when the stock markets dropped, we didn’t lose clients because we hadn’t advised them
to take unnecessary chances. As the markets begin to recover, we’re poised to acquire new
clients who are looking for the levels of service, products and advice that CWF can deliver.
{ Growth Since Inception}
www.canadianwesternfinancial.com
“CWF advisors don’t work
on commission, so we are entirely
focused on helping our clients
make the right investment choices
to meet their own specific needs
and objectives.”
Erwin Granson
Director, Operations
Canadian Western Financial
The percentage of the total loan portfolio comprised of Equipment Financing loans
p 13
$20$40$60$80$1002000200120022003200420052006200720082009$95 million($ millions)Book Value of Client Mutual Funds Since Inception www.cwt.ca
Canadian Western Trust
Canadian Western Trust Company (CWT) first became part of CWB Group in 1996
and has been in business for more than 20 years. Today, CWT offers retirement,
trustee and custodial solutions to financial advisors, corporations and individuals.
CWT operates two distinct business units – Individual Retirement and Investment
Services (IRIS) and Corporate and Group Services (CGS).
IRIS provides independent financial advisors, mortgage brokers, individuals, and investment
counsel and portfolio managers with a full range of trustee, custody and record keeping
services. IRIS has 42,900 accounts and nearly $3.0 billion in assets under administration.
CGS provides those same services to pension plans, custody operations, and group
RRSPs, along with high-end tax deferred products for small business owners or senior
executives of larger corporations. CGS has 1,250 direct clients representing over 130,000
employees/individuals and more than $2.4 billion in assets under administration.
{ CWT Total Revenues, Including Optimum Mortgage }
Providing highly personalized service is one of
our points of differentiation.
Fig. 2.0
“Our size and the backing of
CWB Group is a competitive
advantage. It allows us to be
flexible, innovative and responsive
to our niche market of small to
medium-sized clients that are
underserved by today’s large
custodial providers.”
Scott Scobie
General Manager
Canadian Western Trust
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
0
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
Challenges and successes
Traditionally, trust companies have grown their business by enticing potential clients to
move their business from their existing trustee. But often clients hesitate to make changes,
particularly in an uncertain economic environment. In order to grow, CWT must
consistently demonstrate its ability to deliver superior quality service to our niche market
of small and medium-sized plans, and businesses or individuals that have trust and custody
needs. We differentiate ourselves by providing highly personalized service and innovative
products that are developed to meet the needs of our customers.
We had numerous successes in 2009 despite increased economic challenges. We opened
our first trust office in Toronto, Ontario and were very pleased to report that a major
Canadian investment dealer moved its trustee services to CWT in August 2009, our
largest single win to-date. We realized our third consecutive year of income growth
in excess of 30 per cent, and will be partnering with CWF to develop a group RRSP
service that will help facilitate additional business from CWB’s commercial clients.
14 f Number of years CWT has been part of CWB Group
Optimum Mortgage
Optimum Mortgage, a division of CWT, was established in 2004 to provide mortgage
brokers with an alternative mortgage product for their clients. Today, Optimum Mortgage
originates and funds residential mortgages through a network of mortgage brokers located
throughout Western Canada and within targeted regions of southern Ontario. We operate
without a storefront, working directly with our mortgage broker clients to help them find
the best mortgage products for their customers. In just five years, the Optimum Mortgage
team has expanded to include more than 30 people who manage over 2,200 client mortgages
with a collective book value in excess of $560 million.
Beyond “traditional” mortgages
Alternative mortgages, or Alt-A mortgages, are mortgages offered to certain types
of borrowers (for example, entrepreneurs or small business owners) who may find
it difficult to conform to the specific – and often rigid – requirements established by many
large financial institutions that prefer to standardize their mortgage products for
increased efficiencies. Canadian Western Bank was built on meeting the needs of small
to medium-sized businesses, and this expertise helped us recognize the tremendous
opportunity to offer mortgage products to this segment of the market. The solution
is “Sensible Lending®,” where each customer and credit application is considered on its
own specific merit and circumstances.
Sensible Lending®
We developed our Sensible Lending® philosophy on the concept that we’re willing
to look at more than just credit ratings or debt ratios. We consider the value of the property,
the borrower’s job or vocation and evaluate every application by looking at the complete
picture. We make sensible decisions based on our extensive experience. When brokers
submit an application to Optimum Mortgage, they receive a response within 24 hours.
This level of efficiency and absolute commitment to customer service has combined
to help Optimum Mortgage build an exceptionally strong network of broker clients.
Challenges and successes
Real estate values were hit particularly hard during fiscal 2009, significantly reducing the
demand for residential mortgage products. While some mortgage lenders experienced
considerable difficulties, Optimum Mortgage continued to perform well primarily due
to CWB Group’s strong financial position, an exceptional commitment to customer
service, and our Sensible Lending® strategy. In fact, Optimum Mortgage expanded our
service offerings this year to include an insured high-ratio mortgage product that will help
us further build our competitive position.
Q:
A:
What are mortgage brokers?
The prime function of mortgage brokers is to bring together
borrowers and lenders. Mortgage brokers deal directly with lenders
to secure mortgage financing on behalf of their clients.
www.optimummortgage.ca
“We’ve succeeded because we use
a common sense approach to doing
business. We provide sensible and
timely solutions for our network
of mortgage broker clients.”
Les Shore
Senior Assistant Vice President
Optimum Mortgage
($ millions)
600
500
400
300
200
100
0
Fig. 2.1
$
5
6
1
m
i
l
l
i
o
n
2006
2007
2008
2009
Total Optimum Mortgage loans ($ millions)
CWB’s 2009 provision for credit losses measured as a percentage of average loans
p 15
www.valianttrust.com
Valiant Trust
Valiant Trust Company (Valiant) provides stock transfer, registrar and corporate
trust services to public and private companies. When CWB acquired Valiant Trust
in 2004, it was a private company located in Calgary with just 12 employees and 50 clients.
Today, Valiant is a federally registered trust services company that has grown to serve
more than 260 clients through four separate locations, including offices in Vancouver,
Edmonton, Calgary and, most recently, Toronto. Valiant’s knowledgeable professionals
are committed to providing outstanding levels of personal service. Valiant has earned
“A reputation for getting things done.®”
“Being a part of CWB
Group opens doors with prospective
clients across Canada – competitors
can’t offer what we do: we’re owned
by a bank that’s extremely well
regarded and consistently profitable.
That creates real confidence.”
Matt Colpitts
General Manager
Valiant Trust
s
t
n
e
i
l
C
f
o
r
e
b
m
u
N
300
250
200
150
{ Five Year Client Summary }
2005
2006
2007
2008
2009
Fig. 2.2
The number of client appointments is a primary
source of revenues and confirms Valiant's
increased market presence.
Whatever clients need
As part of our services for corporate clients, we do everything from issuing and transferring
ownership of securities and assisting with annual shareholder meetings, to paying dividends
and distributions on behalf of our clients. We also provide corporate trustee services, act
as a depositary for mergers and acquisitions, and provide recordkeeping and administrative
services for employee share purchase, employee stock option, and other employee incentive
plans. Valiant was recently approved as a deposit–taking trust company and will provide
CWB Group with a new channel to raise additional retail deposits through either the Bank’s
branch network or other means.
Challenges and successes
Although reductions in capital market activity and poor economic conditions created
significant challenges, we realized several successes during the year. For our existing clients,
we found ways to offer additional value including the launch of web services that allow our
issuers to access common shareholder reports online, 24 hours a day, seven days a week.
Despite limited initial public offering (IPO) activity, we continued to grow our business
by transitioning existing companies from our competitors. During 2009, more than one
third of our new appointments came from existing public companies who were attracted by
our expertise and experience. We signed a number of significant new client accounts this
year – clients who chose Valiant because of our commitment to customer service and our
unique value proposition.
16 f Number of CWB branches in British Columbia (BC)
Year# of Client Appointments20053142006390200743320084402009468
Canadian Direct Insurance
Canadian Direct Insurance Inc. (CDI) provides auto and home insurance to customers
throughout Alberta and BC. Launched in 1996, CDI initially began by offering
British Columbians a price and customer service alternative to government auto
insurance. CDI was acquired by CWB Group in 2004, and today offers a full range
of home, auto and travel insurance products at competitive prices.
A winning customer strategy
CDI has earned a reputation for providing well-priced insurance products and excellent
customer service. Like all CWB Group businesses, our commitment to service means that
you can pick up a phone and talk to a customer service representative directly. And when you
talk to us, our trained insurance professionals know how to help you.
CDI serves customers by phone, Internet and through a select network of auto insurance
brokers in BC. We consistently receive very high customer satisfaction ratings; this
is reflected in our impressive claims satisfaction rate in 2009 of 98 per cent. Our customers
appreciate these efforts and our policy retention rates are among the top in our industry.
Challenges and successes
Although the insurance industry is somewhat recession proof, as people will always need
to purchase home and auto insurance, CDI has faced other challenges in recent years.
Increasing competition from government auto insurance has slowed market growth in BC,
while home and auto repair costs have risen significantly. Despite this, we’ve been very
successful at growing our business and properly selecting risk. In fact, we sold over 30,000
new policies, realized double-digit growth in written premiums and exceeded $116 million
in gross written premiums in 2009.
Looking ahead
We are confident that our combination of competitive rates and excellent customer
service will continue to drive our future growth in Western Canada. Many customers have
been surprised to find how easy it is to buy and renew their auto insurance policies on-line.
We aim to use technology to get closer to our customers and we’ll continue to develop
our e-business platform with this goal in mind. Many of our new sales are generated
by “word of mouth” referrals.
{ CDI Highlights }
www.canadiandirect.com
Fig. 2.3
2009 Gross Written Premium
by Product Line
ALBERTA AUTO - 38%
BRITISH COLUMBIA AUTO - 35%
PERSONAL PROPERTY (BC + AB) - 27%
“I tell prospective customers that
you’ll like us when you hear our
rates but you’ll love us if you have
a claim. We are here for you when
you need us.”
Brian Young
President and CEO
Canadian Direct Insurance
CWB's loan growth percentage in fiscal 2005
p 17
20052006200720082009Policies Outstanding149,947159,965164,263168,071175,662 Gross Written Premiums (000’s)$93,101$100,227$104,829$107,054$116,828Net Income (000’s)$5,122$6,940$7,773$8,372$9,111Personal Property - 28%BC Auto - 36%Alberta Auto - 36% www.adroitinvestments.ca
“Our returns have historically
been much better than our
benchmarks. We have consistently
demonstrated the value of our
proven strategies and strong
investment discipline, in even the
most difficult financial markets.”
Maria Holowinsky
Vice President
Adroit Investment Management
Adroit Investment Management
Adroit Investment Management Ltd. (Adroit) is the newest member of the CWB Group
and was acquired in December 2008. Established in 1993, Adroit is a successful Edmonton-
based investment counselling firm that specializes in wealth and portfolio management
for high net worth individuals, corporations, non-profit associations, colleges, foundations
and endowment funds. Our team of investment professionals works closely with clients
across Western Canada to structure portfolios that best meet their specific needs and
risk tolerances. Our clients are free to do what they wish without worrying about their
investments, but we stay very close with regular meetings, phone calls and updates.
Today, we have almost $1 billion in assets under management.
Integrity and trust
Adroit’s clients find us through referrals from existing clients, accountants, lawyers and other
professionals who know they can count on us to maintain the highest ethical standards,
conservative growth strategies and strong investment performance. Like all CWB Group
businesses, we are responsive, conservative in our approach and pride ourselves on having
investment professionals who can address each client’s questions and needs.
Challenges and successes
Although Adroit was not immune to adverse market conditions, our conservative
investment strategies cushioned clients from more severe losses. Even at the height of the
global financial crisis, we received few, if any, panicked calls from clients. They knew they
could trust us to make the right decisions for their investment portfolios. By far our biggest
success over the past year was our ability to retain clients and help them understand the
impact of market events on their investments.
While we can’t tell our clients exactly what return they will get from their investments,
we can promise them that we will always be responsible in managing their money. As we
look ahead, many investors who are unhappy with their current investment managers may
be looking for a fresh, proven alternative; we look forward to welcoming them.
{ Cumulative Value of $100 Invested on Sept. 30, 1999 }
Adroit Canadian Equity Portfolio
TSX Total Return Index
$300
$250
$200
$150
$100
$50
18 f
CWB’s percentage of average assets held in cash and securities in 2009
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Even our day-to-day operations impact the economy. Over the past
five years CWB Group has paid more than $185 million in municipal,
provincial and federal taxes, money that helps support infrastructure
and programs within our communities. Annually, we spend more
than $1.3 million on office supplies, more than $14 million on office
leasing and maintenance, and more than $1.3 million on travel.
These purchases help keep our suppliers in business while driving
local, provincial and national economic activity.
Marketplace
CWB Group has always sought to create responsible products and
services that not only meet our customers’ needs, but also strengthen
and enhance our communities. Although a large part of our focus
is on helping business, we also offer a comprehensive range
of products and services for individuals.
We recognize the importance of helping low income families
manage their finances by offering affordable bank accounts, and
home and auto insurance policies. We also know that our customers
span all ages, and have created specialized products and services
for seniors such as sit down banking counters, no fee bank accounts,
automatic GIC renewals, and comprehensive retirement planning
investment options. We offer youth accounts to help kids manage
their money and student accounts to meet the specific needs of
those pursuing post-secondary study.
To ensure accessibility, all CWB branches and corporate offices are
wheelchair accessible. CDI offers services to its insurance clients
in nine different languages.
Corporate Social Responsibility
Giving back to the communities where we live and work has always
been a guiding principle for CWB Group. We focus our efforts and
resources to help enrich our communities today, while building
stronger tomorrows. We’re equally committed to supporting our
employees, and to being environmentally responsible in both our
processes and our practices. This Corporate Social Responsibility
(CSR) report spans all our operations, and is a fundamental part
of who we are, much like our common sense approach to business
and our commitment to deliver superior customer experiences.
Economic Impact
CWB Group impacts our local economies in numerous ways.
Our investment in Western Canada drives economic development,
helping small and medium-sized businesses secure funding to
purchase equipment, hire employees and keep our economy moving.
Right now, CWB Group has many thousands of business clients
who view us as partners in supporting their future growth. At the
same time, CWB Group helps individuals buy and insure the homes
they need to raise their families, and offers investment products and
services to assist with their financial and retirement goals.
CWB Group’s role as an employer also impacts the communities
where we live and work. CWB Group employs over 1,400 employees
in nearly 50 communities throughout Western Canada. We also
currently have 7 employees who are based out of Ontario. In 2009
alone, we paid a combined total of more than $104 million in salaries
and benefits to our employees, money that they in turn reinvest
in their communities.
CWB also looks for creative ways to invest in our
communities that go beyond traditional sponsorships
and donations. Our Western Spirit employee volunteer
grant program allows employees to support programs
that are close to their hearts by applying for a $250 grant
to be made to a charity of their choice.
Fig. 2.4
Canadian Western Bank has been a proud
supporter of the Easter Seals Regatta
in Vancouver, BC since 1996.
Number of chapters of Big Brothers Big Sisters that benefited from CWB’s The Greater Interest GIC® campaign in 2009
p 19
9
Fig. 2.5
Since 2007, CWB has been selected 4 times
for the list of 50 Best Employers in Canada
Employees helped CWB raise
more than $216,000 for the
United Way, of which more than
65 per cent was from employee
donations and fundraisers. These
same employees also dedicated
more than 3,000 hours to
volunteering with charities and
organizations in need.
Community
CWB has always looked for ways to strengthen and support our communities. We have
identified three target areas on which to concentrate our efforts:
Education
Community and Civic Service
Health, Wellness and Care-giving
In 2009 alone, CWB directed more than $1 million in cash and in-kind donations
and sponsorship to our priority areas, supporting everything from post-secondary
scholarships and awards, and homelessness awareness, to at-risk youth and children with
special medical needs.
CWB also looks for creative ways to invest in our communities that go beyond traditional
sponsorships and donations. Our Western Spirit employee volunteer grant program allows
employees to support programs that are close to their hearts by applying for a $250 grant
to be made to a charity of their choice. As part of this, CWB invested $14,750 in the charities
our employees support. These same employees also dedicated more than 3,000 hours
to volunteering with charities and organizations in need. Additionally, employees helped
CWB raise more than $216,000 for the United Way last year, of which, more than 65 per cent
was from employee donations and fundraisers.
Our commitment to strengthening communities led us to develop The Greater Interest GIC®.
For every dollar CWB clients invested in The Greater Interest GIC®, CWB made a donation
of 1/8% back to the community in which the deposits were raised. In Edmonton, St. Albert
and Leduc, those dollars were directed to the Youth Emergency Shelter Society, while
in other communities the funds went to support local chapters of Big Brothers Big Sisters.
In 2009 alone, The Greater Interest GIC® invested over $300,000 to help youth in our
communities.
Environment
CWB Group is sensitive to climate change issues and takes its responsibility to the
environment – including our lending practices – very seriously.
CWB’s lending includes a due diligence process that assesses the potential environmental
impact of a business, its operations, products or services. We strive to make sure our clients
are managing their environmental commitments and responsibilities before we lend to
them. Many of our business lines offer customers the choice of paperless statements, online
services and paperless record keeping. We also make a concerted effort to minimize our
carbon footprint by utilizing tele-conferencing and web-conferencing wherever possible
to reduce the need for air travel.
Reducing our carbon footprint is also the goal behind the way we manage our branches
and offices. We program heating and air-conditioning to turn off when buildings are
unoccupied and encourage staff to use window blinds to minimize heat gain during
the day. We have also begun replacing our exterior fluorescent signage with LEDs and are
considering green products and practices whenever feasible during new construction.
20 f Number of years Larry Pollock has been President & CEO
Our environmental commitment is also evident in many of our products, services and
the customers we work with. CDI was the first insurance company to offer a discount
for hybrid cars, Smart cars and flex-fuel vehicles. At CDI’s head office in BC, all claims
are administered using imaging technology creating a “paperless” office environment.
We also provide financial services to a number of companies that are involved in such
businesses as alternative energy generation, energy management, and the development
and production of more environmentally friendly products for the oil and gas industry.
Whenever possible, CWB Group looks to make environmentally smart purchases,
including FSC certified paper, green-friendly cleaning products and the installation
of recyclable carpet for our branches. We recycle fax, copier and printer toner cartridges and
donate them to local food banks for their ThINK Food program. Cans and bottles are also
recycled with the proceeds donated to worthwhile causes, such as Child Find Alberta.
People
CWB Group recognized from the very start that our people are our greatest asset.
We set out to build a bank that would not only serve the needs of our customers, but also
give our employees opportunities to grow and flourish, and create the kind of loyalty
that would inspire them to spend their careers with us. Today, we have more than 1,400
employees and what we believe to be one of the lowest employee turnover rates in the
banking industry.
Our compensation, benefits and professional development opportunities are among the
best in Canada, and led to our employee program being named one of Benefit Canada
magazine’s 30 Best Employee Pension and Benefit Plans. We have also been recognized for
four years in a row as one of Canada’s 50 Best Employers by the Globe and Mail’s Report
on Business Magazine.
In 2007 we introduced our CWBalance® program, which encourages a strong work/life
balance while cultivating a healthy workplace and nurturing positive morale. The program,
which includes such things as an extra paid day off for each employee every year, is one
of the many things that makes CWB Group a great place to work. In fact, CWB Group
is such a great place to work that we use our employees to identify and recruit new hires
through our Referral Incentive Program. To date, we’ve received almost 1,200 referrals and
made 525 hires from those referrals.
In addition to our high employee retention rate, participation in our employee share purchase
plan is another important indicator of the loyalty our employees have to CWB Group.
Over 90 per cent of our employees participate in the plan, which features a 50 per cent
matching CWB contribution. They invest in us, we invest in them, and together we’re
investing in Western Canada.
Fig. 2.6
Edmonton CWB Group employees
annually participate in building homes with
Habitat for Humanity.
We set out to build a bank that
would not only serve the needs
of our customers, but also give our
employees opportunities to grow
and flourish, and create the kind
of loyalty that would inspire them
to spend their careers with us.
Today, we have more than 1,400
employees and what we believe
to be one of the lowest turnover
rates in the banking industry.
Years of consecutive profitable quarters for CWB (1988-2009)
p 21
Corporate Governance Highlights
1.
2.
3.
4.
5.
6.
7.
8.
The Board is led by a non-executive
chairman.
11 out of the 12 current directors
are independent.
The independent directors set
aside time for discussion with no
management present at each Board
meeting and at each meeting of
the Audit Committee, Corporate
Governance & Human Resources
Committee and Conduct Review
Committee.
Shareholders vote for individual
directors.
The Bank has adopted a
minimum share ownership
requirement for directors and
executive management, to align
their interests with those of the
shareholders.
The Board evaluates, in alternating
years, the effectiveness of each
director and the Board as a whole
through a written assessment and
feedback process.
There are written mandates for the
Board and each Board Committee,
together with mandates for the
Chairman of the Board and the
Chairs of the Board Committees,
each of which is reviewed annually.
The Bank maintains a
whistleblower procedure through
which complaints or concerns
regarding questionable audit or
accounting matters may be made.
Corporate Governance
Sound and effective corporate governance has always been a priority for CWB Group.
The Board and management are committed to govern and maintain CWB Group'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 monitors corporate governance best practices which are continuously evolving.
During fiscal 2009, the Board adopted a director election policy in which shareholders will
vote for individual directors commencing at the shareholders meeting on March 4, 2010.
A director who receives more votes “withheld” than “for” in an uncontested election, will
be required to tender his/her resignation for consideration by the Board.
The role of the Board is essentially to supervise the management of the business.
The Board has responsibility for stewardship of CWB Group, which includes satisfying
itself that the officers create a culture of integrity throughout the organization.
The CWB Group has written codes of conduct for its directors, officers and employees.
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.
The Board is responsible for 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 Board is also responsible for
the identification of the principal risks of CWB Group’s business, and ensuring the
implementation of appropriate systems to manage these risks.
{ Overview of Corporate Governance Structure }
Shareholders
Shareholders’ Auditor
ELECT
Corporate Governance & Human
Resources Committee
Conduct Review Committee
A
P
P
O
N
T
I
Board of Directors
A
P
P
O
N
T
I
A
P
P
O
N
T
I
REPORT
Audit Committee
Loans Committee
APPOINT
Management
22 f Date in March 1984 that CWB, then the Bank of Alberta, became a Schedule I bank
For More Information
Additional information about CWB’s corporate governance may be obtained through:
Proxy Circular
The annual proxy circular contains information on each director and a detailed discussion of the responsibilities of the
Board and each Board Committee as well as a description of CWB’s corporate governance practices.
CWB Group Website (www.cwbankgroup.com)
The Corporate Governance section of the CWB Group website contains information on its corporate governance practices,
including the mandate of the Board, the mandates of each of the Board Committees, the Personal and Business Conduct
Policy for the officers and employees and the Personal and Business Conduct Policy for directors.
Annual Meeting
Shareholders are invited to attend the annual meeting of shareholders on March 4, 2010 in Edmonton, Alberta.
{ Board Committees }
COMMITTEE
MEMBERS
RESPONSIBILITIES
Audit Committee
Corporate
Governance &
Human Resources
Committee
Loans Committee
Robert A. Manning (Chair)
Wendy A. Leaney
Gerald A.B. McGavin
Robert L. Phillips
Alan M. Rowe
Jack C. Donald (Chair)
Albrecht W.A. Bellstedt
Allan W. Jackson
Robert A. Manning
Howard E. Pechet
Robert L. Phillips
Raymond J. Protti
Arnold J. Shell
Allan W. Jackson (Chair)
Albrecht W.A. Bellstedt
Jack C. Donald
Wendy A. Leaney
Gerald A.B. McGavin
Howard E. Pechet
Robert L. Phillips
Larry M. Pollock
Raymond J. Protti
Alan M. Rowe
•
•
•
•
•
•
•
Oversees the integrity of the CWB Group's financial
reporting, internal controls, disclosure controls and
internal audit function.
Recommends the appointment of the external auditors,
reviews the code of conduct for senior financial officers
and oversees the whistleblower procedures.
Reviews and monitors corporate governance trends
and best practices on an ongoing basis.
Recommends director compensation and director
succession.
Oversees executive compensation and incentive
compensation plans, CEO performance assessment
and senior management succession.
Oversees the documentation, measurement and
management of credit risk.
Approves, declines or recommends approval to the
Board of all credit applications in excess of the CEO’s
lending limit.
Conduct Review
Committee
Albrecht W.A. Bellstedt (Chair)
Allan W. Jackson
Arnold J. Shell
•
Monitors procedures regarding related party
transactions, conflicts of interest, standards of business
conduct and the handling of customer complaints.
The percentage of asset growth we experienced in 1989
p 23
Management’s Discussion and Analysis
table of contents
24 Business Profile And strAtegy
27 grouP finAnciAl PerformAnce
27 Overview
30 Net Interest Income
31 Other Income
33 Non-Interest Expenses and Efficiency
34 Income and Capital Taxes
35 Comprehensive Income
35 Cash and Securities
36 Loans
37 Credit Quality
41 Deposits
42 Other Assets and Other Liabilities
43 Liquidity Management
45 Contractual Obligations
46 Capital Management
49 Financial Instruments
and Other Instruments
50 Acquisitions
50 Off-Balance Sheet Arrangements
50 oPerAting segment review
50 Banking and Trust
52 Insurance
54 summAry of QuArterly results
55 Accounting Policies And estimAtes
55 Critical Accounting Estimates
56 Changes in Accounting Policies,
Including Initial Adoption
56 Future Changes in Accounting Policies
59 risk mAnAgement
59 Overview
60 Credit Risk
61 Liquidity Risk
61 Market Risk
63 Insurance Risk
63 Operational Risk
64 General Business
and Economic Conditions
64 Level of Competition
64 Regulatory and Legal Risk
64 Accuracy and Completeness
of Information on Customers
and Counterparties
65 Ability to Attract
and Retain Key Personnel
65 Ability to Execute Growth Initiatives
65 Information Systems and Technology
65 Reputation Risk
65 Other Factors
65 uPdAted shAre informAtion
65 controls And Procedures
BUSINESS PROFILE AND STRATEGY
Canadian Western Bank (CWB or the Bank) offers a diversified range of financial services and is the largest publicly traded Canadian bank
headquartered in Western Canada. The Bank, along with its subsidiaries, Canadian Western Financial Ltd. (CWF), Adroit Investment
Management Ltd. (Adroit), Canadian Western Trust Company (CWT), Valiant Trust Company (Valiant) and Canadian Direct Insurance
Incorporated (Canadian Direct or CDI), currently operate in all four pillars of the financial services industry. The Bank remains primarily
focused on its core business lending and retail banking services in Western Canada. Third party mutual funds are offered 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.
CWB’s mission is to be known and respected as Canada’s business bank, providing western Canadians and other select markets with a preferred
source of both 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, Valiant and over the Internet;
improve CWB’s revenue diversification by further developing non-interest revenue sources in banking, trust, wealth management
and insurance operations through internal growth as well as strategic acquisitions;
increase the return on common shareholders’ equity 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 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
·
further build 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.
24 f CWB 2009 Annual Report - Fundamentals
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 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 2010 and how it will affect CWB’s businesses are material factors the Bank
considers when setting its objectives. In setting minimum performance targets for fiscal 2010, management’s expectations assume the following:
·
moderate economic growth in Canada aided by positive relative performance in the four western provinces;
·
stable or slightly higher energy and commodity prices;
·
sound credit quality with actual losses remaining within the Bank’s range of acceptable levels;
·
modest inflationary pressures; and,
·
an improved net interest margin resulting from lower deposit costs, a stable prime lending interest rate, favourable yields on both new lending
facilities and renewal accounts and relatively stable investment returns reflecting high quality assets held in the securities portfolio, partially
offset by a reduction in the level of gains on sale of securities compared to fiscal 2009.
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 of $7.8 million (2008 – $5.7 million) increases interest income and the provision for
income taxes to what they would have been had the tax-exempt securities been taxed at the statutory rate. The taxable equivalent basis does
not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other banks.
Total revenues, net interest income and income taxes are discussed on a taxable equivalent basis throughout this Management’s Discussion
and Analysis (MD&A).
CWB 2009 Annual Report - Fundamentals
p 25
Non-GAAP Measures
Taxable equivalent basis, return on common 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 common shareholders’ equity – net income after preferred share dividends divided by average common shareholders’ equity;
·
return on assets – net income after preferred share dividends 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);
·
Tier 1 and total capital adequacy ratios – in accordance with guidelines issued by OSFI;
·
average balances – average daily balances;
·
claims loss ratio – net insurance claims and adjustment expenses as a percentage of net earned premiums;
·
expense ratio – policy acquisition costs and non-interest expenses net of commissions and processing fees as a percentage of net earned
premiums; and
·
combined ratio – sum of the claims loss and expense ratios.
26 f CWB 2009 Annual Report - Fundamentals
GROUP FINANCIAL PERFORMANCE
Overview
Highlights of 2009
·
Record net income of $106.3 million, an increase of 4%. Diluted earnings per share of $1.47, down 7% reflecting the net impact from
the preferred units issued in March 2009.
·
Record total revenues (teb) of $328.0 million, up 10%.
·
Net interest margin (teb) of 2.10%, down 20 basis points resulting in constrained growth in total revenues and lower overall
profitability.
·
Marked 86 consecutive quarters of profitability.
·
Completed offerings of preferred share units for gross proceeds of $209.8 million. Tier 1 capital ratio of 11.3% and total capital ratio
of 15.4%; up from 8.9% and 13.5%, respectively, a year earlier.
·
Loan growth of 7%, reflecting reduced demand in a recessionary environment.
·
Sound credit quality with the provision for credit losses as a percentage of average loans of 15 basis points, an industry best among
Canadian banks.
·
Achieved record net income in the insurance segment.
·
Opened new full-service commercial and retail banking centres in Saskatoon, Saskatchewan and Kamloops, BC.
·
Celebrated the Bank’s 25th anniversary.
·
Opened a CWT office in Toronto.
·
Received federal approval for Valiant to become a deposit-taking institution.
·
Acquired 72.5% ownership position in Adroit.
·
Cash dividends paid to common shareholders of $0.44 increased 5%.
Impact of the Global Financial Crisis
Fiscal 2009 was marked by unprecedented turmoil in global financial and credit markets that impacted economies across the world.
Management’s expectations at the outset of fiscal 2009 were that market and economic uncertainty would adversely affect the Bank’s
performance with moderated economic activity in Western Canada, declining interest rates, lower commodity prices and a compressed
net interest margin. While each of these factors affected performance, the spin-off effects from the global market turmoil had a more
far-reaching impact on CWB’s operations than management initially expected. Rapidly falling interest rates reached all-time lows reflecting
the exceptional actions taken by governments and central bankers worldwide to help alleviate the credit crisis and economic stress.
The combination of elevated deposit costs early in fiscal 2009 due to global credit fears, which included the repatriation of off-balance sheet
funding structures, and historic low prime lending rates had a significant negative impact on the net interest margin and led to constrained
growth in total revenues and profitability. While these adverse market conditions negatively impacted the net interest margin, wider credit
spreads and a steeper yield curve provided the Bank with opportunities to realize unusually high levels of gains on the sale of securities
without significantly altering the yields or the conservative risk profile of the Bank’s investment portfolio. Implementing key investment
strategies helped offset the performance impact from compressed margins, particularly in the first six months of the fiscal year. Other
proactive measures taken by the Bank to help offset margin pressures included the repricing of new and renewal loan accounts to reflect
current market conditions and the introduction of interest rate floors on many floating rate loans. Global market turmoil led to a confirmed
recessionary environment within CWB’s markets that had a material impact both on the level of lending activity and the performance
of the existing loan portfolio. During the second quarter, near the height of market uncertainty, the Bank also completed preferred unit
offerings to further increase its capital in line with the rest of the Canadian banking industry. While the warrants issued with preferred units
will be materially dilutive to existing shareholders, the increased capital significantly augmented CWB’s flexibility to capitalize on strategic
opportunities and management continues to actively evaluate alternatives in this regard.
CWB 2009 Annual Report - Fundamentals
p 27
TABLE 1 – SELECT ANNUAL FINANCIAL INFORMATION(1)
($ thousands, except per share amounts)
Key Performance Indicators
Net income
Earnings per share
Basic
Diluted
Provision for credit losses as a percentage of average loans
Net interest margin (teb)(1)
Net interest margin
Efficiency ratio(3) (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
Change from 2008
2009
2008
2007
$
$
106,285 $ 102,019 $
96,282 $
4,266
1.51
1.47
0.15%
2.10
2.03
48.2
49.4
13.2
0.86
1.61
1.58
0.15%
2.30
2.25
45.2
46.1
15.9
1.03
1.54
1.50
0.16%
2.58
2.51
44.6
45.5
17.4
1.18
$
327,966 $ 298,857 $ 273,480 $
320,119
293,186
268,070
(0.10)
(0.11)
29,109
26,933
11,635,872
10,600,732
9,525,040
1,035,140
375,000
0.44
375,000
390,000
0.42
0.34
–
0.02
%
4%
(6)
(7)
–bp(2)
(20)
(22)
300
330
(270)
(17)
10%
9
10
–
5
(1)
(2)
(3)
See page 25 and page 26 for a discussion of teb and non-GAAP measures.
bp – basis points.
A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
Net income surpassed the $100 million milestone for the second consecutive year to reach a record $106.3 million, a 4% ($4.3 million) increase
over 2008 despite the impacts of a recessionary economic environment and very difficult market conditions in Canada and globally. Reflecting
the net impact from the preferred units issued in March 2009, diluted earnings per common share for the year were $1.47 ($1.51 basic), down
7% from $1.58 ($1.61 basic) in the prior year. Record total revenues (teb) grew 10% to reach $328.0 million driven by 7% ($612 million)
growth in total loans and a 30% ($21.4 million) increase in other income, including $20.5 million higher gains on sale of securities, and offset
the significant impact of a 20 basis point decline in net interest margin (teb) to 2.10%. Higher realized gains on sale of securities primarily
resulted from transactions related to favourable pricing on certain investment grade, short-term debt investments. Margin compression for
the year was mainly due to consecutive reductions in the prime lending interest rate to a historic low of 2.25% reached in April 2009, coupled
with the significant cost of deposits, relative to benchmark bond rates, associated with the global demand for increased liquidity that reached
unprecedented levels in the Fall of 2008. In the last half of the year, margin compression was partially offset by lower deposit costs, more
favourable spreads on both new and renewal loans and an improved mix in the securities portfolio. The Bank’s success in negotiating interest
rate floors on floating rate loans further alleviated net interest margin pressures associated with the reduction in the prime lending interest
rate. Credit quality remained satisfactory and the provision for credit losses as a percentage of average loans was unchanged from 2008 at 15
basis points. The efficiency ratio (teb), which measures non-interest expense as a percentage of total revenues (teb), deteriorated 300 basis
points from last year to 48.2%. The deterioration in the efficiency ratio (teb) reflects constrained growth in net interest income due to margin
compression and a 17% ($23.0 million) increase in non-interest expenses mainly resulting from salary and benefit costs, including additional staff
complement, and investment in future development initiatives, partially offset by the positive earnings impact of loan growth and higher other
income. Return on common shareholders’ equity of 13.2% was down 270 basis points compared to 2008 while return on assets decreased 17
basis points to 0.86%. Margin compression coupled with dividends paid on preferred shares issued
in March 2009 contributed to the year-over-year reduction in key profitability ratios, although this was partially offset by strong growth
in other income. Total cash dividends paid to common shareholders of $0.44 per share were up 5% over the prior year.
Total assets increased 10% to reach $11,636 million. While all lending sectors recorded positive growth in the year, lending activity in general
was constrained by both a recessionary environment and expected repayments of existing accounts resulting in overall loan growth of 7%.
Loan growth was achieved across each of the Bank’s geographic regions. Activity in BC provided the strongest annual contributions in dollar
terms while Saskatchewan showed the best percentage growth for the year. Loans in the Bank’s residential mortgage business, Optimum
Mortgage, increased 20% and comprised approximately 6% of total loans at fiscal year end.
Total branch-generated deposits increased 5% compared to the previous year, while the demand and notice component within branch-raised
deposits was up 31%. The demand and notice component comprised 33% of total deposits at October 31, 2009, compared to 26% a year
earlier. The significant growth in demand and notice deposits reflects CWT’s appointment during the year as trustee for a major Canadian
28 f CWB 2009 Annual Report - Fundamentals
investment dealer and ongoing execution of strategies to further enhance and diversify the Bank’s core funding sources. Customer awareness
continued to build for the Internet-based division of the Bank named Canadian Direct Financial™ and management is optimistic about its
potential as a valued new funding source. Total branch deposits measured as a percentage of total deposits were 64% at October 31, 2009,
compared to 63% a year earlier with the increase reflecting the above-noted very strong growth in the demand and notice component that
more than offset increased fixed rate term deposits raised through the deposit broker network and a reduction in larger commercial and
wholesale term deposits raised through the branch network, due in large part to the impact of the financial crisis.
As noted above, CWB completed offerings in March 2009 for a total of 8,390,000 preferred share units for gross proceeds of $209.8 million.
The offerings, which included both a public and private placement, significantly augmented the Bank’s regulatory capital position. These offerings
were completed in very volatile financial markets, which was consistent with both the Bank’s objective to maintain a strong and efficient capital
base and with the industry’s response to the financial crisis. The Bank’s strong Tier 1 and total capital ratios at October 31, 2009 of 11.3% and
15.4%, respectively, remained well above regulatory minimums. This capital position provides flexibility to pursue strategic growth opportunities
and management continues to develop strategies to deploy capital for the long-term benefit of all CWB shareholders. On November 20, 2009,
subsequent to year end, the Bank redeemed $60.0 million of subordinated debentures.
TABLE 2 – PERFORMANCE TARGETS
The performance target ranges established for the 2009 fiscal year, together with actual performance, and new minimum target ranges for fiscal
2010 are presented below:
Net income growth(1)
Total revenue (teb) growth
Loan growth
Provision for credit losses as a percentage of average loans
Efficiency ratio (teb)
Return on common shareholders’ equity(2)
Return on assets(3)
2009
Target Ranges
2009
Performance
2010
Minimum Targets
2 – 5%
5 – 8%
10%
0.15 – 0.18%
46 – 49%
14 – 16%
0.90 – 1.05%
4%
10%
7%
0.15%
48.2%
13.2%
0.86%
12%
12%
10%
0.15 – 0.20%
48%
13%
0.90%
(1)
(2)
(3)
Net income, before preferred share dividends.
Return on common shareholders’ equity calculated as net income after preferred share dividends divided by average common shareholders’ equity.
Return on assets calculated as net income after preferred share dividends divided by average total assets.
Minimum Performance Targets and Outlook
CWB met or exceeded four out of seven of its fiscal 2009 performance target ranges, despite very challenging market conditions and
a recessionary environment that was much more pronounced than anticipated when the target ranges were established. Total revenue
(teb) growth exceeded expectations while net income growth, the efficiency ratio (teb) and provision for credit losses as a percentage
of average loans were all within the respective target ranges. Realized gains on the sale of securities during the year helped offset the
significant financial impact of a reduced net interest margin. Management expects that margin improvement in fiscal 2010 will offset
reduced securities gains going forward, as such gains are not expected to be sustainable at the levels achieved in 2009. While the return on
common shareholders’ equity and return on assets ratios were both below the respective targets, the net impact from the preferred unit
offerings completed in March 2009 was not considered when these ranges were established. Impacts from the recessionary environment,
repayments of existing loans, particularly in the interim construction and equipment financing portfolios, and uncertainty regarding both
the strength and timing of an economic recovery led to slower than anticipated loan growth for the year.
Expectations for 2010 include a return to double-digit loan growth, strong overall performance aided by improved market conditions,
and a more positive economic outlook compared to 2009. Economic fundamentals in Western Canada are expected to remain favourable
relative to the rest of Canada, notwithstanding continued challenges in certain areas, particularly those related to natural gas in Alberta.
The Bank will maintain its focus on high quality, secured loans that offer a fair and profitable return and management believes there will
be good lending opportunities that fit these parameters. Credit quality is within expectations in consideration of the current environment
and future loan losses are expected to remain within an acceptable range. Maintaining responsible cost control while also ensuring CWB
continues to build on its platform for sustained, high quality growth remains a priority. Strategies for the ongoing development of trust,
insurance, wealth management and other complementary businesses supports objectives to increase the proportion of non-interest income
to total revenues over time. Another key goal for 2010 is to leverage the Bank’s strong capital position and management continues
to evaluate potential strategic acquisitions of loan portfolios and/or other businesses that fit its growth and diversification objectives.
Overall, CWB is well positioned to capitalize on market opportunities and management will maintain its focus on creating value
and growth for shareholders over the long-term.
CWB 2009 Annual Report - Fundamentals
p 29
Net Interest Income
Highlights of 2009
·
Net interest income (teb) was a record $236.4 million, up 3%, reflecting 13% growth in average assets.
·
Net interest margin (teb) was 2.10%, down 20 basis points from 2.30% in 2008 and down 48 basis points from 2.58% in 2007.
Net interest income is the difference between interest and dividends earned on assets and interest expensed on deposits and other liabilities,
including debentures. Net interest margin is net interest income as a percentage of average total assets.
TABLE 3 – NET INTEREST INCOME (teb)(1)
($ thousands)
Assets
Cash, securities and deposits with
2009
2008
Average
Balance
Mix
Interest
Interest
Rate
Average
Balance
Mix
Interest
Interest
Rate
regulated financial institutions
$ 2,007,126
18% $
64,335
3.21% $ 1,684,982
17% $
70,485
4.18%
Securities purchased under
resale agreements
Loans
Residential mortgages
Other loans
Total interest bearing assets
Other assets
Total Assets
Liabilities
Deposits
Demand
Notice
Fixed term
Deposit from CWB Capital Trust
Other liabilities
Subordinated debentures
Shareholders' equity
47,315 –
524
1.11
172,347
2,211,716
6,794,806
9,006,522
11,060,963
191,783
20
60
80
98
2
$ 11,252,746
100% $
$
371,288
3% $
2,236,527
6,924,320
105,000
9,637,135
512,476
375,000
728,135
20
62
1
86
5
3
6
107,896
347,517
455,413
520,272
–
520,272
–
18,873
237,248
6,745
262,866
151
20,901
–
283,918
4.88
5.11
5.06
4.70
1,924,444
5,985,897
7,910,341
9,767,670
163,093
0.00
4.62% $ 9,930,763
0.00% $
0.84
3.43
6.42
2.73
0.03
5.57
369,276
2,033,863
6,090,668
105,000
8,598,807
291,533
396,953
643,470
0.00
2.52% $ 9,930,763
2.10% $ 9,930,763
2
20
60
80
99
1
5,961
3.46
115,168
376,824
491,992
568,438
–
5.98
6.30
6.22
5.82
0.00
100% $
568,438
5.72%
4% $
–
0.00%
20
61
1
86
3
4
7
53,593
257,210
6,751
317,554
–
22,267
–
100% $
339,821
$
228,617
2.64
4.22
6.43
3.69
0.00
5.61
0.00
3.42%
2.30%
Total Liabilities and Equity
$ 11,252,746
100% $
Total Assets/Net Interest Income
$ 11,252,746
$
236,354
(1)
See page 25 and page 26 for a discussion of teb and other non-GAAP measures.
Net interest income (teb) increased 3% ($7.7 million) in the year, driven by 13% growth in average interest bearing assets, largely offset
by the significant negative impact of a 20 basis point decline in net interest margin (teb) to 2.10%. The decrease in net interest margin mainly
resulted from consecutive reductions in the prime lending interest rate to a historic low, coupled with the significant cost of deposits, relative
to benchmark bond rates, associated with the global demand for increased liquidity. As the year progressed, margin compression was partially
offset by lower deposit costs, more favourable spreads on both new and renewal loans, an improved mix in the securities portfolio and the
positive impact from interest rate floors negotiated on many lending accounts. Generally, reductions in the prime interest rate negatively impact
net interest margin because deposits do not reprice as quickly as prime-based loans, which subsequently compresses the interest spread earned
on the Bank’s assets. Also, the marginal benefit attributed to the Bank’s lower cost demand and notice deposits is significantly reduced as
interest rates approach zero. Downward pressures on margin were most prevalent through the first half of the fiscal year; however, net interest
margin (teb) maintained a positive upward trend since March when it reached a monthly low of 1.88%. Illustrating the significant impact of
margin pressures on CWB’s overall financial performance, based on average total assets at year end, it is estimated that every one basis point
30 f CWB 2009 Annual Report - Fundamentals
improvement in net interest margin (teb) would increase annual net interest income (teb) by approximately $1.1 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 fiscal 2008 was 2.30% and was 2.58% in fiscal 2007. The Bank’s average net interest margin (teb) over the past ten years,
including fiscal 2009, was 2.54%.
The prime rate averaged 2.70%, compared to 5.21% last year. The prime rate as at October 31, 2009 was 2.25%, unchanged from its historic
low that was established in April 2009.
Outlook for Net Interest Income
Fiscal 2010 net interest income should increase with the targeted 10% loan growth and expectations for an improved net interest margin
that is consistent with lower deposit costs, a stable prime lending interest rate, improved loan spreads and relatively stable investment
returns. Reduced liquidity levels compared to 2009, net of securities purchased under reverse resale agreements, should have a further
positive impact on net interest margin in 2010. The foregoing factors support management’s current expectations that net interest margin
(teb) will move closer toward the Bank’s historic ten year average of 2.54% as the fiscal year progresses. Growth in net interest income
due to improved margins and asset growth should more than offset the impact on total revenues (teb) resulting from an expected decline
in the level of gains on sale of securities compared to 2009.
Other Income
Highlights of 2009
·
Other income increased 30% ($21.4 million), including a $20.5 million increase in gains on sale of securities.
·
Other income represented 28% of total revenues (teb), compared to 24% in 2008, reflecting an unusually high level of gains on sale
of securities and comparatively slower growth in net interest income resulting from a compressed net interest margin and moderated
loan growth.
TABLE 4 – OTHER INCOME
($ thousands)
Insurance
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
Net insurance revenues
Credit related
Trust and wealth management services
Retail services
Gains on sale of securities, net
Foreign exchange
Other(1)
Total Other Income
2009
2008
$
Change from 2008
$ 104,062 $
97,943 $
6,119
2,852
(68,996)
(20,802)
17,116
23,369
15,478
7,403
25,225
2,745
276
91,612 $
$
2,876
(64,380)
(20,573)
15,866
26,998
13,299
7,689
4,725
1,225
438
(24)
(4,616)
(229)
1,250
(3,629)
2,179
(286)
20,500
1,520
(162)
70,240 $
21,372
%
6%
(1)
7
1
8
(13)
16
(4)
434
124
(37)
30%
(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.
Other income of $91.6 million was up 30% ($21.4 million) over 2008 and included a $20.5 million increase in gains on sale of securities,
16% ($2.2 million) higher trust and wealth management fee income, an 8% ($1.3 million) increase in net insurance revenues and a combined
$1.1 million improvement in foreign exchange gains and other categories, offset by 13% ($3.6 million) lower credit related fee income. Gains
on sale of securities reflect abnormal market conditions and investment strategies that allowed the Bank to capitalize on opportunities to realize
gains while maintaining relatively comparable yields on reinvestment in other high quality investment grade securities. Strong growth in trust
and wealth management fee income reflects revenue contributions from Adroit, acquired in early fiscal 2009, and very strong performance from
CWT, partially offset by a decline in Valiant’s revenues reflecting the considerable slowdown in capital markets activity. Net insurance revenues
were a record $17.1 million, mainly driven by 6% growth in net earned premiums due to continued business growth. Foreign exchange gains
of $2.7 million represented a $1.5 million increase over the prior year reflecting higher transaction volume and improved spreads.
CWB 2009 Annual Report - Fundamentals
p 31
The year-over-year decline in credit related fee income was consistent with decreased loan volumes. A lower volume of commercial account
transaction fees compared to the prior year also contributed to a $0.3 million decline in retail service fees, partially offset by growth in mutual
fund fees and commissions.
Other income as a percentage of total revenues (net interest income and other income) increased to 28%, compared to 24% in the prior year.
This change was mainly attributed to the unusually high level of gains on sale of securities and comparatively slower growth in net interest
income due to a compressed net interest margin and moderated loan growth.
Outlook for Other Income
While shifts in the interest rate curve and market spread fluctuations will likely provide further opportunities to realize gains on sale
of securities, such gains are not expected to be sustainable at the levels realized in fiscal 2009 given the return of more typical credit spreads
and the expectation of a stable interest rate environment. Growth is expected across each other category of other income reflecting a return
to double-digit loan growth and the Bank’s continued focus on enhancing transactional services and other sources of fee income. CWB’s
medium-term objective is to grow non-interest revenues to comprise 30% of total revenues (based on a more normalized net interest
margin) through ongoing generation of new business, an enhanced market presence and expanded product offerings. While this objective
is supported by plans for continued expansion of CWB’s branch network, the ongoing development of insurance, trust services, wealth
management and other complementary fee-based businesses will be the largest contributor toward the ultimate achievement of this goal.
Trust services, including Optimum Mortgage, expects solid growth in 2010 resulting from increased market share and ongoing business
development in both core western markets and select areas in Ontario. Net insurance revenues should benefit from continued policy growth
supported by Canadian Direct’s enhanced distribution capabilities, which will include ongoing development of its Internet channel and
an expanded broker network. Management also expects to evaluate opportunities to expand sources of other income via acquisition.
32 f CWB 2009 Annual Report - Fundamentals
Non-Interest Expenses and Efficiency
Highlights of 2009
·
The efficiency ratio (teb) of 48.2% represented a 300 basis point deterioration compared to 2008 reflecting constrained growth in net
interest income due to margin compression and a 17% ($23.0 million) increase in non-interest expenses mainly resulting from ongoing
investments to support future growth and changes to the long-term employee compensation program.
TABLE 5 – NON-INTEREST EXPENSES AND EFFICIENCY RATIO
($ thousands)
Salaries and Employee Benefits
Salaries
Employee benefits
Premises
Rent
Depreciation
Other
Equipment and Furniture
Depreciation
Other
General
Professional fees and services
Marketing and business development
Postage and stationery
Capital and business taxes
Banking charges
Regulatory costs
Travel
Communications
General insurance
Other
Total Non-Interest Expenses
Efficiency Ratio (teb)(1)
2009
2008
$
%
Change from 2008
$
87,381
$
72,558
$
14,823
16,724
104,105
12,431
2,869
1,997
17,297
4,634
4,099
8,733
5,481
4,424
2,486
2,230
2,224
1,466
1,360
1,155
1,066
6,155
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
1,066
1,441
1,090
1,081
5,741
1,622
16,445
2,029
590
299
2,918
565
187
752
1,095
1,139
(147)
(50)
81
400
(81)
65
(15)
414
28,047
25,146
2,901
$ 158,182
$ 135,166
$
23,016
20%
11
19
20
26
18
20
14
5
9
25
35
(6)
(2)
4
38
(6)
6
(1)
7
12
17%
48.2%
45.2%
300bp(2)
(1)
(2)
Non-interest expenses as a percentage of total revenues (net interest income (teb) plus other income). See page 26 for a discussion of non-GAAP measures.
bp – basis points.
Total non-interest expenses of $158.2 million increased 17% ($23.0 million) and included 19% higher salary and benefit costs, largely reflecting
stock-based compensation charges, increased staff complement and annual salary increments. Total stock-based compensation charges of $10.7 million
represented a $4.9 million increase over fiscal 2008 and included $4.0 million of expense recognized for Restricted Share Units (RSU) and $1.7 million
of additional non-cash, stock-based compensation expense reflecting required accounting treatment for stock options voluntarily forfeited by certain
CWB management. During the year, certain management irrevocably released their collective right, title and interest in 1.3 million stock
options, without consideration, to facilitate a revised long-term employee compensation program. The Board of Directors, in consultation with
external consultants and senior management, enacted enhancements to the Bank’s previous long-term employee compensation program to add a
RSU component and reduce the future component of stock options. The objective of the new program was to increase overall employee retention
for the Bank and to better align CWB’s long-term compensation with industry practices. The number of full-time equivalent employees grew
4% from October 31, 2008 with the increase mostly reflecting staffing requirements for additional bank branches and other business expansion.
Premises and equipment expenses, including depreciation, increased 16% ($3.7 million) mainly resulting from ongoing business growth and capital
CWB 2009 Annual Report - Fundamentals
p 33
investment, while advertising expense increased $1.1 million. Annual non-interest expenses related to Adroit were $2.7 million, including
amortization of intangible assets. Other increases in non-interest expenses mainly reflect costs to manage the ongoing growth and development
of CWB’s businesses.
Growth in non-interest expenses, including certain one-time items, surpassed growth in total revenues (teb), leading to an efficiency ratio
(teb) of 48.2%, a 300 basis point deterioration compared to the prior year. Non-interest expenses as a percentage of average assets of 1.4%
remained comparable to 2008.
Outlook for Non-Interest Expenses and Efficiency
While growth in total revenues (teb) is expected to have a modest positive impact on the efficiency ratio (teb) in 2010, the improvement
will be tempered by increased spending in certain areas to allow for effective execution of CWB’s strategic plan. Expenses related to additional
staff complement, expanded premises, technology upgrades and process improvements are an integral part of management’s commitment
to effectively support growth and maximize shareholder value over the long-term. Building on CWB’s position as an employer of choice
is a priority, and annual salary increments and further enhancements to the employees’ benefit programs are anticipated. In the fourth quarter
of 2009 CWB opened new full service branches in Saskatoon, Saskatchewan and Kamloops, BC. Two additional branches are expected to open
late in 2010. Investments in technology, such as those being made for the introduction of a new loan origination system, systems infrastructure
and business applications, including an integrated general ledger and budget system, will also contribute to the level of non-interest expenses
in 2010, but are expected to provide significant operating efficiencies. Announced reductions in capital tax rates, as well as expectations for
modest inflationary pressures in 2010 will moderate non-interest expenses. Overall, CWB expects to achieve an efficiency ratio (teb) of 48%
or better in fiscal 2010.
Income and Capital Taxes
The provision for income taxes (teb) was 31.8%, down from 32.7% in the prior year. The prior 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 provision before the teb
adjustment was 28.2%, compared to 30.1% in the previous year. The federal corporate income tax rate was reduced from 19.5% to 19.0%,
effective January 1, 2009. Effective July 1, 2009, the corporate provincial income tax rate in Manitoba decreased 100 basis points to 12%.
On April 1, 2009, the capital tax rate in BC applicable to CWB decreased to 0.33%, down from 0.67%, and is expected to be eliminated
completely by April 1, 2010.
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 (2008 – $11.1 million) are available to apply against future capital gains and have no expiry date. The tax benefit
of these capital losses has not been recognized.
TABLE 6 – CAPITAL TAXES
($ thousands)
British Columbia
Alberta
Saskatchewan
Manitoba
Total Capital Taxes
Capital
Capital
Tax Rate
Allocation
0.47%(1)
n/a
0.70%
3.00%
26% $
69%
4%
1%
$
Change from 2008
2009
1,149 $
–
375
408
1,932 $
2008
$
1,469 $
(320)
–
283
249
2,001 $
–
92
159
(69)
%
(22)%
–
33
64
(3)%
(1)
The BC capital tax rate decreased from 0.67% to 0.33% effective April 1, 2009. The above table reflects the blended rate for 2009.
Capital taxes for 2009 totaled $1.9 million, representing a 3% decline from 2008. Lower capital taxes are mainly attributed to a 2009 decrease
in the capital tax rate in BC, partially offset by increased capital associated with the retention of earnings and the preferred unit offerings.
Outlook
Based on current expectations, CWB’s budgeted income tax rate (teb) for fiscal 2010 is 28.8%, or 30.3% before the teb adjustment.
Provincially levied capital taxes are expected to decline in conjunction with the above-mentioned rate reduction, partially offset by the
ongoing retention of earnings and the impact of new capital issues, if material.
34 f CWB 2009 Annual Report - Fundamentals
Comprehensive Income
Comprehensive income is composed of net income and other comprehensive income (OCI) all net of income taxes. CWB’s OCI includes
unrealized gains and losses on available-for-sale cash and securities, and derivative instruments designated as cash flow hedges.
Comprehensive income totaled $130.6 million for the year, compared to $102.7 million in the same period last year. As previously noted,
net income was up 4% ($4.3 million) compared to one year ago. Higher OCI reflects $47.2 million of unrealized gains on available-for-sale
securities compared to $2.6 million of unrealized losses during the same period last year. These increases were partially offset by higher
reclassifications to other income related to available-for-sale securities and higher reclassifications to net interest income and other liabilities
related to derivative instruments designated as cash flow hedges.
TABLE 7 – COMPREHENSIVE INCOME
($ thousands)
Net Income
Other Comprehensive Income
Available-for-sale securities
Gains (losses) from change in fair value, net of tax
Reclassification to other income, net of tax
Derivatives designated as cash flow hedges
Gains 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
2009
2008
$ 106,285 $ 102,019
47,214
(17,556)
29,658
9,453
(9,379)
(5,410)
(5,336)
(2,631)
(3,271)
(5,902)
9,341
(1,773)
(938)
6,630
24,322
728
$ 130,607 $ 102,747
Cash, securities and securities purchased under resale agreements totaled $2,189 million at October 31, 2009, compared to $1,798 million
one year ago. The unrealized gain recorded on the balance sheet at October 31, 2009 was $24.8 million, compared to an unrealized loss
of $17.8 million as at October 31, 2008. The change in unrealized gains and losses is primarily attributed to a market value improvement
in the preferred share portfolio; unrealized gains in this portfolio totaled $5.8 million at October 31, 2009, compared to unrealized losses
of $17.8 million a year earlier. The cash and securities portfolio is mainly comprised of high quality debt instruments and a much smaller
component of preferred equities, primarily those of the major Canadian banks, which are not held for trading purposes and, where applicable,
are typically held until maturity. Fluctuations in fair value for these portfolios are generally attributed to changes in interest rates, market
credit spreads and shifts in the interest rate curve. In fiscal 2009, the Bank elected to introduce a relatively small equity investment portfolio
to be managed by Adroit. Adroit’s investment mandate for this portfolio is to invest in common shares of Canadian large market capitalization
firms with a goal to achieve reasonable long-term capital appreciation with a preference toward dividend income. While the combined value of
investments in preferred and common equity is relatively small in relation to total liquid assets, it does increase the potential for comparatively
larger fluctuations in OCI.
Reflecting the Bank’s investment strategies and abnormal markets attributed to the global financial crisis, including rapidly falling interest
rates and unprecedented market demand for short-term government-grade investments, realized gains on sale of securities in 2009 were
$25.2 million, a $20.5 million increase compared to the prior year. The Bank was able to capitalize on opportunities to realize gains in
2009 while maintaining relatively comparable yields on reinvestment in other high quality, investment-grade securities. The Bank has
no direct exposure to any troubled asset backed commercial paper, collateralized debt obligations, credit default swaps, U.S. subprime
lending or monoline insurers.
See Table 27 – Valuation of Financial Instruments on page 56 of this MD&A for additional information.
Cash and securities are managed in conjunction with CWB’s overall liquidity and additional information is included in the Liquidity
Management discussion beginning on page 43 of this MD&A.
CWB 2009 Annual Report - Fundamentals
p 35
Loans
Highlights of 2009
·
·
Total loan growth of 7%, led by 17% growth in commercial mortgages, 13% growth in personal loans and mortgages, including
Optimum Mortgage, and 11% growth in corporate loans.
A decline in real estate project loans and no growth in the equipment financing portfolio reflecting both expected loan repayments due
to these portfolios’ relatively short durations and a marked reduction in lending opportunities reflective of a recessionary environment.
TABLE 8 – OUTSTANDING LOANS BY PORTFOLIO
($ millions)
Commercial mortgages
General commercial
Real estate project loans
Personal loans and mortgages
Equipment financing
Corporate loans
Oil & gas production
Total Outstanding Loans
Change from 2008
$
2009
2,051 $
1,992
1,803
1,451
1,186
672
157
2008
1,759 $
1,889
1,819
1,288
1,186
604
155
$
292
103
(16)
163
–
68
2
$
9,312 $
8,700 $
612
%
17%
5
(1)
13
–
11
1
7%
Total loans, excluding the allowance for credit losses, increased 7% ($612 million) to total $9,312 million at year end. Measured by loan type
as shown in Table 8, commercial mortgages represented the strongest source of loan growth in 2009, measured in both dollar and percentage
terms. Personal loans and mortgages, which include the Bank’s alternative residential mortgage business, Optimum Mortgage (Optimum),
showed the next best performance with 13% growth. General commercial loans grew 5% over 2008 and include categories based on industry
sector (see Table 12 on page 40) such as manufacturing, finance and insurance, wholesale and retail trade, and others. Corporate loans were
up 11% with the increase mainly reflecting reduced foreign-based competition due to the global financial crisis and increased demand for
additional syndicate partners by the major Canadian banks. Corporate loans represent a diversified portfolio that is centrally sourced and
administered through a designated lending group located in Edmonton. These loans include participation in select syndications structured
and led primarily by the major Canadian banks, but exclude participation in various other syndicated facilities sourced through relationships
developed at CWB branches. Syndicated facilities that are sourced in branches are primarily real estate project loans and oil and gas production
loans and are included under the appropriate classifications in Table 8. The only year-over-year decline by loan type was in real estate project
loans which reflects both significant loan repayments due to this portfolio’s relatively short duration and reduced new lending opportunities
in this area. The equipment financing portfolio also has a short duration with loans fully repaid over a period of three to five years. As shown,
new equipment financing loans were offset by repayments in the year resulting in nil growth for 2009. Oil and gas production loans increased
marginally and represent a very small component of the overall portfolio. Constrained growth for both equipment financing and oil and gas
production loans was largely attributed to ongoing softness in the oil and natural gas services industries. Growth in the equipment financing
portfolio was further impacted by systemic weakness in the forestry industry.
Loans in Optimum, the Bank’s alternative mortgage business, increased 20% over October 31, 2008 to reach $561 million at year end.
Real estate values stabilized during the latter half of fiscal 2009 and the overall level of residential sales activity in Western Canada continued
to show surprising resilience. Improved residential sales activity also positively impacted marketing time for homes in foreclosure and had
a favourable effect on the overall level of delinquent loans, which first began to trend higher in the third quarter of fiscal 2008. During the year,
Optimum began offering higher ratio mortgages insured by either the Canada Mortgage and Housing Corporation or Genworth Financial
Canada. Management expects insured mortgages will become a larger component of this portfolio going forward. In late 2008, Optimum began
underwriting residential mortgages in certain targeted regions of Ontario in an effort to further grow and diversify this portfolio. Uninsured
mortgages, secured via conventional residential first mortgages currently represent approximately 81% of Optimum’s total portfolio.
These mortgages carry a weighted average underwritten loan-to-value ratio at origination of approximately 70%. The vast majority of all
Optimum mortgages carry a fixed interest rate with the principal amortized over 25 years or less. Management remains committed to grow
this business over time as it continues to produce strong returns while maintaining an acceptable risk profile.
36 f CWB 2009 Annual Report - Fundamentals
The mix of the portfolio shifted during the year (see Figure 1 below), with comparatively stronger growth in commercial mortgages and in
personal loans and mortgages offsetting constrained growth in equipment financing and the decrease in real estate project loans. The geographic
distribution of loans (see Figure 3 on page 40) also changed slightly year-over-year reflecting stronger lending activity in BC and increased loans
outstanding in Ontario, mainly from corporate syndications. Based on the location of security, Alberta and BC represented 50% and 35% of total
loans at year end, respectively.
FIGURE 1 – OUTSTANDING LOANS BY PORTFOLIO
(October 31, 2008 in brackets)
Personal Loans
& Mortgages
16% (15%)
General
Commercial
21% (21%)
Corporate
Loans
7% (7%)
Oil & Gas
Production
2% (2%)
Equipment
Financing
13% (14%)
Real Estate
Project Loans
19% (21%)
Outlook for Loans
Commercial
Mortgages
22% (20%)
Management expects the Bank will return to double-digit loan growth and has set its fiscal 2010 loan growth target at 10%. This reflects
the belief that CWB will continue to gain market share due to a combination of its expanded market presence, the implementation
of enhanced loan origination and brand awareness strategies, and fewer foreign-based competitors in some lending areas. Management
also believes Western Canada will be poised for a comparatively faster recovery than the rest of Canada once major global economies
commence a sustained period of growth. While challenging economic conditions are expected to persist, particularly in areas related
to natural gas, the current outlook for new loans is encouraging. Paybacks on existing real estate project loans, equipment financing
and other accounts will moderate the overall level of loan growth and this circumstance is expected to continue until there is increased
certainty regarding both the strength and timing of an economic recovery.
Credit Quality
Highlights of 2009
·
Credit quality remained satisfactory despite a recessionary environment.
·
Provision for credit losses was $13.5 million and represented 15 basis points of average loans, consistent with the fiscal 2009 target range.
·
Gross impaired loans increased as expected in view of the ongoing economic challenges and represented 149 basis points of total loans
at October 31, 2009, compared to 105 basis points at the end of fiscal 2008.
Impaired Loans
As shown in Table 9 on page 38, gross impaired loans totaled $137.9 million and represented 149 basis points of outstanding loans. Fluctuations
in the level of impaired loans are expected as loans become impaired and are subsequently resolved. The dollar level of gross impaired loans
does not directly reflect the dollar value of expected write-offs given the tangible security held against the Bank’s lending positions. The
global economic recession has impacted virtually all industries represented in the Bank’s loan portfolio. Recessionary effects have had the most
pronounced impact on the construction and real estate industries and have resulted in an oversupply of residential product and the retraction
of purchase agreements in a number of markets. The overall level of residential sales activity has improved and Canada’s economic recovery and
a continued low interest rate environment will have a further positive impact on demand in this area. The substantial reduction in natural gas
prices has had a significant negative impact on exploration activity and continues to adversely affect cash flows for companies involved in oil
and gas services, particularly in Alberta. Crude oil prices have rebounded and exploration and production companies appear to be increasing
their capital budgets tied to conventional oil exploration. There is also clear evidence supporting increased capital investment in both the
Alberta oil sands and the shale gas deposits in BC. These areas should have a positive impact on the overall level of activity in fiscal 2010.
Systemic softness in the forestry industry is expected to continue, but this currently represents less than 2% of the Bank’s overall portfolio.
CWB 2009 Annual Report - Fundamentals
p 37
TABLE 9 – CHANGE IN GROSS IMPAIRED LOANS
($ thousands)
Gross impaired loans, beginning of period
New formations
Reductions, impaired accounts paid down
or returned to performing status
Write-offs
Total, end of period
2009
91,636 $
$
158,129
2008
2007
$
%
21,104 $
10,403 $
70,532
99,078
21,185
59,051
334%
60
Change from 2008
(97,979)
(13,842)
137,944
(25,968)
(2,578)
91,636
(9,698)
(786)
21,104
(72,011)
(11,264)
46,308
277
437
51
34
39
40
Balance of the ten largest impaired accounts
Total number of accounts classified as impaired
Total number of accounts classified as impaired under $1 million
Gross impaired loans as a percentage of total loans(1)
76,101
224
199
1.49%
(1)
(2)
Total loans do not include an allocation for credit losses or deferred revenue and premiums.
bp – basis point change.
56,797
13,735
19,304
161
142
85
78
63
57
1.05%
0.28% –
44bp(2)
Although the level of gross impaired loans increased substantially compared to prior years, the ongoing resolution of impaired accounts with
relatively low loss experience demonstrates the benefits of CWB’s secured lending practices, as well as the ongoing success of loan realization
efforts and work out programs. The current estimates of expected write-offs for existing loans classified as impaired are reflected in the specific
provisions for credit losses. The Bank establishes its current estimates of expected write-offs through detailed analyses of both the overall
quality and ultimate marketability of the security held against impaired accounts. The ten largest accounts classified as impaired measured
by dollars outstanding represented approximately 55% of the total gross impaired loans at year end, compared to 62% a year earlier. While
new formations of impaired loans exceeded reductions in the year by $60.1 million, more than half of the net increase compared to 2008 was
represented by two large accounts that were classified as impaired during the fourth quarter.
The 2009 provision for credit losses of $13.5 million increased $1.5 million over the previous year and represented 15 basis points of average loans,
unchanged from 2008. At October 31, 2009, gross impaired loans exceeded the total allowance for credit losses by $62.5 million, representing
68 basis points (2008 – 19 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, which is also reflected in Figure 2. The general allowance represented 65 basis points of risk-weighted assets at year end
(2008 – 70 basis points). Continued fluctuations are expected as the economic cycle runs its course and as specific weaknesses in the portfolio
become evident. The allowance for credit losses as a percentage of gross impaired loans (coverage ratio) decreased to 55% (2008 – 82%).
FIGURE 2 – NET IMPAIRED LOANS AS A PERCENTAGE OF NET LOANS OUTSTANDING
(0.57%)
(0.75%)
(0.68%)
(0.36%)
(0.36%)
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.19%
0.68%
0.13%
0.25%
0.17%
The overall loan 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.
38 f CWB 2009 Annual Report - Fundamentals
Outlook for Impaired Loans
Overall credit quality is expected to remain satisfactory and actual losses should be within CWB’s range of acceptable levels. The level
of gross impaired loans will continue to fluctuate up and down from current levels until realization objectives are attained and the credit
cycle runs its course. Gross impaired loans will return to more normal levels over time as an economic recovery is confirmed. 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.
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 Allowance
Commercial
Real estate
Equipment financing
Consumer and personal
General Allowance
Total
(1)
Recoveries in 2009 totaled $263 (2008 – $3,093).
2009 Write-Offs,
Provision
Opening
net of
for Credit
Balance
Recoveries(1)
Losses
$
6,111 $
4,877
$
58 $
2,948
5,647
305
15,011
60,527
5,158
2,786
758
7,821
3,335
1,660
13,579
12,874
–
626
2009
Ending
Balance
1,292
5,611
6,196
1,207
14,306
61,153
$
75,538 $
13,579
$
13,500 $
75,459
The allowance for credit losses is maintained to absorb both identified and unidentified losses in the loan portfolio and, at October 31, 2009,
consisted of $14.3 million in specific allowances and $61.2 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 losses inherent in the portfolio that are not presently identifiable on an
account-by-account basis. The general allowance represented 66 basis points of gross outstanding loans (2008 – 70 basis points) and 65 basis
points of risk-weighted assets (2008 – 70 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 impaired accounts are identified and 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, such as the current period. Based on management’s current outlook
for credit performance, actual historic loss experience and results from stress testing of the portfolio, the existing level of the general
allowance is deemed sufficient to mitigate losses inherent in the portfolio that are not presently identifiable.
CWB 2009 Annual Report - Fundamentals
p 39
Provision for Credit Losses
The provision for credit losses represented 15 basis points of average loans in 2009 (see Table 11), a decrease from the five- and ten-year
averages of 18 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 asset growth. Net new specific provisions represented 14 basis points of average loans in 2009.
These results compare to the five- and ten-year trend when the net new specific provision for credit losses averaged six basis points and
13 basis points of average loans, respectively. The credit quality of the portfolio resulted in 5% of the current year’s provision for credit losses
being allocated to the general allowance for credit losses. 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.
TABLE 11 – PROVISION FOR CREDIT LOSSES
($ thousands)
Provision for credit losses(1)
Net new specific provisions (net recovery)(2)
General allowance
Coverage ratio(3)
2009
0.15%
0.14
2008
0.15%
0.09
2007
0.16%
0.04
2006
0.20%
(0.03)
2005
0.24%
0.06
$
61,153
$
60,527
$
55,608
$
48,037
$
36,462
55%
82%
299%
514%
370%
(1)
(2)
(3)
As a percentage of average loans.
Portion of the year’s provision for credit losses allocated to specific provisions as a percentage of average loans.
Allowance for credit losses as a percentage of gross impaired loans.
Outlook for Provision for Credit Losses
The provision for credit losses in 2010 is expected to be between 15 to 20 basis points of average loans, up modestly from the target
range established for fiscal 2009. The expected provision reflects the Bank’s current assessment based on reasonable assumptions about
the 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 is ongoing and management’s expectations are communicated no less than quarterly.
Diversification of Portfolio
Total Advances Based on Location of Security
FIGURE 3 – GEOGRAPHICAL DISTRIBUTION OF LOANS(1)
(October 31, 2008 in brackets)
The following table illustrates the diversification in lending operations
by standard industry sectors.
TABLE 12 – TOTAL ADVANCES BASED ON INDUSTRY SECTOR(1)
% at October 31
British Columbia 35% (36%)
Saskatchewan 5% (4%)
Manitoba 3% (2%)
Other 7% (5%)
(1)
Includes letters of credit.
Construction
Real estate operations
Alberta 50% (53%)
Consumer loans and residential mortgages(2)
2009
2008
22%
22
14
24%
22
13
Transportation and storage
Health and social services
Hotel/motel
Finance and insurance
Oil and gas (service)
Oil and gas (production)
Manufacturing
Other services
Retail trade
Logging/forestry
Wholesale trade
All other
Total
6
4
4
4
3
3
3
3
3
2
1
6
6
4
4
3
4
3
3
3
2
2
2
5
100%
100%
(1)
(2)
Table is based on the Standard Industrial Classification (SIC) codes.
Residential mortgages in this table include only single-family properties.
40 f CWB 2009 Annual Report - Fundamentals
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 located in Calgary. 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, with centralized administration based in Edmonton.
Outlook for Diversification of Portfolio
Portfolio diversification by geography is expected to remain relatively consistent with prior years. Interim construction accounts
(real estate project loans) are expected to show modest or slightly negative growth in 2010, reflecting a combination of loan repayments
due to this portfolio’s relatively short duration and moderated lending opportunities compared to other lending areas. An enhanced
emphasis on generating residential mortgages, mainly through Optimum Mortgage, should result in a further increase in the proportion
of consumer loans and residential mortgages in fiscal 2010.
Deposits
Highlights of 2009
·
Personal deposits, which include the Bank’s lowest cost source of funding, increased 20%.
·
Business and government deposits decreased 18% largely reflecting impacts from the global financial crisis.
·
Branch and trust generated demand and notice deposits increased 31% to comprise 33% of total deposits at year end.
·
Branch and trust generated deposits were 64% of total deposits, up from 63% a year earlier.
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
2009
Total
$
20,028
$ 1,660,715
$ 4,717,146
$ 6,397,889
339,148
1,117,886
1,655,315
3,112,349
–
–
–
–
2,000
2,000
105,000
105,000
$
359,176
$ 2,778,601
$ 6,479,461
$ 9,617,238
4%
29%
67%
100%
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
10,000
105,000
105,000
$ 383,083
$ 2,010,039
$ 6,852,597
$ 9,245,719
4%
22%
74%
100%
% of
Total
67%
32
–
1
100%
% of
Total
58%
41
–
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 conversion
right in circumstances in which holders of WesTS exercise their holder exchange right. See the Capital Management discussion on page 46 of this MD&A or Note 14 to the consolidated
financial statements for more information on WesTS and CWB Capital Trust.
CWB 2009 Annual Report - Fundamentals
p 41
Total deposits at year end of $9,617 million increased 4% ($372 million) over 2008 as very strong 20% ($1,048 million) growth in personal deposits
more than offset an 18% ($668 million) decline in business and government deposits. Reflecting the Bank’s commercial focus, a considerable portion
of branch deposits are generated from corporate clients that tend to hold larger balances compared to personal retail clients (See the Liquidity
Management section on page 43 of this MD&A). The considerable change in deposit mix compared to 2008 was due in part to a strategic effort
to both diversify the Bank’s overall funding mix by targeting a broader customer base and to not meet competitive pricing pressures for wholesale
deposits. Pricing pressures were particularly evident during the first half of fiscal 2009 when there was a significant increase in the demand for
liquidity by financial institutions in Canada and globally. Some business customers also prudently chose to direct their excess cash balances toward
the repayment of debt until the economic outlook was more certain.
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
2009
64%
34
1
1
100%
2008
2007
2006
2005
63%
34
2
1
100%
64%
33
2
1
100%
66%
30
2
2
100%
67%
32
1
–
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 $110 million in the year to
reach $571 million. An Internet-based division of the Bank named Canadian Direct Financial™ was introduced in September 2008 to offer
retail deposit products primarily to customers who do not have convenient access to CWB’s branch network. Although it was launched as
a pilot initiative, Canadian Direct Financial™ has shown good results to date and management is optimistic about its potential to provide
a valued and diversified source of funding. Insured deposits raised through deposit brokers also remain a valued 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 5%. The demand and notice
component within branch-raised deposits increased 31% to comprise 33% of total deposits at year end, up from 26% in the previous year.
At October 31, 2009, branch and trust generated deposits comprised 64% of total deposits, compared to 63% in the previous year.
The increase in branch-raised deposits as a percentage of total deposits compared to October 31, 2008 reflects very strong growth in the
demand and notice component that more than offset a 4% ($130 million) increase in fixed rate term deposits raised through the deposit broker
network and a reduction in larger commercial term deposits raised in the branches. The significant growth in demand and notice deposits
compared to 2008 reflects CWT’s appointment during the year as trustee for a major Canadian investment dealer and ongoing execution
of strategies to further enhance and diversify the Bank’s core funding sources.
Outlook for Deposits
A strategic focus on increasing branch-raised deposits (including CWT) will continue in 2010, with particular emphasis on the demand
and notice component, which is often lower cost and provides associated transactional fee income. CWB’s expanded market presence also
supports objectives to generate branch-raised deposits. Further diversifying the deposit base via new and/or enhanced product offerings
and through Canadian Direct Financial™ are ongoing initiatives. Valiant received federal approval to become a deposit–taking trust
company in 2009 and this will provide an additional channel to generate deposits in the future. The Bank’s deposit broker network also
remains a valued source for raising insured fixed-term retail deposits and has proven to be an extremely effective and efficient way to
access liquidity over a wide geographic base.
Other Assets and Other Liabilities
At October 31, 2009 other assets totaled $211 million (2008 – $179 million). Insurance related other assets were $56 million (2008 – $53 million)
and consisted primarily of instalment premiums receivable as well as the reinsurers’ share of unpaid claims. Other assets at October 31, 2009 also
include goodwill and intangible assets of $9.4 million and $6.5 million, respectively.
Other liabilities totaled $657 million at October 31, 2009 (2008 – $301 million) and included $300 million of securities purchased under
reverse resale agreements (2008 – $nil). Reverse resale agreements are used for short-term cash management purposes. Insurance related other
liabilities were $146 million (2008 – $135 million) and consisted primarily of provisions for unpaid claims and adjustment expenses and
unearned premiums.
42 f CWB 2009 Annual Report - Fundamentals
Liquidity Management
Highlights of 2009
·
Strong liquidity position and conservative investment profile.
·
Implemented improved methodologies for measuring and monitoring liquidity.
·
Enhanced deposit monitoring capabilities.
·
No direct exposure to troubled asset classes.
A schedule outlining the consolidated securities portfolio at October 31, 2009 is provided in Note 4 to the consolidated financial statements.
A conservative investment profile is maintained by ensuring:
·
all investments, other than preferred shares and those securities categorized as “other marketable securities”, are limited to high quality debt
securities and short-term money market instruments;
·
specific investment criteria and procedures are in place to manage the securities portfolio;
·
regular review, monitoring and approval of investment policies by the Asset Liability Committee (ALCO); and
·
quarterly reporting to the Board of Directors on the composition of the securities portfolio supported by an annual review and approval
by the Board of Directors.
The Bank has no direct exposure to any troubled non-bank sponsored asset-backed commercial paper, collateralized debt obligations, credit
default swaps, U.S. subprime mortgages or monoline insurers. The Bank’s liquidity management is a comprehensive process that includes,
but is not limited to:
·
monitoring of liquidity reserve levels;
·
operating micro and macro scenario stress testing;
·
maintenance of a short duration liquidity portfolio;
·
monitoring the credit profile of the liquidity portfolio;
·
monitoring deposit behaviour; and
·
ongoing market surveillance.
TABLE 15 – LIQUID ASSETS
($ thousands)
Cash
Deposits with regulated financial institutions
Cheques and other items in transit
Total Cash Resources
Securities purchased (sold) under resale agreements (net)
Government of Canada treasury bills
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 or Sold 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
2009
4,069 $
$
Change from
2008
2008
8,988 $
(4,919)
280,358
12,677
297,104
(300,242)
156,677
130,510
820,413
434,361
349,448
464,193
18,992
492,173
77,000
214,482
167,683
417,657
256,232
171,671
1,304,725
(183,835)
(6,315)
(195,069)
(377,242)
(57,805)
(37,173)
402,756
178,129
177,777
286,442
1,591,167
1,888,271 $
91,373
$
$ 11,635,872 $ 10,600,732 $ 1,035,140
1,796,898 $
$
16%
9,617,238 $
20%
17%
(1)%
9,245,719 $
371,519
19%
1%
CWB 2009 Annual Report - Fundamentals
p 43
As shown in Table 15, liquid assets comprised of cash, interbank deposits, securities purchased under resale agreements and marketable securities
totaled $1,888 million at October 31, 2009, an increase of $91 million compared to a year earlier. The Bank continues to carry more liquidity
than it would in more normal market conditions and a stable economic environment. Liquid assets represented 16% (2008 – 17%) of total assets
and 20% (2008 – 19%) of total deposit liabilities at year end.
Highlights of the composition of liquid assets at October 31, 2009 are as follows:
·
maturities within one year decreased to 9% (2008 – 47%) of liquid assets, or $162 million (2008 – $836 million);
·
Government of Canada, provincial and municipal debt securities increased to 59% (2008 – 45%) of liquid assets;
·
deposits with regulated financial institutions, including Bankers’ Acceptances, decreased to 15% (2008 – 26%) of liquid assets;
·
preferred shares increased to 23% of liquid assets (2008 – 14%); and
·
other marketable securities increased to 18% of liquid assets (2008 – 10%).
Securities purchased under reverse resale agreements totaled $300 million at October 31, 2009. This compares to October 31, 2008 when
securities purchased under resale agreements totaled $77 million. These agreements are used for cash flow management purposes.
Securities purchased under reverse resale agreements are included in other liabilities. These represent short-term borrowings from securities
dealers that require subsequent repurchase of the securities given as collateral, typically within a few days. CWB may enter into resale agreements
which are included in liquid assets. These are short-term advances, typically no more than a few days in duration, to securities dealers and
require the dealer to repurchase the securities, which are comprised of government securities or other high quality liquid securities. Short-term
uncommitted and committed facilities have been arranged with a number of financial institutions. The government insured/guaranteed mortgage
portfolios held by the Bank also represent a potential source of liquidity.
A significant portion of branch-generated deposits are generated from corporate clients that tend to hold larger balances and are subject to more
volatility compared to deposits generated from personal retail clients.
The primary source of new funding is the issuance of deposit instruments. A summary of outstanding deposits by contractual maturity date
is presented in Tables 16 and 17.
TABLE 16 – DEPOSIT MATURITIES WITHIN ONE YEAR
($ millions)
October 31, 2009
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
Within
1 to 3
3 Months
Cumulative
1 Month
Months
to 1 Year Within 1 Year
$
359 $
– $
2,779
944
–
816
– $
–
1,514
$
4,082 $
816 $
1,514 $
359
2,779
3,274
6,412
October 31, 2008 Total
$
3,695 $
870 $
1,916 $
6,481
TABLE 17 – TOTAL DEPOSIT MATURITIES
($ millions)
October 31, 2009
Demand deposits
Notice deposits
Deposits payable on a fixed date
Note to CWB Capital Trust
Total
October 31, 2008 Total
$
$
Within
1 Year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5 More than
Years
5 Years
– $
– $
– $
$
359 $
2,779
3,274
–
– $
–
1,693
–
–
773
–
–
394
–
6,412 $
1,693 $
773 $
394 $
–
240
–
240 $
– $
–
–
105
105 $
Total
359
2,779
6,374
105
9,617
6,481 $
1,205 $
663 $
520 $
272 $
105 $
9,246
A breakdown of deposits by source is provided in Table 14 on page 42. 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 the branch network as its 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
44 f CWB 2009 Annual Report - Fundamentals
through notice accounts (comprised primarily of cash balances held in self-directed registered accounts), corporate trust deposits and the Bank’s
branch network, in addition to deposits generated through the deposit broker network. At October 31, 2009, CWT’s notice account balances
totaled $931 million (2008 – $429 million) reflecting its 2009 appointment as trustee for a major Canadian investment dealer and ongoing
business and client growth. Also, as noted earlier, Valiant received federal approval in 2009 to become a deposit-taking institution which
provides an additional channel to raise deposits in the future.
In addition to deposit liabilities, CWB has subordinated debentures outstanding that are presented in the table below.
TABLE 18 – SUBORDINATED DEBENTURES OUTSTANDING
($ thousands)
Interest
Rate
5.550%(1)
5.426%(2)
5.070%(3)
5.571%(4)
5.950%(5)
Total
Maturity
Earliest Date
Redeemable
Date
November 19, 2014
by CWB at Par
November 20, 2009
$
November 21, 2015
November 22, 2010
2009
60,000 $
70,000
March 21, 2017
March 22, 2012
March 21, 2022
March 22, 2017
June 27, 2018
June 27, 2013
120,000
75,000
2008
60,000
70,000
120,000
75,000
50,000
50,000
$ 375,000 $ 375,000
(1)
(2)
(3)
(4)
(5)
(6)
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. On November 20, 2009, these conventional debentures were redeemed by the Bank.
Subsequent to year end, these conventional debentures were redeemed by the Bank.
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.
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, $5,000 were acquired by Canadian Direct Insurance Incorporated, a wholly owned subsidiary, and have
been eliminated on consolidation.
These conventional debentures have a 15-year term with a fixed interest rate for the first ten years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 180 basis points.
These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 302 basis points.
Outlook for Liquidity Management
The Bank has implemented improved methodologies for measuring and monitoring liquidity and has also enhanced its deposit monitoring
capabilities. This has enabled management to better assess risks under various scenarios and provides flexibility to decrease the level of liquid
asset coverage on a general basis. Overall liquidity is expected to decrease in future periods, although elevated levels will be maintained
compared to what would be held under more normal market conditions. Management intends to maintain this strategy until economic
uncertainties subside further.
Contractual Obligations
In addition to the obligations related to deposits and subordinated debentures discussed in the Deposits and Liquidity Management sections
on pages 41 and 43 of this MD&A, as well as Notes 13, 17 and 28 of the consolidated financial statements, the following contractual
obligations are outstanding at October 31, 2009:
TABLE 19 – CONTRACTUAL OBLIGATIONS
($ thousands)
Lease commitments
Purchase obligations for capital expenditures
October 31, 2009
October 31, 2008
Within
1 Year
1 to 3
Years
4 to 5
Years
More than
5 Years
Total
$
$
$
8,625 $
16,471 $
15,646 $
27,124 $
67,866
250
10
–
–
8,875 $
8,316 $
16,481 $
15,609 $
15,646 $
14,689 $
27,124 $
28,873 $
260
68,126
67,487
CWB 2009 Annual Report - Fundamentals
p 45
Capital Management
Highlights of 2009
·
Achieved very strong Total and Tier 1 capital adequacy ratios of 15.4% and 11.3%, respectively.
·
Completed offerings of preferred units for gross proceeds of $209.8 million.
·
Introduced a dividend reinvestment plan.
Subsequent Highlights
·
In December 2009, the Board of Directors declared a quarterly cash dividend of $0.11 per common share, unchanged from both the
previous quarterly cash dividend and the quarterly cash dividend declared one year earlier. The Board of Directors also declared a cash
dividend of $0.453125 per Series 3 Preferred Share.
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. Under normal market conditions, 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 common shareholders. In 2009,
the global financial crisis led to significant demand for increased capital levels, particularly from investors. The Canadian financial industry
responded with numerous issues of capital raised during periods of heightened market uncertainty.
In March 2009, the Bank issued 8.3 million preferred units for total proceeds of $209.8 million reflecting management’s decision to respond
to the overall market while providing capital flexibility to take advantage of potential acquisitions that could become available in a disrupted
market. The opportunity to establish a market for preferred shares issued by CWB was an additional consideration, as accessing this type of
Tier 1 capital for the Bank had previously proven very challenging. The preferred unit offerings consisted of both a public offering and a private
placement to institutional investors. The preferred units issued via the public offering each consisted of one Non-Cumulative 5-Year Rate Reset
Preferred Share, Series 3 (the “Series 3 Preferred Shares”) in the capital of the Bank with an issue price of $25.00 per share and 1.78 common
share purchase warrants (each whole warrant a “Warrant”). Each Warrant is exercisable at a price of $14.00 to purchase one common share in
the capital of the Bank until March 3, 2014. The preferred units issued by way of a private placement to institutional investors consisted of one
Series 3 Preferred Share and 1.7857 Warrants. The Warrants have the same terms as those issued under the public offering.
Based on a $25.00 issue price, the Series 3 Preferred Shares yield a 7.25% dividend annually, payable quarterly, as and when declared by the
Board of Directors of CWB for an initial period ending April 30, 2014. Thereafter, the dividend rate will reset every five years at a level of
500 basis points over the then current five-year Government of Canada bond yield. Holders of Series 3 Preferred Shares will, subject to certain
conditions, have the option to convert their shares to Non-Cumulative Floating Rate Preferred Shares, Series 4 (the “Series 4 Preferred Shares”)
on April 30, 2014 and on April 30 every five years thereafter. Holders of the Series 4 Preferred Shares will be entitled to a floating quarterly
dividend rate equal to the then current 90-day Canadian Treasury Bill Rate plus 500 basis points, as and when declared by the Board of
Directors of CWB. The Series 3 Preferred Shares and Series 4 Preferred Shares are redeemable at the option of CWB on April 30, 2014,
and every fifth anniversary thereafter at a price of $25.00 per share. In addition, the Series 4 Preferred Shares are redeemable at the option
of CWB at any other time, on or after April 30, 2014, at a price of $25.50 per share.
The Series 3 Preferred Shares and the Series 4 Preferred Shares qualify as Tier 1 capital for the Bank. Both the Series 3 Preferred Shares
and the Warrants commenced trading on the Toronto Stock Exchange on March 2, 2009 under the trading symbols CWB.PR.A
and CWB.WT, respectively.
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 options outstanding, the weighted average exercise price and the amounts exercisable at year-end. Note 19 to the consolidated
financial statements also includes details of the RSU component of the Bank’s long-term incentive plan which was introduced in fiscal 2009.
During the year, CWB introduced a dividend reinvestment plan to provide holders of CWB’s common shares and holders of any other class
of shares deemed eligible by the Bank’s Board of Directors with the opportunity to direct cash dividends paid toward the purchase of common
shares. Further details regarding the Bank’s dividend reinvestment plan are available at www.cwbankgroup.com/investor_relations/drip.htm.
46 f CWB 2009 Annual Report - Fundamentals
Basel II Capital Adequacy Accord
OSFI requires banks to measure capital adequacy in accordance with guidelines for determining risk-adjusted capital and risk-weighted assets,
including off-balance sheet commitments, which are commonly referred to as Basel II. CWB uses the standardized approach to calculate risk-weighted
assets for both credit and operational risk. 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 primarily comprised of common shareholders’ equity, preferred shares and innovative capital (to a regulatory maximum of 15%
of net Tier 1 capital) while Tier 2 capital primarily includes subordinated debentures (to the regulatory maximum amount of 50% of net
Tier 1 capital) and the inclusion of the general allowance for credit losses (to a prescribed regulatory maximum).
Consistent with Basel II guidelines, CWB has now implemented an internal capital adequacy assessment process (ICAAP) aimed at ensuring
that capital levels remain adequate in relation to current and future risks.
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 unrealized losses on available-for-sale securities, net of tax(1)
Common shares
Preferred shares
Contributed surplus
Innovative capital instrument(2)
Non-controlling interest in subsidiary
Less goodwill of subsidiaries
Total
Tier 2 Capital
General allowance for credit losses (Tier A)(3)
Accumulated unrealized gains on available-for-sale securities, net of tax(1)
Subordinated debentures (Tier B)(4)
Total
Less investment in insurance subsidiary
Total Regulatory Capital
Regulatory Capital to Risk-Weighted Assets
Tier 1 capital
Tier 2 capital
Less investment in insurance subsidiary
Total Regulatory Capital Adequacy Ratio
Assets to Regulatory Capital Multiple(5)
Change from
2009
2008
2008
$ 511,784
$ 448,203
$
63,581
–
226,480
209,750
19,366
105,000
267
(9,360)
(6,973)
221,914
6,973
4,566
–
209,750
14,234
105,000
–
5,132
–
267
(6,933)
(2,427)
1,063,287
775,445
287,842
61,153
2,118
380,000
443,271
(56,768)
60,527
–
380,000
440,527
(47,700)
626
2,118
–
2,744
(9,068)
$ 1,449,790
$ 1,168,272
$ 281,518
11.3%
4.7
(0.6)
15.4%
8.1
8.9%
5.1
(0.5)
13.5%
9.2
2.4%
(0.4)
(0.1)
1.9%
(1.1)
(1)
(2)
(3)
(4)
(5)
Accumulated other comprehensive income related to unrealized losses on certain available-for-sale equity securities, net of tax, reduces Tier 1 capital, while unrealized gains on certain
available-for-sale equity securities, net of tax, increases Tier 2 capital.
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.
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, 2009, the Bank’s general
allowance represented 0.65% (2008 – 0.70%) of risk-weighted assets.
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, 2009
and October 31, 2008 all subordinated debentures are included in Tier 2B capital.
Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital.
CWB 2009 Annual Report - Fundamentals
p 47
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, 2009
As at October 31, 2008
TABLE 22 – RISK-WEIGHTED CATEGORY
($ thousands)
Cash,
Securities
and Resale
Agreements
Loans
2009
Risk-
Weighted
Total
Assets
Other
Items
$
180,925 $ 7,039,728 $
– $ 7,220,653 $ 7,162,496
1,093,957
786,253
–
–
–
2,393
40,777
1,298,949
165,210
774,501
10,169
–
–
–
–
–
–
–
1,096,350
827,030
1,298,949
165,210
774,501
10,169
–
–
–
165,613
–
165,613
–
40,755
40,755
43,484
179,505
222,989
6,173
233,650
455,382
122,402
596,198
10,169
163,044
509,443
136,722
$ 2,071,304 $ 9,530,655 $
$ 1,689,497 $ 8,841,784 $
220,260 $ 11,822,219 $ 9,395,679
194,694 $ 10,725,975 $ 8,679,176
0%
20%
35%
50%
75%
100%
2009
150% and
greater
Risk-
Balance Weighted
$ 35,147 $ 17,009 $
– $ 104,703 $
– $ 6,977,898 $
85,896 $ 7,220,653 $ 7,162,496
1,065,486
30,864
1,962
693,966
–
–
–
72,501
–
–
–
58,601
–
–
1,096,350
6,173
827,030
233,650
264,273
–
812,211
-
205,429
17,036
–
1,298,949
455,382
1,287
2,205
2,405
3,127
–
–
–
–
–
–
72,531
15,123
–
–
–
–
–
–
-
-
–
–
–
–
160,474
719,270
-
37,456
10,169
10,280
155,333
–
1,044
165,210
122,402
12,443
774,501
596,198
–
–
10,169
10,169
165,613
163,044
–
–
40,755
40,755
509,443
6,464
128,871
–
222,989
136,722
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, 2009
As at October 31, 2008
$ 1,442,891 $ 762,494 $ 812,211 $ 177,204 $ 1,101,917 $ 7,385,364 $ 140,138 $ 11,822,219 $ 9,395,679
69,965 $ 10,725,975 $8,679,176
$ 948,334 $ 824,162 $ 830,118 $ 148,312 $ 1,009,422 $ 6,895,662 $
At October 31, 2009, the total capital adequacy ratio was 15.4% (2008 – 13.5%), of which 11.3% (2008 – 8.9%) was Tier 1 capital.
Total regulatory capital increased $281.5 million over 2008, primarily from the combination of:
·
the issue of 8,390,000 preferred units for gross proceeds of $209.8 million;
·
earnings, net of dividends, of $68.2 million;
·
a net change related to accumulated unrealized gains/(losses) on available-for-sale securities of $9.1 million;
·
an increase in the general allowance for credit losses of $0.7 million; partially offset by
·
an increase of $2.4 million in the deduction for goodwill of subsidiaries; and
·
an increase of $9.1 million in the investment in insurance subsidiary.
On November 20, 2009, subsequent to year end, the Bank redeemed $60.0 million of subordinated debentures.
48 f CWB 2009 Annual Report - Fundamentals
Outlook for Capital Management
CWB expects to remain very well capitalized with both the Tier 1 and total capital ratios staying well above the regulatory minimums
of 7% and 10% respectively. The ongoing retention of earnings should support capital requirements associated with the anticipated
achievement of the 2010 minimum performance targets. Assuming a normal operating environment, the Bank’s very strong capital
ratios are currently above management’s targeted thresholds and provide considerable flexibility to pursue strategic growth opportunities.
Management continues to evaluate alternatives to deploy capital for the long-term benefit of CWB shareholders, which includes
the potential for strategic acquisitions. OSFI has indicated to the Canadian financial institution industry that amendments will be
forthcoming to the capital adequacy guidelines as a result of a global review of the adequacy of capital levels during the global financial
crisis. It is unknown what the impact to Canadian banks will be, however, the industry in Canada is already very well capitalized.
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 59 to 65 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 55.
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
2009
2008
$
$
235,000 $ 593,000
4,400
2,000
2,496
2,600
239,496 $ 600,000
(1)
(2)
(3)
Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between November 2009 and June 2010. The total gross positive
replacement cost of interest rate contracts was $2,265 (2008 – $9,827). This market value represents an unrealized gain, or the approximate payment the Bank would receive if these
contracts were unwound and settled.
Equity contracts are used to offset the return paid to depositors on certain deposit products where the return is linked to a stock index. The outstanding contracts mature between
March 2010 and March 2011. The total gross positive replacement cost was $nil (2008 – $nil).
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, 2009, there were $2,233 U.S.
(2008 – $2,424 U.S.) of forward foreign exchange contracts outstanding that mature between November 2009 and April 2010.
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. Given that
interest rates appeared to have reached the bottom of the cycle during 2009, certain interest rate contracts were unwound to maximize
returns when rates begin to trend upwards.
CWB 2009 Annual Report - Fundamentals
p 49
Acquisitions
On December 1, 2008 CWB finalized a transaction 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 and provided a modest positive earnings impact
for fiscal 2009. The acquisition supported a key strategic objective to enhance the Bank’s revenue diversification and sources of fee income.
Adroit’s financial results are reported on a consolidated basis under the banking and trust segment.
On December 9, 2009, the Bank signed an agreement to acquire 100% of the common shares of National Leasing Group Inc. (National Leasing)
in exchange for cash and common shares of the Bank (based on a price of approximately $22.42 per CWB common share). The vendors may
retain a participating interest in National Leasing for up to 25 per cent of the agreed upon enterprise value of $130 million. The enterprise value
of $130 million represents a multiple of approximately 9.8 times the National Leasing’s fiscal 2009 operating net income or an 84% premium over
book value. The acquisition is subject to regulatory and other approvals, and is expected to close at the beginning of February 2010.
National Leasing is a privately held commercial equipment leasing company for small to mid-size transactions. National Leasing is headquartered
in Winnipeg, Manitoba and has over 58,000 lease agreements with a collective book value of approximately $650 million, including securitized
leases which comprise approximately one half of the portfolio. The acquisition is expected to be modestly accretive to the Bank’s consolidated
earnings per diluted common share in fiscal 2010. As the acquisition will be funded with the issuance of additional CWB common shares, it
should initially have only moderate negative impact on the Bank’s regulatory capital ratios.
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 2009.
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 2009
·
Realized record net income of $97.2 million, an increase of 4% ($3.5 million).
·
Constrained revenue and earnings growth due to compression of net interest margin.
·
Maintained satisfactory credit quality and a provision for credit losses measured as a percentage of average loans of 15 basis points,
an industry best among all Canadian banks.
·
Grew branch and trust generated deposits 5%, with the demand and notice component up 33%.
·
Opened new full service branches in Saskatoon, Saskatchewan and Kamloops, BC.
·
Acquired 72.5% ownership of Adroit Investment Management Ltd.
·
Appointment of CWT as trustee for a major Canadian investment dealer.
·
Opened a CWT trust services office in Toronto, Ontario.
·
Received federal approval for Valiant to become a deposit-taking institution.
The operations of the banking and trust segment include business and retail banking services, including the offering of third party mutual
funds through CWF, personal and corporate trust services provided through CWT and Valiant, and wealth management services offered
through Adroit. 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.
50 f CWB 2009 Annual Report - Fundamentals
Customer accessibility is provided through a network of 37 client-focused branches in select locations across the four western provinces.
Internet and telephone banking services are also offered. Canadian Direct Financial™ is an Internet-based division of the Bank that offers
a high-interest savings account, chequing 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 offers stock transfer and corporate trustee services to public companies and
income trusts. Adroit is an Edmonton-based firm that specializes in wealth management for individuals, corporations and institutional clients.
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)
Non-controlling interest in subsidiary
Net Income
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Average loans ($ millions)(4)
Average assets ($ millions)(4)
2009
$
230,227
$
74,013
304,240
13,500
147,571
45,763
232
2008
222,837
54,338
277,175
12,000
125,748
45,780
–
$
97,174
$
93,647
48.5%
49.7
2.08
2.02
$
9,007
$
11,055
45.4%
46.2
2.29
2.23
7,910
9,747
Change from
2008
3%
36
10
13
17
–
nm(2)
4%
310bp(3)
350
(21)
(21)
14%
13
(1)
(2)
(3)
(4)
See page 25 and page 26 for a discussion of teb and non-GAAP measures.
nm – not meaningful.
bp – basis points.
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.
Record banking and trust net income of $97.2 million was up 4% ($3.5 million) over 2008 on 10% ($27.1 million) growth in total revenues
(teb). Growth in total revenues (teb) reflects net interest income (teb) that was 3% ($7.4 million) higher compared to the prior year as the
positive contribution from 7% loan growth was largely offset by the significant impact of a 21 basis point decline in net interest margin
to 2.08%. The significant decrease in net interest margin was mainly the result of consecutive reductions in the prime lending interest rate
and lower yields on investments held in the securities portfolio, partially offset by more favourable spreads on both new and renewal loans and
an improved mix in the securities portfolio. Margin pressures were most prevalent through the first half of the fiscal year, but net interest margin
maintained a positive upward trend since March when it reached its monthly low. Other income increased 36% ($19.7 million) and included
$20.5 million of additional gains on sale of securities primarily resulting from transactions related to favourable pricing on certain short-term
debt investments. Other income also included 16% ($2.2 million) higher trust and wealth management fee income and a combined $1.1 million
improvement in foreign exchange gains and other categories, offset by 13% ($3.6 million) lower credit related fee income, consistent with
decreased loan volumes. Non-interest expenses increased 17% ($21.8 million) mainly reflecting salary and benefit costs related to changes
in the Bank’s long-term employee incentive program, increased staff complement and annual salary increments, as well as premises and
equipment expenses to facilitate business growth. Although partially offset by very strong other income, constrained growth in net interest income
(teb) due to margin compression and higher non-interest expenses led to a 310 basis point deterioration in the efficiency ratio (teb) to 48.5%.
Growth in total branch and trust deposits increased 5%, while the demand and notice component of branch and trust deposits was up 33%.
Growth in branch and trust generated deposits mainly reflect CWT’s appointment during the year as trustee for a major Canadian investment
dealer and ongoing execution of strategies to further enhance and diversify the Bank’s core funding sources.
Significant infrastructure initiatives completed in 2009 included additional full-service branches in Saskatoon, Saskatchewan, and in Kamloops,
BC, the opening of a CWT office in Toronto, Ontario and further upgrades and expansions to existing premises.
Combined assets under administration in CWT and Valiant grew 26% ($1,120 million) in the year to total $5,467 million at October 31,
2009. A portion of assets under administration are held in investment accounts, including self-directed RRSP and RRIF accounts, which
numbered 44,143 (2008 – 42,402), an increase of 4% from one year ago. Assets under management were $878 million at October 31, 2009,
compared to nil one year ago reflecting the acquisition of Adroit which was effective November 1, 2008. Assets under administration and assets
under management are not reflected in the consolidated balance sheets (see Note 26 to the consolidated financial statements).
CWB 2009 Annual Report - Fundamentals
p 51
FIGURE 4 – NUMBER OF CWT INVESTMENT ACCOUNTS
2009
2008
2007
2006
2005
44,143
42,402
37,473
31,716
24,943
Outlook for Banking and Trust
This segment will continue to be the primary driver of the Bank’s earnings, and the outlook is for strong performance consistent with
an improved net interest margin (teb) and a cautious outlook for the timing and strength of an economic recovery. While economic
challenges are expected to persist, particularly in areas related to natural gas in Alberta, fundamentals in Western Canada are expected
to be positive relative to the rest of Canada. CWB’s expanding market presence, a strong commitment to relationship-based banking
and reduced foreign-based competition in certain lending areas should also support a continued flow of quality lending opportunities.
Management expects the Bank will return to double-digit loan growth and has established its fiscal 2010 target at 10%. The Bank will
maintain its focus on disciplined credit underwriting and direct appropriate resources towards continued realization efforts and the
ongoing resolution of problem accounts. While the level of gross impaired loans is expected to fluctuate up and down as the economic
cycle runs its course, based on the current view of credit quality, actual losses should remain within CWB’s range of acceptable levels.
Gains on the sale of securities are expected to be lower in fiscal 2010, but the associated reduction in revenues should be more than offset
by the positive impact from an improved net interest margin. Credit and retail services fee income is expected to increase in line with
increased lending activity and an expanded branch network. CWT, including Optimum, expects continued strong results for 2010 and
should make solid contributions toward consolidated earnings. Valiant’s business continues to develop and improved capital markets
activity will have a positive impact on its performance. Adroit is also expected to make positive contributions as the Bank further builds
its presence in wealth management services. While strong fiscal responsibility will be maintained, effective execution of CWB’s strategic
plan will require continued spending in areas mainly correlated with enhancements to the Bank’s growth platform. These areas include
ongoing investment in technology and infrastructure, including plans for further expansion of the branch network. The efficiency ratio
(teb) should show modest improvements compared to fiscal 2009 as expected revenue growth should more than offset the impact of higher
non-interest expenses.
Insurance
Highlights of 2009
·
Record net income of $9.1 million, representing a 9% increase.
·
Net earned premiums reached $116.8 million, also up 9%.
·
Claims loss ratio of 67% and a combined ratio of 94%.
·
Growth in policies outstanding of 5% and a customer retention rate of 87%.
Canadian Direct provides auto and home insurance products in BC and Alberta and has more than 175,000 policies outstanding. Policy
distribution channels include two dedicated call centres, the Internet and, for customers in BC, the option to purchase auto insurance through
select broker networks. Offering enhanced electronic fulfilment of CDI’s products and services is an important part of the overall business
strategy, and continued development of this technology will remain a priority.
Canadian Direct’s mission is to provide customers with attractively priced products and a high level of customer service – “better insurance
for less money.” The core strategy includes the use of sophisticated underwriting techniques to offer more competitively priced insurance
to better risk customers. The “Canadian Direct Insurance” brand is marketed through several media channels, including television,
radio, newspapers and over the Internet. It has established a very high level of awareness in the BC market and the level of awareness
in Alberta continues to grow. All claims are administered by Canadian Direct’s head office in BC using imaging technology and effective
workflow management to maintain a “paperless office” environment. This has enabled CDI to maintain a low claims expense ratio without
compromising customer satisfaction. CDI currently retains a high percentage of its business on renewal, a measure that helps confirm its success
in providing customers with quality service at competitive prices.
52 f CWB 2009 Annual Report - Fundamentals
TABLE 25 – INSURANCE HIGHLIGHTS(1)
($ 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
Expense ratio
Combined ratio
Alberta automobile insurance Risk Sharing Pools impact on net income before tax
Average total assets(4)
2009
$
6,127
$
2008
5,780
Change from
2008
6%
104,062
2,852
(68,996)
(20,802)
17,116
483
23,726
10,611
4,004
9,111
$
97,943
2,876
(64,380)
(20,573)
15,866
36
21,682
9,418
3,892
8,372
$
175,662
168,071
$
116,828
$ 107,054
67%
27
94
66%
27
93
$
(292)
$
(973)
197,845
183,892
6
(1)
7
1
8
nm(2)
9
13
3
9%
5%
9
100bp(3)
–
100
70%
8
(1)
(2)
(3)
(4)
See page 25 and 26 for a discussion of teb and non-GAAP measures.
nm – not meaningful.
bp – basis points.
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 reported record net income of $9.1 million, up 9% over 2008, reflecting continued policy growth and a 6% increase in net
earned premiums. Net claims expense was $4.6 million higher than 2008 due largely to claims in the home product line which was impacted
by severe weather and a few large fire losses. Improved profitability in the auto lines of business due to strong underwriting results more than
offset the impact of increased claims in the home product line. Canadian Direct’s share of the Alberta auto risk sharing Pools (the Pools) was
a before tax loss of $0.3 million, which was a $0.7 million improvement from 2008. The Pools’ results for 2008 included a large unfavourable
adjustment to unpaid claims reserves specifically attributed to the impact of a ruling on the Minor Injury Regulation (MIR) by the Court
of Queen’s Bench of Alberta. That ruling struck down the cap on the amount a claimant may receive in respect of minor injuries suffered
in an automobile accident. In 2009, the Alberta Court of Appeal overturned the lower court ruling on the MIR, thereby reinstating the cap.
A leave to appeal this ruling has been filed with the Supreme Court of Canada. No specific adjustment to the unpaid claims reserves has been
made based on the Alberta Court of Appeal’s decision. Canadian Direct’s claims ratio and combined ratio each rose by 1% from last year to
67% and 94%, respectively. Policies outstanding grew by 5%, while the overall policy retention rate increased 1% to 87%.
Outlook for Insurance Operations
The outlook for 2010 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 2010 claims loss ratio is expected to be within a range of 65% – 67%, which is consistent with 2009 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 for BC auto is expected to be the
primary driver for growth in that line.
CWB 2009 Annual Report - Fundamentals
p 53
SUMMARY OF QUARTERLY RESULTS
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 52), 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 ($0.01 per diluted share) of tax expense resulting from the write-down of future tax assets to reflect lower future federal
corporate income tax rates.
During the fourth quarter of 2008 and throughout fiscal 2009 the Bank’s quarterly net interest income was negatively impacted by
compression of the net interest margin mainly resulting from consecutive reductions in the prime lending interest rate coupled with
significantly higher deposit costs and other spin-off effects of the global financial crisis. Gains on sale of securities, which are reflected
in other income, were unusually high in fiscal 2009 also mainly due to factors associated with the financial crisis, including wide credit
spreads and a steeper interest rate curve that allowed the Bank to capitalize on investment strategies.
Comprehensive management’s discussion and analysis along with unaudited interim consolidated financial statements for each
quarter, including the fourth quarter of fiscal 2009, are available for review on SEDAR at www.sedar.com and on the Bank’s website
at www.cwbankgroup.com. Copies of the quarterly reports to shareholders can also be obtained, free of charge, by contacting the Bank’s
Investor Relations department via email at InvestorRelations@cwbank.com.
TABLE 26 – QUARTERLY FINANCIAL HIGHLIGHTS(1)
($ 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
2009
Q4
Q3
Q2
$ 68,012
$ 60,934
$ 52,812
2,397
2,189
1,675
2008
Q1
Q4
Q1
$ 54,596 $ 58,622 $ 57,290 $ 55,659 $ 57,046
1,337
1,540
1,352
1,442
Q3
Q2
1,586
65,615
22,087
90,099
87,702
30,357
58,745
24,604
85,538
83,349
28,729
51,137
22,570
75,382
73,707
21,580
53,010
22,351
76,947
75,361
25,619
57,082
15,437
74,059
72,519
24,485
55,848
19,085
76,375
74,933
26,327
54,307
18,095
73,754
72,402
25,302
$
0.42
$
0.39
$
0.30
$
0.39
0.38
0.30
0.40 $
0.40
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
shareholders' equity (ROE)
13.7%
13.4%
11.0%
14.7%
14.4%
16.0%
16.1%
16.9%
Return on average total assets (ROA)
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Provision for credit losses as
0.91
46.1
47.4
2.34
2.25
0.87
47.0
48.2
2.13
2.05
0.70
53.1
54.3
1.93
1.87
0.93
47.3
48.3
1.99
1.93
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
a percentage of average loans
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
(1)
See page 25 and page 26 for a discussion of teb and non-GAAP measures.
54 f CWB 2009 Annual Report - Fundamentals
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, 2009, the Bank’s total allowance for credit losses was $75.5 million (2008 – $75.5
million), which included a specific allowance of $14.3 million (2008 – $15.0 million) and a general allowance of $61.2 million (2008 – $60.5
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 37 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
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, 2009, the provision for unpaid claims and adjustment expenses totaled $81.0 million (2008 – $76.2 million). Additional information
on the process and methodology for determining the provision for unpaid claims and adjustment expenses can be found in Note 21 to the
consolidated financial statements. This critical estimate relates to CWB’s insurance segment, Canadian Direct.
Financial Instruments Measured at Fair Value
Cash resources, securities, securities purchased under resale agreements and sold under reverse resale agreements, and derivative financial
instruments are reported on the consolidated balance sheets at fair value.
The fair value of a financial instrument on initial recognition is the value of the consideration given or received. Subsequent to initial
recognition, financial instruments measured at fair value that are quoted in active markets are based on bid prices for financial assets and
offer prices for financial liabilities. For derivative financial instruments where an active market does not exist, fair values are determined using
valuation techniques that refer to observable market data, including discounted cash flow analysis, option pricing models and other valuation
techniques commonly used by market participants.
CWB 2009 Annual Report - Fundamentals
p 55
The following table summarizes the significant financial assets and liabilities reported at fair value at October 31, 2009.
TABLE 27 – VALUATION OF FINANCIAL INSTRUMENTS
($ thousands)
Financial assets
Cash resources
Securities
Derivative related
October 31, 2009
October 31, 2008
Financial Liabilities
Securities purchased under reverse resale agreements
Derivative related
October 31, 2009
October 31, 2008
Valuation Technique
Quoted Model with
Market
Observable
Prices Market Data
Fair
Value
$
297,104 $
297,104 $
1,891,409
1,884,918
2,334
–
$ 2,190,847 $ 2,182,022 $
–
6,491
2,334
8,825
$ 1,808,117 $ 1,665,237 $
142,880
$
300,242 $
– $
300,242
74
$
$
300,316 $
163 $
–
–
$
– $
74
300,316
163
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
Goodwill and Intangible Assets
Effective November 1, 2008, the Bank adopted the Canadian Institute of Chartered Accountants (CICA) new accounting standard,
Section 3064, Goodwill and Intangible Assets. Section 3064, which replaces Section 3062, Goodwill and Other Intangible Assets,
and Section 3450, Research and Development Costs, provides clarifying guidance on the criteria that must be satisfied in order for an
intangible asset to be recognized, including internally developed intangible assets. The new guidance did not have a material effect on the
financial position or earnings of the Bank.
Credit Risk and Fair Value
Effective November 1, 2008, the Bank adopted EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities.
The abstract clarifies how the Bank’s own credit risk and the credit risk of the counterparty should be taken into account in determining
the fair value of financial assets and financial liabilities, including derivatives. The new guidance did not have a material effect on the
financial position or earnings of the Bank.
Financial Instruments – Disclosures
Effective October 31, 2009, the Bank adopted CICA amendments to Section 3862, Financial Instruments – Disclosures. These
amendments require enhanced disclosures over fair value measurements of financial instruments and liquidity risks. The additional
disclosures over fair value measurements include categorization of fair value measurements into one of three levels, ranging from those fair
value measurements that are determined through quoted market prices in an active market to those fair value measurements that are based
on inputs that are not based on observable market data. The additional disclosures over liquidity risks require greater clarification over the
application of liquidity risk as well as maturity analysis for derivative financial liabilities.
Future Changes in Accounting Policies
International Financial Reporting Standards
The CICA will transition Canadian GAAP for publicly accountable entities to International Financial Reporting Standards (IFRS) for
interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011, including comparatives for the prior
year. As a result, the Bank’s consolidated financial statements will be prepared in accordance with IFRS for its 2012 fiscal year commencing
November 1, 2011 and will include comparative information for its 2011 fiscal year. The objective of this transition is to improve financial
reporting through the use of one single set of accounting standards that are comparable with other entities on an international basis.
56 f CWB 2009 Annual Report - Fundamentals
The information provided below will allow investors and others to obtain a better understanding of our IFRS transition plan and the resulting
possible effects on such things as the Bank’s financial statements and operating performance measures. Readers are cautioned, however, that
it may not be appropriate to use such information for any other purpose. The information provided reflects our most recent assumptions and
expectations, and there will likely be significant changes in the standards as issued by the International Accounting Standards Board (IASB).
Of the IASB’s Work Plan, the Financial Instruments project may impact CWB significantly, and therefore, management will monitor the
developments of this project closely.
The Bank commenced its IFRS conversion project during 2008 and established a formal project governance structure, including an IFRS
Steering Committee, to monitor the progress and critical decisions in the transition to IFRS. The Steering Committee consists of senior
levels of management from Finance, Credit Risk Management and Information Services. An external advisor has been engaged to work with
the Bank’s project staff on certain IFRS topics. Regular reporting is provided by the project team to the Steering Committee and the Audit
Committee.
IFRS Transition Plan
The Bank has established a four-phase project to identify and evaluate the impact of the transition to IFRS on the consolidated financial
statements and develop a plan to complete the transition. The project plan includes the following phases:
1.
Diagnostic phase – This phase involves performing a high-level impact assessment to identify key areas that may be impacted by the
transition to IFRS. As a result of these procedures, the potentially affected areas were ranked as high, medium or low priority.
2.
3.
Design and planning phase – In this phase, each area identified from the diagnostic phase was addressed through a detailed impact
assessment. This phase involved specification of changes required to existing accounting policies and/or disclosures, information systems
and business processes. In addition, preliminary internal communication and training occurred during this phase.
Solution development phase – This phase includes the execution of changes to information systems and business processes, completing
formal authorization processes to approve recommended accounting policy changes, development of draft IFRS financial statements,
and delivery of training programs for the Finance staff and other groups, as necessary.
4.
Implementation phase – The final phase will involve the collection of financial information necessary to compile IFRS-compliant financial
statements, embedding IFRS in business processes, and Audit Committee approval of IFRS financial statements.
Progress Towards Transition Plan
The Bank completed the diagnostic phase in October 2008 and the design and planning phase in October 2009. Management’s detailed
impact assessment has identified a number of differences between IFRS and Canadian GAAP that impact our financial statements. Many of the
differences identified are not expected to have a material impact on the reported results and financial position, and the Bank has determined
that our accounting policies are largely aligned with IFRS requirements in many key areas.
The solution development phase will commence in fiscal 2010, and CWB will begin designing solutions to address the differences, focusing
CWB 2009 Annual Report - Fundamentals
p 57
initially on those differences that may require changes to the Bank’s financial systems or that are more complex or time-consuming to resolve.
The following table is a summary of our progress towards completion of selected key activities of our IFRS transition plan as of October 31, 2009.
At this time, the Bank cannot quantify the impact that the future adoption of IFRS will have on the Bank’s financial statements and operating
performance measures; however, such impact may be material. Additional information will be provided as the changeover date draws nearer.
KEY ACTIVITY
KEY MILESTONES
STATUS
T
N
E
M
E
T
A
T
S
L
A
C
N
A
N
I
F
I
N
O
I
T
A
R
A
P
E
R
P
I
G
N
N
A
R
T
I
Identify applicable differences
in Canadian GAAP/IFRS accounting
policies and practices and design
and implement solutions
Senior management and Steering
Committee sign-off for all key IFRS
accounting policy choices to occur
during the third quarter of 2010
Select IFRS 1 choices
Develop financial statement and related
note disclosure format
Quantify effects of transition
Development of draft financial statement
format to occur during the latter part
of 2010
Define and introduce appropriate level
of IFRS expertise for each of the
following:
Timely training provided to align with
work under transition – all training
completed by mid-2011
·
Finance group
·
CWB lenders
·
Audit Committee & Board of Directors
Communicate effects of transition in time
for 2012 financial planning process,
by mid-2011
Completed the Diagnostic phase
and Design & Planning phase, which
involved a detailed impact assessment
of the differences between Canadian
GAAP and IFRS
In-depth analysis of accounting policy
choices and solution development will
occur during 2010
Participation in industry IFRS
specialist groups
Finance group, Audit Committee
and Board of Directors formal training
occurred during Q3 2009. Periodic status
reports on-going
Engaged a third-party subject matter
expert to assist in the training of CWB
lenders
N
O
I
T
A
M
R
O
F
N
I
S
M
E
T
S
Y
S
L
O
R
T
N
O
C
T
N
E
M
N
O
R
V
N
E
I
Identify and address IFRS differences that
require changes to financial systems
Evaluate and select methods to address
need for dual record-keeping during 2011
(i.e., IFRS and Canadian GAAP) for
comparatives
Revise existing internal control processes
and procedures to address significant
changes to existing accounting policies
and practices, including the need for dual
record-keeping during 2011
Design and implement internal controls
with respect to one-time transition
adjustments and related communications
Confirm that business processes and
systems are IFRS compliant throughout
the project
Diagnostic analysis regarding current
systems completed; solution development
to occur in 2010
Confirm that systems can address
2011 dual record-keeping processing
requirements by the first quarter of 2009
Dual record-keeping process determined
during first quarter of 2009
All key control and design effectiveness
implications will be assessed throughout
2010
Analysis of control issues will occur
concurrently during the Solution
Development phase
Changes completed by the first quarter
of 2011
58 f CWB 2009 Annual Report - Fundamentals
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 CICA Handbook section 3862, Financial Instruments – Disclosures and Presentation which permits
these specific disclosures to be included in the MD&A. Therefore, the shaded areas presented on pages 59 to 63 of this MD&A form an
integral part of the audited consolidated financial statements for the year ended October 31, 2009.
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 all subsidiaries, 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.
CWB 2009 Annual Report - Fundamentals
p 59
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.
60 f CWB 2009 Annual Report - Fundamentals
Liquidity Risk
Liquidity risk relates to financial liabilities that are settled by delivering cash or another financial asset. 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 regulatory guidelines.
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.
Generally, 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 generally occur when market interest rates fall. However, the directness of the correlation may
be disrupted when interest rates approach zero.
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, 2009 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.
CWB 2009 Annual Report - Fundamentals
p 61
During the year, the one-year and under cumulative gap decreased to 1.8% from 2.1% at October 31, 2008, while the one-month and under
gap decreased to 4.1% from 9.5% a year earlier. 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 $3,274 million in fixed term deposit liabilities maturing within one year from October 31, 2009, approximately $2,404 million
(25% of total deposit liabilities) mature by April 30, 2010. The term in which maturing deposits are retained will have an impact on the future
asset liability structure and, hence, interest rate sensitivity. Approximately $212 million of the fixed term deposit liabilities maturing within one
month are 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. The estimates are
based on a number of assumptions and factors, which include:
·
a constant structure in the interest sensitive asset liability portfolio;
·
floor levels for various deposit liabilities;
·
prime rate decreases limited to 0.25% at October 31, 2009 due to the historic low levels of interest rates;
·
interest rate changes affecting interest sensitive assets and liabilities by proportionally the same amount and applied at the appropriate
repricing dates; and
·
no early redemptions.
At October 31, 2009, a 1% increase in interest rates would decrease net interest income by 2.5% over the following 12 months; this compares
to October 31, 2008 when a 1% increase in interest rates would have increased net interest income by 4.8% over the following 12 months.
During 2009, to better manage interest rate sensitivity against falling interest rates, many prime related loans were negotiated with a floor rate
and a corresponding minimum interest rate level. Should prime rate decrease, the rate on these loans would remain fixed, however when prime
rates increase, the rates on these loans only begin to increase once the floor rate is passed. Hence, when modelling the effects of a 1% increase
in interest rates at October 31, 2009, not all loans would increase by the full 1%, whereas it is assumed that all liabilities increase by the full
amount. The result is a decrease in net income when interest rates rise by 1%, however, this effect is diminished on further increases in interest
rates. Notwithstanding the movement of interest rates, net interest margin is expected to improve in fiscal 2010 due to the re-pricing of high
cost fixed term deposits raised in prior periods. When modelling a 1% decrease in rates, the rates on the above negotiated prime rate loans do
not decrease, whereas the balance of prime related loans decrease only by 0.25%. Many liabilities, though, decrease by the full 1% causing net
interest income to rise on a decrease in rates. At October 31, 2009, a 1% decrease in interest rates would increase net interest income by 3.8%
over the following 12 months; this compares to October 31, 2008 when a 1% decrease in interest rates would have decreased net interest
income by 4.8% over the following 12 months.
TABLE 28 – ESTIMATED SENSITIVITY OF NET INTEREST INCOME AS A RESULT OF A ONE PERCENTAGE POINT CHANGE IN INTEREST RATES
($ thousands)
Impact of 1% increase in interest rates
Period
90 days
1 year
1 year percentage change
Impact of 1% decrease in interest rates
Period
90 days
1 year
1 year percentage change
2009
$
(1,394)
$
(6,574)
(2.5)%
2008
3,180
10,324
4.8%
2009
2008
$
2,394
$
(3,188)
10,241
3.8%
(10,356)
(4.8)%
Based on the current interest rate gap position, it is estimated that a 1% increase in all interest rates would decrease annual other comprehensive
income by $21.4 million, net of tax (2008 – $20.0 million). A one-percentage point decrease in all interest rates would increase other
comprehensive income by a similar amount.
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
62 f CWB 2009 Annual Report - Fundamentals
(see discussion under Derivative Financial Instruments on page 49). 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, 2009, assets denominated in U.S.
dollars were 1.4% (2008 – 1.2%) of total assets and U.S. dollar liabilities were 1.4% (2008 – 1.3%) 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 forward contracts or other means. Policy respecting foreign exchange exposure
is reviewed and approved at least annually by the Board of Directors, and deviations from policy are reported to the Board and ALCO.
Insurance Risk
The Bank is exposed to insurance risk through its wholly owned subsidiary, CDI, which offers home and auto insurance to consumers
in BC and Alberta. Accordingly, CDI’s operations are subject to the elements of risk associated with these lines of business, which can cause
fluctuations and uncertainties in earnings. These elements include cyclical patterns in the industry and unpredictable developments, including
weather-related and other natural catastrophes. CDI carries reinsurance coverage as part of its strategy to manage these risks. The industry
is also impacted by political, regulatory, legal and economic influences. The insurance business involves various types of insurance related risk;
in particular, underwriting risk, pricing risk, claims risk, reinsurance risk and regulatory risk. Policies and procedures have been established
to manage insurance related risk, as well as other categories of risk to which CDI is exposed. CDI’s Board of Directors, either directly
or through a Board committee, is responsible for reviewing and approving key policies and implementing reporting requirements to monitor
compliance over significant areas.
Underwriting risk is the risk of financial loss due to inappropriate selection of customers and is reduced through controls built into CDI’s
rating and underwriting system. These controls include eligibility audits and a review by senior staff of exceptions. Pricing risk is the risk that
products may be inappropriately priced due to actual experience not matching the assumptions made at the time pricing is determined.
This is mitigated by regular underwriting reviews of product rate adequacy. Regulatory intervention may also impact rate adequacy.
Claims risk includes the risk of financial loss due to adverse deviation in the amount, frequency or timing of claims. Policies and procedures are
in place to ensure that trained staff handle claims. However, the process for establishing the provision for unpaid claims may reflect significant
judgment and uncertainty, especially with respect to liability claims. Factors such as inflation, claims settlement patterns, legislative activity and
litigation trends may impact the actual claims amount as the claims are adjusted over time.
The risk that CDI might be exposed to large claims or to an accumulation of claims resulting from a natural catastrophe, such as a weather-
related or seismic event, is mitigated by reinsurance treaties that protect CDI from such risks. Reinsurance risk includes the risk that
reinsurance counterparties are not financially strong and that underwriting strategies are inappropriately matched with reinsurance programs.
CDI’s reinsurance is only purchased from reinsurers meeting a certain minimum security rating 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 managed 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, wealth management 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 2009 or 2008.
The Basel II framework includes capital requirements related to operational risk in the banking and trust operating segment. Under Basel II,
CWB uses the Standardized approach for operational risk. CWB continues to evolve and enhance our approach to operational risk management.
CWB 2009 Annual Report - Fundamentals
p 63
Strategies to minimize and manage operational risk include:
Management:
·
·
·
·
a knowledgeable and experienced management team that is committed to sound management and promotes 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;
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;
an effective change management process supported by a Project Steering Committee;
continual review and upgrade of systems and procedures; and
·
.
updated and tested procedures and contingency plans for disaster recovery, business continuity, including pandemic planning
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
64 f CWB 2009 Annual Report - Fundamentals
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.
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, 2009, there were 63,908,660 common shares outstanding and employee stock options, which are or will be
exercisable for up to 4,386,555 common shares for maximum proceeds of $81.9 million. Also outstanding were 14,961,156 warrants that
are each exercisable at a price of $14.00 to purchase one common share in the Bank until March 3, 2014.
On December 2, 2009, the Board of Directors declared a quarterly cash dividend of $0.11 per common share payable on January 8, 2010
to shareholders of record on December 24, 2009. The Board of Directors also declared a cash dividend of $0.453125 per Series 3 Preferred
Share payable on January 31, 2010 to shareholders of record on January 21, 2010.
CONTROLS AND PROCEDURES
As of October 31, 2009, 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, 2009, an evaluation was carried out of the effectiveness 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 and operating effectiveness of internal
controls over financial reporting were effective.
These evaluations were conducted in accordance with the standards of COSO (Committee of Sponsoring Organizations of the Treadway
Commission) 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. Management’s evaluation of controls can only provide reasonable, not absolute assurance
that all control issues that may result in material misstatement, if any, have been detected.
There were no changes in the Bank’s internal controls over financial reporting that occurred during the year ended October 31, 2009 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 3, 2009, except as to the agreement to acquire National Leasing presented
on page 50 of this MD&A, which is as of December 9, 2009.
CWB 2009 Annual Report - Fundamentals
p 65
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 25, 2009, except as to Note 35,
which is as of December 9, 2009
Tracey C. Ball, FCA
Executive Vice President and Chief Financial Officer
66 f CWB 2009 Annual Report - Fundamentals
Auditors’ Report
TO ThE ShAREhOLDERS OF CANADIAN WESTERN BANK
We have audited the Consolidated Balance Sheets of Canadian Western Bank as at October 31, 2009 and 2008 and the Consolidated
Statements of Income, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flow for the years then ended. These consolidated
financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our 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, 2009 and 2008 and the results of its operations and its cash flow for the years then ended in accordance with Canadian generally accepted
accounting principles.
KPMG LLP
Chartered Accountants
Edmonton, Alberta
November 25, 2009 except as to Note 35,
which is as of December 9, 2009
CWB 2009 Annual Report - Fundamentals
p 67
CONSOLIDATED BALANCE ShEETS
AS AT 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
Securities purchased under reverse resale agreements
Other liabilities
Subordinated Debentures
Conventional
Shareholders' Equity
Preferred shares
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total Liabilities and Shareholders' Equity
Contingent Liabilities and Commitments
2009
2008
$
(Note 3)
(Note 4)
$
17,447
266,980
12,677
297,104
854,457
253,143
783,809
1,891,409
–
2,282,475
7,029,177
9,311,652
(75,459)
9,236,193
39,252
9,360
6,465
55,932
2,334
97,823
211,166
11,635,872
359,176
2,778,601
6,374,461
105,000
9,617,238
41,964
145,509
74
300,242
169,346
657,135
375,000
209,750
226,480
19,366
511,784
19,119
986,499
11,635,872
$
$
$
(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 5)
(Note 16)
(Note 17)
(Note 18)
(Note 18)
$
$
$
(Note 20)
8,988
464,193
18,992
492,173
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
375,000
–
221,914
14,234
448,203
(5,203)
679,148
10,600,732
Jack C. Donald
Chairman
Larry M. Pollock
President and Chief Executive Officer
68 f CWB 2009 Annual Report - Fundamentals
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 and wealth management 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
(Note 7)
(Note 21)
Net Income before Income Taxes and Non-Controlling Interest in Subsidiary
Income Taxes
(Note 24)
2009
$
455,413
$
44,209
12,803
512,425
263,017
20,901
283,918
228,507
13,500
215,007
23,369
17,116
15,478
7,403
25,225
2,745
276
91,612
306,619
104,105
26,030
26,115
1,932
158,182
148,437
41,920
106,517
232
Non-Controlling Interest in Subsidiary
Net Income
Preferred Share Dividends
Net Income Available to Common Shareholders
Average number of common shares (in thousands)
Average number of diluted common shares (in thousands)
Earnings Per Common Share
Basic
Diluted
$
106,285
$
$
$
(Note 25)
$
10,062
96,223
63,613
65,335
$
1.51
1.47
2008
491,991
52,929
17,847
562,767
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
–
102,019
–
102,019
63,214
64,441
1.61
1.58
CWB 2009 Annual Report - Fundamentals
p 69
CONSOLIDATED STATEMENTS OF ChANGES IN ShAREhOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31
($ thousands)
Retained Earnings
Balance at beginning of year
Net income
Dividends – Preferred shares
– Common shares
Issuance costs on preferred units
Balance at end of year
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year
Other comprehensive income
Balance at end of year
Total retained earnings and accumulated other comprehensive income (loss)
Preferred Shares
Balance at beginning of year
Issued
Balance at end of year
Common Shares
Balance at beginning of year
Issued on exercise of options
Transferred from contributed surplus on the exercise or exchange of options
Issued on exercise of warrants
Issued under dividend reinvestment plan
Balance at end of year
Contributed Surplus
Balance at beginning of year
Amortization of fair value of options
Transferred to capital stock 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, net of tax
Available-for-sale securities
Gains (losses) from change in fair value(1)
Reclassification to other income(2)
Derivatives designated as cash flow hedges
Gains 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)
(2)
(3)
(4)
(5)
Net of income tax expense of $20,094 (2008 – tax benefit of $1,170).
Net of income tax benefit of $7,669 (2008 – $1,454).
Net of income tax expense of $4,066 (2008 – $4,104).
Net of income tax benefit of $4,035 (2008 – $775).
Net of income tax benefit of $2,264 (2008 – $429).
70 f CWB 2009 Annual Report - Fundamentals
$
(Note 18)
(Note 18)
2009
$
448,203
106,285
(10,061)
(27,992)
(4,651)
511,784
(5,203)
24,322
19,119
530,903
–
209,750
209,750
221,914
2,200
1,613
9
744
226,480
(Note 19)
$
14,234
6,745
(1,613)
19,366
986,499
$
2008
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
$
2009
106,285
$
2008
102,019
47,214
(17,556)
29,658
9,453
(9,379)
(5,410)
(5,336)
24,322
130,607
$
(2,631)
(3,271)
(5,902)
9,341
(1,773)
(938)
6,630
728
102,747
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
Amortization of fair value of employee stock options
Future income taxes, net
Gain on sale of securities, net
Accrued interest receivable and payable, net
Current income taxes payable, net
Other items, net
Cash Flows from Financing Activities
Deposits, net
Securities purchased under reverse resale agreements, net
Debentures issued
Debentures redeemed
Common shares issued
Preferred units issued
Issuance costs on preferred units
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
Business acquisition
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
2009
2008
$
106,285
$
102,019
13,500
8,773
6,745
(13,633)
(25,225)
1,032
11,694
5,595
114,766
371,519
300,242
–
–
2,953
209,750
(4,651)
(38,053)
841,760
203,663
(3,253,024)
2,302,967
348,998
77,000
(625,624)
(14,809)
(6,481)
(967,310)
(10,784)
(1,056)
(11,840) $
17,447
$
12,677
(41,964)
(11,840) $
12,000
6,896
5,817
276
(4,725)
2,719
(454)
(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)
8,988
18,992
(29,036)
(1,056)
275,943
$
44,198
336,106
44,179
(Note 18)
(Note 18)
(Note 33)
$
$
$
$
CWB 2009 Annual Report - Fundamentals
p 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 2009
($ 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 entities 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
Note Topic
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
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
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Stock-based compensation
Contingent liabilities and commitments
Insurance operations
Disclosures on rate regulation
Employee future benefits
Income taxes
Earnings per common share
Assets under administration and management
Related party transactions
Interest rate sensitivity
Fair value of financial instruments
Risk management
Capital management
Segmented information
Business acquisition
Subsidiaries and affiliate
Subsequent event
Comparative figures
72 f CWB 2009 Annual Report - Fundamentals
e)
Change in Accounting Policies
Goodwill and Intangible Assets
Effective November 1, 2008, the Bank adopted the Canadian Institute of Chartered Accountants (CICA) new accounting standard,
Section 3064, Goodwill and Intangible Assets. Section 3064, which replaces Section 3062, Goodwill and Other Intangible Assets,
and Section 3450, Research and Development Costs, provides clarifying guidance on the criteria that must be satisfied in order for
an intangible asset to be recognized, including internally developed intangible assets. The new guidance did not have a material effect
on the financial position or earnings of the Bank.
Credit Risk and Fair Value
Effective November 1, 2008, the Bank adopted EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. The abstract
clarifies how the Bank’s own credit risk and the credit risk of a counterparty should be taken into account in determining the fair value of financial
assets and financial liabilities, including derivatives. The new guidance did not have a material effect on the financial position or earnings of the Bank.
Financial Instruments – Disclosures
Effective October 31, 2009, the Bank adopted CICA amendments to Section 3862, Financial Instruments – Disclosures. These amendments
require enhanced disclosures over fair value measurements of financial instruments and liquidity risks. The additional disclosures over fair value
measurements include categorization of fair value measurements into one of three levels, ranging from those fair value measurements that are
determined through quoted market prices in an active market to those fair value measurements that are based on inputs that are not based on
observable market data. The additional disclosures over liquidity risks require greater clarification over the application of liquidity risk as well as
maturity analysis for derivative financial liabilities.
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 and will include
comparative information for the prior year.
During 2008, the Bank commenced a four stage conversion project to identify and evaluate the impact of the transition to IFRS on the
consolidated financial statements and develop a plan to complete the transition. The project plan includes the following phases – diagnostic,
design and planning, solution development, and implementation. The diagnostic and the design and planning phases are complete, and the
solution development phase will be completed in the fourth quarter of fiscal 2010.
The impact of the transition to IFRS on the Bank’s consolidated financial statements for current standards is not yet determinable. CWB continues
to monitor the International Accounting Standards Board’s proposed changes to standards during Canada’s transition to IFRS. These proposed
changes may have a significant impact on our implementation plan and future financial statements.
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 2009 Annual Report beginning on page 59.
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.
cash resources
Cash resources have been designated as available-for-sale and are reported on the balance sheets 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 $266,980 (2008 – $464,193), which is $7,390 (2008 – $940) higher than amortized cost.
CWB 2009 Annual Report - Fundamentals
p 73
4.
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.
The analysis of securities at carrying value, by type and maturity, is as follows:
Maturities
Within
Over 1
Over 3
1 Year
to 3 Years
to 5 Years
Over 5
Years
$
184,536 $
665,875 $
4,046 $
- $
102,652
74,725
108,430
167,706
39,936
77,906
29,895
80,023
272,372
–
–
–
2,125
12,255
52,071
16,856
2009
Total
Carrying
Value
854,457 $
253,143
332,592
434,361
16,856
2008
Total
Carrying
Value
347,777
452,045
168,707
256,232
4,203
$
391,808 $
1,022,034 $
394,260 $
83,307 $
1,891,409 $
1,228,964
Securities issued or guaranteed by
Canada
A province or municipality
Other debt securities
Equity securities
Preferred shares
Common shares
Total(1)
(1)
All securities have been designated as available-for-sale.
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
2009
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair Amortized Unrealized Unrealized
Losses
Gains
Cost
Value
Fair
Value
2008
Securities issued or
guaranteed by
Canada
A province or
municipality
Other debt securities
Equity securities
Preferred shares
Common shares
Total
$
852,863 $
1,602 $
8 $
854,457 $ 346,360 $
1,417 $
– $ 347,777
250,596
325,694
2,682
7,279
135
381
253,143
332,592
450,831
1,442
228
452,045
170,665
686
2,644
168,707
428,551
14,108
16,298
1,244
$ 1,874,002 $
26,915 $
8,298
434,361
16,856
5,802
686
9,508 $ 1,891,409 $ 1,247,719 $
274,061
–
17,829
256,232
49
1,648
4,203
3,594 $
22,349 $ 1,228,964
The securities portfolio is primarily comprised of high quality debt instruments, preferred shares and common shares that are not held for
trading purposes and, where applicable, 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. There were no such agreements
outstanding as at October 31, 2009.
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.
74 f CWB 2009 Annual Report - Fundamentals
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.
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, by loan type, are as follows:
2009
Gross
Net
2008
Gross
Net
Gross
Impaired
Specific
Impaired
Gross
Impaired
Specific
Impaired
Consumer and personal
$ 1,452,682 $
14,805 $
1,207 $
Amount
Amount
Allowance
Real estate(1)
3,909,991
76,643
Equipment financing
1,412,344
26,408
5,611
6,196
1,292
2,536,635
20,088
$ 9,311,652 $ 137,944 $
14,306
Commercial
Total(3)
General allowance(2)
Net impaired loans after
general allowance
Amount
Loans
13,598 $ 1,288,160 $
71,032 3,673,158
20,212 1,391,287
18,796 2,347,002
123,638 $ 8,699,607 $
(61,153)
Amount
Allowance
Loans
11,462 $
305 $
11,157
51,909
20,456
7,809
2,948
5,647
6,111
48,961
14,809
1,698
91,636 $
15,011
76,625
(60,527)
$
16,098
$
62,485
(1)
(2)
(3)
Multi-family residential mortgages are presented as real estate loans in this table.
The general allowance for credit risk is not allocated by loan type.
Gross impaired loans includes foreclosed assets with a carrying value of nil (2008 – $901) which are held for sale.
CWB 2009 Annual Report - Fundamentals
p 75
Outstanding impaired loans, net of allowance for credit losses, by provincial location of security, are as follows:
Alberta
British Columbia
Saskatchewan
Manitoba
Other(2)
Total
General allowance(1)
Net impaired loans after
general allowance
2009
Gross
Impaired
Specific
Amount Allowance
$
74,847 $
7,651 $
37,655
5,000
1,632
337
609
23
23,473
1,023
$ 137,944 $
14,306
Net
Impaired
Loans
67,196 $
32,655
1,023
314
22,450
123,638 $
(61,153)
$
62,485
2008
Gross
Net
Impaired
Specific
Impaired
Amount
Allowance
Loans
48,133 $
9,005 $
39,128
40,656
2,155
389
303
4,626
792
389
199
36,030
1,363
–
104
91,636 $
15,011
76,625
(60,527)
$
16,098
(1)
(2)
The general allowance for credit risk is not allocated by province.
Included in Other is a corporate loan with security that is not identifiable to a specific province.
During the year, interest recognized as income on impaired loans totaled $1,726 (2008 – $360).
Gross impaired loans exclude certain past due loans where payment of interest or principal is contractually in arrears, 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, 2009
Residential mortgages
Other loans
1 – 30 days
31 – 60 days
61 – 90 days
More than
90 days
Total
$
5,002 $
11,102 $
1,828 $
22,531
18,170
2,866
– $
17,932
–
43,567
$
27,533 $
29,272 $
4,694 $
– $
61,499
Total as at October 31, 2008
$
18,949 $
12,560 $
689 $
– $
32,198
76 f CWB 2009 Annual Report - Fundamentals
British
Columbia
Alberta Saskatchewan
Manitoba
Other
Composition
Total(1) Percentage
The composition of the Bank’s loan portfolio by geographic region and industry sector follow:
October 31, 2009
($ millions)
Loans to Individuals
Residential mortgages(2)
Other loans
Loans to Businesses
Commercial
Construction and real estate(3)
Equipment financing
Energy
$
1,005
$
1,006
$
120
$
62
1,067
752
1,126
324
–
2,202
102
1,108
1,258
1,361
744
158
3,521
15
135
120
154
50
–
324
$
89
3
92
85
61
14
–
160
$
62
1
63
321
194
125
–
640
2,282
183
2,465
2,536
2,896
1,257
158
6,847
9,312
100%
Total Loans
Composition Percentage
$
3,269
$
35%
4,629
$
50%
459
$
5%
252
$
3%
703
$
7%
October 31, 2008
Loans to Individuals
Residential mortgages(2)
Other loans
Loans to Businesses
Commercial
Construction and real estate(3)
Equipment financing
Energy
Total Loans
Composition Percentage
$
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
$
3,103
$
4,589
$
24
139
86
73
39
–
198
337
3
65
83
62
13
–
158
1
52
220
144
32
–
396
$
223
$
448
$
343
2,473
2,300
2,534
1,237
156
6,227
8,700
36%
53%
4%
2%
5%
100%
(1)
(2)
(3)
This table does not include an allocation of the allowance for credit losses or deferred revenue and premiums.
Includes single- and multi-unit residential mortgages and project (interim) mortgages on residential property.
Includes commercial term mortgages and project (interim) mortgages for non-residential property.
25%
2
27
27
31
13
2
73
100%
24%
4
28
27
29
14
2
72
100%
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.
CWB 2009 Annual Report - Fundamentals
p 77
The following table shows the changes in the allowance for credit losses during the year:
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
Balance at end of year
2009
General
Allowance
2008
General
Allowance
Specific
for Credit
Specific
for Credit
Allowance
Losses
Total
Allowance
Losses
Total
$
15,011 $
60,527 $
12,874
(13,842)
263
626
–
–
$
14,306 $
61,153 $
75,538 $
13,500
(13,842)
263
75,459 $
7,414 $
55,608 $
63,022
7,081
(2,577)
3,093
4,919
–
–
12,000
(2,577)
3,093
15,011 $
60,527 $
75,538
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
2009
Depreciation and
Net Book
Cost Amortization
$
2,783
$
–
$
5,318
27,658
19,224
35,538
3,333
21,160
12,120
14,656
Value
$
2,783
1,985
6,498
7,104
20,882
$
90,521
$
51,269
$
39,252
$
2008
Net Book
Value
2,783
2,247
5,593
5,326
15,944
31,893
Depreciation and amortization for the year amounted to $7,503 (2008 – $6,370).
78 f CWB 2009 Annual Report - Fundamentals
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
Non-competition agreements
Trademarks
Others
Total
Accumulated
Net Book
2009
2008
Net Book
Cost
Amortization
$
9,360 $
– $
6,750
2,630
580
200
10,160
2,865
630
–
200
3,695
$
19,520 $
3,695 $
Value
9,360 $
3,885
2,000
580
–
6,465
15,825 $
Value
6,933
1,835
–
300
20
2,155
9,088
Amortization of customer relationships and other intangible assets for the year amounted to $1,270 (2008 – $526). The trademarks have an
indefinite life and are not subject to amortization. Goodwill includes $6,106 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
2009
27,620 $
10,441
9,808
7,303
760
55,932 $
$
$
2008
24,333
11,561
8,924
6,939
1,186
52,943
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.
CWB 2009 Annual Report - Fundamentals
p 79
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.
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 46 of Management’s Discussion and Analysis.
Replace-
ment
2009
Future
Credit
Credit
Risk-
Risk Weighted
Cost
Exposure Equivalent
Balance
Notional
Amount
Notional
Amount
$ 235,000 $
2,265 $
– $
2,265 $
2,000
–
130
130
453 $ 593,000 $
26
4,400
Replace-
ment
2008
Future
Credit
Credit
Risk-
Risk Weighted
Cost
Exposure Equivalent
Balance
9,827 $
1,825 $ 11,652 $
2,361
–
304
304
2,496
44
22
66
$ 239,496 $
2,309 $
152 $
2,461 $
2,600
22
501 $ 600,000 $ 9,829 $
2
26
28
2,155 $ 11,984 $ 2,436
61
14
Interest rate swaps
Equity contracts
Foreign exchange
contracts
Total
80 f CWB 2009 Annual Report - Fundamentals
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).
Favourable Contracts
Unfavourable Contracts
Favourable Contracts
Unfavourable Contracts
2009
2008
Interest rate swaps
Equity contracts
Foreign exchange
contracts
Embedded derivatives in
equity linked deposits
Other forecasted
transactions
Total
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
$ 235,000 $
2,265 $
– $
– $ 593,000 $
9,827 $
– $
–
–
2,000
1,248
n/a
–
44
25
–
1,248
n/a
–
(33)
(41)
–
–
–
1,300
–
2
4,400
1,300
(24)
n/a
151
n/a
–
–
–
–
–
$
236,248 $
2,334 $
3,248 $
(74) $ 594,300 $
9,980 $
5,700 $
(163)
Fair
Value
–
(139)
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)
2009
7,547 $
287 $
2008
4,094
322
$
$
The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received
on contracts.
2009
Maturity
2008
Maturity
1 Year or Less
More than 1 Year
1 Year or Less
More than 1 Year
Contractual
Notional
Amount
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Contractual
Contractual
Notional
Amount
Interest
Rate
Notional
Amount
Interest
Rate
Interest Rate Contracts
Interest rate swaps -
receive fixed amounts(1)
$ 235,000
3.33% $
Equity Contracts(2)
Foreign Exchange
Contracts (3)
Total
1,500
2,496
$ 238,996
$
–
500
–
500
n/a $ 228,000
2,400
2,600
$ 233,000
3.83% $ 365,000
3.46%
2,000
–
$ 367,000
(1)
(2)
(3)
The Bank pays floating interest amounts based on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps mature between November 2009 and June 2010.
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
March 2010 and March 2011.
The contractual interest rate is not meaningful for foreign exchange contracts. Foreign exchange contracts mature between November 2009 and April 2010.
During the year, a net unrealized after tax gain of $9,453 (2008 – $9,341) was recorded in other comprehensive income for changes in fair
value of the effective portion of derivatives designated as cash flow hedges and $nil (2008 – $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 $9,379 (2008 – $1,773) was reclassified to net income. During the year, $5,410 after tax (2008 – $938) was reclassified to other
liabilities for derivatives terminated prior to maturity and the deferred balance will be amortized into net interest income over the original
hedged period. A net gain of $1,678 (2008 – $2,432) after tax recorded in accumulated other comprehensive income (loss) as at October 31,
2009 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.
CWB 2009 Annual Report - Fundamentals
p 81
12.
other assets
Accrued interest receivable
Future income tax asset
Accounts receivable
Prepaid expenses
Financing costs(1)
Taxes receivable
Other
Total
(1)
Amortization for the year amounted to $989 (2008 – $1,037).
$
(Note 24)
2009
47,184 $
20,319
16,888
6,209
3,730
127
3,366
97,823 $
$
2008
40,241
16,142
6,004
3,520
4,636
1,259
2,820
74,622
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
2009
Total
$
20,028 $
339,148 $
1,660,715
1,117,886
– $
––
359,176
2,778,601
4,717,146
1,655,315
2,000
6,374,461
–
105,000
–
105,000
$
6,397,889 $
3,217,349 $
2,000 $
9,617,238
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
(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.
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.
82 f CWB 2009 Annual Report - Fundamentals
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 amounts 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 commissions
Total
(Note 21)
$
2008
76,176
2009
81,025 $
62,307
1,425
752
$ 145,509 $ 134,769
56,799
987
807
CWB 2009 Annual Report - Fundamentals
p 83
16.
other liabilities
Accrued interest payable
Accounts payable
Taxes payable
Leasehold inducements
Future income tax liability
Deferred revenue
Total
2009
2008
$ 109,559 $ 101,584
24,895
37,391
(Note 24)
15,822
2,673
2,037
1,864
5,260
1,373
1,300
2,485
$ 169,346 $ 136,897
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)
Maturity
Date
November 19, 2014
November 21, 2015
Earliest Date
Redeemable
by CWB at Par
November 20, 2009 $
November 22, 2010
2009
60,000 $
70,000
March 21, 2017
March 22, 2012
March 21, 2022
March 22, 2017
June 27, 2018
June 27, 2013
120,000
75,000
50,000
2008
60,000
70,000
120,000
75,000
50,000
$ 375,000 $ 375,000
(1)
(2)
(3)
(4)
(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 160 basis points. On November 20, 2009, these conventional debentures were redeemed by the Bank.
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.
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.
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.
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.
84 f CWB 2009 Annual Report - Fundamentals
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). 8,390,000 first preferred shares Series 3 have been issued and are
convertible to first preferred shares Series 4 as noted below.
Issued and fully paid:
Preferred Shares – Series 3
Outstanding at beginning of year
Issued during the year
Outstanding at end of year
Common Shares
Outstanding at beginning of year
Issued on exercise of warrants
Issued under dividend reinvestment plan
Issued on exercise or exchange of options
Transferred from contributed surplus on exercise or exchange of options
Outstanding at end of year
Share Capital
2009
2008
Number of
Shares
Number of
Shares
Amount
Amount
– $
8,390,000
8,390,000
–
209,750
209,750
– $
–
–
–
–
–
63,457,142
624
38,760
406,934
–
63,903,460
$
221,914 62,836,189
–
–
620,953
9
744
2,200
1,613
–
226,480 63,457,142
436,230
$ 221,914
219,004
–
–
1,646
1,264
221,914
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.
a)
Preferred Shares
During 2009, the Bank issued 8.4 million preferred units at $25 per unit, for total proceeds of $209.8 million. Of the total, 5.4 million
preferred units were issued by way of a private placement for total proceeds of $135.0 million, and 3.0 million were issued under a public
offering for total proceeds of $74.8 million.
The preferred units issued by way of the private placement and the public offering each consist of one Non-Cumulative 5-Year Rate Reset
Preferred Share, Series 3 (Series 3 Preferred Shares) in the capital of the Bank with an issue price of $25.00 per share and 1.7857 and 1.7800
common share purchase warrants, respectively. Each warrant is exercisable at a price of $14.00 to purchase one common share in the capital of
the Bank until March 3, 2014.
Holders of the Series 3 Preferred Shares are entitled to receive non-cumulative quarterly fixed dividends for the initial five-year period ending
April 30, 2014 of 7.25% per annum, payable quarterly, as and when declared by the Board of Directors. The dividend rate on Series 3
Preferred Shares will reset May 1, 2014 and every five years thereafter at a level of 500 basis points over the then current five-year Government
of Canada bond yield. On April 30, 2014, and every five years thereafter, holders of Series 3 Preferred Shares will, subject to certain conditions,
have the option to convert their shares to Non-Cumulative Floating Rate Preferred Shares, Series 4 (Series 4 Preferred Shares). Holders of the
Series 4 Preferred Shares will be entitled to a floating quarterly dividend rate equal to the 90-day Canadian treasury bill rate plus 500 basis
points, as and when declared by the Board of Directors.
The Series 3 Preferred Shares are not redeemable prior to April 30, 2014. Subject to the provisions of the Bank Act, the prior consent of OSFI
and the provisions described in the prospectus for the public offering, on April 30, 2014 and on April 30 every five years thereafter, the Bank may
redeem all or any part of the then outstanding Series 3 Preferred Shares at the Bank’s option without the consent of the holder, by the payment
of an amount in cash for each such share so redeemed of $25.00 together with all declared and unpaid dividends to the date fixed for redemption.
CWB 2009 Annual Report - Fundamentals
p 85
Subject to the provisions of the Bank Act, the prior consent of OSFI and the provisions described in the prospectus for the public offering, on not
more than 60 nor less than 30 days’ notice, the Bank may redeem all or any part of the then outstanding Series 4 Preferred Shares at the Bank’s
option without the consent of the holder by the payment of an amount in cash for each such share so redeemed of: (i) $25.00 together with all
declared and unpaid dividends to the date fixed for redemption in the case of redemptions on April 30, 2019 and on April 30 every five years
thereafter; or (ii) $25.50 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on any other
date on or after April 30, 2014.
b)
Warrants to Purchase Common Shares
Number of Warrants
Outstanding at beginning of year
Issued
Exercised
Outstanding at end of year
c)
Dividend Reinvestment Plan
October 31, October 31,
2008
2009
–
14,964,980
(624)
14,964,356
–
–
–
–
During the year, the Bank introduced a dividend reinvestment plan (plan) that provides holders of the Bank’s common shares and holders of any
other class of shares deemed eligible by the Bank’s Board of Directors with the opportunity to direct cash dividends paid on any class of their
eligible shares towards the purchase of additional common shares. Currently, the Board of Directors has deemed that the holders of the Bank’s
Series 3 Preferred Shares are eligible to participate in the plan. The plan is only open to shareholders residing in Canada.
At the option of the Bank, the common shares may be issued from the Bank’s treasury at an average market price based on the closing prices of
a board lot of common shares on the Toronto Stock Exchange for the five trading days immediately preceding the dividend payment date, with
a discount of between 0% to 5% at the Bank’s discretion. The Bank also has the option to fund the plan through the open market at market
prices. During the year, 38,760 common shares were issued under the plan from the Bank’s treasury with a 2% discount.
19.
a)
stock-based compensation
Stock Options
Stock options are accounted for using the fair value based method. The estimated fair value is recognized over the applicable vesting period
as an increase to both salary expense and contributed surplus. 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 5,848,470 common shares (2008 – 5,505,404) for issuance under the share incentive plan. Of the amount authorized,
options exercisable into 4,394,605 shares (2008 – 5,204,882) 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 May 2010 to June 2014.
The details of, and changes in, the issued and outstanding options follow:
2009
2008
Weighted
Average
Exercise
Price
20.83
13.33
10.56
26.88
Number
of Options
5,204,882 $
1,465,035
(933,900)
(1,341,412)
Number
of Options
4,911,277 $
1,249,032
(838,177)
(117,250)
4,394,605 $
18.66
5,204,882 $
Weighted
Average
Exercise
Price
16.96
28.39
8.98
24.26
20.83
1,742,100 $
18.22
1,870,500 $
13.10
Options
Balance at beginning of year
Granted
Exercised or exchanged
Forfeited
Balance at end of year
Exercisable at end of year
86 f CWB 2009 Annual Report - Fundamentals
Further details relating to stock options outstanding and exercisable follow:
Range of Exercise Prices
$8.58 to $10.84
$11.76 to $13.78
$15.46 to $17.58
$19.16 to $21.46
$22.29 to $26.38
$28.11 to $31.18
Total
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Remaining
Average
Number of
Contractual
Exercise
Number of
Weighted
Average
Exercise
Options
26,500
1,209,735
1,185,100
1,063,890
684,600
224,780
4,394,605
Life (years)
2.7 $
3.4
2.3
2.1
2.8
3.1
Price
9.20
12.16
16.61
21.45
25.64
31.13
Options
10,000 $
239,500
733,500
753,100
6,000
–
Price
10.21
13.78
16.44
21.44
22.30
–
2.7 $
18.66
1,742,100 $
18.22
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 933,900
(2008 – 838,177) options exercised or exchanged, option holders exchanged the rights to 722,400 (2008 – 651,727) options and received
195,434 (2008 – 434,503) shares in return under the cashless settlement alternative.
Salary expense of $6,745 (2008 – $5,817) was recognized relating to the estimated fair value of options granted since November 1, 2002, which
included the stock option forfeiture discussed below. 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 2.2% (2008 – 3.8%), (ii) expected option life of 4.0 (2008 – 4.0) years,
(iii) expected volatility of 38% (2008 – 23%), and (iv) expected dividends of 3.6% (2008 – 1.5%). The weighted average fair value of options
granted was estimated at $2.94 (2008 – $5.84) per share.
During the year, certain employees voluntarily and irrevocably released, without consideration, all right, title and interest in 1,283,062 stock
options. The unamortized fair value of these forfeited options ($1,696) was recognized at that time as additional non-tax deductible salary
expense with an offsetting increase to contributed surplus.
During the year, $1,613 (2008 – $1,264) was transferred from contributed surplus to share capital, representing the estimated fair value
recognized for 933,900 (2008 – 804,177) options granted after November 1, 2002 and exercised during the year.
b)
Restricted Share Units
During the year, the Bank adopted a plan to grant Restricted Share Units (RSUs) as part of its long-term incentive plan. Under this plan,
certain employees are eligible to receive an award in the form of RSUs. Each RSU entitles the holder to receive the cash equivalent of the market
value of the Bank’s common shares at the vesting date and an amount equivalent to the dividends paid on the common shares during the
vesting period. RSUs vest on each anniversary of the grant in equal one-third installments over a vesting period of three years. Salary expense is
recognized evenly over the vesting period except where the employee is eligible to retire prior to the vesting date, in which case the expense is
recognized between the grant date and the date the employee is eligible to retire.
During the year, salary expense of $3,985 ($2,770, net of tax) was recognized related to RSUs. As at October 31, 2009, the liability for the
RSUs held under this plan was $3,985. At the end of each period, the liability and salary expense are adjusted to reflect changes in the market
value of the Bank’s common shares.
For the year ended October 31, 2009
Restricted Share Units
Balance at beginning of year
Granted
Forfeited
Balance at end of year
Number of
RSUs
–
286,929
(1,732)
285,197
CWB 2009 Annual Report - Fundamentals
p 87
20.
contingent liabilities and commitments
a)
Credit Instruments
In the normal course of business, the Bank enters into various commitments and has contingent liabilities, which are not reflected in the
consolidated balance 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
2009
2008
$ 196,380 $ 232,649
2,346,324 3,190,420
$ 2,542,704 $ 3,423,069
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 $1,180,690 (2008 – $931,957) and recently authorized but unfunded loan commitments of $1,165,634
(2008 – $2,258,463). In the majority of instances, availability of undrawn commercial commitments is subject to the borrower meeting specified
financial tests or other covenants regarding completion or satisfaction of certain conditions precedent. It is also usual practice to include the right
to review and withhold funding in the event of a material adverse change in the financial condition of the borrower. From a liquidity perspective,
undrawn credit authorizations will be funded over time, with draws in many cases extending over a period of months. In some instances,
authorizations are never advanced or may be reduced because of changing requirements. Revolving credit authorizations are subject to repayment
which, on a pooled basis, also decreases liquidity risk.
b)
Lease Commitments
The Bank has obligations under long-term non-cancellable operating leases for the rental of premises. Minimum future lease commitments
for each of the five succeeding years and thereafter are as follows:
2010
2011
2012
2013
2014
2015 and thereafter
Total
c)
Guarantees
$
8,625
8,409
8,062
8,024
7,622
27,124
$
67,866
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 $10,496 (2008 – $11,503), and the balance outstanding was $2,566 (2008 – $2,778).
No amounts are reflected in the consolidated financial statements related to these guarantees and indemnifications.
88 f CWB 2009 Annual Report - Fundamentals
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.
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
2009
$ 104,062 $
2,852
(68,996)
(20,802)
17,116 $
$
2008
97,943
2,876
(64,380)
(20,573)
15,866
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.
CWB 2009 Annual Report - Fundamentals
p 89
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.
Provision for Unpaid Claims and Adjustment Expenses
An annual evaluation of the adequacy of unpaid claims is completed at the end of each financial year. This evaluation includes a re-estimation
of the liability for unpaid claims relating to each preceding financial year compared to the liability that was originally established. The results
of this comparison and the changes in the provision for unpaid claims and adjustment expenses follow:
Unpaid claims and adjustment expenses, net, beginning of year
Claims incurred
In the current year
In prior periods
Claims paid during the year
Unpaid claims and adjustment expenses, net, end of year
Reinsurers' share of unpaid claims and adjustment expenses
Recoverable on unpaid claims
Unpaid claims and adjustment expenses, net, end of year
2009
57,676 $
2008
50,389
$
73,346
(4,350)
(63,391)
63,281
10,441
7,303
81,025 $
$
67,457
(3,077)
(57,093)
57,676
11,561
6,939
76,176
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 2.75% (2008 – 4.1%). However, that rate was reduced by a 1%
(2008 – 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 $887 (2008 – $850) in unpaid claims and adjustment
expenses and related reinsurance recoveries.
Policy balances, included in insurance related other assets and other liabilities, analyzed by major lines of business are as follows:
Unpaid claims and adjustment expenses
Reinsurers' share of unpaid claims and adjustment expenses
Unearned premiums
c)
Underwriting Policy and Reinsurance Ceded
2009
Automobile
$
65,736 $
9,984
44,635
2008
Home
15,289 $
457
17,672
Automobile
Home
64,181 $
11,995
11,561
–
40,886
15,913
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 (2008 – $180,000) is obtained to protect against certain catastrophic losses. Retention on catastrophic
events and property and liability risks is generally $1,000 (2008 – $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.
At October 31, 2009, $10,441 (2008 – $11,561) 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
$
2009
7,257 $
595
2008
6,849
2,987
90 f CWB 2009 Annual Report - Fundamentals
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 $36,900 in 2009 (2008 – $31,300) and represented 47% (2008 – 44%)
of direct automobile premiums written.
Province
Alberta
Rate Filing
Regulatory Authority
File and approve or
File and use
Alberta Automobile Insurance Rate Board
Relevant regulatory authorities may, in some circumstances, require retroactive rate adjustments, which could result in a regulatory asset or
liability. At October 31, 2009, 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 $7,077 (2008 – $6,183).
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 gains (losses) on available-for-sale securities
Gains (losses) on derivatives designated as cash flow hedges
Total
2009
2008
$
55,553 $
(13,633)
41,920
43,725
276
44,001
12,425
(2,233)
10,192
52,112 $
(2,624)
2,900
276
44,277
$
CWB 2009 Annual Report - Fundamentals
p 91
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
$
43,743
29.5% $
44,536
30.5%
2009
2008
Increase (decrease) arising from:
Tax-exempt income
Stock-based compensation
Future federal and/or provincial tax rate reductions(1)
Other
(5,329)
1,985
149
1,372
Provision for income taxes and effective tax rate
$
41,920
(3.6)
1.3
0.1
0.9
28.2% $
(3,579)
1,774
999
271
(2.5)
1.2
0.7
0.2
44,001
30.1%
(1)
Future federal and/or 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
Deferred loan fees
Other temporary differences
Net future income tax liabilities
Intangible assets
Allowance for credit losses
Other temporary differences
2009
2008
16,487 $
3,448
384
20,319 $
16,103
1,428
(1,389)
16,142
2,217 $
–
(180)
2,037 $
742
(845)
1,403
1,300
$
$
$
$
The Bank has approximately $11,140 (2008 – $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.
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 available to common shareholders
Denominator
Weighted average of common shares outstanding – basic
Dilutive instruments:
Warrants
Stock options(1)
Weighted average number of common shares outstanding – diluted
Earnings per Common Share
Basic
Diluted
2009
2008
$
96,223 $ 102,019
63,613,398 63,214,117
1,439,723
–
281,442 1,227,017
65,334,563 64,441,134
$
1.51 $
1.47
1.61
1.58
(1)
At October 31, 2009, the denominator excludes 1,122,170 (2008 – 3,334,382) employee stock options with an average adjusted exercise price of $28.58 (2008 – $27.45) where the exercise
price, adjusted for unrecognized stock-based compensation, is greater than the average market price.
92 f CWB 2009 Annual Report - Fundamentals
26.
assets under administration and management
Assets under administration of $5,467,447 (2008 – $4,347,723) and assets under management of $878,095 (2008 – nil) represent the fair
value of assets held for personal, corporate and institutional clients. The assets are kept separate from the Bank’s own assets. Assets under
administration and management are not reflected in the consolidated balance sheets and relate to the banking and trust segment.
27.
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 $62,861 (2008 – $64,836). 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 $139,871 (2008 – $127,219).
28.
interest rate sensitivity
The Bank is exposed to interest rate risk as a result of a difference, or gap, between the maturity or repricing behaviour of interest sensitive
assets and liabilities. The interest rate gap is managed by forecasting core balance trends. The repricing profile of these assets and liabilities has
been incorporated in the table following showing the gap position at October 31 for select time intervals. Figures in brackets represent an excess
of liabilities over assets or a negative gap position.
ASSET LIABILITY GAP POSITIONS
($ millions)
October 31, 2009
1 Month
Months
to 1 Year
1 Year
5 Years
5 Years
Sensitive
Total
Floating Rate
Total
Non-
and Within
1 to 3
3 Months
Within
1 Year to More than
Interest
$
92
$
36
$
352
$
480
$
1,573
$
81
$
55
$
2,189
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)
4,792
–
–
4,884
585
–
–
621
929
–
239
1,520
6,306
–
239
7,025
2,890
–
–
4,463
3,796
826
1,560
6,182
3,343
303
60
–
239
6
–
–
–
27
–
–
–
336
60
–
239
36
240
–
–
128
–
–
209
105
8
75
–
–
188
(88)
211
–
178
(13)
277
–
987
–
9,236
211
239
11,875
9,617
657
375
987
239
1,251
(1,073) $
–
$
11,875
–
–
Total
4,398
832
1,587
6,817
3,619
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
$
$
486
$
(211) $
(67) $
208
$
844
$
21
$
486
$
275
$
208
$
208
$
1,052
$
1,073
$
Percentage of Total Assets
4.1%
2.3%
1.8%
1.8%
8.9%
9.0%
–
–
October 31, 2008
Total assets
$
5,140 $
784 $
1,263 $
7,187 $
3,749 $
141 $
120 $
11,197
Total liabilities and equity
4,072
889
1,992
6,953
3,165
189
890
11,197
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
$
$
1,068 $
(105) $
(729) $
234 $
584 $
(48) $
(770) $
1,068 $
963 $
234 $
234 $
818 $
770 $
– $
Percentage of Total Assets
9.5%
8.6%
2.1%
2.1%
7.3%
6.9%
–
–
–
–
(1)
(2)
(3)
Derivative financial instruments are included in this table at the notional amount.
Accrued interest is excluded in calculating interest sensitive assets and liabilities.
Potential prepayments of fixed rate loans and early redemption of redeemable fixed term deposits have not been estimated. Redemptions of fixed term deposits where depositors have this
option are not expected to be material. The majority of fixed rate loans, mortgages and leases are either closed or carry prepayment penalties.
CWB 2009 Annual Report - Fundamentals
p 93
The effective, weighted average interest rates for each class of financial asset and liability are shown below.
WEIGHTED AVERAGE EFFECTIVE INTEREST RATES
(%)
October 31, 2009
Assets
Cash resources and securities
Loans
Derivative financial instruments
Total
Liabilities
Deposits
Other liabilities
Debentures
Derivative financial instruments
Total
Interest Rate Sensitive Gap
October 31, 2008
Total assets
Total liabilities
Interest Rate Sensitive Gap
Floating Rate
and Within
1 to 3
3 Months
1 Month
Months
to 1 Year
Total
Within
1 Year
1 Year to More than
5 Years
5 Years
Total
0.6%
1.7%
1.9%
1.6%
3.3%
5.7%
3.0%
3.8
3.1
3.8
0.7
0.3
5.6
0.2
0.7
3.1%
4.7%
2.2
2.5%
2.7
2.7
2.6
2.4
–
–
–
2.4
0.2%
4.2%
3.6
0.6%
5.7
3.1
4.5
3.1
–
–
–
3.1
1.4%
5.1%
4.0
1.1%
4.0
3.0
3.8
1.6
0.3
5.6
0.2
1.4
5.8
2.3
4.9
3.5
–
5.4
–
3.6
5.8
–
5.8
6.4
–
5.6
–
5.8
4.6
2.8
4.3
2.3
0.3
5.4
0.2
2.3
2.4%
1.3%
0.0%
2.0%
4.8%
2.9
1.9%
5.4%
4.2
1.2%
5.8%
5.7
0.1%
5.0%
3.4
1.6%
Based on the current interest rate gap position, it is estimated that a one-percentage point increase in all interest rates would decrease net
interest income by approximately 2.5% or $6,574 (October 31, 2008 – 4.8% or $10,324 increase to net interest income) and decrease
other comprehensive income $21,355 (October 31, 2008 – $19,982) net of tax, respectively over the following twelve months. A one-
percentage point decrease in all interest rates would increase net interest income by approximately 3.8% or $10,241 (October 31, 2008
– 4.8% or $10,356 decrease to net interest income) and increase other comprehensive income $21,355 (October 31, 2008 – $19,982) net
of tax.
94 f CWB 2009 Annual Report - Fundamentals
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 (referred to as Level 1) and estimated using a valuation technique based on observable market data (referred to as Level 2). 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. There were no financial instruments that were measured using unobservable market data (referred to as Level 3).
Financial Assets
Cash resources
Securities
Derivative related
October 31, 2009
October 31, 2008
Financial Liabilities
Securities purchased under reverse resale agreements
Derivative related
October 31, 2009
October 31, 2008
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$ 297,104 $ 297,104 $
– $
1,891,409
1,884,918
2,334
–
6,491
2,334
$ 2,190,847 $ 2,182,022 $
8,825 $
$ 1,808,117 $ 1,665,237 $ 142,880 $
$ 300,242 $
– $ 300,242 $
74
–
74
$ 300,316 $
163 $
$
– $ 300,316 $
163 $
– $
–
–
–
–
–
–
–
–
–
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.
CWB 2009 Annual Report - Fundamentals
p 95
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.
2009
2008
Fair Value
Over (Under)
Fair Value
Over (Under)
Book Value
Fair Value
Book Value
Book Value
Fair Value
Book Value
Assets
Cash resources
Securities
Securities purchased under
resale agreements
Loans(1)
Other assets(2)
Derivative related
Liabilities
Deposits(1)
Other liabilities(3)
Securities purchased under
reverse resale agreements
Subordinated debentures
Derivative related
(Note 3)
(Note 4)
$ 297,104
$ 297,104
$
1,891,409
1,891,409
–
–
$ 492,173
$ 492,173
$
1,228,964
1,228,964
–
–
–
–
9,320,749
–
9,368,074
97,179
2,334
97,179
2,334
–
47,325
–
–
9,628,949
9,739,360
265,295
265,295
110,411
–
300,242
375,000
300,242
377,363
74
74
–
2,363
–
77,000
77,000
8,700,672
8,635,811
(64,861)
82,782
9,980
82,782
9,980
–
–
9,258,776
9,247,017
(11,759)
232,678
232,678
–
–
–
–
375,000
387,774
12,774
163
163
–
(1)
(2)
(3)
(4)
Loans and deposits exclude deferred premiums and deferred revenue, which are not financial instruments.
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.
Other liabilities exclude future income tax liability, deferred revenue, unearned insurance premiums and other items that are not financial instruments.
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.
96 f CWB 2009 Annual Report - Fundamentals
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 59 to 63 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 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
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
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, which is commonly referred to as Basel II. 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-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 the regulatory maximum) and any innovative capital not included in Tier 1.
During March 2009, the Bank issued 8.4 million preferred units for total proceeds of $209.8 million, which qualify as Tier 1 capital
(refer to Note 9). The preferred units, issued by way of the private placement and the public offering, each consist of one Non-
Cumulative 5-Year Rate Reset Preferred Share, Series 3 (Series 3 Preferred Shares) in the capital of the Bank with an issue price of $25.00
per share and 1.7857 and 1.7800 common share purchase warrants, respectively. Each warrant is exercisable at a price of $14.00 to
purchase one common share in the capital of the Bank until March 3, 2014 (refer to Note 18).
CWB 2009 Annual Report - Fundamentals
p 97
During the year, the Bank complied with all internal and external capital requirements.
CAPITAL STRUCTURE AND REGULATORY RATIOS AT YEAR-END
($ thousands)
Tier 1 Capital
Retained earnings
Accumulated unrealized losses on available-for-sale equity securities, net of tax(2)
Preferred shares
Common shares
Contributed surplus
Innovative capital instrument(3)
Non-controlling interest in subsidiary
Less goodwill of subsidiaries
Total
Tier 2 Capital
General allowance for credit losses (Tier A)(4)
Accumulated unrealized gains on available-for-sale equity securities, net of tax(2)
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)
2009
2008
$ 511,784
$ 448,203
–
209,750
226,480
19,366
105,000
267
(9,360)
1,063,287
61,153
2,118
380,000
443,271
(56,768)
(6,973)
–
221,914
14,234
105,000
–
(6,933)
775,445
60,527
–
380,000
440,527
(47,700)
$ 1,449,790
$ 1,168,272
11.3%
4.7
(0.6)
15.4%
8.1
8.9%
5.1
(0.5)
13.5%
9.2
(1)
(2)
(3)
(4)
(5)
(6)
Regulatory capital and capital ratios are calculated in accordance with the requirements of the Office of the Superintendent of Financial Institution, and capital is managed and
reported in accordance with the requirements of the Basel II Capital Adequacy Accord (Basel II).
Accumulated other comprehensive income related to unrealized losses on certain available-for-sale equity securities, net of tax, reduces Tier 1 capital, while unrealized gains on certain
available-for-sale equity securities, net of tax, increases Tier 2 capital.
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.
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, 2009, the Bank’s general
allowance represented 0.65% (2008 – 0.70%) of risk-weighted assets.
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, 2009 and October 31, 2008, all subordinated debentures are included in Tier 2B capital.
Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital.
98 f CWB 2009 Annual Report - Fundamentals
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 banking, trust and wealth management services to personal clients, small to medium-sized commercial
business clients and institutional clients primarily in Western Canada. The insurance segment provides home and auto insurance to individuals
in British Columbia and Alberta.
Banking and Trust
Insurance
Total
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
Non-controlling interest in subsidiary
Net Income(5)
Total average assets ($ millions)(4)
2009
2008
2009
$ 230,227
$ 222,837
$
6,127
$
7,203
223,024
74,013
297,037
13,500
147,571
38,560
5,191
217,646
54,338
271,984
12,000
125,748
40,589
644
5,483
17,599
23,082
–
10,611
3,360
2008
2009
5,780 $ 236,354
480
7,847
5,300
15,902
21,202
–
9,418
3,412
228,507
91,612
320,119
13,500
158,182
41,920
232
97,174 $
–
93,647 $
–
9,111 $
–
232
8,372 $ 106,285
2008
$ 228,617
5,671
222,946
70,240
293,186
12,000
135,166
44,001
–
$102,019
11,055 $
9,747 $
198 $
184 $
11,253 $
9,931
$
$
(1)
(2)
(3)
(4)
(5)
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.
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.
Amortization of intangible assets of $1,020 (2008 – $276) is included in the banking and trust segment and $250 (2008 – $250) in the insurance segment. Amortization of land, buildings and
equipment total $6,000 (2008 – $5,040) for the banking and trust segment and $1,503 (2008 – $1,330) for the insurance segment while additions amounted to $13,422 (2008 – $10,552) for the
banking and trust segment and $1,387 (2008 – $1,975) for the insurance segment. Goodwill of $6,106 (2008 – $3,679) is allocated to the banking and trust segment and $3,254 (2008 – $3,254) to
the insurance segment.
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.
Transactions between the segments are reported at the exchange amount, which approximates fair market value.
33.
business acquisition
Effective November 1, 2008 the Bank acquired 72.5% of the outstanding shares of Adroit Investment Management Ltd. (Adroit). Adroit is an
Edmonton, Alberta based firm specializing in wealth management for individuals, corporations and institutional clients. The results of operations
for Adroit have been included in the Bank’s consolidated financial statements since the effective acquisition date. The initial $6,481 acquisition cost
was paid in cash. Additional contingent consideration, to a maximum of $1,675, will be paid in cash if earnings targets are achieved over a two year
period. Any future contingent payment will be recorded when the liability has been incurred and will increase goodwill.
The following table summarizes the fair value of the assets acquired and liabilities assumed:
Net assets acquired
Other assets
Other intangible assets
Goodwill
$
$
90
3,964
2,427
6,481
Other intangible assets include customer relationships, non-competition agreements and a trademark. The trademark, which has an estimated value
of $280, is not subject to amortization. Adroit’s financial results, the goodwill and other intangible assets related to the acquisition are included in
the banking and trust segment. The total amount of goodwill and intangible assets are not deductible for income tax purposes.
CWB 2009 Annual Report - Fundamentals
p 99
34.
subsidiaries and affiliate
Canadian Western Bank Subsidiaries(1)
(annexed in accordance with subsection 308 (3) of the Bank Act)
October 31, 2009
Canadian Western Trust Company
Suite 3000, 10303 Jasper Avenue
$
60,753
Address of
Head Office
Carrying Value of
Voting Shares Owned
by the Bank(2)
Canadian Direct Insurance Incorporated
Valiant Trust Company
Edmonton, Alberta
Suite 600, 750 Cambie Street
Vancouver, British Columbia
Suite 310, 606 4th St. S.W.
Calgary, Alberta
Adroit Investment Management Ltd.
Suite 1250, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Financial Ltd.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Bank Leasing Inc.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Bank Capital Trust(3)
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
(1) The Bank owns 100% of the voting shares of each entity, with the exception of Adroit Investment Management Ltd. (72.5% ownership).
(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.
59,681
13,672
6,312
1,639
1,397
1,000
35.
subsequent event
On December 9, 2009 the Bank signed an agreement to acquire 100% of the common shares of National Leasing Group Inc. (National
Leasing) in exchange for cash and common shares of the Bank. The vendors may retain a participating interest in National Leasing for
up to 25% of the agreed upon enterprise value of $130 million. The acquisition is subject to the regulatory and other approvals and
is expected to close at the beginning of February 2010.
National Leasing is a privately held commercial equipment leasing company for small to mid-size transactions. National Leasing is
headquartered in Winnipeg, Manitoba, and has over 58,000 lease agreements with a collective book value of approximately $650 million,
including securitized leases which comprise approximately one half of the portfolio.
36.
comparative figures
Certain comparative figures have been reclassified to conform to the current period’s presentation.
100 f CWB 2009 Annual Report - Fundamentals
Glossary of Key Terms
allowance for credit losses:
An allowance set aside which, in management’s
opinion, is adequate to absorb both expected and
unexpected credit-related losses that are likely
to exist in the portfolio. It includes specific and
general allowances.
assets under administration:
Assets owned by customers, for which the Bank
provides custodial services. Services provided
in respect of assets under administration are
of an administrative nature and include such
things as record keeping, safekeeping, collecting
investment income or settling purchase and sale
transactions. These assets are not reported on the
Bank’s consolidated balance sheet.
assets under management:
Assets owned by customers, for which the
Bank provides investment management services.
Services provided in respect of assets under
management include the selection of investments
and investment advice. These assets are not
reported on the Bank’s consolidated balance sheet.
basis point: A unit of measure defined
as one-hundredth of one per cent.
capital: Primarily consists of common and
preferred shareholders’ equity, innovative capital
instruments and subordinated debentures. It can
support asset growth, absorb impacts from loan
losses and protect depositors.
derivative instruments: Financial
contracts whose value is derived from an
underlying price, interest rate, exchange rate
or price index. Forwards, options and swaps
are all derivative instruments.
efficiency ratio: Measures the efficiency
with which the Bank incurs expenses to generate
revenue. It expresses non-interest expenses
as a percentage of the sum of net interest income
on a taxable equivalent basis and other income.
A lower ratio indicates improved productivity.
earnings per share (eps), basic:
Calculated as net income less preferred share
dividends divided by the average number
of common shares outstanding.
earnings per share (eps), diluted:
Calculated as net income less preferred share
dividends divided by the average number
of common shares outstanding adjusted for
the dilutive effects of stock options and other
convertible securities (common share purchase
warrants).
fair value: The amount of consideration
that would be agreed upon in an arm’s length
transaction between knowledgeable, willing
parties who are under no compulsion to act.
general allowance: Established by the
Bank to recognize credit losses which are likely
embedded in the loan portfolio, but have not
yet been specifically identified on an individual
item-by-item basis.
hedging: Protecting against interest rate,
market or foreign exchange exposures by taking
positions that are expected to react to market
conditions in an offsetting manner.
impaired loans: Loans on which the Bank
no longer has reasonable assurance as to the
timely collection of interest and/or principal,
or where a contractual payment is past due
a prescribed period. Interest is not accrued
on impaired loans.
interest rate curve or yield curve:
A graph showing the term structure of interest
rates, plotting the yields of similar quality bonds
by term to maturity.
marked-to-market: The valuation
of certain financial instruments at fair value
as of the balance sheet date.
net interest income: The difference
between what is earned on assets such as loans
and securities and what is paid on liabilities such
as deposits and subordinated debentures.
net interest margin: Net interest
income, on a taxable equivalent basis, expressed
as a percentage of average total assets.
off-balance sheet instruments:
These are indirect credit commitments, including
undrawn commitments to extend credit and
guarantees.
osfi: The Office of the Superintendent
of Financial Institutions Canada (OSFI),
the regulator of federal banks, trust and
insurance companies.
provision for credit losses:
The amount charged against income necessary
to bring the allowance for credit losses to a level
determined appropriate by management. This
includes both specific and general provisions.
return on equity (roe): Net income
available to common shareholders (net income
less preferred share dividends), expressed as a
percentage of average common shareholders’
equity.
return on assets (roa): Net income
available to common shareholders (net income
less preferred share dividends), expressed
as a percentage of average assets.
risk: Financial institutions face a number
of different risks that expose them to possible
losses. These risks include, but are not limited to,
credit risk, market risk, operational risk, liquidity
risk, reputation risk, regulatory and legal risk and
insurance risk.
risk-weighted assets: Calculated using
weights based on the degree of credit risk for
each class of counterparty. Off-balance sheet
instruments are converted to balance sheet
equivalents, using specified conversion factors,
before the appropriate risk weights are applied.
secured lending: Loans or other obligations
in which assets are pledged as security to protect
the lender’s interests. Collateral can take many
forms, such as cash, highly rated financial
securities, property, inventory, equipment,
receivables, etc.
standby letters of credit and
letters of guarantee: Assurances given
by the Bank that it will make payments on behalf
of clients to third parties. The Bank has recourse
against its clients for any advanced funds.
swaps: Interest rate swaps are agreements to
exchange streams of interest payments, typically
one at a floating rate, the other at a fixed rate,
over a specified period of time, based on notional
principal amounts.
tangible common equity ratio:
The tangible common equity ratio (TCE) is a
ratio of TCE to risk-weighted assets. The level of
tangible common equity is generally considered
to be one of the most important measures of
a bank’s capital strength, and is often used to
assess the quality of a bank’s capital position.
CWB calculates tangible common equity as
total shareholders’ equity, less preferred shares,
unrealized gains/losses on available-for-sale
securities and cash flow hedges, goodwill, and
intangible assets.
taxable equivalent basis (teb):
The grossing up of tax-exempt income earned
on certain securities to an equivalent before-tax
basis. This ensures uniform measurement and
comparison of net interest income arising from
both taxable and tax-exempt sources.
tier 1 and total capital ratios:
These are ratios of capital to risk-weighted
assets, as stipulated by OSFI. Tier 1 capital, the
more permanent, consists primarily of common
shareholders’ equity, non-controlling interest
in subsidiaries plus non-cumulative preferred
shares, plus eligible Innovative capital
instruments, less unamortized goodwill and
ineligible intangible assets. Tier 2 capital consists
mainly of subordinated debentures and the
eligible general allowance. Together, Tier 1 and
Tier 2 capital less certain deductions (including
CWB’s investment in CDI) comprise total
regulatory capital.
CWB 2009 Annual Report - Fundamentals
p 101
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 M. 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.
Senior Vice President
General Counsel and
Corporate Secretary
Blair R. Himmelreich
Acting Vice President
Finance
Darrell R. Jones
Senior Vice President and
Chief Information Officer
Uve Knaak
Senior Vice President
Human Resources
Peter K. Morrison
Vice President
Marketing and Product
Development
cOmmErcial and
rEtail Banking
James O. Burke
Vice President
Equipment Financing Group
Mario V. Furlan
Vice President
Real Estate Lending
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 K.F. 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
adrOit invEstmEnt
managEmEnt
Valmon A. Vaillant
President
David D. Schuster
Executive Vice President
Maria K. Holowinsky
Vice President
valiant trust
Adrian M. Baker
President
Matt K. Colpitts
General Manager
OmBudsman
R. Graham Gilbert
(L – R) Howard Pechet, Arnold Shell , Alan Rowe, Robert Phillips,
Gerald McGavin, Allan Jackson, Robert Manning, Raymond Protti,
Larry Pollock, Wendy Leaney, Jack Donald. Missing: Albrecht Bellstedt
Larry M. Pollock
President and
Chief Executive Officer
Canadian Western Bank
Edmonton, Alberta
Raymond J. Protti
Consultant on national security
and financial services
Victoria, British Columbia
Alan M. Rowe
Partner
Crown Realty Partners
and Crown Capital Partners Inc.
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
BOARD OF DIRECTORS
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 Investments Ltd.
Edmonton, Alberta
Gerald A.B. McGavin,
C.M.,O.B.C., FCA
President
McGavin Properties Ltd.
Vancouver, British Columbia
Howard E. Pechet
President
Mayfield Consulting Inc.
Rancho Mirage, California, USA
Robert L. Phillips, Q.C.
President
R.L. Phillips Investments Inc.
Vancouver, British Columbia
102 f CWB 2009 Annual Report - Fundamentals
Shareholder Information
CWB Group Corporate
Headquarters
canadian Western Bank & trust
suite 3000, canadian Western Bank place
10303 Jasper avenue
Edmonton, alberta t5J 3x6
telephone: (780) 423-8888
fax: (780) 423-8897
Website: www.cwbankgroup.com
Transfer Agent and Registrar
valiant trust company
suite 310, 606 - 4th street s.W.
calgary, alberta t2p 1t1
telephone: (866) 313-1872
fax: (403) 233-2857
Website: www.valianttrust.com
Stock Exchange Listings
the toronto stock Exchange (tsx)
common shares: cWB
series 3 preferred shares: cWB.pr.a
common share purchase Warrants: cWB.Wt
Shareholder Administration
valiant trust company, with offices in calgary,
Edmonton, vancouver and toronto, serves as
transfer agent and registrar for the common
shares, preferred shares and common share
purchase warrants of cWB.
for dividend information, change in share
registration or address, lost share certificates, tax
forms or estate transfers, please write or call the
transfer agent and registrar, or email inquiries@
valianttrust.com.
Duplicated Communications
if you receive, but do not require, more than one
mailing for the same ownership, please contact the
transfer agent to combine the accounts.
Direct Deposit Services
shareholders may choose to have cWB common
and preferred cash dividends deposited directly
into their accounts held at their financial
institutions. to arrange direct deposit service,
please contact the transfer agent and registrar.
Eligible Dividend Designation
cWB designates all dividends for both common
and preferred shares paid to canadian residents as
“eligible dividends”, as defined in the income tax
act (canada), unless otherwise noted.
Dividend Reinvestment Plan
cWB’s dividend reinvestment plan allows common
and preferred shareholders to purchase additional
common shares by reinvesting their cash dividend
without incurring brokerage and commission fees.
for information about participation in the plan,
please contact the transfer agent and registrar.
Investor Relations
shareholders, institutional investors or research
analysts who would like additional financial
information are asked to contact:
investor relations department
canadian Western Bank
suite 3000, canadian Western Bank place
10303 Jasper avenue
Edmonton, alberta t5J 3x6
telephone: (800) 836-1886
fax: (780) 969-8326
Email: investorrelations@cwbank.com
more comprehensive investor information –
including supplemental financial reports, quarterly
financial releases, corporate presentations,
corporate fact sheets and frequently asked
questions – is available under the investor relations
section on our website at www.cwbankgroup.com
this 2009 annual report, along with our annual
information form, notice of annual meeting of
shareholders and proxy circular, is available on
our website. for additional printed copies of these
reports, please contact the investor relations
department.
filings are available on the canadian securities
administrator’s website: www.sedar.com
2010 Annual and Special Meeting
the annual and special meeting of the common
shareholders of canadian Western Bank will be held
in Edmonton, alberta, on march 4, 2010, at the
Winspear centre (the studio room), at 3:00 p.m.
mst (5:00 p.m. Est).
Corporate Secretary
gail l. Harding, Q.c.
senior vice president
general counsel and corporate secretary
canadian Western Bank
suite 3000, 10303 Jasper avenue
Edmonton, alberta t5J 3x6
telephone: (780) 969-1525
fax: (780) 969-8326
Complaints or Concerns regarding
Accounting, Internal Accounting
Controls or Auditing Matters
please contact either:
tracey c. Ball
Executive vice president and
chief financial Officer
canadian Western Bank
telephone: (780) 423-8855
fax: (780) 969-8326
Email: tracey.ball@cwbank.com
or
robert a. manning
chairman of the audit committee
c/o 210 – 5324 calgary trail
Edmonton, alberta t6H 4J8
telephone: (780) 438-2626
fax: (780) 438-2632
Email: rmanning@shawbiz.ca
Award of Excellence Recipients for 2009
Hard working. Enthusiastic. responsive. dedicated.
these are the characteristics exemplified by the recipients of the award of Excellence, an annual recognition for employees who every day,
live and breathe the qualities for which cWB group is known.
Exceeding the expectations of both clients and colleagues, these individuals consistently take initiative, innovate and inspire.
congratulations to the 2009 recipients of the award of Excellence.
Trent Bobinski, CWB Corporate Office
Henry Cheung, CDI Cambie
Jennifer Eng, CWB Lethbridge
Joan Hopp, CWB Edmonton 103rd Street
Craig Martin, CWB Langley
Zehra Mehrani, CWT Cambie
Wendy Nish, CWB Calgary Foothills
Anna Phan, Valiant Trust, Vancouver
Drinda Ribeiro, CDI Cambie
Toneille Steiner, CWB Corporate Office
Pam Szufnarowicz, CWB Kamloops
Marjan Wams, CWB Courtenay
CWB 2009 Annual Report - Fundamentals
p 103
Locations
Canadian
Western Bank
REGIONAL OFFICES
British Columbia
2200, 666 Burrard Street
Vancouver
(604) 669–0081
Greg Sprung
Northern Alberta
3000, 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
James Comstock
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
Broker Buying Centre
285, 2880 Glenmore Trail
(403) 720–8960
David Miller
GRANDE PRAIRIE
11226 – 100 Avenue
(780) 831–1888
Todd Kramer
LEDUC
5407 Discovery Way
(780) 986–9858
Brad Ford
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
Mario Furlan
West Broadway
110, 1333 West Broadway
(604) 730–8818
Jules Mihalyi
ABBOTSFORD
100, 2548 Clearbrook Road
(604) 855–4941
Rick Howard
COQUITLAM
Unit 310, 101
Schoolhouse Street
(604) 540–8829
Ron Baker
COURTENAY
200, 470 Puntledge Road
(250) 334–8888
Alan Dafoe
(Jason Zaichkowsky) - Acting
CRANBROOK
2nd Floor, Suite A
828 Baker Street
(250) 426–1140
Mike Eckersley
KAMLOOPS
Unit 101, 1211 Summit Drive
(250) 828–1070
Peter Greenway
KELOWNA
Kelowna
1674 Bertram Street
(250) 862–8008
Keith Wilkes
Kelowna Industrial
101, 1505 Harvey Avenue
(250) 860–0088
James 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 STRAWBERRY HILL
1, 7548 – 120 Street
(604) 591–1898
Bob Duffield
VICTORIA
1201 Douglas Street
(250) 383–1206
Bob Granger
SASKATCHEWAN
REGINA
100, 1881 Scarth Street
The Hill Center Tower II
(306) 757–8888
Kelly Dennis
VANCOUVER
100, 666 Burrard Street
(604) 602–2773
WINNIPEG
230 Portage Avenue
(204) 926–1547
NORTHERN ONTARIO
Barrie
16 Bear Creek Drive
(705) 719–6360
SOUTHERN ONTARIO
Woodbridge
101 Golden Gate Circle
(705) 882–9919
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
3000, 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
Adroit Investment
Management Ltd.
EDMONTON
1250, 10303 Jasper Avenue
(780) 429–3500
Canadian
Western Financial
EDMONTON
3000, 10303 Jasper Avenue
(780) 423–8888
SASKATOON
Saskatoon City Centre
244 – 2 Avenue
(306) 477–8888
Ron Kowalenko
Saskatoon North Landing
101, 2803 Faithfull Avenue
(306) 244–8008
Dwayne Demeester
YORKTON
45, 277 Broadway Street East
(306) 782–1002
Barb Apps
MANITOBA
WINNIPEG
230 Portage Avenue
(204) 956–4669
Robert Bean
Canadian Direct
Financial
EDMONTON
Suite 2200, 10303 Jasper Avenue
(877) 441–2249
www.canadiandirectfinancial.com
Canadian
Western Trust
VANCOUVER
600, 750 Cambie Street
(604) 685–2081
TORONTO
2950, 130 King Street W.
(416) 360–0713
CALGARY
Suite 310, 606 – 4 Street S.W.
(403) 717–3145
EDMONTON
3000, 10303 Jasper Avenue
(780) 969–8332
REAL ESTATE LENDING
22nd Floor, 666 Burrard Street
(604) 669–0081
Optimum Mortgage
EDMONTON
3000, 10303 Jasper Avenue
(780) 423–9748
CALGARY
300, 5222 – 130 Avenue S.E.
(403) 726–8239
COQUITLAM
310, 101 Schoolhouse Street
(604) 523–5250
104 f CWB 2009 Annual Report - Fundamentals
Five Year Financial Summary
Performance Targets
($ thousands, except per share amounts)
Results of Operations
Net interest income (teb)(1)
Less teb adjustment
Net interest income per financial statements
Other income
Total revenues (teb)
Total revenues
Net income
Return on common shareholders’ equity(2)
Return on average total assets(3)
Per Common Share(4)
Average common shares outstanding (thousands)
Earnings per share
Basic
Diluted
Dividends
Book value
Market price
High
Low
Close
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and resale agreements
Loans
Deposits
Subordinated debentures
Shareholders’ equity
Assets under administration
Assets under management
Capital Adequacy
Tangible common equity to risk-weighted assets(5)
Tier 1 ratio(6)
Total ratio(6)
Other Information
Efficiency ratio (teb)(7)
Efficiency ratio
Net interest margin (teb)(8)
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
$
$
2009
2008
2007
2006
2005
$
$
236,354
7,847
228,507
91,612
327,966
320,119
106,285
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
13.2%
0.86
15.9%
1.03
17.4%
1.18
14.8%
1.12
12.7%
1.03
63,613
63,214
62,354
61,514
60,394
$
1.51
1.47
0.44
12.16
23.00
7.52
21.38
$
1.61
1.58
0.42
10.70
32.20
14.67
18.44
$
1.54
1.50
0.34
9.48
30.86
20.78
30.77
$
1.17
1.13
0.25
8.39
22.78
16.64
21.15
0.90
0.87
0.19
7.48
20.35
11.04
17.60
$ 11,635,872
2,188,513
9,236,193
9,617,238
375,000
986,499
5,467,447
878,095
$ 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
1,649,065
—
—
—
—
8.0%
11.3
15.4
48.2%
49.4
2.10
2.03
0.15
0.68
1,339
37
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
(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 common shareholders’ equity is calculated as net income after preferred share dividends divided by average common shareholders’ equity.
(3) Return on assets is calculated as net income after preferred share dividends 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) Tangible common equity to risk-weighted assets is calculated as shareholders’ equity less subsidiary goodwill divided by risk-weighted assets, calculated in accordance with guidelines issued by the Office of the Super-
intendent of Financial Institutions Canada (OSFI). As of November 1, 2007, OSFI adopted a new capital management framework called Basel II and capital is managed and reported in accordance with those requirements.
Prior year ratios have been calculated using the previous framework.
(6) 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 managed and
reported in accordance with those requirements. Prior year ratios have been calculated using the previous framework.
(7) Efficiency ratio is calculated as non-interest expenses divided by total revenues.
(8) Net interest margin is calculated as net interest income divided by average total assets.
When this past fiscal year began, everyone in the financial services
industry – including Canadian Western Bank Group – was braced for
a downturn. While the extent of the downturn was unknown, we knew
challenging market and economic conditions would have an ongoing
impact, and that related issues such as lower interest rates and a higher
level of impaired loans would be reflected in our overall performance.
We are pleased to report that Canadian Western
Bank Group achieved or surpassed four out of seven
of our 2009 performance target ranges despite
the foregoing uncertainty. Annual performance
highlights included record earnings and revenues,
and an industry-best provision for credit losses
measured as a percentage of average loans.
In the coming year, while we are still uncertain
about the timing and strength of an economic
recovery, our minimum performance targets reflect
ongoing confidence in our business strategies and
the strength of our core western Canadian markets.
Net income growth
Total revenue (teb) growth
Loan growth
2009
Target Ranges
2009
2010
Performance Minimum Targets
2 to 5%
5 to 8%
10%
4%
10%
7%
12%
12%
10%
Provision for credit losses as a percentage of average loans
0.15 to 0.18%
0.15%
0.15 to 0.20%
Efficiency ratio (teb)
Return on common shareholders’ equity
46 to 49%
14 to 16%
48.2%
13.2%
48%
13%
Return on assets
0.90 to 1.05%
0.86%
0.90%
Eco Audit
This annual report uses paper that comes from
well-managed forests, certified in accordance with
the international standards of the Forest Stewardship
Council (FSC). The paper used for the report cover
contains 30% Post Consumer Recycled (PCR) and
the paper used for the report contains 100% PCR
fibre instead of virgin paper. As a result, the following
savings to our natural resources were realized:
TREES SAVED
215
WOOD SAVED
30 TONNES
ENERGY NOT CONSUMED
68 (Million BTUs)
NET GREENHOUSE GASES PRE VENTED
20,449(lbs. Co2 Equiv.)
WASTE WATER
98,486 (Water Saved Gallons)
SOLID WASTE
5,980 (Landfill Reduced lbs.)
Above information is based on use of the following products:
155,000 sheets of 23 x 35, Envirographic 100, 60lb Text, 102M
8,500 sheets of 26 x 40, Via Felt, 80lb Cover, 320M
Data research provided by www.environmentaldefence.org
Designed by Vision Creative Inc. www.visioncreativeinc.com
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Fundamentals
{ principles for success }
C A NA DI A N W E S T E R N BA N K GROU P
2 0 0 9 A N N U A L R E P O R T
9
2008 annual report
Our History of Financial Performance
TOTAL ASSETS ($ MILLIONS)
TOTAL LOANS ($ MILLIONS)
11,636
10,601
9,525
7,268
5,705
2005
2006
2007
2008
2009
9,236
8,624
7,406
5,782
10,000
8,000
6,000
4,000
4,590
2,000
0
2005
2006
2007
2008
2009
TOTAL REVENUES (teb) ($ MILLIONS)
NET INCOME ($ MILLIONS)
328
299
273
222
186
2005
2006
2007
2008
2009
PROVISION FOR CREDIT LOSSES
(AS A PERCENTAGE OF AVERAGE LOANS)
0.24%
0.20%
0.16%
0.15%
0.15%
2005
2006
2007
2008
2009
120
100
80
60
40
20
0
100
75
50
25
0
102
106
96
72
54
2005
2006
2007
2008
2009
EFFICIENCY RATIO (teb)
(EXPENSES TO REVENUES)
48.6% 46.0% 44.6% 45.2%
48.2%
2005
2006
2007
2008
2009
12,000
10,000
8,000
6,000
4,000
2,000
0
350
300
250
200
150
100
50
0
1.00
0.75
0.50
0.25
0.00