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G R O U P
D Y N A M I C S
CANADIAN WeSteRN BANk GROUP
2012 ANNUAl RePORt
Financial PerFormance
Summary(1)
cwbankgroup.com
Total Loans
($ millions)
Total Assets
($ millions)
13,954
12,293
10,496
12,702
11,636
10,601
9,236
8,624
16,873
14,849
Total Revenue (teb)
($ millions)
525
484
434
328
299
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
GAAP
IFRS
GAAP
IFRS
GAAP
IFRS
Net Income Available to
Common Shareholders
($ millions)
148
150
102
96
Efficiency Ratio (teb)
(expenses to revenues)
Provision for Credit Losses
(as a percentage of average loans)
172
45.2%
48.2%
44.1%
44.9%
44.8%
0.21%
0.19%
0.19%
0.15%
0.15%
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
GAAP
IFRS
GAAP
IFRS
GAAP
IFRS
(1) As of 2011, financial results are reported under International Financial Reporting Standards (IFRS), as
opposed to Canadian Generally Accepted Accounting Principles (GAAP), and may not be directly comparable.
Performance Targets
Net income available to common shareholders growth
Total revenue (teb) growth
Loan growth
Provision for credit losses as a percentage of average loans(1)
Efficiency ratio (teb)(2)
Return on common shareholders’ equity(3)
Return on assets(4)
2012
Minimum Targets
2012
Performance
2013
Minimum Targets
10%
7%
10%
0.20 to 0.25%
46%
15%
1.05%
15%
9%
14%
0.19%
44.8%
15.0%
1.08%
8%
8%
10%
0.18 to 0.23%
46%
14%
1.05%
(1) Provision for credit losses divided by average total loans.
(2) Efficiency ratio (teb) calculated as non-interest expenses divided by total revenues (teb), excluding the non-tax deductible change in fair value of contingent consideration.
(3) Return on common shareholders’ equity calculated as net income available to common shareholders divided by average common shareholders’ equity.
(4) Return on assets calculated as net income available to common shareholders divided by average total assets.
CWB Group 2012 Annual Report
1
Canadian
Western Bank
Group at a
Glance
CWB Group
Employees†: 2,000+
Clients: 600,000+
Total assets: $16.8 billion+
CEO: Larry M. Pollock
Chair: Allan W. Jackson
Optimum Mortgage
Employees†: 45+
Total mortgages: $1,090 million+
Number of client mortgages: 3,700+
Operating Division
Canadian Western Bank
Employees†: 1,250+
Consecutive profitable quarters: 98
Number of branches: 41
Number of commercial
accounts: 15,000+
Canadian Western Bank (CWB),
along with its affiliate companies
and operating divisions, comprise
CWB Group
Canadian Western Trust
Employees†: 65+
Investment accounts: 48,000+
Total assets under administration:
$6.9 billion+
Canadian Western Financial
Mutual fund representatives: 125+
Number of mutual fund clients: 3,700+
Operating Division
Subsidiary (Affiliate) Companies
Canadian Direct Financial
Established: 2008
Client deposits: $177 million+
Provinces and territories in Canada
where products are offered: 12
Adroit Investment Management
Employees†: 10+
Total assets under management: $855 million+
Number of client relationships: 300+
Canadian Direct Insurance
Employees†: 300+
Number of policies outstanding: 190,000+
Annual gross written premiums: $134 million+
Valiant Trust
Employees†: 45+
Client appointments in 2011: 560+
Number of clients: 320+
National Leasing
Employees†: 280+
Total leases under management: $890 million+
Number of leases outstanding: 62,000+
2
CWB Group 2012 Annual Report
† Includes both full- and part-time employees
canadian
WeStern
Bank
Canadian Western Bank (CWB) is the largest publicly traded
Canadian bank headquartered in Western Canada. CWB Group is
comprised of CWB, its five affiliate companies: National Leasing;
Canadian Direct Insurance (CDI); Canadian Western Trust
(CWT); Valiant Trust; and Adroit Investment Management, and
its two operating divisions: Canadian Direct Financial (CDF); and
Optimum Mortgage. Together, CWB Group offers a wide range
of business and personal banking, trust, insurance and wealth
management services across Canada. CWB Group’s vision and
mission set our strategic direction and act as a guide for how we
make decisions and serve our clients.
Vision
CWB Group is seen as crucial to our clients’ futures.
mission
To build a western Canadian-based financial services franchise
through the responsible delivery of:
• Entrepreneurial approaches to assist clients and
consistently grow our banking, leasing, trust, insurance and
wealth management businesses;
• Best-in-class client experiences that are responsive,
resourceful and realistic;
• Relevant financial products that fit with our demonstrated
areas of expertise and chosen geographic markets;
• Progressive career opportunities that are engaging,
educational and rewarding;
• Meaningful contributions to the communities where
CWB Group operates; and
• Consistent profitability and strong shareholder returns
that reflect an industry-leading, growth-focused group
of companies.
taBle oF contentS
Financial Performance Summary........................................................... 1
Governance Structure, Updates & Initiatives .................................. 14
CWB Group at a Glance ......................................................................... 2
Board of Directors .................................................................................. 16
Introduction ............................................................................................... 3
Management’s Discussion and Analysis...........................................17
Table of Contents ..................................................................................... 3
Financial Statements ............................................................................ 64
Message from the CEO – Larry Pollock ..............................................4
Shareholder Information......................................................................110
Interview with the President – Chris Fowler ...................................... 6
Award of Excellence Recipients for 2012 .........................................111
Interview with the Chair – Allan Jackson ........................................... 8
Eco Audit ..................................................................................................111
20-year Performance Highlights ........................................................ 10
Locations ................................................................................................. 112
Executive Committee & Senior Officers ............................................13
CWB Group 2012 Annual Report
3
meSSage From the chieF
executiVe oFFicer (ceo)
“We
achieved
record financial
performance and
strong growth amidst
very challenging
market conditions.”
Larry Pollock, CEO
With fiscal 2012 now behind us, I take great satisfaction in reporting
that we achieved record financial performance and strong growth
amidst consistently challenging market conditions. While talk of
global uncertainties and slow economic growth permeated the
headlines once again, we continued to do what we’ve done over the
past 20-plus years: profitably and responsibly grow our businesses
while adding value for our stakeholders. Record results were driven
by strong double-digit loan growth, steadily improved credit quality
and meaningful contributions from our complementary businesses.
Managing the combined impact of very low interest rates and
competitive factors was perhaps our greatest challenge this year as
we continued to face pressure on net interest margin. Once again,
our unique, growth-focused business has proven to be one of the
most consistently profitable in the Canadian financial industry, as
demonstrated by the achievement of the Bank’s 98th consecutive
profitable quarter.
Capital and liquidity regulatory requirements will change under Basel III,
and we will ensure CWB Group’s business strategy continues to be
focused on producing strong and consistent results for our shareholders,
while complying with these new standards. One important component
of our strategy includes a commitment to steadily develop our
infrastructure and technology to both enhance growth and increase
efficiencies. Infrastructure highlights this year include a beautiful
new branch in Winnipeg, which adds to our presence in Manitoba. In
Saskatchewan, we are relocating our Regina branch and are also building
a new, much larger location in the growing city of Yorkton. Our flagship
main branch in Edmonton will be relocated to a significantly larger
location, while our St. Albert branch is also expanding to improve our
presence in that city.
4
CWB Group 2012 Annual Report
Some other highlights in 2012 included Optimum Mortgage
surpassing $1 billion of total loans, exceptional growth and
profitability in our Equipment Finance Group and steadily growing
contributions from National Leasing. The progression of and
contributions from the retail side of our business, which is mainly
focused on raising branch and trust deposits, was also very
impressive this year. Deposit growth was further augmented
by the ongoing development of Canadian Direct Financial, our
Internet-based division of the Bank, which we believe can add much
more significant strategic value moving forward. In addition, we
further enhanced and diversified our funding capabilities through
highly successful offerings of CWB senior deposit notes
in the debt capital markets.
As always, CWB Group’s many notable achievements were
entirely owing to our dedicated staff and their collective
commitment to delivering exceptional client services, which I
believe are second to none. I would like to personally thank each
and every one of our employees for their invaluable contributions,
and their continued dedication in 2013 and beyond.
As many of you know, I will be stepping down as CWB’s
CEO in March 2013 at our Annual Meeting of Shareholders.
I am proud to say that I am truly fortunate to have had the
opportunity to participate in the spectacular growth and
development of this organization from its infancy. When I first
joined in 1990, we had a $16 million market capitalization,
which has grown today to reach more than $2.3 billion. Our
balance sheet is comprised of nearly $17 billion of high quality
assets, and, on an apples-to-apples comparison, I believe
we have the strongest capital base in the Canadian banking
industry. Our expansion into small-ticket leasing (National
Leasing), insurance (Canadian Direct), trust services (Canadian
Western Trust and Valiant Trust) and wealth management
(Adroit) has resulted in very meaningful contributions toward
CWB Group’s performance and diversification, as well as
our award-winning corporate culture. I am also very proud
of CWB’s history of maintaining one of the strongest growth
profiles and lowest loan loss records in the industry.
So as I step away, I am leaving our shareholders with a proven
and highly dedicated management team, as well as a rock-solid
balance sheet. I say with complete confidence that CWB Group
has never been stronger. We have more than 2,000 tremendous,
innovative people who gain genuine satisfaction from both helping
our clients and exceeding expectations. I am so very proud of them
all. Our succession will be internal and Chris Fowler will provide
excellent leadership as he transitions to the role of CEO. He is one
of us, has lived the culture and has been a key to our success for
more than 21 years. The senior management team remains intact,
as does their collective wealth of experience. I would like to thank
our shareholders for investing in CWB Group, and our dedicated
employees, our Board and the many thousands of great clients
who borrow, deposit, invest and choose to do business with us.
In conclusion, the greatest satisfaction in my career has been the
privilege of working with such a tremendous group of people, some
of whom are retired, some of whom have passed on, but many more
who remain committed to taking CWB Group to the next level of its
development. To our employees, clients and others, I will remember
you forever for affording me the opportunity to work in such a dynamic
workplace - and through it all, we had a whole lot of fun!
Thank you very much for fulfilling all of my business goals and dreams
beyond anything I could have imagined.
Sincerely,
Larry Pollock
Chief Executive Officer
CWB Group 2012 Annual Report
5
an interVieW With
the PreSident,
chriS FoWler
The title of this year’s Annual Report is “Group Dynamics.”
What makes CWB Group a dynamic company?
We are dynamic in many ways, but it really boils down to our people
and the passion they bring to their work each day. Our culture is
entrepreneurial, which allows us to be highly responsive and flexible when
making decisions. Maintaining our strong track record of growth also
requires that we adapt and constantly evolve our businesses to ensure
we maintain our competitive advantages, and continue to meet the
needs of our clients and other stakeholders. This has been instrumental
in our ability to thrive in all operating environments, including the current
period of very low interest rates, the ups and downs of credit cycles
and the challenges of the global financial crisis that began in 2008.
CWB Group had another year of record financial performance in 2012.
What were some of the organization’s most notable accomplishments?
Our most significant financial accomplishment was the continuation of
strong, profitable growth despite a challenging operating environment.
We met or exceeded all of our 2012 performance targets. However, the
combination of very low interest rates, a flat yield curve, and competitive
pressures continued to materially impact our net interest margin, which
was ultimately reflected in constrained revenue growth compared to
what would be expected in a more normal historical environment. We
were pleased to finalize the Bank’s ownership of National Leasing in the
third quarter. We’re also very proud of our placement among Canada’s
50 Best Employers for a seventh consecutive year, an accomplishment
that was announced in November 2012. Our collective commitment
to offering exceptional levels of service is one of CWB Group’s key
competitive advantages, and our group of highly dedicated and
enthusiastic employees continually demonstrate this through their
invaluable contributions.
You were recently appointed as CWB Group’s President. What is your
vision for the future and how are you positioning CWB Group to achieve
that vision?
CWB Group’s vision is to be seen as crucial to our clients’ futures. This
reflects our desire to be viewed by clients as a highly valued and strategic
financial partner. Every client has different needs, and our vision requires
that we are equipped to recognize those needs and focus on offering
our clients the financial services that add the most value for them. One
example could include a full business banking relationship, where we
also provide personal banking, wealth management and trust services.
However, it’s equally applicable in circumstances where we simply
provide equipment financing for a business that requires assistance
with its capital expenditures. In either case, our goal is to be the partner
of choice for our clients in the areas where we have proven expertise.
“We are
dynamic
in many ways, but it really
boils down to our people
and the passion they bring
to their work each day.”
Chris Fowler, President and Chief Operating Officer
6
CWB Group 2012 Annual Report
We are communicating and acting to achieve this vision across
every corner of our business. Our collective commitment to exceed
expectations needs to be cemented in our approaches with clients,
the way we interact with our fellow employees and how we get
involved in the communities where we operate. The achievement of
our vision also requires a high degree of trust, and we will continue to
focus on building strong business relationships.
You have worked with Larry Pollock and several members of
CWB Group’s senior management team for more than 20 years.
How has this prepared you to lead CWB Group into the future?
I have benefited over many years by working closely with members
of senior management, both past and present, who have tremendous
amounts of experience and a long history of success. Our existing
management team remains in place and we all share common goals,
have deep mutual respect and work very well together. I have also
learned a lot from Larry, who has been a highly valued mentor for me
for many years. I believe my breadth of experience and knowledge of
different facets of our business gives me the necessary perspectives
to further enhance our culture and continue leading CWB Group’s
growth story. I have transitioned over my career from generating
business myself to becoming a facilitator for all of our businesses.
I am now responsible for cultivating a work environment where
everyone can be successful. It is my job to make sure our entire group
of companies works together on behalf of our clients, shareholders,
communities and other stakeholders. This objective forms the basis
of our strategic theme to make the whole worth more than the sum of
the parts.
Where do you see the greatest opportunities for growth across
CWB Group’s lines of business?
We have a strong presence in all of our key western Canadian
markets, but there is still substantial room for growth. The same can
be said for each company of CWB Group. Our continued investment
in people, infrastructure and technology will position us to better
manage the development of our businesses and enhance CWB
Group’s capacity to deliver our clients a more comprehensive suite
of relevant products and services. I believe this creates tremendous
potential to extend more financial offerings to our existing clients,
while also attracting new business.
We have a strategic focus and desire to grow sources of non-interest
revenue in both the Bank and our complementary companies. While
we won’t sway from our primary geographical focus in Western
Canada, we see meaningful potential in extending more of our
business offerings to the rest of Canada, particularly in Ontario. By
necessity, most of the very large Canadian banks have global growth
strategies, but we still have significant untapped markets right
here within our borders. Effectively managing risks, including the
challenges of ongoing regulatory change, is also a top priority for us.
CWB Group has an award-winning culture. How does the culture
impact business success?
The basis of our organizational culture was established by our founders’
belief that building strong relationships was key to business success. They
further believed that maintaining our headquarters and core presence in
Western Canada would prove to be a sustainable competitive advantage
in the banking industry – and they were right. We are committed to being
an employer of choice, and we work to foster an environment where our
employees know they make a difference. We also believe it resonates
strongly when building client relationships if you have highly satisfied and
engaged people. Our culture is crucial to CWB Group’s success, and we
will continue to nurture this core advantage going forward.
What major investments are being made to better position CWB
Group for the future?
In addition to ongoing investment in our key assets – the people who
work here – over the past five years we have undertaken an extensive
redevelopment of both our technology and infrastructure. I’m pleased
to say that we are now positioned to begin realizing more of the benefits
of these investments, such as those offered by the new loan origination
system we implemented in 2011. We just launched a major program to
replace our core banking system, which is expected to be completed by
the second half of 2015. This will create many additional advantages, as
well as business flexibility for us. In particular, it will augment our ability to
benefit from economies of scale and help us better understand our client
relationships so we can further enhance our service offerings. Together
with the loan origination system, the core banking system is a critical
component to collect and disseminate the data we need for an eventual
transition to an advanced internal ratings based (AIRB) approach for
calculating risk-weighted assets. Although it will be subject to regulatory
approval, the implementation of an AIRB methodology will not only help
us better manage our credit portfolio as we continue to grow, it will give
us additional flexibility with regard to managing regulatory capital.
What are your expectations for CWB Group in 2013 and beyond?
Our primary goal is to meaningfully grow our earnings and assets while
continuing to strategically invest in CWB Group’s future. This goal
is partly reflected in our 2013 target for another year of high quality,
double-digit loan growth, which we will continue to support with our
proven underwriting capabilities. CWB’s solid capital position has us well
positioned to manage the upcoming transition to Basel III. We are also
working hard to better define key performance indicators for certain parts
of our businesses to enhance our strategic planning, implementation and
measurement processes. Finally, given that we are experiencing a shift in
executive leadership, one of my primary commitments is to ensure that
we continue developing and supporting our culture and our great team
of employees. The way I see it, CWB Group has incredible potential. For
our team, our clients and our shareholders, I am extremely excited about
what the future holds.
CWB Group 2012 Annual Report
7
an interVieW With
the chair,
allan JackSon
As Chair of the Board of Directors (the Board), how would you
summarize the Board’s main areas of focus over the past year?
As Chair, my goal is to ensure the effectiveness of our Board as
we collectively oversee management of the organization. While
our Board sets the tone for CWB Group’s strategic direction, the
management team is ultimately responsible for making it happen.
When I look back over the past year, working on our transition plan
for a new CEO continued to be a headline topic, but it was something
that our Board has been focused on for quite some time. There
was also heightened focus at both the Board and management
levels on various aspects of risk management. While effective
risk management has always been a fundamental objective for
CWB Group, evolving governance practices combined with the
organization’s growth, in terms of both size and complexity, has
required us to look at certain things through slightly different lenses.
Can you give us some additional perspective on the Board’s view of
risk management, evolving governance practices and the changing
regulatory landscape?
This year we worked to better align our risk management
practices with an enterprise-wide risk framework. One of our
Board’s top priorities is to maintain a comprehensive approach to
risk. We also need to ensure that we have the right tools, people
and processes in place to effectively deliver on this part of our
mandate. Progress continued in 2012 on the formalization and
approval of a Group-wide risk management framework.
One of the significant developments faced by all financial
institutions worldwide lies in the ongoing use of sophisticated
computer models to assess risk. While these models are
wonderful tools to assist with risk management, they should
never be relied upon as a substitute for good judgment. CWB
Group has never lost sight of the importance of good judgment,
and we will ensure this continues to be the case going forward.
We continually evaluate best practices for governance and take a
prudent approach in assessing, or adopting, these practices in the
context of what we believe are in the best interests of CWB Group
and its shareholders. In 2012, we completed enhancements to our
self-assessment process to help confirm the effectiveness of the
Board, our committees and the performance of individual directors.
Managing the impact of ongoing regulatory changes is the “new
normal” for all financial institutions globally, including CWB Group.
Given the importance of this topic and the implications of changing
regulations on our businesses, we remain abreast of pending changes,
as well as their potential impacts. At our request, representatives
from the Office of the Superintendent of Financial Institutions
8
CWB Group 2012 Annual Report
(OSFI) gave our Board a summary of the evolving regulatory
landscape on two separate occasions this year. I’m very pleased
to confirm that CWB Group is well positioned for the forthcoming
transition to the Basel III regulatory capital framework in 2013.
You mentioned the Board’s emphasis on ensuring an effective
CEO transition when Larry Pollock steps down; can you provide
some details about the Board’s approach to this?
The Board undertook an extensive planning process over the past
several years to determine Larry’s successor. We looked broadly at
the marketplace and closely considered the needs of our organization,
both today and in the future. Resoundingly, the Board decided Chris
Fowler is the right person to lead CWB Group, our growth and our
people going forward. He is also the right person to ensure we uphold
our invaluable organizational culture. Accordingly, in August of this
year, we appointed Chris to the role of President, in addition to Chief
Operating Officer (COO). Larry will continue as CEO until our Annual
Meeting of Shareholders in March 2013. After that date, Chris will
formally take on the role of President and CEO.
Can you explain why the Board chose Chris Fowler to lead CWB
Group going forward?
Chris has been with us for more than 21 years, and has been a key part
of our executive management team for the past six years. As our COO,
he was instrumental in creating the current strategic business plan
for CWB Group, and has always impressed our Board members with
his thoughtful vision of the organization’s future. In many respects,
choosing Chris was an easy decision. He is a principled leader who is
highly motivated and enthusiastic about the opportunity to take CWB
Group to the next level of its development. Chris is a team player who
possesses the qualities and attributes our employees, clients, investors
and the marketplace expect of the senior leader of our growing group
of companies. I believe Chris personifies our culture: he is intelligent,
kind, responsive, dedicated, humble, collaborative, a smart thinker
and is always focused on doing the right thing for the right reasons.
He has the complete confidence and support of the directors, and I
am personally very excited to watch him deliver in his new role.
How has Larry Pollock influenced CWB Group’s success and will
he have an on ongoing role in the organization in the future?
As a Board, we cannot express enough appreciation for Larry’s
amazing contributions and his strong leadership role in helping
build CWB Group to what it is today. He has been our President
and CEO for 22 years and has been instrumental in our growth
from a small, regional bank into a multi-faceted financial services
firm that does business across the country. What a tremendous
legacy he has given us. In addition to our achievement of
consistently strong financial performance, Larry’s leadership is
defined by two other achievements that are just as impressive.
First, he spearheaded the development of a workplace culture
for CWB Group that is envied by companies across Canada.
Second, Larry assembled an incredibly talented and effective
senior management team that has been equally crucial to our
success. This team is ready to continue to deliver and support our
incoming CEO in his new role. The exceptional performance and
depth of current executive and senior management was a deciding
factor in our selection of Chris as CWB Group’s next leader.
Larry has a two-year employment agreement to serve the
organization in an advisory capacity, as requested by the executive
team and the Board. We are fortunate that Larry has agreed to stay
involved with CWB Group, as his ongoing support and insight will
be invaluable.
“We
continually
evaluate best practices
for governance and take
a prudent approach in
assessing, or adopting,
these in the context of what
we believe are in the best
interests of CWB Group and
its shareholders.”
Allan Jackson, Chair of the Board
So what does CWB Group’s strong financial position and the
forthcoming change in leadership mean for the organization
and its shareholders?
In almost all respects, it’s business as usual. Like every other day,
the collective goal of the Board, management and all other CWB
Group employees is to continue to work together to profitably grow
our businesses by supporting both our clients and each other. It’s
an exciting time for all of us as a new leader brings forth his ideas
and vision for building on the success of CWB Group, and tapping
further into its significant potential.
CWB Group 2012 Annual Report
9
172
150
148
96
102
96
20-year PerFormance
highlightS(1)
NET INCOME AVAILABLE
TO COMMON
SHAREHOLDERS
$MILLIONS
20 yearS
72
54
44
38
30
30
26
19
20
16
13
11
5
2
‘93
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
IFRS
$0.62
$0.54
$0.44
$0.44
$0.42
(1) As of 2011, financial results are reported under International Financial Reporting Standards (IFRS), as
opposed to Canadian Generally Accepted Accounting Principles (GAAP), and may not be directly comparable.
GAAP
DIVIDENDS PER
COMMON SHARE(2)
20 YEARS
20 yearS
$0.34
$0.25
$0.20
$0.19(4)
$0.1200(3)
$0.0750
$0.09
$0.10
$0.0850
$0.12
$0.0625
$0.0375
$0.0125
$0.0175
$0.0250
‘93
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
(2) Dividends are adjusted for stock dividends effecting a two-
for-one split of CWB’s common shares in both 2005 and 2007.
(3) Includes the last annual dividend and one semi-annual dividend.
(4) Includes the last semi-annual dividend and three quarterly dividends.
10
CWB Group 2012 Annual Report
525
484
434
328
TOTAL REVENuES (teb)
$MILLIONS
20 yearS
299
273
222
186
152
133
113
105
89
75
68
57
51
41
23
17
‘93
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
GAAP
IFRS
12,293
13,954
10,496
9,236
TOTAL LOANS
$MILLIONS
20 yearS
8,624
7,406
5,782
4,590
3,930
3,529
3,182
2,883
2,560
2,254
1,990
1,710
1,478
1,135
600
511
‘93
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
GAAP
IFRS
CWB Group 2012 Annual Report
11
PROVISION FOR CREDIT LOSSES
20 yearS
CWB Group
Average of six largest Canadian banks(5)
(5) Average of the six largest Canadian banks is calculated
based on information contained in the publicly available
company reports of the following Toronto Stock Exchange
(TSX) trading symbols: BMO, BNS, CM, NA, RY and TD.
1.00%
0.86%
0.56%
0.53%
0.42%
0.40%
0.37%
0.29%
0.25%
0.15%
0.24%
0.21%
0.20%
0.20%
0.16%
0.15%
0.15%
0.21%
0.19%
0.19%
0.76%
0.51%
0.47%
0.38%
0.35%
0.32%
0.61%
0.47%
0.38%
0.30%
0.29%
0.32%
0.30%
0.25%
0.22%
0.18%
0.21%
0.23%
0.26%
0.25%
‘93
‘94
‘95
‘96
‘97
‘98
‘99
‘00
‘01
‘02
‘03
‘04
‘05
‘06
‘07
‘08
‘09
‘10
‘11
‘12
GAAP
IFRS
CWB BANkING LOCATIONS
Banking location
Grande Prairie
Prince George
St. Albert
Edmonton (5)
Sherwood Park
Leduc
Red Deer
Kamloops
Calgary (5)
Courtenay
Nanaimo
Vancouver (4)
Coquitlam
Langley
Kelowna(2)
Cranbrook
Richmond
Victoria
Abbotsford
Surrey (2)
Medicine Hat
Lethbridge
Saskatoon (2)
Yorkton
Regina
Winnipeg (2)
12
CWB Group 2012 Annual Report
executiVe
committee
& Senior oFFicerS
CWB Group Executive Committee
• Larry M. Pollock
Chief Executive Officer
• Chris H. Fowler
President and
Chief Operating Officer
• William J. Addington, FCMA
Executive Vice President
• Tracey C. Ball, FCA, ICD.D
Executive Vice President and
Chief Financial Officer
• Randy W. Garvey, FCMA
Executive Vice President
• Brian J. Young
Executive Vice President
CWB Group Senior Officers
Corporate Officers
• Richard R. Gilpin
Senior Vice President
Credit Risk Management
• Ricki L. Golick
Senior Vice President and
Treasurer
• Carolyn J. Graham, FCA
Senior Vice President and
Chief Accountant
• Gail L. Harding, Q.C.
Senior Vice President,
General Counsel and
Corporate Secretary
• Darrell Jones
Senior Vice President and
Chief Information Officer
• Uve Knaak
Senior Vice President,
Human Resources
• Jack C. Wright
Senior Vice President
Commercial and
Retail Banking
• Michael N. Halliwell
Senior Vice President and
Regional General Manager
• Gregory J. Sprung
Senior Vice President and
Regional General Manager
• Glen Eastwood
Senior Vice President and
Regional General Manager
National Leasing
• Nick R. Logan
President and
Chief Executive Officer
Trust Services
• Canadian Western Trust
Matt Colpitts
Vice President and
General Manager
• Valiant Trust
Jay Campbell
General Manager
Canadian Direct Insurance
• Brian J. Young
President and
Chief Executive Officer
Adroit Investment Management
• David Schuster
President and
Chief Executive Officer
Ombudsman
• R. Graham Gilbert
CWB Group 2012 Annual Report
13
We are
responsible
for developing and monitoring CWB
Group’s governance structure, overseeing
risk management and fostering a culture of
ethical conduct and accountability.
goVernance
Structure,
uPdateS &
initiatiVeS
Effective corporate governance is critical in the sound functioning
of a financial institution. CWB’s Board of Directors (the Board)
is responsible for developing and monitoring CWB Group’s
governance structure, overseeing risk management and fostering
a culture of ethical conduct and accountability. By focusing on risk
oversight, supporting a culture of integrity, and favouring long-term
sustainable profitability over short-term gain, the Board protects
and enhances shareholder value.
Risk Management
The Board plays an integral role in CWB Group’s enterprise risk
framework and directly oversees risk management to ensure a
comprehensive approach is taken. As part of this oversight, in 2012,
the Board approved CWB’s Risk Framework and management is
required to provide the Board with quarterly progress updates.
Composition
Members of the Board have been carefully selected for their
expertise in financial services or in key markets in which
CWB operates. During fiscal 2012, the Board was composed
of fourteen business and community leaders whose diverse
backgrounds and experiences are invaluable in developing
the CWB Group’s strategic direction. Thirteen of the fourteen
directors are independent. Mr. Pollock, CWB’s CEO is the
only non-independent member of the Board. It is a regulatory
requirement for a bank’s CEO to serve on its board.
As CWB Group grows and evolves, the demands on the Board
also evolve. To this end, the Board assesses, in alternating years,
the functioning of the Board and the skills of individual directors.
These assessments ensure that the Board maintains an appropriate
complement of skills, experiences and qualifications. In recent
years, the Board’s assessment methodology has been evaluated
and strengthened. As a result of the most recent Board assessment,
in December 2012, Andrew Bibby was appointed as the Board’s
fifteenth member. The Board believes Mr. Bibby’s expertise in real
estate will be a valuable complement to the Board’s set of skills.
Oversight
The Board has implemented a committee structure to assist it in its
governance role. Four committees made up of directors who report
directly to the Board, are given specific oversight roles over the
CWB Group. Full mandates of each committee, as well as the Board
mandate, can be found in the Corporate Governance section of the
CWB Group website, cwbankgroup.com. Below is an abbreviated
description of each committee’s mandate:
• Audit Committee
The Audit Committee assists the Board by reviewing and working
with management on CWB Group’s financial disclosure. To ensure
the accuracy of CWB Group’s financial reporting, the Committee is
also responsible for overseeing CWB Group’s internal controls.
14
CWB Group 2012 Annual Report
• Governance Committee
The Governance Committee’s role is to review existing governance
practices and ensure they align with legal requirements, regulatory
requirements and industry best practices. It is also responsible for
nominating and recommending compensation for directors. This
Committee acts as the conduct review committee under the
Bank Act.
• Human Resources Committee
The Human Resources Committee oversees CWB Group’s human
capital. The Committee works with CWB Group management to
foster a culture of ethical conduct. The Committee also ensures
that executive compensation is competitive and fair and that CWB
Group’s succession plans are adequate.
• Loans Committee
The Loans Committee establishes lending policies and guidelines
for CWB Group, and establishes lending limits for the Bank’s
management. This Committee is also responsible for evaluating
and approving applications for loans above these limits.
ethical conduct
At CWB Group, ethical conduct is not only a legal and regulatory
requirement but a core value that allows CWB Group to build and
develop relationships with customers and other stakeholders in the
communities in which CWB Group operates.
CWB Group has codes of conduct for its directors, officers and
employees. Annually, each CWB Group director, officer and
employee must review the appropriate code of conduct and certify
that he or she has abided by the code. CWB Group’s whistleblower
policy allows for the anonymous reporting of complaints and
concerns. Concerns and complaints, however raised, are
investigated and appropriate action taken.
Compensation Programs
CWB Group’s director and executive compensation policies are
strongly aligned with governance best practices. For the past
two years, CWB Group has asked shareholders to vote on the
Board’s approach to executive compensation. To further ensure
that compensation is competitive and fair, the Human Resources
Committee is authorized to seek the advice of an independent
compensation advisor.
In addition, to align pay with risk management principles, directors
and senior officers are required to maintain a minimum level of
share ownership to encourage decision-making that aligns with the
interests of shareholders. Compensation is linked to CWB Group’s
performance and a recoupment or “clawback” policy discourages
short-term decision-making and excessive risk taking.
Left to Right: Robert
Phillips, Gerald McGavin,
Wendy Leaney (seated),
Larry Pollock, Arnold Shell,
Howard Pechet, Robert
Manning, Allan Jackson,
Linda Hohol, Raymond
Protti, H. Sanford Riley, Alan
Rowe, Albrecht Bellstedt
(seated) and Ian Reid.
CWB Group 2012 Annual Report
15
For more information
The Board supports an open dialogue of ideas with shareholders.
Shareholders may contact the Board directly about corporate
governance issues by emailing chairoftheboard@cwbank.com.
Additionally, the Corporate Governance section of CWB Group’s
website, cwbankgroup.com, contains more detailed information
about CWB Group’s practices.
Finally, shareholders are welcome to attend CWB Group’s annual and
special meeting of shareholders in March 2013 to meet with directors
and senior management and to hear about CWB Group’s future direction.
Shareholders wishing to attend the shareholder meeting are encouraged
to review CWB Group’s management proxy circular for information on
how they can attend and participate.
• Larry M. Pollock,
Chief Executive Officer,
Canadian Western Bank,
Edmonton, Alberta
• Raymond J. Protti, ICD.D,
Corporate Director,
Victoria, British Columbia
• Ian M. Reid, Corporate Director,
Edmonton, Alberta
• H. Sanford Riley, C.M.,
President and
Chief Executive Officer,
Richardson Financial
Group Limited,
Winnipeg, Manitoba
• Alan M. Rowe, CA, Partner,
Crown Realty Partners,
Toronto, Ontario
• Arnold J. Shell, President,
Arnold J. Shell Consulting Inc.,
Toronto, Ontario
Board of Directors (Oct 31, 2012)
• Albrecht W. A. Bellstedt, Q.C.,
President, A.W.A. Bellstedt
Professional Corporation,
Canmore, Alberta
• Linda M.O. Hohol,
Corporate Director,
Calgary, Alberta
• Allan W. Jackson (Chair),
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
Corporate Governance Highlights
• The Board is led by a non-executive chairman to ensure
independent leadership.
• Independent directors set time aside at each Board and
Committee meeting to discuss issues without the presence
of management.
• The Board and Committees have the power to retain
independent advisors to assist them in fulfilling their
mandates.
• Shareholders vote for individual directors rather than a slate
of directors.
• Directors who receive more “withhold” than “for” votes from
shareholders are required to tender their resignation for the
Board’s consideration.
• At CWB Group’s 2012 annual shareholder meeting, the
Board’s approach to executive compensation was approved
by 93.8% of votes cast by shareholders.
• The Board prioritizes ongoing director education by requesting
presentations from management and outside experts.
• In 2012 the Board’s self assessment process, which assesses
the effectiveness of the Board, Committees and individual
directors, was enhanced.
• In 2012, the Board focused on succession planning and
named Chris Fowler as CWB Group’s President and
Chief Operating Officer.
• In 2012, the Board approved the CWB Risk Management
Framework.
16
CWB Group 2012 Annual Report
ManageMent’s Discussion anD analysis
table of contents
17 business Profile
and strategy
20 grouP financial
Performance
20 Overview
23 Net Interest Income
24 Other Income
26 Non-interest Expenses
and Efficiency
28 Income and Capital Taxes
28 Comprehensive Income
29 Cash and Securities
29 Loans
33 Credit Quality
36 Deposits
38 Other Assets and Other Liabilities
38 Liquidity Management
41 Capital Management
46 Financial Instruments
and Other Instruments
46 Acquisitions
46 Off-balance Sheet Arrangements
47 summary of Quarterly
results and fouth Quarter
47 Quarterly Results
48 Fourth Quarter of 2012
49 accounting Policies
and estimates
49 Critical Accounting Estimates
50 Changes in Accounting Policies
51 Future Changes in Accounting
Policies
52 risk management
52 Overview
54 Credit Risk
56 Market Risk
58 Liquidity and Funding Risk
59 Capital Risk
60 Operational Risk
61 Reputation Risk
61 Regulatory Risk
61
Insurance Risk
62 Other Risk Factors
63 uPdated share
information
63 controls and Procedures
business Profile and strategy
Canadian Western Bank (CWB or the Bank) offers a diverse range
of financial services and is the largest publicly traded Schedule I
Canadian bank headquartered in Western Canada. The Bank, along
with its subsidiaries, National Leasing Group Inc. (National Leasing),
Canadian Western Trust Company (CWT), Valiant Trust Company
(Valiant), Canadian Direct Insurance Incorporated (Canadian Direct),
Adroit Investment Management Ltd. (Adroit) and Canadian Western
Financial Ltd. (CWF), are together known as Canadian Western Bank
Group (CWB Group).
CWB Group currently operates in the financial services areas of
banking, trust, insurance and wealth management. With a focus on
mid-market commercial banking, real estate financing, equipment
financing and energy lending, CWB’s proven strategy is mainly based
on building strong customer relationships and providing value-added
services to businesses and individuals in Western Canada. The
Bank also delivers a wide variety of personal financial products and
services, including personal loans and mortgages, deposit accounts,
investment products and other banking services. Customer access is
primarily provided through a network of 41 client-focused branches
in select locations across the four western provinces. Canadian
Direct Financial® (CDF) is an Internet-based division of the Bank that
offers a range of deposit and registered savings products directly to
customers in all provinces and territories except Quebec. National
Leasing specializes in commercial equipment leasing for small- and
mid-sized transactions and is represented across all provinces of
Canada. CWT provides trustee and custody services to independent
financial advisors, corporations, brokerage firms and individuals.
Optimum Mortgage, a division of CWT, underwrites and administers
residential mortgages sourced through an extensive network of
mortgage brokers located in Western Canada and select markets in
Ontario. Valiant’s operations include stock transfer and corporate
trust services. Canadian Direct provides personal auto and home
insurance to customers in British Columbia (BC) and Alberta. Adroit
specializes in discretionary wealth management for individuals,
corporations and institutional clients. Third-party mutual funds are
offered through CWF, the Bank’s mutual fund dealer subsidiary.
Vision
CWB Group is seen as crucial to our clients’ futures.
mission
To build a western Canadian-based financial services franchise through
responsible delivery of:
• Entrepreneurial approaches to assist clients and support growth
in the business areas of banking, trust, insurance and wealth
management;
• Best-in-class client experiences that are responsive, resourceful
and realistic;
• Relevant financial products that fit with demonstrated areas of
expertise and chosen geographic markets;
• Progressive career opportunities that are engaging, educational
and rewarding;
• Meaningful contributions to the communities where CWB Group
operates; and,
• Consistent profitability and strong shareholder returns that reflect
an industry-leading, growth-focused group of companies.
CWB’s overall strategic plan is based on two overriding themes:
1) “Do what we do, only better.”
2) “Make the whole worth more than the sum of the parts.”
CWB Group 2012 Annual Report
17
Additional strategic priorities include:
• Maintenance of a conservative risk profile and strong capital
base while ensuring growth is focused, strategic and accretive for
shareholders;
• Reinforcement of leadership in cost efficiency and low credit
losses by enhancing technology, improving service delivery
capabilities and maintaining strong discipline in managing lending
portfolios;
• Leveraging core profitability and further diversifying funding
sources, which includes ongoing generation of internal core
deposits raised through the branch network, trust operations and
over the Internet;
• Improvement of revenue diversification by further developing
non-interest revenue sources through both internal growth and
strategic acquisitions;
• Supporting return on common shareholders’ equity by maintaining
strong operating performance, an efficient capital structure, and
continued diversification into business areas with higher margins
and lower capital requirements;
• Recruiting, developing and retaining high quality employees
who embrace the Bank’s culture by offering a rewarding work
environment that includes comprehensive employee benefits,
career growth opportunities, a focus on work/life balance
and competitive compensation packages. CWB believes that
such employees are critical to build and maintain competitive
advantages related to offering superior client service and
relationship-based banking; and,
• Further building CWB’s reputation and reinforcing public
confidence through continued stakeholder communication,
diligence in corporate governance practices, and high standards
in corporate social responsibility, corporate reporting and
accountability.
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS)
and are presented in Canadian dollars.
The following pages contain management’s discussion of the
financial performance of CWB 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 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”, “goal”, “focus”,
“potential”, “proposed” 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 and are subject to inherent risks and uncertainties,
which give rise to the possibility that the Bank’s predictions,
forecasts, projections, expectations and conclusions will not prove
to be accurate, that its assumptions may not be correct and that its
strategic goals will not be achieved.
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 level of liquidity in financial
markets, fluctuations in interest rates and currency values, changes
in monetary policy, changes in economic and political conditions,
legislative and regulatory developments, legal developments,
the level of competition in the Bank’s markets, the occurrence
of weather-related and other natural catastrophes, changes in
accounting standards and policies, the accuracy 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.
Additional information about these factors can be found in the Risk
Management section of this Management’s Discussion
and Analysis (MD&A).
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
2013 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 2013, management’s assumptions
included:
• Modest economic growth in Canada and relatively stronger
performance in the four western provinces;
• Relatively stable prices for energy and other commodities
compared to the levels observed at October 31, 2012;
• Sound credit quality with actual losses remaining within the Bank’s
historical range of acceptable levels; and,
• A lower net interest margin attributed to expectations for the
continuation of a very low interest rate environment, a flat interest
rate curve, competitive factors and ongoing uncertainties about
global economic conditions.
Potential risks that would have a material adverse impact on the
Bank’s current economic expectations and forecasts include a global
economic recession spurred by unfavourable developments in the
euro zone, the strength of economic recovery in the United States, a
meaningful slowdown in China’s economic growth, or a significant
and sustained deterioration in Canadian residential real estate prices.
18
CWB Group 2012 Annual Report
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 fiscal 2012 adjustment to taxable equivalent basis of
$9.1 million (2011 – $11.0 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 IFRS 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 MD&A.
non-gaaP measures
Taxable equivalent basis, adjusted cash earnings per common share,
return on common shareholders’ equity, return on assets, efficiency
ratio, net interest margin, tangible common equity to risk-weighted
assets, common equity Tier 1, Tier 1 and total capital adequacy ratios,
and average balances do not have standardized meanings prescribed
by IFRS 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;
• Adjusted cash earnings per common share – diluted earnings per
common share excluding the after-tax amortization of acquisition-
related intangible assets and the non-tax deductible change in fair
value of contingent consideration. These exclusions represent non-
cash charges mainly related to the acquisition of National Leasing
Group Inc. and are not considered to be indicative of ongoing
business performance;
• Return on common shareholders’ equity – net income available to
common shareholders divided by average common shareholders’
equity;
• Return on assets – net income available to common shareholders
divided by average total assets;
• Efficiency ratio – non-interest expenses divided by total revenues
excluding the non-tax deductible change in fair value of contingent
consideration;
• Net interest margin – net interest income divided by average total
assets;
• Tangible common equity to risk-weighted assets – common
shareholders’ equity less subsidiary goodwill divided by risk-
weighted assets, calculated in accordance with Basel II guidelines
issued by the Office of the Superintendent of Financial Institutions
Canada (OSFI);
• Basel II Tier 1 and total capital adequacy ratios – in accordance
with guidelines issued by OSFI;
• Basel III common equity Tier 1, Tier 1 and total capital ratios – in
accordance with CWB’s interpretation of the Basel III capital
requirements and OSFI proposed guidance; and
• Average balances – average daily balances.
adoPtion of international financial
rePorting standards
The Canadian Institute of Chartered Accountants has transitioned
Canadian generally accepted accounting principles (Canadian GAAP)
for publicly accountable entities to IFRS. The transition is applicable
to 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, CWB’s consolidated financial statements for
the 2012 fiscal year are prepared in accordance with IFRS, including
comparative information for 2011 and the opening transition balance
sheet as at November 1, 2010. Unless otherwise noted, amounts
reflected for 2010 and earlier are prepared in accordance with
Canadian GAAP. Please refer to the Changes in Accounting Policies
section of this MD&A for further information on the adoption of
IFRS.
segment rePorting
Commencing in the first quarter of 2012, operating results are
presented as one segment – Banking and Financial Services –
operating in one geographic region – Canada.
CWB Group 2012 Annual Report
19
grouP financial Performance
overview
highlights of 2012 (compared to 2011)
• Record net income available to common shareholders
• Return on assets of 1.08%, down one basis point.
of $172.2 million, up 15%, and the achievement of the Bank’s
98th consecutive profitable quarter.
• Very strong loan growth of 14%.
• Record diluted earnings per common share of $2.22, up 14%
(adjusted cash earnings per common share of $2.30, up 6%).
• Record total revenues (teb) of $525.5 million, up 9%.
• Net interest margin (teb) of 2.79%, down 20 basis points.
• Improved credit quality as evidenced by relatively low write-offs
and a provision for credit losses measured as a percentage of
average loans of 19 basis points, unchanged from 201 1.
• Ten consecutive quarterly reductions in the level of gross
impaired loans.
• Return on common shareholders’ equity of 15.0%, up 30
basis points.
• Efficiency ratio (teb) of 44.8%, an improvement of 10
basis points.
• A Basel II tangible common equity to risk-weighted assets ratio
of 8.8%, up from 8.6%; a Tier 1 capital ratio of 10.6%, down
from 1 1.1%; and a total capital ratio of 13.8%, down from 15.4%.
• Pro forma application of the all-in Basel III standards to the
Bank’s financial position at October 31, 2012 results in an
estimated 8.1% common equity Tier 1 (CET1) ratio, 9.9% Tier 1
capital ratio and 13.1% total capital ratio.
• Cash dividends of $0.62 per share paid to common
shareholders, up 15%.
• Total assets and total loans surpassed $16 billion and $13 billion,
respectively.
table 1 – select annual Financial inForMation (1)
($ ThOUSANDS, ExCEPT PER ShARE AMOUNTS)
key Performance indicators
Net income available to common shareholders
$
172,197
$
149,538
$
148,413
$
22,659
15%
ifrs
2012
IFRS
2011
Canadian
GAAP (4)
2010
Change from 2011
$
%
Earnings per share
Basic
Diluted
Adjusted cash (1)
Provision for credit losses as a
percentage of average loans
Net interest margin (teb) (1)
Net interest margin
Efficiency ratio (teb) (1)(3)
Efficiency ratio
Return on common shareholders’ equity
Return on assets
other financial information
Total revenues (teb) (1)
Total revenues
Total assets
Debt
Dividends per common share
2.24
2.22
2.30
2.07
1.95
2.17
2.26
2.05
2.09
0.17
0.27
0.13
8
14
6
0.19%
0.19%
0.21%
–bp (2)
2.79
2.73
44.8
45.6
15.0
1.08
2.99
2.91
44.9
45.9
14.7
1.09
2.74
2.64
44.1
45.3
17.1
1.24
$
525,482
$
483,555
$
434,259
$
516,339
472,496
423,073
41,927
43,843
16,873,269
14,849,141
12,701,691
2,024,128
634,273
634,877
0.62
0.54
315,000
0.44
(604)
0.08
(20)
(18)
(10)
(30)
30
(1)
9%
9
14
–
15
(1) See page 19 for a discussion of teb and non-GAAP measures.
(2) bp – basis points.
(3) A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
(4) Financial information prepared under IFRS (2011 and 2012) and Canadian GAAP (2010) may not be directly comparable.
20
CWB Group 2012 Annual Report
Record net income available to common shareholders of $172.2
million increased 15% ($22.7 million) over 2011 while diluted
earnings per common share of $2.22 ($2.24 basic) was up 14%
from $1.95 ($2.07 basic). Adjusted cash earnings per share, which
is diluted earnings per share excluding the after-tax amortization
of acquisition-related intangible assets and the non-tax deductible
change in fair value of contingent consideration, was $2.30, up
6%. Record total revenues (teb) of $525.5 million grew 9% ($41.9
million) reflecting the combined benefit of very strong 14% ($1,660
million) loan growth and a 14% ($9.8 million) increase in other
income, partially offset by a 20 basis point reduction in net interest
margin (teb) to 2.79%. Margin contraction in the year mainly
resulted from lower yields on loans and securities, as well as a
slightly higher average liquidity level, partially offset by reduced
fixed term deposit costs and lower debt expense. Lower asset yields
reflect the combined impact of the sustained very low interest
rate environment and a flat interest rate curve, as well as ongoing
competitive pressures. The positive trend in credit quality continued
from 2011 and the provision for credit losses remained unchanged at
19 basis points of average loans.
The efficiency ratio (teb), which measures non-interest expenses
as a percentage of total revenues (teb) (excluding the non-tax
deductible change in fair value of contingent consideration), of
44.8% improved 10 basis points from last year as the benefit of
strong percentage growth in total revenues was largely offset by
the combination of a 6% ($14.1 million) increase in non-interest
expenses and the difference in the fair value adjustment for
contingent consideration. The increase in non-interest expenses
was mainly attributed to additional staff complement and ongoing
investment in branches, other infrastructure and technology to
support continued business growth.
The return on common shareholders’ equity of 15.0% was up 30
basis points compared to 2011 while return on assets decreased
one basis point to 1.08%. The increase in return on equity was
attributed to a lower charge for the change in fair value of contingent
consideration in the current year compared to 2011, largely offset
by the impact of margin compression. Contingent consideration
associated with the 2010 acquisition of National Leasing was settled
in the third quarter of 2012 with the issuance of 2.3 million CWB
common shares valued at $63.5 million. Total cash dividends paid to
common shareholders of $0.62 per share increased 15% from $0.54
per share paid in the prior year.
Total assets increased 14% to reach $16,873 million, driven by loan
growth and a higher balance of liquid assets. Total branch-raised
deposits increased 11% ($782 million) compared to the previous
year, while the demand and notice component within branch-raised
deposits was up 12% ($468 million). Strong growth in branch-raised
deposits, including the demand and notice component, reflects the
success of ongoing strategies to further enhance and diversify core
funding sources. Total deposits grew 14% ($1,750 million) in the
year to reach $14,145 million and kept pace with very strong loan
growth. Total deposit growth also includes $700 million of fixed
term notes issued in the debt capital markets and personal fixed
rate term deposits raised through the deposit broker network. Total
branch-raised deposits represented 57% of total deposits at October
31, 2012, compared to 58% a year earlier. The demand and notice
component comprised 32% of total deposits, unchanged from a year
earlier. The ratio of total deposits to total loans at October 31, 2012
was 1.01 times, down slightly from 1.02 times last year.
The maintenance of solid capital levels is fundamental to CWB’s
objectives to effectively manage risks and support strong growth.
The Bank’s Basel II Tier 1 and total capital ratios at October 31, 2012
of 10.6% (2011 – 11.1%) and 13.8% (2011 – 15.4%), respectively,
remained well above both internal and regulatory minimums.
Reported capital ratios for 2011 are based on the returns filed and
have not been restated for the full transition impact of IFRS or a
required change in the capital deduction related to CWB’s insurance
subsidiary, both of which were effective in the first quarter of
2012. The lower total capital adequacy ratio compared to a year
earlier also reflects the March 2012 redemption of $125 million of
subordinated debentures. The Basel II tangible common equity ratio,
which represents the highest quality form of capital, was also solid at
8.8%, up from 8.6% twelve months ago. Pro forma application of the
all-in Basel III standards to the Bank’s financial position at October
31, 2012 results in an estimated 8.1% common equity Tier 1 (CET1)
ratio, 9.9% Tier 1 ratio and 13.1% total capital ratio. This compares
to the minimum Basel III regulatory capital ratios, which include a
250 basis point capital conservation buffer, of 7.0% CET1 effective
January 1, 2013, and 8.5% Tier 1 and 10.5% total capital effective
January 1, 2014.
CWB Group 2012 Annual Report
21
MiniMuM PerforMance TargeTs and ouTlook
table 2 – PerForMance targets
2012
Minimum
2012
Targets
Performance
2013
Minimum
Targets
Net income available to common shareholders growth
Total revenue (teb) growth
Loan growth
10%
7
10
Provision for credit losses as a percentage of average loans
0.20 - 0.25
Efficiency ratio (teb)
Return on common shareholders’ equity
Return on assets
46
15
1.05
15%
9
14
0.19
44.8
15.0
1.08
8%
8
10
0.18 - 0.23
46
14
1.05
CWB met or exceeded all of its fiscal 2012 minimum
performance targets led by very strong loan growth of 14%.
Growth in net income available to common shareholders of
15% reflected 9% growth in total revenues mainly resulting
from loan growth and a $9.8 million lower charge for the non-
tax deductible change in fair value of contingent consideration.
Excluding the change in fair value of contingent consideration
for both years, net income available to common shareholders
was up 8% as the benefit of very strong loan growth was
partially offset by the impact of a 20 basis point reduction in
net interest margin and a 6% increase in non-interest expenses.
Loan growth was apparent across each of the Bank’s lending
sectors with the exception of oil and gas production loans.
Measured in dollars, the strongest loan growth by lending sector
was in general commercial loans, closely followed by equipment
financing. Overall credit quality improved compared to 201 1 and
the provision for credit losses was slightly below the low end of
the target range at 19 basis points of average loans. The return
on common shareholders’ equity of 15.0% was on par with the
target, while return on assets was slightly above the target at
1.08%. The efficiency ratio (teb) of 44.8% compared favourably
with the 2012 target of 46%.
Fiscal 2013 minimum performance targets are based on
expectations for modest economic growth in Canada and
comparatively stronger performance within the Bank’s key
western Canadian markets. Lending activity remains solid and
double-digit loan growth is expected to be maintained despite
the impacts of competitive factors and ongoing global economic
uncertainties. Overall credit quality is expected to remain sound
and the provision for credit losses is targeted between 18 and
23 basis points of average loans. The Bank will maintain its
focus on secured loans that offer a fair and profitable return in
an environment where net interest margin pressure is expected
to persist as a result of a very low interest rate environment, a
flat interest rate curve and increased competitive influences in
certain sectors. The foregoing circumstances will continue to
constrain growth in total revenues and earnings compared to
what would be expected in a more normal historical interest
rate environment. Targeted growth of 8% for both total revenues
(teb) and net income available to common shareholders
reflects confidence in CWB’s proven business model and overall
strategic direction, but also considers the impact of expectations
for a lower net interest margin compared to 2012. Minimum
targets for return on common shareholders’ equity and return
on assets have been established at 14% and 1.05%, respectively.
One of management’s key priorities is to maintain effective
control of costs while ensuring the Bank is positioned to deliver
continued strong growth. In consideration of targeted revenue
growth and planned expenditures, the 2013 efficiency ratio (teb)
is expected to remain at 46% or less.
The ongoing development of CWB Group’s core businesses
will remain a key priority to achieve continued strong growth.
Potential acquisitions that are both strategic and accretive for
CWB shareholders will also be evaluated very closely. With its
strong capital position under the more conservative Standardized
Approach for calculating risk-weighted assets, CWB is
positioned to support continued growth and manage unforeseen
challenges. Management will maintain its focus on creating
value and growth for shareholders over the long term. Despite
challenges arising from the interest rate environment and related
pressures on net interest margin, the current overall outlook for
2013 and beyond is positive.
22
CWB Group 2012 Annual Report
net interest income
Net interest income is the difference between interest and dividends
earned on assets and interest expensed on deposits and other
liabilities, including debt. Net interest margin is net interest income
as a percentage of average total assets.
highlights of 2012
• Net interest income (teb) increased 8% to a record $443.6
million based on 15% growth in average total interest
earning assets.
• Net interest margin (teb) of 2.79%, down 20 basis points
compared to 201 1 reflecting the very low interest rate
environment, a flat interest rate curve and competitive factors.
table 3 – net interest incoMe (teb)(1)
($ ThOUSANDS)
2012
2011
average
balance
mix
interest
interest
rate
Average
Interest
Balance
Mix
Interest
Rate
assets
Cash, securities
and deposits with
regulated financial
institutions
$ 2,227,457
14% $
53,849
2.42% $ 1,902,370
14% $
58,382
3.07%
Securities purchased under
resale agreements
124,935
1
1,231
0.99
94,402
Loans
Residential mortgages
3,233,082
Other loans
9,973,138
13,206,220
Total interest bearing assets
15,558,612
319,493
20
63
83
98
2
131,105
555,429
686,534
741,614
–
4.06
5.57
5.20
4.77
0.00
2,794,172
8,675,784
11,469,956
13,466,728
310,389
1
20
63
83
98
2
916
0.97
119,800
505,248
625,048
684,346
–
4.29
5.82
5.45
5.08
0.00
Other assets
total assets
liabilities
Deposits
Demand
Notice
Fixed term
Other liabilities
Debt
$ 15,878,105
100% $
741,614
4.67% $ 13,777,117
100% $ 684,346
4.97%
$
614,951
4% $
–
0.00% $ 569,709
4% $
–
0.00%
3,704,059
8,991,089
13,310,099
474,329
632,132
23
57
84
3
4
8
1
42,156
227,555
269,711
61
28,270
–
–
1.14
2.53
2.03
0.01
4.47
0.00
0.00
3,286,379
7,446,424
11,302,512
477,616
666,660
1,225,104
105,225
24
54
82
3
5
9
1
35,668
202,935
238,603
98
34,193
–
–
1.09
2.73
2.11
0.02
5.13
0.00
0.00
Shareholders’ equity
1,356,306
Non-controlling interests
105,239
total liabilities and equity $ 15,878,105
100% $ 298,042
1.88% $ 13,777,117
100% $ 272,894
1.98%
total assets/
net interest income
$ 15,878,105
$ 443,572
2.79%
$ 13,777,117
$ 411,452
2.99%
(1) See page 19 for a discussion of teb and other non-GAAP measures.
CWB Group 2012 Annual Report
23
Net interest income (teb) increased 8% ($32.1 million) for the year
to reach a record $443.6 million reflecting 15% ($2,101 million)
growth in average interest earning assets, partially offset by the
impact of a significant 20 basis point reduction in net interest margin
(teb) to 2.79%. Growth in average interest earning assets resulted
from a combination of very strong 15% ($1,736 million) growth
in total average loans and an 18% ($356 million) increase in total
average cash, securities, deposits with regulated financial institutions
and securities purchased under resale agreements. The compressed
net interest margin mainly resulted from the combined impact of
the ongoing very low interest rate environment, a flat interest rate
curve and competitive factors, and is reflected in a 25 basis point
lower average yield on loans, partially offset by an eight basis point
reduction in total average deposit costs and reduced debt expense.
The yield on average cash, securities and deposits with regulated
financial institutions was down 65 basis points, partially reflecting
the Bank’s strategy to reposition a significant portion of its previous
investments in the preferred shares of other financial institutions,
which, under Basel III, require a deduction from regulatory capital for
amounts over a certain threshold.
In general, increases in the prime interest rate positively impact net
interest margin because prime-based loans reprice more quickly than
deposits, which subsequently expands the interest spread earned on
the Bank’s assets. The prime rate averaged 3.00% for the year and
has remained unchanged since the Bank of Canada last increased
rates in September of 2010.
ouTlook for neT inTeresT incoMe
Loan growth will continue to have a positive influence on net
interest income, but the current very low interest rate environment,
the flat shape of the interest rate curve and competitive factors
will likely result in a lower net interest margin compared to 2012.
The current interest rate environment diminishes margin due to
the adverse impact as it relates to the benefit of the Bank’s low
and no-cost deposits, as well as deposits that are less interest
sensitive. In a more normal historical environment, a steeper
upward sloping interest rate curve would be observed that would
allow for a significant incremental earnings benefit from the Bank’s
growing base of core deposits that are less interest sensitive. In
addition, a steeper curve would provide a more meaningful positive
differential between the incremental price on loans and the cost
of matched funding based on the duration of certain portfolios.
An increased level of competition, particularly in certain business
areas, also results in lower overall loan pricing. The average liquidity
level is expected to remain relatively consistent with 2012. Lower
liquidity generally enhances margins due to the decreased level of
comparatively lower yielding assets. In the absence of increases
in the prime lending interest rate and/or a significant steepening
of the interest rate curve, pressures on net interest margin will
continue. Based on the current view, the Bank’s financial targets for
2013 assume no increases in the prime lending interest rate.
other income
highlights of 2012
• Other income increased 14% as a lower charge for contingent
consideration fair value changes and the combined growth in
net gains on securities and credit-related fee income more than
offset a decline in the “other” component of other income and a
reduction in net insurance revenues resulting from the impact on
claims from severe storm activity in Alberta.
• Other income represented 16% of total revenues (teb),
unchanged from 201 1.
24
CWB Group 2012 Annual Report
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
Gains on securities, net
Retail services
Foreign exchange
Contingent consideration fair value change
Other (1)
total other income
2012
2011
$
Change from 2011
$
123,204
$
117,632
$
1,855
(83,167)
(24,539)
17,353
19,705
19,065
12,449
9,227
3,255
(2,489)
3,345
1,869
(74,734)
(24,517)
20,250
18,307
19,050
7,283
9,486
3,488
(12,305)
6,544
$
81,910
$
72,103
$
5,572
(14)
(8,433)
(22)
(2,897)
1,398
15
5,166
(259)
(233)
9,816
(3,199)
9,807
%
5%
(1)
11
–
(14)
8
–
71
(3)
(7)
(80)
(49)
14%
(1) Includes gains on loan portfolio sales, lease administration services, fair value changes 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 $81.9 million was up 14% ($9.8 million) reflecting
a $9.8 million lower charge for contingent consideration fair value
changes related to the 2010 acquisition of National Leasing.
Contingent consideration was eliminated effective in the third
quarter of 2012 upon the settlement of a contingent liability related
to the 2010 acquisition of National Leasing. Net gains on securities
remained high and were up $5.2 million over 2011 reflecting
favourable market opportunities, the strategic repositioning of certain
investments in preferred shares, common equities and government
securities and the 2011 write-down of certain impaired available-for-
sale securities to their respective fair market values. Management’s
decision to sell certain securities issued by financial institutions
reflects forthcoming changes under the new Basel III regulatory
capital framework which requires a deduction from regulatory capital
of amounts over a certain threshold for this type of investment.
Growth in credit-related fee income of 8% ($1.4 million) was driven
by strong lending activity.
ouTlook for oTher incoMe
A reduction of $3.2 million in the “other” component of other income
resulted from the expiry of a lease administration contract in early
fiscal 2012 and the absence of fair value adjustments for interest rate
swaps previously held within National Leasing. The sale of insured
residential mortgage portfolios added approximately $2 million to
the “other” category of other income in both years. Net insurance
revenues were down $2.9 million as the positive impact of growth
in net earned premiums was more than offset by increased claims
expense related to severe storm activity in Alberta. Trust and wealth
management services fees remained relatively unchanged while retail
services and foreign exchange income were down 3% ($0.3 million)
and 7% (0.2 million), respectively.
Other income as a percentage of total revenues (net interest income
and other income) was 16%, unchanged compared to 201 1.
Solid growth is expected across most categories of other income
reflecting CWB’s continued focus on enhancing transactional
services and increasing other sources of fee-based income. The
generation of more transactional business with both new and
existing clients, an enhanced market presence, double-digit loan
growth and expanded product offerings are key factors contributing
to expected growth in banking-related services. While net insurance
revenues should increase meaningfully with the benefit of a return
to more normal claims experience and continued policy growth,
increased volatility in the claims ratio could result from severe
weather-related events, as was the case in 2012. Contingent
consideration fair value changes, which reduced other income by
$2.5 million in 2012, will not be applicable going forward. While
net gains on securities are expected to remain an ongoing source
of revenue, the future level of contributions from this source
is expected to be much lower compared to 2012. Generating
additional other income through whole loan sales of residential
mortgage portfolios remains an option, but near-term growth in the
“other” category of other income is likely to be constrained reflecting
the expiry of a lease administration contract in the previous year.
CWT, including Optimum Mortgage, and Valiant Trust each expect
solid growth in 2013 resulting from increased market share and
ongoing business development in core western markets and select
areas in Ontario. Revenue and earnings contributions from National
Leasing should also increase with expected strong business growth.
Adroit has had good success introducing its services to many CWB
banking clients and this positive trend is expected to continue.
CWB maintains its long-term objective to grow non-interest
revenues as a percentage of total revenues and will continue to
develop, or acquire, complementary fee-based businesses.
CWB Group 2012 Annual Report
25
non-interest expenses and efficiency
highlights of 2012
• The efficiency ratio (teb) of 44.8% represented a 10 basis point improvement compared to 201 1 as growth in total revenues (teb) more
than offset a 6% increase in non-interest expenses.
table 5 – non-interest exPenses anD eFFiciency ratio
($ ThOUSANDS)
2012
2011
$
Change from 2011
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
Amortization of intangibles
Banking charges
Postage and stationery
Travel
Regulatory costs
Community investment
Communications
General insurance
Capital and business taxes
Other
$
127,835
$
118,323
$
26,009
153,844
15,738
5,212
3,115
24,065
8,108
7,329
15,437
6,379
6,746
5,160
3,253
2,630
2,493
2,131
2,095
1,770
969
676
8,918
43,220
23,542
141,865
14,929
4,736
2,975
22,640
7,609
6,489
14,098
6,979
6,973
6,000
3,222
2,845
2,375
2,439
1,140
1,631
970
1,588
7,686
43,848
total non-interest expenses
$
236,566
$
222,451
$
efficiency ratio (teb) (1)(2)
44.8%
44.9%
9,512
2,467
11,979
809
476
140
1,425
499
840
1,339
(600)
(227)
(840)
31
(215)
118
(308)
955
139
(1)
(912)
1,232
(628)
14,115
%
8%
10
8
5
10
5
6
7
13
9
(9)
(3)
(14)
1
(8)
5
(13)
84
9
–
(57)
16
(1)
6%
(10)bp (3)
(1) Non-interest expenses as a percentage of total revenues (net interest income (teb) plus other income) excluding the non-tax deductible change in fair value of contingent consideration.
See page 19 for a discussion of non-GAAP measures.
(2) A decrease in this ratio reflects improved efficiency, while an increase reflects deterioration.
(3) bp – basis points.
26
CWB Group 2012 Annual Report
Total non-interest expenses of $236.6 million were up 6% ($14.1
million) largely reflecting an 8% ($12.0 million) increase in salary
and employee benefits due to a combination of increased staff
complement and annual salary increments. The number of full-time
equivalent employees (FTEs) grew 5% (89 FTEs) from October
31, 201 1 to meet additional staffing requirements for new and/or
expanded banking branches, corporate support services and other
business expansion. Premises and equipment expenses, including
depreciation, increased 8% ($2.8 million) and reflected the impact
of a new full-service branch opened near the end of 2011 and the
ongoing development and expansion of other premises. Investment
in technology infrastructure, such as the Bank’s loan origination
system and corporate office data centre implemented in 2011,
also contributed to the increase in non-interest expenses. Ongoing
Figure 1 – nuMber oF Full-tiMe equivalent staFF
investment in premises and technology infrastructure are necessary
to position the Bank for future growth. These investments are
expected to provide considerable efficiencies in the future at both
the branch and corporate office level; this includes improving the
turnaround time of credit approvals and affording lenders more
time to assist clients. Certain technology investment, including
the loan origination system and the future implementation of a
new core banking system, will also improve data, portfolio and
client relationship management capabilities. General non-interest
expenses were down 1% ($0.6 million) as the benefit of lower capital
and business taxes, amortization of intangibles, professional fees
and services, and regulatory costs more than offset the impact of
increases in other areas, including community investment.
2012
2011
2010
2009
2008
+5%
+5%
+28%
+4%
1,885
1,796
1,716 (1)
1,339
1,284
(1) The significant increase in the number of full-time equivalent staff in 2010 reflects the acquisition of National Leasing.
The efficiency ratio (teb), which measures non-interest expenses
as a percentage of total revenues (teb), excluding the non-tax
deductible change in fair value of contingent consideration, was
44.8%, compared to 44.9% last year, as the benefit of core revenue
growth offset the impact of higher non-interest expenses. Non-
interest expenses as a percentage of average assets were 1.5%, down
slightly from 1.6% in 2011.
ouTlook for non-inTeresT exPenses and efficiency
One of management’s key priorities is to maintain effective control
of costs while ensuring the Bank is positioned to deliver strong
growth over the long term. Effective execution of CWB’s strategic
plan will continue to require increased investment in certain
areas. Significant anticipated expenditures relate to additional
staff complement as well as expanded infrastructure and further
technology upgrades. The investment in these areas is aligned
with the Bank’s commitment to maximize long-term shareholder
value and is expected to provide material benefits in future
periods. The major program to implement a new core banking
system is progressing as planned. Preliminary timelines anticipate
implementation of the new core banking system in 2015 with an
initial estimated capital budget of $50 million. Optimum Mortgage
successfully implemented a new loan origination system in 2012
which is expected to enhance client service, increase capacity
and improve efficiencies. CWT also successfully completed a
major system conversion in 2012 that is expected to create similar
benefits and efficiencies within that business. Compliance with an
increasing level of regulatory rules and oversight for all Canadian
banks requires the investment of both time and resources, which
further contributes to higher non-interest expenses.
Ongoing expansion plans include moving CWB’s flagship main
branch in Edmonton to a new, much larger location, the opening of
new and expanded premises in Regina and St. Albert, and National
Leasing’s recent expansion in Quebec. Other potential new branch
locations are under consideration while upgrades and expansion of
existing branch infrastructure continues.
Anticipated growth in total revenues (teb) should largely offset the
impact of increased investment necessary for effective execution of
CWB’s strategic plan. however, expected pressures on net interest
margin, as previously discussed, will likely limit the potential for
improvement in the efficiency ratio compared to 2012. Overall,
CWB expects to achieve an efficiency ratio (teb) of 46% or better
in fiscal 2013.
CWB Group 2012 Annual Report
27
income and capital taxes
The effective income tax rate (teb) was 26.3%, down 190 basis
points from 201 1, while the tax rate before the teb adjustment was
23.6%, or 120 basis points lower. The lower tax rate compared to
last year reflects the 150 basis point reduction in the federal income
tax rate effective on each of January 1, 2011 and January 1, 2012, but
was also impacted by the non-tax deductible change in fair value
of contingent consideration. Excluding the impact of contingent
consideration in both years, the effective tax rate (teb) was 26.0%,
down 90 basis points from 2011.
Deferred tax assets and liabilities represent the cumulative amount
of tax applicable to temporary differences between the carrying
amount of the assets and liabilities, and their values for tax purposes.
The Bank’s deferred income tax assets and liabilities relate primarily
to the collective allowance for credit losses and intangible assets,
ouTlook for incoMe and caPiTal Taxes
respectively. Deferred tax assets and liabilities are measured using
enacted or substantively enacted tax rates anticipated to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. Changes in deferred income
taxes related to a change in tax rates are recognized as income in the
period of the tax rate change.
Capital losses of $11.1 million (2011 – $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.
Capital tax applicable to CWB has been eliminated in recent years
in both BC and Manitoba, while Alberta has not had a capital tax
for several years. CWB remains subject to provincial capital tax
in Saskatchewan. Capital taxes in 2012 totaled $0.5 million and
represented a $0.9 million decline from 2011.
CWB’s expected income tax rate (teb) for fiscal 2013 is
approximately 26.5%, or 23.8% before the teb adjustment.
Saskatchewan provincial capital taxes will likely increase with the
ongoing retention of earnings and any potential impact from the
issuance of new capital, if material. There is also the possibility that
a change in the provincial political landscape in BC could result in a
reinstatement of capital tax on financial institutions in that province.
comprehensive income
Comprehensive income is comprised 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, in 2012, fair value changes for derivative instruments
designated as cash flow hedges. The increase in comprehensive
income was driven by 13% ($22.7 million) higher net income and
$9.6 million of unrealized gains, net of tax, on available-for-sale
securities in 2012 compared to $11.7 million of unrealized losses in
2011. While the combined dollar investment in preferred shares and
common equities is relatively small in relation to total liquid assets, it
increases the potential for comparatively larger fluctuations in OCI.
table 6 – coMPrehensive incoMe
($ ThOUSANDS)
net income
other comprehensive income (loss)
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
2012
2011 Change from 2011
$
194,457 $
171,721
$
22,736
9,580
(9,129)
451
1,430
(483)
947
1,398
(11,710)
(5,133)
(16,843)
–
–
–
(16,843)
21,290
(3,996)
17,294
1,430
(483)
947
18,241
40,977
total comprehensive income
$
195,855 $
154,878
$
28
CWB Group 2012 Annual Report
cash and securities
Cash, securities and securities purchased under resale agreements
totaled $2,573 million at October 31, 2012, compared to $2,238
million one year ago. Total net unrealized gains before tax recorded
on the balance sheet at October 31, 2012 were $10.8 million,
compared to $10.0 million last year. The change in net unrealized
gains reflects fluctuations in the market value of all securities, as
well as net gains recognized through the income statement. The
combined balance of securities issued or guaranteed by governments
and other debt securities included net unrealized gains of $1.7 million
at year end, compared to $0.7 million at October 31, 201 1. The
portfolio of preferred shares included net unrealized gains of $7.0
million, down from $9.3 million a year earlier. The common equities
portfolio reflected net unrealized gains of $2.1 million, compared to
nil at October 31, 2011.
The cash and securities portfolio is mainly comprised of high
quality debt instruments and a comparatively smaller component of
preferred and common equities. Securities are not held for trading
purposes and, where applicable, are typically held until maturity.
Fluctuations in the value of securities, other than common equities,
are generally attributed to changes in interest rates, movements in
market credit spreads and shifts in the interest rate curve. Volatility
in equity markets also leads to fluctuations in value, particularly for
common shares.
loans.
highlights of 2012
In the past four years, the Bank capitalized on opportunities to
realize gains on sale of securities resulting from a combination of
investment strategies and market conditions. Realized net gains on
securities in 2012 of $12.4 million remained high and were $5.2
million above the prior year. Excluding the impact of $3.1 million
of write-downs in the prior year, net gains on securities in 2012
were $2.1 million higher than in 2011. The majority of net gains on
securities in 2012 were attributed to the sale of preferred shares of
other financial institutions in anticipation of the new Basel III capital
framework effective January 1, 2013, although the sale of certain
government securities and common equities also contributed to
the net result. The specific change under Basel III that prompted
the decision to reposition a portion of certain preferred shares is a
required deduction from regulatory capital for investments in other
financial institutions over a certain threshold.
CWB has no direct investment in any non-Canadian sovereign debt
or other securities issued outside of Canada or the United States.
See Table 24 – Valuation of Financial Instruments of this MD&A for
additional information.
Cash and securities are managed in conjunction with CWB’s overall
liquidity; additional information and management’s outlook for 2013
is included in the Liquidity Management discussion of this MD&A.
• Loan growth of 14% largely driven by very strong performance
in general commercial loans, equipment financing and leasing,
personal loans and mortgages, and corporate loans.
• Double-digit loan growth achieved in 22 of the past 23 years
(the exception being 2009 when loan growth was 7%).
table 7 – outstanDing loans by PortFolio
($ MILLIONS)
General commercial loans
Commercial mortgages
Equipment financing and leasing
Personal loans and mortgages
Real estate project loans
Corporate loans
Oil and gas production loans
total outstanding loans
Change from 2011
2012
$
3,179
$
2,788
2,498
2,292
2,024
912
342
$
2011
2,598
2,691
2,097
2,020
1,888
709
362
$
14,035
$
12,365
$
$
581
97
401
272
136
203
(20)
1,670
%
22%
4
19
13
7
29
(6)
14%
CWB Group 2012 Annual Report
29
Total loans before the allowance for credit losses increased 14%
($1,670 million) to reach $14,035 million at year end. Measured in
dollar terms and by loan type as shown in Table 7, growth in general
commercial loans of 22% ($581 million) represented the strongest
source of loan growth, followed by 19% ($401 million) growth
in equipment financing and leasing. Based on industry sector as
shown in Table 8, general commercial loans include categories such
as manufacturing, finance and insurance, and wholesale and retail
trade. Equipment financing and leasing includes the Bank’s heavy
equipment financing business and the small- and mid-ticket leasing
business of National Leasing. Corporate loans, which represent
a diversified portfolio that is centrally sourced and administered
through a designated lending group located in Edmonton, had the
best percentage growth at 29% ($203 million). Corporate 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 sourced in
branches are primarily real estate project loans, and oil and gas
production loans, and are included under the corresponding
classifications in Table 7. Real estate project loans increased 7%
($136 million) as the benefit of solid activity in both residential and
commercial construction was partially offset by an increased level
of paybacks reflecting the relatively short duration of this portfolio.
Commercial mortgages, an area where loan pricing continued to
be highly competitive, grew 4% ($97 million). Personal loans and
Figure 2 – outstanDing loans by PortFolio
(OCTOBER 31, 2011 IN BRACkETS)
mortgages, which include lending activity in both CWB branches and
the Bank’s broker-sourced residential mortgage business, Optimum
Mortgage, showed strong performance with 13% ($272 million)
growth. The balance of oil and gas production loans, which represent
a relatively small percentage of the total portfolio, was down
6% ($20 million) mainly resulting from the impact of sustained
downward pressure on natural gas prices.
Total loans of $1,090 million in the broker-sourced residential
mortgage business, Optimum Mortgage, represented growth of
16% ($153 million). Adjusting for a $50 million residential mortgage
portfolio sold during the year, total loan growth was 22%. Growth
was mainly driven by alternative mortgages secured via conventional
residential first mortgages carrying a weighted average loan-to-value
ratio at initiation of approximately 71%. The book value of alternative
mortgages represented approximately 70% of Optimum Mortgage’s
total portfolio at year end. Management remains committed to
further developing this mortgage business as it continues to produce
solid returns while maintaining an acceptable risk profile.
The mix of the portfolio (see Figure 2) shifted slightly during
the year as very strong growth in general commercial loans and
equipment financing and leasing led to decreases in the proportion
of commercial mortgages, real estate project loans and oil and gas
production loans. Based on the location of security (see Figure 3),
Alberta and BC respectively represented 45% and 33% of total loans
at year, relatively unchanged from 2011.
General Commercial
Loans 23%
(21%)
Commercial
Mortgages 20%
(22%)
Equipment Financing
and Leasing 18%
(16%)
Personal Loans
and Mortgages 17%
(17%)
Real Estate
Project Loans 14%
(15%)
Corporate
Loans 6%
(6%)
Oil and Gas
Production Loans 2%
(3%)
30
CWB Group 2012 Annual Report
ouTlook for loans
While strong competition from domestic banks and other financial
services firms is expected to persist, the current overall outlook for
generating new business opportunities continues to be positive.
The Bank expects to maintain double-digit loan growth and has set
its fiscal 2013 minimum loan growth target at 10%. Management
believes market share will be gained from the combined positive
influences of an expanded market presence, increased brand
awareness in core geographic markets due in part to targeted
marketing initiatives, and the effective execution of CWB’s strategic
plan which is focused on further enhancing existing competitive
advantages.
Canada’s domestic economy is expected to grow modestly in
2013 despite impacts from ongoing uncertainties. The Bank’s key
markets in Western Canada are expected to continue to perform
well relative to the rest of Canada largely reflecting ongoing
capital investment and in-migration related to a favourable long-
term outlook for commodities. In Alberta, the forecast for 2013
is supported by significant long-term capital investment in the oil
sands, as well as a relatively positive outlook for activity related to
conventional oil production. Activity related to the resource sector
in BC, including forestry, has also remained solid due to current
favourable resource prices, positive trends in the United States
(U.S.) housing sector and ongoing export opportunities to Pacific
Rim countries, including China. Growth in Saskatchewan will be
supported by the region’s growing energy sector, potash production
and the potential for improvement in agriculture output. Manitoba’s
economy is diverse with positive economic growth contributions
mainly expected from agriculture production, mining, and energy.
Affordability in most Canadian residential real estate markets
remains within historical ranges largely reflecting very low interest
rates. however, the combination of historically high price levels,
relatively high levels of Canadian consumer debt and the potential
for increasing interest rates in the future could slow construction
and other related lending activity, particularly in areas of Vancouver
and Toronto. Very low natural gas prices have adversely impacted
the financial flexibility and cash flows of many exploration and
production companies, but the Bank’s direct exposure to this sector
remains low. While fallout from sustained downward pressure
on natural gas prices is not expected to materially impact overall
portfolio quality, related growth opportunities will continue to be
constrained.
Uncertainty about the future impact of recently confirmed
regulatory changes related to more stringent residential mortgage
underwriting criteria has resulted in an improved competitive
environment for the Bank’s alternative residential mortgage
business in the short term, but the long-term impacts of these
changes are less certain. Notwithstanding less competition for
alternative mortgages, the overall level of demand could moderate
as a result of the new regulations.
Potential risks that would have a material adverse impact on the
Bank’s economic expectations and forecasts include a global
economic recession spurred by unfavourable developments in
the euro zone, the strength of economic recovery in the U.S.,
a meaningful slowdown in China’s economic growth, or a significant
and sustained deterioration in Canadian residential real estate
prices.
diVersification of Portfolio
Total advances based on location of security
Figure 3 – geograPhical Distribution oF loans (1)
(OCTOBER 31, 2011 IN BRACkETS)
Alberta 45%
(46%)
British Columbia
33% (33%)
Ontario
10% (10%)
Saskatchewan
6% (6%)
Manitoba
3% (3%)
Other
3% (2%)
(1) Includes letters of credit.
CWB Group 2012 Annual Report
31
The following table illustrates the diversification in lending operations by standard industry sectors.
table 8 – total aDvances baseD on inDustry sector (1)
(% AT OCTOBER 31)
Real estate operations
Construction
Consumer loans and residential mortgages (2)
Transportation and storage
hotel/motel
health and social services
Finance and insurance
Oil and gas production
Manufacturing
Retail trade
Oil and gas service
Wholesale trade
Other services
Logging/forestry
All other
total
2012
23%
18
15
2011
22%
19
15
6
5
5
5
3
3
3
3
2
2
2
5
5
6
5
5
3
3
3
2
2
2
1
7
100%
100%
(1) Table is based on the North American Industry Classification System (NAICS) codes.
(2) Residential mortgages in this table include only single-family properties.
The loan portfolio is focused on areas of demonstrated lending
expertise, while concentrations measured by geographic area and
industry sector are managed within specified tolerance levels. The
portfolio is well diversified with a mix of business and personal loans.
heavy equipment financing is primarily sourced within branches
or through stand-alone equipment financing centres, while small-
and mid-sized leases are offered across Canada through National
Leasing. Oil and gas production lending is conducted by specialists
located in Calgary. Real estate specialists are established in the
major centres of Edmonton, Calgary and Vancouver. Optimum
Mortgage maintains centralized administration based in Edmonton
and sources residential mortgages throughout Western Canada
and select regions of Ontario through an established network of
mortgage brokers.
ouTlook for diversificaTion of PorTfolio
While positive growth is expected to continue across all lending
sectors, the proportion of total loans comprised of commercial
mortgages and real estate project loans could decrease slightly in
2013 reflecting expectations for comparatively faster net growth in
other areas such as general commercial loans, equipment financing
and leasing, and personal loans and mortgages. Commercial
mortgages are currently subject to a high level of pricing
competition and the Bank’s focus will be to maintain this portfolio
based on client relationships and adequate returns. Expectations
for comparatively slower growth in real estate project loans reflects
the combined impact of this portfolio’s relatively short duration and
forecasted moderation in Canadian residential real estate activity,
particularly in certain geographical areas.
While stronger economic activity in Alberta and the success of
strategic initiatives to increase the Bank’s lending exposure in
Ontario could lead to comparatively faster growth in these areas,
portfolio diversification by geography will likely remain relatively
consistent with October 31, 2012.
32
CWB Group 2012 Annual Report
credit Quality
highlights of 2012
• Continued strong quality and a low level of write-offs in relation
• A dollar provision for credit losses of $25.1 million represented
to total loans.
• Ten consecutive quarterly reductions in the dollar level of gross
impaired loans, which decreased 31% ($30.4 million) from the
prior year. Gross impaired loans measured as a percentage of
total loans represented 48 basis points, compared to 79 basis
points one year ago.
imPaired loans
As shown in Table 9, gross impaired loans totaled $66.8 million
and represented 0.48% of outstanding loans, compared to $97.3
million, or 0.79%, of total loans last year. The ten largest accounts
classified as impaired, measured by dollars outstanding, represented
approximately 52% of total gross impaired loans at year end, up from
48% a year earlier. New formations of impaired loans totaled $80.7
table 9 – change in gross iMPaireD loans
($ ThOUSANDS)
19 basis points of average loans and compared favourably to the
2012 target range of 20 to 25 basis points.
million, compared to $94.6 million last year. The dollar level of gross
impaired loans goes up and down as loans become impaired and are
subsequently resolved, and does not directly reflect the dollar value
of expected write-offs given the tangible security held against the
Bank’s lending positions.
Change from 2011
Gross impaired loans, beginning of period
$
97,258
$
143,700
$
(46,442)
2012
2011
$
New formations
Reductions, impaired accounts paid down
or returned to performing status
Write-offs
Total, end of period (1)
Balance of the ten largest impaired accounts
Total number of accounts classified as impaired (2)
Total number of accounts classified as impaired under $1 million
80,734
94,601
(13,867)
$
$
(93,440)
(17,712)
66,840
35,034
125
111
$
$
(107,656)
(33,387)
14,216
15,675
97,258
$
(30,418)
46,884
$
(11,850)
153
137
(28)
(26)
%
(32)
(15)
(13)
(47)
(31)
(25)
(18)
(19)
Gross impaired loans as a percentage of total loans (3)
0.48%
0.79%
(31)bp (4)
(1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $9,785 (2011 – $3,241). The Bank pursues timely realization on foreclosed assets and does not use the
assets for its own operations.
(2) Total number of accounts excludes National Leasing accounts.
(3) Total loans do not include an allocation for credit losses or deferred revenue and premiums.
(4) bp – basis point change.
The lower balance of gross impaired loans reflects the success of
ongoing loan realization efforts and work-out programs, as well as
relatively stable economic conditions in the Bank’s core geographic
markets. Actual credit losses experienced over the past two years in
relation to the level of gross impaired loans in the same time period
demonstrates the benefits of CWB’s secured lending practices and
disciplined underwriting.
Current estimates of expected write-offs for existing loans classified
as impaired are reflected in the specific provisions for credit losses,
which totaled $14.4 million at year end compared to $10.7 million a
year earlier. 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 each impaired
account.
The 2012 dollar provision for credit losses of $25.1 million increased
15% ($3.3 million) over the previous year. The provision measured
as a percentage of average loans was unchanged from 2011 at 19
basis points as the percentage growth in total average loans and the
dollar provision was relatively consistent. As at October 31, 2012,
the collective allowance for credit losses exceeded the balance of
impaired loans, net of specific allowances. The allowance for credit
losses as a percentage of gross impaired loans (coverage ratio) was
122%, up from 74% in 2011.
CWB Group 2012 Annual Report
33
Figure 4 – net iMPaireD loans as a Percentage oF net loans outstanDing
0.21%
0.19%
0.62%
0.68%
-0.11%
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
-0.57%
-0.75%
-0.68%
-0.36%
-0.36%
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 by a specialized team with quarterly, or more
frequent, reviews of each loan and its realization plan.
A report of impaired loans is also reviewed quarterly by the Loans
Committee of the Board of Directors.
ouTlook for iMPaired loans
Ongoing disciplined underwriting practices and expectations
for a relatively consistent level of economic activity in Western
Canada compared to 2012 underpin management’s view that
overall credit quality will remain sound. The level of gross impaired
loans continued to show a positive trend throughout 2012, but will
likely increase from the current very low level reflecting normal
fluctuations of the credit cycle. Overall lending exposures will
continue to be closely monitored and actual losses are expected
to remain within CWB’s historical range of acceptable levels.
Management remains confident in the strength, diversity and
underwriting structure of the overall loan portfolio.
34
CWB Group 2012 Annual Report
allowance for credit losses
Table 10 shows the year-over-year change in the allowance for credit losses split between specific provisions by category of impaired loans
and the collective allowance for credit risk.
table 10 – allowance For creDit losses
($ ThOUSANDS)
2012
Opening
Balance
Provision
for Credit
Write-Offs,
net of
Losses
Recoveries (1)
$
1,369
$
2,516
5,592
1,173
10,650
61,330
$
71,980
$
11,183
3,027
3,828
1,055
19,093
6,014
25,107
$
(4,807)
$
(2,938)
(5,850)
(1,769)
(15,364)
–
$ (15,364)
$
2012
ending
balance
7,745
2,605
3,570
459
14,379
67,344
81,723
• historical loss experience in portfolios that display similar credit
risk characteristics;
• the estimated period of time between when the impairment
occurs and when the loss is identified; and,
• management’s judgment as to whether current economic and
credit conditions are such that the actual level of inherent losses
at the balance sheet date is likely to be greater or less than that
suggested by historical experience.
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.
specific allowance
Commercial
Real estate
Equipment financing
Consumer and personal
collective allowance
total
(1) Recoveries in 2012 totaled $2,348 (2011 – $2,061).
The allowance for credit losses is maintained to absorb both
identified and unidentified losses in the loan portfolio, and, at
October 31, 2012, consisted of $14.4 million of specific allowances
and $67.3 million in the collective allowance for credit losses
(previously referred to as the “general allowance for credit losses”
under Canadian GAAP). The specific allowance includes all the
accumulated provisions for losses on identified impaired loans
required to reduce the carrying value of those loans to their
estimated realizable amount. The collective allowance for credit risk
includes allowances for losses inherent in the portfolio that are not
presently identifiable on an account-by-account basis. Policies and
methodology governing the management of the collective allowance
are in place.
An assessment of the adequacy of the collective allowance for credit
losses is conducted quarterly in consideration of:
• historical trends in loss experience during economic cycles;
• the current portfolio profile;
ouTlook for allowance for crediT losses
Specific allowances will continue to be determined on an account-
by-account basis and reviewed at least quarterly. The collective
allowance is expected to fluctuate to account for portfolio growth,
lower levels of specific allowances in strong economic times and
higher levels of specific allowances in weaker economic times.
Based on management’s current outlook for credit performance and
actual historical loss experience, the existing level of the collective
allowance is considered sufficient to mitigate losses inherent in the
portfolio that are not presently identifiable.
CWB Group 2012 Annual Report
35
ProVision for credit losses
The provision for credit losses represented 19 basis points of average
loans in 2012 (see Table 11), unchanged from the previous year. Net
new specific provisions represented 14 basis points of average loans,
compared to 20 basis points in 2011. The Bank has a long history of
strong credit quality and low loan losses, both of which compare very
favourably to the Canadian banking industry. External factors that
table 11 – Provision For creDit losses
($ ThOUSANDS)
may impact Western Canada and the sectors in which the Bank’s
customers operate are continually analyzed. The 2010 increase in the
provision for credit losses as a percentage of average loans compared
to prior years, as shown in Table 11, was attributed to the acquisition
of National Leasing and the relatively higher rate of losses that is
typical in the small- and mid-market leasing business.
Provision for credit losses (1)
Net new specific provisions (net of recoveries) (2)
IFRS
2012
0.19%
0.14
Canadian GAAP
2011
0.19%
0.20
2010
0.21%
0.27
2009
0.15%
0.14
2008
0.15%
0.09
Collective allowance
Coverage ratio (3)
$
67,344
$
61,330
$
59,603
$
61,153
$
60,527
122%
74%
55%
55%
82%
(1) As a percentage of average loans.
(2) Portion of the year’s provision for credit losses allocated to specific provisions as a percentage of average loans.
(3) Allowance for credit losses as a percentage of gross impaired loans.
ouTlook for The Provision for crediT losses
The provision for credit losses in 2013 is expected to be 18 to 23
basis points of average loans, slightly lower than the target range
established for 2012 of 20 to 25 basis points of average loans. The
expected provision reflects the Bank’s current assessment based
on assumptions about the economic outlook, the overall quality of
the portfolio and its underlying security, and the adequacy of the
collective allowance for credit losses. The assessment process is
continuous and the Bank’s updated expectations are communicated
no less than quarterly.
deposits
highlights of 2012
• Branch and trust generated demand and notice deposits
• Branch and trust generated deposits were 57% of total deposits,
increased 12%.
down slightly from 58% a year earlier.
• Personal deposits, which include those raised through the
broker deposit network, increased 7% (excluding broker-raised
deposits, personal deposits were up 19%).
• Business and government deposits increased 1 1%.
• Maintained a credit rating on long-term deposits and senior debt
from DBRS Limited (DBRS) of A (low) with a stable outlook.
• Diversified funding sources with the issuance of $700 million of
senior deposit notes in the debt capital markets to a broad range
of institutional investors.
36
CWB Group 2012 Annual Report
table 12 – DePosits
($ ThOUSANDS)
Personal
Business and government
Capital markets
Total Deposits
% of Total
Personal
Business and government
Capital markets
Total Deposits
% of Total
demand
notice
term
2012
total
$
31,980
$ 2,382,262
$ 6,545,876
$ 8,960,118
653,213
1,391,349
–
–
2,190,157
950,000
4,234,719
950,000
$
685,193
$
3,773,611
$ 9,686,033
$ 14,144,837
5%
27%
68%
100%
Demand
Notice
Term
2011
Total
$
30,440
$ 2,086,231
$ 6,229,158
$ 8,345,829
552,827
1,321,359
–
–
1,924,674
250,000
3,798,860
250,000
$
583,267
$ 3,407,590
$ 8,403,832
$ 12,394,689
5%
27%
68%
100%
% of
total
63%
30
7
100%
% of
Total
67%
31
2
100%
Total deposits at year end of $14,145 million increased 14% ($1,750
million) over 2011 reflecting $700 million of additional senior notes
issued in the debt capital markets, 7% ($614 million) growth in
personal deposits, which include those issued through the deposit
broker network, and 11% ($436 million) growth in business and
government deposits. Consistent with 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 of this
MD&A).
table 13 – DePosits by source
(AS A PERCENTAGE OF TOTAL DEPOSITS AT OCTOBER 31)
Branches
Deposit brokers
Capital markets
total
Deposits are primarily generated from the branch network (including
CWT, CDF and Valiant) 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, which
has enhanced importance as the Bank transitions toward the Basel
III rules governing liquidity beginning in 2015 (see the Liquidity
Management section of this MD&A). CWT raises deposits through
notice accounts (comprised primarily of cash balances held in self-
directed registered accounts), corporate trust deposits and through
the Bank’s branch network. CDF, the Internet-based division of the
Bank, currently offers various deposit products to customers in
all provinces and territories except Quebec. The total amount of
deposits outstanding in CDF at October 31, 2012 was $178 million, a
74% increase compared to a year earlier. Valiant’s status as a federal
deposit-taking institution adds a third Canada Deposit Insurance
Corporation (CDIC) licence and provides an additional channel to
raise insured deposits. Valiant deposits are currently offered only in
CWB branches.
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
2012
57%
36
7
100%
2011
58%
40
2
100%
retail deposits over a wide geographic base. The proportion of funds
sourced through deposit brokers was reduced in 2012 as a result
of growth in branch-raised deposits and the issuance of senior
deposit notes in the debt capital markets. The selective use of capital
markets-based funding commenced in 2011 upon the establishment
of a credit rating by DBRS on the Bank’s long-term deposits and
senior debt. As additional sources of funding, in 2012 the Bank
securitized $226 million of equipment leases and sold a $50 million
portfolio of residential mortgages via a whole loan sale.
Growth in total branch-raised deposits was 11% ($782 million) in
2012, while the demand and notice component within branch-raised
deposits increased 12% ($468 million). Demand and notice deposits,
which include lower cost funding sources, comprised 32% of total
deposits at year end, unchanged from the previous year. Branch-
raised deposits comprised 57% of total deposits, compared to
58% in the previous year. The level of growth in demand and notice
deposits reflects ongoing execution of strategies to further enhance
and diversify the Bank’s core funding sources, including CWT’s
success in generating deposits through its trust business.
CWB Group 2012 Annual Report
37
ouTlook for dePosiTs
A strategic focus on increasing branch-raised deposits will continue
in 2013 with emphasis on the demand and notice component,
which is often lower cost and provides associated transactional
fee income. CWB’s expanded market presence, which includes the
expansions and/or openings of full-service branches, also supports
the objectives to generate branch-raised deposits. Various strategic
initiatives, which include the offering of significantly enhanced cash
management products and a competitive business savings account,
are also intended to further augment desired types of branch-raised
funding. The deposit broker network remains a valued source for
raising insured fixed term retail deposits and has proven to be an
extremely effective and efficient way to access funding and liquidity
over a wide geographic base. Selectively utilizing the debt capital
markets is also part of management’s strategy to further augment
and diversify both the long- and short-term funding base over
time. Provided costs remain satisfactory, National Leasing plans to
continue utilizing securitization channels for a portion of its funding
requirements. Management also continues to evaluate the benefits
of using loan securitization and/or additional whole loan sales as
added sources of funding for certain other types of portfolios, most
notably residential mortgages.
other assets and other liabilities
At October 31, 2012 other assets totaled $347 million (2011 – $318
million). Property and equipment increased $14 million mainly due to
ongoing investment in both physical infrastructure and technology.
Insurance related other assets were $58 million (2011 – $57 million)
and consisted primarily of instalment premiums receivable as well
as deferred policy acquisition costs. The amount of goodwill and
intangible assets recorded on the balance sheet at October 31, 2012
was $46 million and $32 million, respectively.
Other liabilities totaled $524 million at October 31, 2012 (2011 –
$458 million). Insurance related other liabilities were $160 million
(2011 – $149 million) and consisted primarily of provisions for unpaid
claims and adjustment expenses and unearned premiums.
liquidity management
highlights of 2012
• Maintained a strong liquidity position and conservative
investment profile.
• Compared to recent years, relative stability in Canadian capital
markets allowed the Bank to maintain its lowest yielding liquid
assets at levels more consistent with a normal operating
environment; liquidity was augmented in the fourth quarter of
the year based on expected business requirements.
• In October 2012, DBRS maintained its published credit ratings
on CWB of A (low) and BBB (high) for long-term senior debt/
deposits and subordinated debentures, respectively; both
ratings were issued indicating a stable outlook.
A schedule outlining the consolidated securities portfolio at
October 31, 2012 is provided in Note 4 to the consolidated financial
statements. A conservative investment profile is maintained by
ensuring:
• all investments are high quality and include government debt
securities, short-term money market instruments, preferred
shares, common shares and other marketable securities;
The Bank’s liquidity management is a comprehensive process that
includes, but is not limited to:
• monitoring liquidity reserve levels;
• monitoring micro- and macroeconomic trends and key risk
indicators;
• micro- and macroeconomic scenario stress testing;
• specific investment criteria and procedures are in place to manage
• maintaining a short duration liquidity portfolio;
the securities portfolio;
• regular review, monitoring and approval of investment policies
is completed by management’s Investment Committee and the
Asset Liability Committee (ALCO); and,
• quarterly reports are provided to the Board of Directors (the Board)
on the composition of the securities portfolio, which is further
supported by the Board’s annual review and approval of
investment policies.
• monitoring the credit profile of the liquidity portfolio;
• monitoring deposit liability diversification;
• monitoring deposit behaviour; and,
• ongoing market surveillance.
38
CWB Group 2012 Annual Report
table 14 – liquiD assets
($ ThOUSANDS)
Cash and non-interest bearing deposits with financial institutions
$
33,690
$
73,318
$
(39,628)
2012
2011
Change
from
2011
Deposits with regulated financial institutions
Cheques and other items in transit
total cash resources
Government of Canada treasury bills
Government of Canada, provincial and municipal debt, term to maturity 1 year or less
Government of Canada, provincial and municipal debt, term to maturity more than 1 year
Other debt securities
Preferred shares
Common shares
Securities sold under resale agreement
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
As shown in Table 14, liquid assets comprised of cash, interbank
deposits, securities purchased (or sold) under resale agreements and
marketable securities totaled $2,503 million at October 31, 2012,
an increase of $265 million compared to a year earlier. Liquid assets
represented 15% (2011 – 15%) of total assets and 18% (2011 – 18%)
of total deposit liabilities at year end.
The composition of total liquid assets shifted compared to October
31, 201 1 through the normal course of prudent liquidity management.
This resulted in a significant increase in the allocation of Government
of Canada, provincial and municipal debt securities with a maturity
of one year or less, and also contributed to a lower overall average
yield on the securities portfolio. highlights of the composition of
liquid assets at October 31, 2012 are as follows:
• Maturities within one year increased to 53% (2011 – 40%) of
liquid assets, or $1,332 million (2011 – $892 million);
• Government of Canada, provincial and municipal debt securities
increased to 58% (2011 – 46%) of liquid assets;
• Deposits with regulated financial institutions, including Bankers’
Acceptances, decreased to 8% (2011 – 14%) of liquid assets;
• Preferred shares decreased to 16% (2011 – 22%) of liquid assets;
and,
177,028
26,265
236,983
378,253
610,103
470,466
371,044
398,752
107,482
(70,089)
233,964
5,053
312,335
384,721
173,723
465,943
303,545
497,130
100,642
–
(56,936)
21,212
(75,352)
(6,468)
436,380
4,523
67,499
(98,378)
6,840
(70,089)
$ 2,266,011
$
1,925,704
$ 2,502,994
$ 2,238,039
$
$
340,307
264,955
$ 16,873,269
$ 14,849,141
$ 2,024,128
15%
15%
–
$ 14,144,837
$ 12,394,689
$
1,750,148
18%
18%
–
• Other marketable securities increased by 1% to 19% of liquid
assets.
When applicable, securities purchased under resale agreements
are included in liquid assets, while securities sold under resale
agreements are deducted from liquid assets. Securities purchased
under resale agreements represent short-term loans to securities
dealers that require subsequent repurchase of the securities received
as collateral, typically within a few days. Securities sold under resale
agreements are included in other liabilities and totaled $70 million
at October 31, 2012, compared to nil a year earlier. These are short-
term advances from securities dealers, typically no more than a few
days in duration, and require the Bank to repurchase the securities
given as collateral. Collateral securities are comprised of government
or other high quality liquid securities. These agreements are primarily
used for cash management purposes.
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. As additional sources of
liquidity and funding, in 2012 the Bank securitized $226 million of
equipment leases and sold a $50 million portfolio of residential
mortgages via a whole loan sale.
CWB Group 2012 Annual Report
39
The primary source of incremental new funding is the issuance
of deposit instruments. A summary of outstanding deposits by
contractual maturity date is presented in Tables 15 and 16.
table 15 – DePosit Maturities within one year
($ MILLIONS)
October 31, 2012
Demand deposits
Notice deposits
Deposits payable on a fixed date
total
October 31, 2011 Total
table 16 – total DePosit Maturities
($ MILLIONS)
October 31, 2012
Demand deposits
Notice deposits
Deposits payable on a fixed date
total
October 31, 2011 Total
within
1 to 3
3 months
cumulative
1 month
months
to 1 year within 1 year
$
685
$
3,774
931
$
–
–
–
–
1,106
3,428
$ 5,390
$ 4,884
$
$
1,106
$ 3,428
1,009
$ 2,912
$
$
$
685
3,774
5,465
9,924
8,805
within
1 year
$
685
$
3,774
5,465
1 to 2
years
–
–
2,057
$ 9,924
$ 2,057
$ 8,805
$ 2,046
2 to 3
years
–
–
1,262
1,262
893
$
$
$
3 to 4
years
–
–
466
466
376
$
$
$
4 to 5 more than
years
5 years
$
$
$
–
–
436
436
275
$
$
$
–
–
–
–
–
$
$
$
total
685
3,774
9,686
14,145
12,395
A breakdown of deposits by source is provided in Table 13. Target
limits by source have been established as part of the overall liquidity
policy and are monitored regularly to ensure an acceptable level
of funding diversification is maintained. Management continues to
develop and implement strategies to ensure branch-raised deposits
remain the core source of funding. At the same time, the total
dollar value of broker-generated deposits is expected to increase to
support incremental asset growth or when higher levels of liquidity
are required. Insured deposits raised through deposit brokers remain
a highly effective and valued funding source. Deposits raised in the
capital markets provide a further source of liquidity.
In addition to deposit liabilities, CWB has subordinated debentures
and debt securities related to the securitization of leases to third
parties (refer to Note 16 of the consolidated financial statements for
additional information).
A summary of subordinated debentures outstanding is presented in the following table:
table 17 – suborDinateD Debentures outstanDing
($ ThOUSANDS)
Interest
Rate
4.389% (1)
5.571% (2)
5.950% (3)
5.070% (4)
total
Maturity
Earliest Date
Redeemable
Date
by CWB at Par
2012
2011
November 30, 2020
November 30, 2015
$
300,000
$
300,000
March 21, 2022
March 22, 2017
June 27, 2018
June 28, 2013
March 21, 2017
March 22, 2012
75,000
50,000
–
$
425,000
$
75,000
50,000
120,000
545,000
(1) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 193 basis points.
(2) 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.
(3) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 302 basis points.
(4) These conventional debentures had a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate would have 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 held by Canadian Direct Insurance Incorporated, a wholly owned subsidiary, and eliminated on
consolidation at October 31, 201 1. On March 22, 2012, these conventional debentures were redeemed by the Bank.
40
CWB Group 2012 Annual Report
ouTlook for liquidiTy ManageMenT
The Bank continues to refine its methodologies for measuring and
monitoring liquidity risk. CWB utilizes dynamic scenario analysis
to monitor and stress liquidity coverage while maintaining prudent
liquidity standards. To the extent the composition of liquid assets
continues to include a higher balance of low yielding government
securities, net interest margin will be further pressured.
The Basel Committee on Banking Supervision has issued a
framework document outlining two new liquidity standards. The
document prescribes the Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFR) as minimum regulatory standards
effective January 1, 2015 and January 1, 2018, respectively. The
LCR establishes a common measure of liquidity risk and requires
institutions to maintain sufficient liquid assets to cover a minimum
of 30 days of cash flow requirements in a stress situation. The
NSFR establishes a second common measure of liquidity based on
the ratio of longer term assets to longer term liabilities. Although
the rules are not yet finalized, CWB believes it is well positioned to
comply with the new requirements.
capital management
highlights of 2012
• Maintained strong Basel II Tier 1 and total capital adequacy
ratios of 10.6% and 13.8%, respectively.
of tangible common equity to risk-weighted assets at 8.8%, up
from 8.6%.
• Well positioned for the “all-in” implementation of the Basel III
• Cash dividends of $0.62 per share paid to common
rules for Canadian banks, effective January 1, 2013.
shareholders, up 15%.
• Supported very strong loan growth while maintaining the ratio
• Redeemed $125 million of subordinated debentures.
subsequent highlights
• In December 2012, the Board of Directors declared a quarterly
cash dividend of $0.17 per common share, an increase of 6%
($0.01) over the previous quarterly cash dividend and 13%
($0.02 per share) over 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 is managed in accordance with policies and plans that are
regularly reviewed and approved by the Board of Directors. Capital
management takes into account forecasted capital needs with
consideration of anticipated profitability, asset growth, market
and economic conditions, regulatory changes and dividends. The
overriding goal is to remain well capitalized in order to protect
customer deposits and provide capacity for internally generated
growth and strategic opportunities that do not otherwise require
accessing the capital markets, all while providing a satisfactory return
for common shareholders. Consistent with the Basel II guidelines
described below, CWB has implemented an Internal Capital
Adequacy Assessment Process (ICAAP) to ensure capital levels
remain adequate in relation to current and anticipated future risks,
as well as changing regulatory capital requirements.
The Bank provides a share incentive plan 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 18 to the consolidated financial statements details
the number of options outstanding, the weighted average exercise
price and the amounts exercisable at year end. holders of CWB’s
common shares and holders of any other class of shares deemed
eligible by the Bank’s Board of Directors are offered the choice to
direct cash dividends paid toward the purchase of common shares
through a dividend reinvestment plan (DRIP). Further details
regarding the Bank’s DRIP are available on the Bank’s website at
www.cwbankgroup.com/investor_relations.
CWB Group 2012 Annual Report
41
basel ii caPital adeQuacy accord
The Office of the Superintendent of Financial Institutions Canada
(OSFI) requires banks to measure capital adequacy in accordance
with published guidelines commonly referred to as Basel II for
determining risk-adjusted capital and risk-weighted assets,
including off-balance sheet commitments. CWB currently uses the
Standardized Approach under Basel II to calculate risk-weighted
assets for both credit and operational risk. The Standardized
Approach for credit risk applies a weighting of 0% to 150% based on
the deemed credit risk for each type of asset. As an example, a loan
that is fully insured by 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 CWB’s ICAAP thresholds and
standards for Canadian financial institutions as established by OSFI.
Off-balance sheet items, 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. Securitized
assets (reported on balance sheet under IFRS) result in a deduction
from both Tier 1 and total capital. As CWB’s insurance subsidiary
(Canadian Direct) is subject to separate OSFI capital requirements
specific to insurance companies, its assets are excluded from the
consolidated calculation of risk-weighted assets. however, the Bank’s
investment in Canadian Direct ($71.4 million at October 31, 2012
and $80.9 million at October 31, 2011) is deducted 50% against
Tier 1 capital and 50% against Tier 2 capital. At October 31, 201 1,
the capital deduction related to Canadian Direct was deducted
solely from Tier 2 capital. Accordingly, this change effective in fiscal
2012 had a negative impact on the level of Tier 1 regulatory capital
compared to the previous year.
Current regulatory guidelines require banks to maintain a minimum
ratio of capital to risk-weighted assets and off-balance sheet items
of 8%, of which 4% must be core capital (Tier 1) and the remainder
supplementary capital (Tier 2). however, OSFI has established that
Canadian banks need to maintain a minimum total capital adequacy
ratio of 10% with a Tier 1 ratio of not less than 7%. CWB’s Tier 1
capital is primarily comprised of common shareholders’ equity,
preferred shares and innovative capital, while Tier 2 capital primarily
includes subordinated debentures and the collective allowance for
credit losses (to a prescribed regulatory maximum). Refer to Table
19 for additional details on CWB’s capital structure and regulatory
capital ratios.
The Bank complied with all internal and external capital requirements
in 2012.
42
CWB Group 2012 Annual Report
table 19 – caPital structure anD basel ii regulatory ratios at year enD (1)
($ ThOUSANDS)
tier 1 capital
Retained earnings
Common shares
Preferred shares
Share-based payment reserve
Innovative capital instrument (2)
Non-controlling interest in subsidiary
Less goodwill
Less investment in insurance subsidiary
Less securitization
total
tier 2 capital
Collective allowance for credit losses (Tier 2A) (3)
Accumulated unrealized gains on available-for-sale securities, net of tax (4)
Subordinated debentures (Tier 2B) (5)
Less investment in insurance subsidiary
Less securitization
total
total regulatory capital
Regulatory Capital to Risk-Weighted Assets
Tier 1 capital
Tier 2 capital
total regulatory capital adequacy ratio
assets to regulatory capital multiple (6)
2012
2011
2011
Change from
$
733,298
$
650,028
$
83,270
490,218
209,750
22,468
105,000
266
(45,536)
(35,699)
(18,989)
408,014
209,750
21,884
105,000
225
(37,852)
–
(6,583)
1,460,776
1,350,466
82,204
–
584
–
41
(7,684)
(35,699)
(12,406)
110,310
6,915
3,849
67,344
5,358
425,000
(35,699)
(18,989)
443,014
60,429
1,509
545,000
(120,000)
(80,941)
(6,583)
519,414
45,242
(12,406)
(76,400)
$ 1,903,790
$ 1,869,880
$
33,910
10.6%
3.2
13.8%
8.8
11.1%
4.3
15.4%
7.9
(0.5)%
(1.1)
(1.6)%
0.9
(1) The 2011 capital structure and regulatory ratios reflect the returns filed and have not been restated to IFRS.
(2) The innovative capital instrument consists of CWB Capital Trust Capital Securities Series 1 (WesTS) and may be included in Tier 1 capital to a maximum of 15% of net Tier 1 capital. Any excess
innovative capital outstanding is included in Tier 2B capital.
(3) Banks are permitted to include the collective allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2A capital.
(4) 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 securities, net of tax, increases Tier 2 capital.
(5) Tier 2B capital may be included in Tier 2 capital to a maximum of 50% of net Tier 1 capital. Any excess Tier 2B capital is included in capital as net Tier 1 capital increases. All subordinated
debentures are currently included in Tier 2B capital.
(6) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital.
CWB Group 2012 Annual Report
43
table 20 – basel ii 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, 2012
As at October 31, 2011
cash,
securities
and resale
agreements
loans
other
items
total
2012
risk-
weighted
assets
$
125,721
$
10,416,367
$
1,438,368
330,964
–
–
–
449,672
–
–
–
50,071
46,184
2,172,533
184,501
986,773
–
296,579
–
63,978
–
–
–
–
–
–
–
–
63,382
341,166
$ 10,542,088
$
10,133,106
1,488,439
377,148
2,172,533
184,501
986,773
449,672
296,579
63,382
405,144
38,294
157,065
770,679
133,211
757,087
449,672
293,487
792,272
250,570
$
$
2,344,725
2,036,784
$
$
14,216,986
12,603,801
$
$
404,548
$ 16,966,259
349,826
$
14,990,411
$
$
13,775,443
12,160,91 1
table 21 – basel ii risk-weighting category
($ ThOUSANDS)
2012
0%
31,513 $
$
1,334,404
64
20%
26,675 $
129,078
275,025
35%
50%
– $ 738,414 $
–
–
24,957
–
150% and
100% greater
75%
balance weighted
– $ 9,719,326 $ 26,159 $ 10,542,087 $ 10,133,106
38,294
–
–
157,065
–
–
1,488,439
377,149
–
102,060
372,226
–
1,462,072
–
317,125
21,110
–
2,172,533
770,679
921
8,956
1,087
–
3,911
–
–
–
–
129,069
–
28,292
–
–
–
–
–
–
–
–
–
–
–
–
174,002
29
593
184,501
133,211
912,693
–
63,677
449,672
5,405
–
986,773
449,672
757,087
449,672
12,369
284,210
–
296,579
293,487
–
11,486
–
236,297
63,382
–
63,382
405,144
792,272
250,570
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, 2012
$ 1,869,284
$ 471,937
$ 1,462,072
$ 763,371
$ 1,427,675
$ 10,876,381
$ 95,539
$ 16,966,259
$ 13,775,443
As at
October 31, 2011
$ 1,487,228
$ 665,427
$ 1,194,624
$ 787,558
$ 1,266,019
$ 9,477,591
$ 111,964
$ 14,990,411
$ 12,160,911
As at October 31, 2012, the Basel II Tier 1 capital adequacy ratio was
10.6% (2011 – 1 1.1%) and the total capital adequacy ratio was 13.8%
(201 1 – 15.4%). Tier 1 regulatory capital increased $110 million over
2011 mainly resulting from:
• the retention of earnings, net of common and preferred share
dividends, of $124 million;
• the issuance of $63 million of CWB common shares to settle the
contingent consideration of National Leasing; and,
• the issuance of $18 million of CWB common shares resulting from
shareholder participation in the Bank’s DRIP and the exercise of
employee stock options, partially offset by:
• a $49 million deduction reflecting the full transition impact to IFRS;
• a $36 million net reduction resulting from the expiration of a
Basel II transition related to investments in insurance subsidiaries
(previously deducted from total capital), as well as the impact of a
$20 million dividend paid by Canadian Direct to the Bank; and,
• a $12 million increase in the Tier 1 capital deduction for additional
pools of securitized assets.
44
CWB Group 2012 Annual Report
Total regulatory capital increased $34 million over 2011 mainly
resulting from the factors mentioned above, offset by:
• the redemption of $125 million of subordinated debentures ($120
million of which was previously included as regulatory capital);
and,
• Innovative Tier 1 instruments, such as CWB’s WesTS, will no
longer qualify;
• investment in an insurance subsidiary is no longer deducted from
capital; and
• changes in the capital treatment for investments in the regulatory
• a $13 million increase in the total capital deduction for additional
capital of other financial institutions.
pools of securitized assets.
basel iii caPital adeQuacy accord
The Basel Committee on Banking Supervision of The Bank for
International Settlements (the Committee) published the Basel III
rules supporting more stringent global standards on capital adequacy
and liquidity, and OSFI has confirmed its intent to implement the
Basel III rules for Canadian banks at the beginning of calendar
2013. OSFI also issued guidance and advisories on its capital
implementation plan for all Canadian financial institutions, including
transition allowances and details about the treatment of non-viability
contingent capital (NVCC). Significant capital changes most relevant
to CWB include:
• increased focus on tangible common equity;
• all forms of non-common equity, such as conventional
subordinated debentures and preferred shares, must be NVCC.
Compliant NVCC instruments include a clause requiring
conversion to common equity in the event that OSFI deems the
institution to be insolvent or a government has decided to inject
“bail out” funding;
ouTlook for caPiTal ManageMenT
OSFI requires Canadian banks to comply with the Basel III capital
standards on an “all-in” basis effective January 1, 2013. Required
minimum regulatory capital ratios, including a 250 basis point capital
conservation buffer, will be 7.0% tangible common equity Tier 1
(CET1) as at January 1, 2013, and 8.5% Tier 1 and 10.5% total capital
as at January 1, 2014. The Basel III rules provide for transitional
adjustments whereby certain aspects of the new rules will be phased
in between 2013 and 2019. The only available transition adjustment
in the Basel III capital standards permitted by OSFI for Canadian
banks relates to the multi-year phase out of non-qualifying capital
instruments. Pro forma application of the “all-in” Basel III standards
to the Bank’s financial position at October 31, 2012 results in an
estimated 8.1% CET1 ratio, 9.9% Tier 1 ratio and 13.1% total capital
ratio. The foregoing estimates are based on the Bank’s current
capital structure and composition of risk-weighted assets, and
will change depending on strategic initiatives, the composition of
regulatory capital, the Bank’s financial performance in the future
and modifications, if any, to the standards and available transitional
adjustments implemented by regulatory authorities.
The Bank is well positioned for the forthcoming Basel III transition
and management expects this solid capital position will be
maintained. Currently, the Bank’s pro forma “all-in” Basel III capital
ratios are approximately 100 basis points above OSFI’s required
minimums for all ratios, and have the Bank reasonably positioned
to manage future business growth and unexpected events. Target
capital ratios under Basel III, including an appropriate capital buffer
over the prescribed OSFI minimums, will be reconfirmed through
ongoing development of the Bank’s comprehensive ICAAP for
2013. The ongoing retention of earnings should support capital
requirements associated with the anticipated achievement of the
2013 minimum performance targets.
Management continues to evaluate alternatives to deploy capital
for the long-term benefit of CWB shareholders, which includes
the potential for strategic acquisitions. Longer term strategies
to further optimize the Bank’s existing capital structure are also
underway. As an example, CWB currently reports its regulatory
capital ratios using the Standardized Approach for calculating risk-
weighted assets. Management believes this approach requires
the Bank to carry significantly more capital for certain credit
exposures compared to requirements under the Advanced Internal
Ratings Based (AIRB) methodology used by many other financial
institutions. For this reason, regulatory capital ratios of banks that
utilize the Standardized Approach versus the AIRB methodology
are not directly comparable. Required resources, costs and
potential timelines related to the Bank’s possible transition to an
AIRB methodology for managing credit risk and calculating risk-
weighted assets are still being evaluated, and would be subject to
the approval of OSFI. Preliminary analysis confirms a multi-year
time frame would be required. CWB’s new core banking system,
expected to be implemented in 2015, is also a critical component
for a number of requirements necessary for AIRB compliance,
including the collection and analyses of certain types of data.
CWB Group 2012 Annual Report
45
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 sold under repurchase agreements, derivative financial
instruments and debt.
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
of this MD&A.
derivative financial instruments
More detailed information on the nature of derivative financial
instruments is shown in Note 11 to the consolidated financial
statements. The notional amounts of derivative financial instruments
are not reflected on the consolidated balance sheets.
table 22 – Derivative Financial instruMents
($ ThOUSANDS)
notional amounts
Interest rate contracts (1)
Equity swaps (2)
Foreign exchange contracts (3)
total
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.
Income and expenses are classified as to source, either securities
or loans for income, and deposits or borrower funds for expense.
Net realized gains (losses) on securities are shown separately
in other income.
2012
2011
$
225,000
$
19,400
15,445
2,450
–
6,384
$
242,895
$
25,784
(1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between January and October 2013.
(2) Equity swaps designated as hedges mature between June 2013 and June 2015. Equity swaps are used to reduce the earnings volatility from restricted share units linked to the Bank’s common
share price.
(3) U.S. dollar foreign exchange contracts are used from time to time to manage the difference between U.S. dollar assets and liabilities. Forward foreign exchange contracts outstanding mature
between November 2012 and July 2013.
The active use of interest rate contracts remains an integral
component in managing the Bank’s short-term gap position. CWB
had previously allowed outstanding interest rate swaps designated
as cash flow hedges for interest rate risk to mature without
replacement. The significant increase in the volume of outstanding
contracts (measured by the notional amount) compared to 2011
reflects the normal course management of interest rate risk and
more favourable costs of certain hedging instruments. 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 the Asset Liability Committee and reviewed and approved by the
Board of Directors at least annually.
acquisitions
There were no material acquisitions in 201 1 or 2012.
off-balance sheet
Off-balance sheet items include assets under administration and
assets under management. Total assets under administration, which
are comprised of trust assets under administration and third-party
leases under service agreements, totaled $7,172 million at October
31, 2012, compared to $9,370 million one year ago. The significant
reduction in assets under administration compared to the same
time last year reflects the termination of a lease servicing contract in
December 2011. Assets under management held within Adroit were
$855 million at year end, compared to $816 million last year.
Other off-balance sheet items are comprised of standard industry
credit instruments (guarantees, standby letters of credit and
commitments to extend credit). CWB does not utilize, nor does it
have exposure to, collateralized debt obligations or credit default
swaps. For additional information regarding other off-balance
sheet items refer to Note 20 of the audited consolidated financial
statements.
46
CWB Group 2012 Annual Report
summary of Quarterly results and fourth Quarter
Quarterly results
The financial results for each of the last eight quarters are
summarized in Table 23. In general, CWB’s performance reflects a
consistent growth trend, although the second quarter contains three
fewer revenue-earning days (or two fewer days in a leap year like
2012).
The Bank’s quarterly financial results are subject to some fluctuation
due to its exposure to property and casualty insurance. Insurance
operations, which are primarily reflected in other income, are subject
to seasonal weather conditions, cyclical patterns of the industry
and natural catastrophes. Mandatory participation in the Alberta
auto risk sharing pools can also result in unpredictable quarterly
fluctuations.
Among other things, quarterly results can also fluctuate from the
recognition of periodic income tax items.
Net gains on securities, reflected in other income, were unusually
table 23 – quarterly Financial highlights(1)
($ ThOUSANDS, ExCEPT PER ShARE AMOUNTS)
high in the first two quarters of 2011, as well as in the second and
fourth quarters of 2012. The majority of net gains on securities in
these periods resulted from the repositioning of investments in
preferred and common equities. Other income in the fourth quarter
of 2011 included a $3.1 million net loss on securities. Based on the
current composition of the securities portfolio, management expects
the level of net gains on securities will be significantly reduced in
future periods.
Detailed management’s discussion and analysis along with unaudited
interim consolidated financial statements for each quarter, except for
the fourth quarters of fiscal 2011 and 2012, 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.
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
Adjusted cash
Return on common
shareholders’ equity (ROE)
Return on average total assets (ROA)
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Provision for credit losses as
2012
2011
Q4
$ 113,246
1,979
Q3
$ 115,217
2,086
Q2
$ 107,600
2,458
Q1
$ 107,509
2,620
Q4
$ 106,184
3,133
Q3
$ 104,886
2,797
Q2
$ 99,165
2,385
Q1
$ 101,217
2,744
111,267
19,932
133,178
131,199
43,046
113,131
22,933
138,150
136,064
48,004
105,142
20,254
127,854
125,396
39,669
104,889
18,791
126,300
123,680
41,478
103,051
13,489
119,673
116,540
35,921
102,089
17,867
122,753
119,956
38,824
96,780
20,601
119,766
117,381
36,941
98,473
20,146
121,363
118,619
37,852
0.55
0.55
0.56
13.8%
1.03
46.7
47.4
2.71
2.67
0.62
0.61
0.63
16.1%
1.19
42.8
43.4
2.85
2.80
0.52
0.52
0.55
14.6%
1.03
46.2
47.1
2.81
2.74
0.55
0.54
0.57
15.5%
1.07
43.7
44.6
2.77
2.70
0.48
0.47
0.53
13.6%
0.97
45.5
46.7
2.87
2.79
0.52
0.50
0.54
14.3%
1.11
44.6
45.6
2.99
2.91
0.52
0.48
0.55
15.2%
1.12
44.9
45.7
3.02
2.95
0.56
0.50
0.55
15.9%
1.15
44.5
45.5
3.07
2.99
a percentage of average loans
0.17
0.19
0.19
0.20
0.17
0.17
0.19
0.23
(1) See page 19 for a discussion of teb and non-GAAP measures.
CWB Group 2012 Annual Report
47
fourth Quarter of 2012
CWB posted solid fourth quarter performance marking its 98th
consecutive profitable quarter. Net income available to common
shareholders of $43.0 million was up 20% ($7.1 million) compared
to the same quarter last year while diluted earnings per common
share increased 17% to $0.55. Adjusted cash earnings per share,
which excludes the after-tax amortization of acquisition-related
intangible assets and the non-tax deductible change in fair value of
contingent consideration, was $0.56, up 6%. Fourth quarter total
revenues (teb) grew 11% ($13.5 million) to reach a record $133.2
million as the benefit of very strong 14% year-over-year loan growth
and 48% ($6.4 million) higher other income more than offset the
impact of a 16 basis point decline in net interest margin (teb) to
2.71%. Growth in other income mainly resulted from an $8.5 million
positive change in net gains on securities and the elimination of
charges related to changes in fair value of contingent consideration
($3.6 million in the fourth quarter of 2011), partially offset by $4.0
million lower net insurance revenues and a $2.6 million decline in the
“other” component of other income. Net gains on securities of $5.4
million in the fourth quarter compared to net losses of $3.1 million in
the same period of 2011. Charges for contingent consideration were
eliminated in the third quarter of this year upon the settlement of the
Bank’s ownership of National Leasing. Net insurance revenues were
impacted by increased claims expense related to severe hailstorms
in Alberta in August 2012. Other income in the fourth quarter of 201 1
included a $2.0 million gain attributed to the sale of a residential
mortgage portfolio.
Compared to last quarter, net income available to common
shareholders declined 10% ($5.0 million) as the positive revenue
contribution from 2% quarterly loan growth and $3.5 million higher
gains on securities was more than offset by the combined impact
of a 14 basis point reduction in net interest margin (teb), a $5.3
million decline in net insurance revenues and a $1.8 million reduction
in the “other” component of other income. The material reduction
in net interest margin largely resulted from unusually high interest
recoveries in the previous quarter, as well as lower yields on both
loans and securities, partially offset by more favourable fixed term
deposit costs. Diluted earnings per common share decreased 10%
($0.06) from the prior quarter while adjusted cash earnings per
share was down 11% ($0.07).
Net interest margin (teb) of 2.71% was down from 2.87% in
the fourth quarter last year with the difference resulting from
lower yields on both loans and securities, partially offset by more
favourable costs on fixed term deposits and reduced debt expense.
Compared to the prior quarter, net interest margin (teb) decreased
14 basis points reflecting significantly lower interest recoveries
on previously impaired loans and lower yields on both loans and
securities, partially offset by more favourable fixed term deposit
costs.
The quarterly return on common shareholders’ equity of 13.8%
increased 20 basis points compared to a year earlier, but was down
230 basis points from the prior quarter for the reasons already
mentioned. Fourth quarter return on assets of 1.03% compared to
0.97% last year and 1.19% in the previous quarter.
Total loans of $13,954 million grew 2% ($311 million) in the quarter
mainly reflecting growth in general commercial loans, equipment
financing and leasing, and personal loans and mortgages.
Overall credit quality remained sound reflecting disciplined
underwriting, secured lending practices and a relatively strong level
of economic activity in the Bank’s key geographic markets. Gross
impaired loans totaled $66.8 million at quarter end, compared
to $70.2 million last quarter and $97.3 million a year earlier. This
represented the tenth consecutive quarterly decrease in the dollar
level of impaired loans.
The fourth quarter efficiency ratio (teb), which measures non-
interest expenses as a percentage of total revenues (teb),
excluding the non-tax deductible change in fair value of contingent
consideration, was 46.7%, up 120 basis points.
48
CWB Group 2012 Annual Report
accounting Policies and estimates
critical accounting estimates
CWB’s significant accounting policies are outlined in Note 1 with
related financial note disclosures by major caption included 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 based on management’s
estimate 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 collective allowance for
credit losses is intended to address this uncertainty. At October 31,
2012, the Bank’s total allowance for credit losses was $81.7 million
(201 1 – $72.0 million) which included a specific allowance of $14.4
million (2011 – $10.7 million) and a collective allowance of $67.3
million (2011 – $61.3 million). Additional information on the process
and methodology for determining the allowance for credit losses can
be found in the discussion of Credit Quality in this MD&A and in
Note 7 to the consolidated financial statements.
ProVision for unPaid insurance 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 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, 2012, the provision for unpaid
claims and adjustment expenses totaled $86.2 million (2011 – $76.9
million). Additional information on the process and methodology for
determining the provision for unpaid claims and adjustment expenses
can be found in Note 21 to the consolidated financial statements.
financial instruments measured
at fair Value
Cash resources, securities, securities purchased (sold) under resale
agreements, acquisition contingent consideration and derivative
financial instruments are reported on the consolidated balance
sheets at fair value.
The Bank categorizes its fair value measurements of financial
instruments recorded on the consolidated balance sheets according
to a three-level hierarchy. Level 1 fair value measurements reflect
published market prices quoted in active markets. Level 2 fair value
measurements were estimated using a valuation technique based
on observable market data. Level 3 fair value measurements were
determined using a valuation technique based on non-market
observable input.
CWB Group 2012 Annual Report
49
The following table summarizes the significant financial assets and liabilities reported at fair value.
table 24 – valuation oF Financial instruMents
($ ThOUSANDS)
as at october 31, 2012
Financial Assets
Cash resources
Securities
Derivative related
Total Financial Assets
Financial Liabilities
Derivative related
As at October 31, 2011
Financial Assets
Cash resources
Securities
Total Financial Assets
Financial Liabilities
Other liability
Derivative related
Total Financial Liabilities
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
236,983
$
236,983
$
2,336,100
2,336,100
$
–
–
1,951
–
1,951
$
2,575,034
$
2,573,083
$
1,951
$
$
10
$
–
$
10
$
–
–
–
–
–
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
312,335
$
272,704
$
39,631
$
1,925,704
1,925,704
–
$
2,238,039
$
2,198,408
$
39,631
$
–
–
–
$
$
61,011
$
436
61,447
$
–
–
–
$
$
–
$
61,011
436
436
–
$
61,011
Notes 3, 4, 5, 1 1 and 29 to the consolidated financial statements provide additional information regarding these financial instruments.
changes in accounting Policies
international financial
rePorting standards
The Canadian Institute of Chartered Accountants (CICA)
transitioned 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, 201 1, including comparatives for the prior year. As a
result, the Bank’s consolidated financial statements are prepared in
accordance with IFRS in effect at October 31, 2012 for the 2012 fiscal
year, and include comparative information for the 2011 fiscal year.
Impact on Financial Reporting and Accounting Policies
As stated in Notes 1 and 32 to the consolidated financial statements,
these are the Bank’s first annual financial statements prepared in
accordance with IFRS. In preparing the opening IFRS consolidated
balance sheet as at November 1, 2010, the Bank has adjusted
amounts reported previously in the 2011 consolidated financial
statements prepared in accordance with Canadian GAAP. An
explanation of how the transition from Canadian GAAP to IFRS has
affected the Bank is set out below. The impact on the Bank’s business
activities, financial processes and information systems, and internal
controls was not significant. IFRS has been applied retrospectively,
except for certain optional and mandatory exemptions from full
retrospective application provided for under IFRS 1 - First time
Adoption of IFRS (IFRS 1), as described below:
Optional Exemptions
Business combinations – The Bank has elected to apply IFRS 3 –
Business Combinations prospectively only to business combinations
on or after February 1, 2010. As a result, business combinations prior
to February 1, 2010 have not been restated.
Mandatory Exemptions
The Bank has applied all mandatory exemptions as required under IFRS 1.
Business Combinations
The Bank elected to apply IFRS retrospectively to business
combinations that occurred on or after February 1, 2010. This
election resulted in the adjustment of the accounting for the February
1, 2010 acquisition of National Leasing. The following transition
adjustments were required:
• Under Canadian GAAP, contingent consideration is recorded only
when it is determinable beyond a reasonable doubt. Under IFRS,
certain contingent consideration arrangements are reported at
fair value as at the acquisition date, and, each period thereafter,
the contingent consideration fair value is remeasured and
any adjustments are recorded in other income (non-tax
deductible).
• Under Canadian GAAP, acquisition-related costs are included in
the cost of the acquisition while, under IFRS, acquisition-related
costs are expensed.
• Under Canadian GAAP, the valuation of the Bank’s shares issued
as part of the consideration for the acquisition is based on a
reasonable time frame before and after the acquisition date. Under
IFRS, the valuation is completed on the acquisition date.
50
CWB Group 2012 Annual Report
Derecognition of Securitized Financial Assets
The Bank participates in securitization activities. Securitization
consists of the transfer of equipment leases to an independent trust
or other third party, which purchases the cash flows associated with
the leases and may issue securities to investors. Under Canadian
GAAP, securitized assets are accounted for as sales and removed
from the consolidated balance sheet as the Bank surrenders control
of the transferred assets and receives consideration other than
beneficial interests in the transferred assets. Under IFRS, because
the Bank has an obligation to remit contractual cash flow payments
regardless of whether the underlying cash flows are collected from
lessees, the Bank has not transferred substantially all of the risks and
rewards relating to the leases. As a result, the derecognition criteria
within International Accounting Standards (IAS) 39 – Financial
Instruments: Recognition and Measurement are not met and the
leases are accounted for as a secured borrowing with the underlying
leases of the securitization remaining on the consolidated balance
sheet and a debt security recognized for the funding received.
Consolidation
Under IFRS, a special purpose entity (SPE) is consolidated if it is
deemed to be controlled by the reporting entity, as determined
under specific criteria. Canadian Western Bank Capital Trust is
consolidated under IFRS, which resulted in a $105 million decrease
in deposits and the presentation of the CWB Capital Trust Capital
Securities Series 1 (WesTS) as equity attributed to non-controlling
interests. Distributions on the WesTS that were effectively reported
as deposit interest expense under Canadian GAAP are now
presented as an equity dividend within IFRS “net income attributable
to non-controlling interests.” For more information about this
special purpose entity, refer to Note 19 to the consolidated financial
statements.
Impairment of Available-for-Sale Securities
Under both Canadian GAAP and IFRS, available-for-sale securities
are reported on the balance sheet at fair value with changes in
fair value generally reported in other comprehensive income. An
unrealized loss is recognized in net income when a security is
considered impaired; a subsequent recovery in the value of an equity
security is not reversed through net income until the security is
either sold or redeemed. Under Canadian GAAP, a significant or
prolonged decline in the fair value of an investment below its cost
is assessed in the context of whether it is considered an “other than
temporary impairment” (OTTI). Under IFRS, the concept of OTTI
does not exist and either a significant or prolonged decline in fair
value is considered objective evidence of impairment. The differences
between Canadian GAAP and IFRS will generally result in earlier
recognition of impairment losses through net income under IFRS.
Other Reclassifications
Certain other financial statement reclassifications have been made
on the transition to IFRS. An example includes the presentation of
the non-controlling interest in Adroit Investment Management Ltd.
which has been reclassified from other liabilities under Canadian
GAAP to non-controlling interests (presented in equity) under IFRS.
In addition to the IFRS transition adjustments previously described,
the recognition of certain credit related fees was also amended.
Certain credit related fees, previously recognized in other income, are
now reflected as part of the loan yield and amortized to net interest
income over the expected life of the loan. Because total loans are
reported net of deferred loan fees, this change resulted in a decrease
in total loans of $18.0 million, and a reduction in retained earnings of
$13.5 million. While the change had no impact on 201 1 net income,
approximately $14.5 million was reclassified from other income to
net interest income.
future changes in accounting Policies
A number of standards and amendments have been issued by the
International Accounting Standards Board (IASB), and the following
changes may have an impact on the Bank’s future financial statements.
CWB is currently reviewing these standards to determine the impact
on the financial statements.
IFRS 9 – Financial Instruments
The IASB deferred the mandatory effective date of IFRS 9 to annual
periods beginning on or after January 1, 2015. The new standard
specifies that financial assets be classified into one of two categories
on initial recognition: financial assets measured at amortized
cost or financial assets measured at fair value. Gains or losses
on remeasurement of financial assets measured at fair value will
generally be recognized in profit or loss.
IFRS 10 – Consolidated Financial Statements and IFRS 12 – Disclosure
of Interests in Other Entities
The IASB has issued IFRS 10 and 12, which establish principles
for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities,
and new disclosure requirements for all forms of interests in other
entities. IFRS 10 and 12 are effective for annual periods beginning on
or after January 1, 2013.
IFRS 13 – Fair Value Measurement
The IASB has issued new guidance on fair value measurement and
disclosure requirements for IFRS. The amendments are effective for
annual periods beginning on or after January 1, 2013.
Amendments to IAS 32 and IFRS 7 – Offsetting Financial Assets
and Liabilities
In December 2011, the IASB published Offsetting Financial Assets
and Financial Liabilities and issued new disclosure requirements in
IFRS 7 - Financial Instruments: Disclosures. The effective date for the
amendments to IAS 32 - Financial Instruments: Presentation is annual
periods beginning on or after January 1, 2014. The effective date for
the amendments to IFRS 7 is annual periods beginning on or after
January 1, 2013. These amendments are to be applied retrospectively.
CWB continues to monitor IASB ongoing activity and proposed
changes to IFRS. Several accounting standards that are in the process
of being amended by the IASB (i.e. loan impairment, macro-hedging,
leases and insurance) may have a significant impact on the Bank’s
future consolidated financial statements.
CWB Group 2012 Annual Report
51
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 IFRS, which permits these specific
disclosures to be included in the MD&A. Therefore, the shaded areas
presented on pages 52 to 57 of this MD&A form an integral part
of the audited consolidated financial statements for the year ended
October 31, 2012.
overview
CWB’s risk management processes are designed to complement
the organization’s overall size, level of complexity and philosophy
regarding risk, which emphasizes sound controls, effective
governance, transparency and accountability. Selectively choosing
and managing acceptable risks has been integral to CWB’s ability to
continually grow profitability in both favourable and adverse market
conditions. The maintenance of a strong risk culture continues to be
a cornerstone of CWB’s approach to risk management.
CWB, like other financial institutions, is exposed to risk factors that
could adversely affect its operating environment, financial condition
and financial performance, and which may also influence an
investor’s decision to buy, sell or hold CWB shares, other securities
or its deposits. CWB has demonstrated its ability to effectively
manage risks through conservative management practices based
on a strong risk culture and disciplined risk management approach;
however, many risks are beyond CWB’s direct control. The Bank
actively evaluates existing and potential risks to develop and
implement appropriate mitigation strategies. The level of active
management related to regulatory risks has increased significantly in
recent years in response to changes caused by economic fallouts of
the global financial crisis in 2008, the European sovereign debt crisis
and other factors.
Each of CWB’s businesses is subject to certain risks that require
unique mitigation strategies. In response to this, CWB has
established a Group Risk Management function that continues
to evolve under its mandate to provide enhanced and structured
approaches for identifying and appropriately mitigating risks across
all companies. Senior management establishes and recommends
the Group’s risk appetite, which is ultimately approved by the Board
of Directors. Group Risk Management is functionally independent
of the business and is responsible for maintaining the group-wide
risk management framework and resulting policies. Group Risk
Management also assists senior management in developing and
communicating risk appetite, as well as monitoring certain risk
management activities.
Management uses various forms of stress testing to assist in making
informed risk management and capital planning decisions, which
includes the development of sound business strategy. Stress testing
is performed across key functional areas of CWB and is based on
both quantitative and qualitative inputs.
Risk Management Principles
The following principles guide the management of risks on a group-
wide basis:
• An effective balance of risk and reward through alignment of
business strategy with risk appetite, diversifying risk, pricing
appropriately for risk, and mitigating risk through preventive and
detective controls;
• A group-wide view of risk and the acceptance of risks required to
build the business only if those risks do not harm the CWB brand;
• The belief that every employee is essentially a risk manager and
must be knowledgeable of the risks inherent in their respective
day-to-day activities;
• Use of common sense, sound judgment and fulsome risk-based
discussions; and,
• Recognition that “knowing your client” reduces risks by ensuring
the services provided are suitable for, and understood by, all
clients.
Effective risk management for CWB requires a strong principles-
based risk culture, a well-defined risk management framework, and
clearly understood and well documented risk governance practices.
Risk Management Framework
The primary goal of risk management is to ensure that the outcomes
of risk-taking are consistent with the Bank’s business activities,
strategies and risk appetite. The Bank’s group-wide risk management
framework provides the foundation for achieving this goal. CWB
utilizes the ISO 31000 Standard for Risk Management as a
comprehensive framework to help ensure risk is managed effectively
and efficiently across CWB and its subsidiaries. This international
standard provides principles and guidelines for managing risk in
a systematic, transparent and credible manner. This framework is
subject to constant evaluation to ensure that it meets the challenges
and requirements faced by CWB in its operations, including the
evaluation of industry best practices and compliance with evolving
regulatory standards.
Risk Culture
A strong risk culture emphasizes transparency and accountability.
Organizations with a strong risk culture have a consistent and
repeatable approach to risk management when making key business
decisions, including regular discussions of risk and reviews of risk
scenarios that can help management and members of the Board
understand the inter-relationships and potential impacts of risks.
CWB’s strong risk culture is the cornerstone of its effective group-
wide risk management framework. It starts with an appropriate
“tone at the top,” that demonstrates and sends consistent and
clear messages throughout the organization. Risk culture is
additionally communicated and emphasized by the actions of senior
management and the Board.
52
CWB Group 2012 Annual Report
Risk Management Governance Structure
Management owns the risk it takes or is exposed to while
conducting CWB’s business activities, while the Board approves
and monitors the framework under which this risk is managed.
This places ultimate accountability for the management of risk
with the Chief Executive Officer (CEO) and other members of
senior management. Senior management, with the assistance of the
Group Risk Management function, is responsible for establishing
the framework, identifying risks and developing appropriate risk
management policies and frameworks. The Board, either directly or
through its committees, reviews or approves the key policies and
implements specific reporting procedures to enable monitoring of
ongoing compliance as it relates to 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, assessment and
approval.
The Loans Committee of the Board maintains a close working
relationship with the Credit Risk Management department of the
Bank and is responsible for the:
• review and approval of credit risk management policies;
• review and approval of loans in excess of delegated limits;
• review of impaired and other less than satisfactory loans; and,
• recommendation of the adequacy of the allowance for credit
losses to the Audit Committee.
The Internal Audit department, which reports to the Audit
Committee, provides independent, objective assurance and
consulting services designed to improve CWB’s operations. The
scope of the department’s work includes determining whether the
network of risk management controls and governance processes,
as designed and represented by management, are adequate and
functioning in the intended manner.
Risk Appetite
Risk appetite is the formalization of basic business principles such
as making decisions based on risk-reward tradeoffs, understanding
potential outcomes of different decisions, and deciding whether the
organization is comfortable with the risk associated with different
decisions. It provides a context to discuss risks and reach a shared
understanding of appropriate risk thresholds. Setting these risk
tolerances is dynamic and requires flexible processes, as well as
continuous review and guidance from both senior management and
the Board. CWB continues to formalize a group-wide risk appetite
framework. key attributes of this framework include the following:
• An ongoing focus on “plain vanilla” banking complemented by
extensive knowledge and experience in CWB’s chosen lending
sectors, key geographic regions and other business areas.
• No direct exposure to wholesale banking businesses (investment
banking, brokerage and trading) which are subject to significant
earnings volatility and can lead to large unexpected losses
compared to typical spread lending.
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 CEO, President and Chief Operating Officer (COO), Chief
Financial Officer (CFO) and other senior officers as members. ALCO
is responsible for:
• ensuring that risks other than credit and insurance 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,
capital risk management, foreign exchange risk, interest rate and
derivatives risk, operational risk and trust services risk; and,
• overseeing strategy and compliance respecting diversification of
product offerings and management of related risks.
Asset liability management policies are approved and reviewed at
least annually by the Board with quarterly compliance reporting also
provided.
• Careful and diligent management of risks at all levels led by a
knowledgeable and experienced management team committed
to sound management practices and the promotion of a highly
ethical culture.
• A conservative culture that is prevalent throughout the organization,
from the Board to senior management to front-line staff.
• A flat organizational structure with management close to their
respective operations, helping to facilitate effective internal
communications and reinforcing an appropriate “tone at the top.”
• A continuous commitment and focus on the achievement of high
quality, sustainable financial results.
• A philosophy of avoiding exposure to risks that are not well
understood. Management strives to thoroughly understand the
risks of the businesses in which CWB chooses to engage.
• Accountability by all employees to understand risks relevant to
their respective area of responsibility, managing within appropriate
risk thresholds, and maintaining high ethical standards. The
businesses are also managed within the confines of all legal and
regulatory requirements.
CWB Group 2012 Annual Report
53
Principal/Foundational Risks
The ability to identify, measure and monitor risks is a key component
of effective group-wide risk management. While CWB’s operations
are exposed to numerous different types of risk – explained in more
detail in the following sections – certain principal (or foundational)
risks have been identified that have the greatest potential
to materially impact CWB’s operations. Following is a visual
representation of CWB’s principal/foundational risk exposures by
business line:
CWB Group
Credit risk
Market risk
Liquidity/Funding risk
Capital risk
Operational risk
Business and Retail
Lending
Business and Retail
Banking Services
Trust Services
Insurance
Wealth Management
Credit risk
Operational risk
Credit risk
Operational risk
Operational risk
Operational risk
Operational risk
Regulatory risk is also considered to be a principal risk for CWB’s
operations, particularly in the context of the current and evolving
regulatory environment. These and other important risk factors are
described in more detail in the following sections. While each of
these risks is described independently, readers are cautioned that
many of the factors and risks discussed may also be interrelated.
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 or its affiliates.
Risk Overview
CWB’s main source of credit risk exposure results from its focus
and expertise in granting business loans and leases. The credit risk
management culture reflects the unique combination of policies,
practices, experience and management attitudes that support growth
within chosen industries and geographic markets. Underwriting
standards are designed to ensure an appropriate balance of risk and
return, and are supported by established loan exposure limits in
areas of demonstrated lending expertise. Concentration is measured
against specified tolerance levels by geographic region, industry
sector and product type. In order to minimize its potential loss
given default, the vast majority of loans are secured by tangible
collateral. This approach to managing credit risk has proven to be
very effective, as demonstrated by the Bank’s consistently low and
relatively stable loan loss provisions and write-offs.
Risk Governance
The credit approval process is centrally controlled, with all significant
credit requests submitted to the Credit Risk Management group
for adjudication. Credit Risk Management is independent of the
originating business. In certain cases, credit requests must be
referred to the Bank Credit Committee or to the Loans Committee of
the Board for approval.
The Bank Credit Committee approves credit applications to
a specified limit beyond the lending limit of the CEO. Credit
applications above the limit of the Bank Credit Committee are
approved by the Loans Committee of the Board.
54
CWB Group 2012 Annual Report
Risk Management
The Bank is committed to a number of important principles to
manage credit exposures, which include:
• the oversight of a Loans Committee of the Board;
• delegated lending authorities that are clearly communicated to
personnel engaged in the credit granting process, complemented
by a defined approval process for loans in excess of those limits,
which include making recommendations to the Bank Credit
Committee or 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
both qualified and experienced;
• a standardized credit risk rating classification established for all
credits that is assessed at least annually;
• a review at least annually 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 while maintaining the quality of loans;
• early recognition of problem accounts and immediate
implementation of steps to protect the safety of the
Bank’s capital;
• delegation of all higher risk loans to a specialized loan workout
group that performs an appropriate level of regular monitoring
and close management;
•
independent reviews of credit evaluation, risk classification and
credit management procedures by the Internal Audit group,
which includes direct reporting of results to senior management,
the CEO and the Audit Committee; and,
• detailed quarterly reviews of accounts rated less than
satisfactory. Reviews include a recap of action plans for each
less than satisfactory account, the 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.
Credit Risk Concentration
Risk diversification is addressed by establishing portfolio limits by
geographic area, industry sector and product. CWB’s policy is to
limit loans to connected corporate borrowers to not more than 10%
of the Bank’s shareholders’ equity. Generally, the Bank’s lending
limit is $50 million for a single risk exposure. however, for certain
quality connections with more than one risk exposure, the limit is
$75 million. CWB customers with larger borrowing requirements
can be accommodated through loan syndications with other
financial institutions.
Environmental Risk
While the day-to-day operations of the Bank do not have a material
impact on the environment, environmental risks include the risk
of loss given default if a borrower is unable to repay loans due to
environmental cleanup costs, and the risk of damage to CWB’s
reputation resulting from the same. In order to manage these risks,
and to help mitigate CWB’s overall impact on the environment,
CWB evaluates potential environmental risks as part of its credit
granting process. If potential environmental risks are identified that
cannot be resolved to the Bank’s satisfaction, CWB will deny the
application. Reports on environmental inspections and findings are
provided quarterly to the Board. Where financing is provided, Internal
Audit will sample test loan files to ensure environmental studies
required as a condition of financing are in place, including review
for a transmittal letter from the author of the environmental study
indicating that it may be relied upon for financing purposes.
Portfolio Quality
CWB’s strategy is to maintain a quality, secured and diversified loan
portfolio by engaging experienced personnel who provide a hands-
on approach in credit granting, account management and quick
action when problems develop. Lending is largely directed toward
small- and medium-sized businesses with operations conducted
in the four western provinces, and to individuals. Relationship
banking and “knowing your client” are important tenets of effective
account management. Earning an appropriate financial return for
the level of risk is also fundamental. Geographic diversification in
the loan portfolio outside of Western Canada is achieved through
participation in syndicated lending facilities primarily led by other
Canadian banks, National Leasing’s representation across all
provinces of Canada, and residential mortgages underwritten and
serviced by Optimum Mortgage in select regions of Ontario.
CWB Group 2012 Annual Report
55
market risk
Market risk is the impact on earnings resulting from changes in financial market variables such as interest rates and foreign exchange rates.
Risk Overview
Market risk arises when making loans, taking deposits and making
investments. CWB itself does not undertake market activities such
as market making, arbitrage or proprietary trading and, therefore,
does not have direct risks related to those activities. A diversified
securities portfolio is maintained that is primarily comprised of high
quality debt instruments and preferred and common equities that are
subject to price fluctuations based on volatility in financial markets.
The most material market risks for CWB are those related to
changes in interest rates. CWB has limited direct exposure to foreign
exchange risk.
interest rate risk
Risk Governance
The Board of Directors annually approves asset liability policies
specifying interest rate and foreign exchange exposure limits, and
regularly reviews the Bank’s position against these thresholds. ALCO
is responsible for ongoing oversight and reviews and endorses the
asset liability policies at least annually, in addition to providing
related strategic direction and oversight for Treasury. Treasury
actively monitors market risk with strong support from senior
management.
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 the potential for variability in earnings arise 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
primarily reflect differences in the preferences for term 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 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 works within 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
interest rate risk within prudent guidelines. Interest rate risk policies
are reviewed and approved by the Board at least annually. The gap
position is reported to the Board at least quarterly.
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, 2012 for select
time intervals.
The analysis in Note 28 is a static measurement of interest rate
sensitivity gaps at a specific point in time. There is potential for these
gaps to change significantly in a short period of time. The impact on
earnings from changes in market interest rates will depend on both
the magnitude of and speed with which interest rates change, as well
as the size and maturity structure of the cumulative interest rate gap
position and the management of those positions over time.
The one-year and under cumulative gap increased to 4.5% of total
assets at October 31, 2012, up from -0.4% one year ago, while
the one-month and under gap decreased to 9.1%, 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 have a
relatively neutral effect on 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 typically
managed at a targeted duration as set and guided by ALCO.
56
CWB Group 2012 Annual Report
Of the $5,465 million in fixed term deposit liabilities maturing within
one year from October 31, 2012, approximately $3,260 million (23%
of total deposit liabilities) mature by April 30, 2013. The term in
which maturing deposits are renewed will have an impact on the
future asset liability structure and, hence, interest rate sensitivity.
Approximately $237 million of the fixed term deposit liabilities
maturing within one month are deposits redeemable at any time.
The estimated sensitivity of net interest income to a change in
interest rates is presented in Table 25. The amounts represent the
estimated change in net interest income over the time period shown
resulting from a one-percentage point change in interest rates.
The estimates are based on a number of assumptions and factors,
which include:
• a constant structure in the interest sensitive asset liability
portfolio;
• floor levels for various deposit liabilities;
• interest rate changes affecting interest sensitive assets and
liabilities by proportionally the same amount and applied at the
appropriate repricing dates; and,
• no early redemptions.
table 25 – estiMateD sensitivity oF net interest incoMe as a result oF one-Percentage Point change in interest rates
($ 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
$
2012
4,411
15,086
$
2011
4,015
11,024
3.8%
3.0%
2012
2011
$
(6,289)
$
(4,786)
(21,534)
(13,436)
(5.4)%
(3.7)%
It is estimated that a one-percentage point increase in all interest
rates at October 31, 2012 would decrease unrealized gains related
to available-for-sale debt securities and the fair value of interest
rate swaps designated as hedges, and result in a reduction in
other comprehensive income of approximately $12.6 million, net
of tax (October 31, 2011 – $9.0 million); it is estimated that a one-
percentage point decrease in all interest rates at October 31, 2012
would result in a higher level of unrealized gains related to available-
for-sale debt securities and increase the fair value of interest rate
swaps designated as hedges, which would increase other
comprehensive income by approximately $12.6 million, net of tax
(October 31, 2011 – $9.0 million).
It is management’s intention to continue to manage the asset liability
structure and interest rate sensitivity through pricing and product
policies to attract desired assets and liabilities, as well as through the
use of interest rate swaps or other appropriate hedging techniques
(see discussion under Derivative Financial Instruments on page 46).
Assets and liabilities having a term to maturity in excess of five years
are subject to specific review and control and were not material.
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, 2012,
assets denominated in U.S. dollars were 1.1% (2011 – 1.1%) of total
assets and U.S. dollar liabilities were 1.2% (2011 – 1.2%) 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 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
and deviations from policy are reported regularly to ALCO and
quarterly to the Board.
CWB Group 2012 Annual Report
57
liquidity and funding risk
Liquidity risk is the risk that CWB cannot meet a demand for cash or fund its financial obligations in a cost efficient or timely manner as they
become due. These financial obligations can arise from withdrawals of deposits, debt maturities, and commitments to provide credit.
Risk Overview
CWB maintains a sound, prudent and conservative approach to
managing exposure to liquidity risk, including targeting a contingency
planning horizon under slightly stressed and/or severe operating
conditions that may be caused by Bank-specific or market-wide
stress scenarios. The contingency planning horizon and related
liquidity and funding management strategies comprise an integrated
liquidity risk management program designed to ensure that CWB
maintains liquidity risk within an appropriate threshold.
CWB’s key risk mitigation strategies include the maintenance of:
• an appropriate balance between the level of risks CWB undertakes
and the corresponding costs of risk mitigation that consider the
potential impact of extreme but plausible events;
• broad funding access, including preserving and growing a reliable base
of core deposits and continual access to diversified sources of funding;
• a comprehensive group-wide liquidity contingency plan that is
supported by a pool of unencumbered marketable securities that
would provide assured access to liquidity in a crisis; and
• the maintenance of a liquidity position to manage current and
future liquidity requirements while also contributing to the
flexibility, safety and soundness of the Bank under times of stress.
Refer to the Deposit section and Liquidity Management section on
pages 36 and 38, respectively, for additional information.
Risk Governance
Liquidity management is centralized to better facilitate the effective
management of liquidity risk on a group-wide basis. The Board
annually approves asset liability policies and delegates liquidity
risk authorities to senior management. The Board is responsible for
oversight of the liquidity policies and also reviews, on a regular basis,
reporting on CWB Group’s liquidity position, status and trends.
ALCO annually reviews and endorses the liquidity management
policies and provides strategic direction and primary management
oversight for the treasury management function. Treasury actively
monitors liquidity risk with strong support from senior management.
Risk Management
CWB has comprehensive Asset Liability Management policies that
cover key aspects of liquidity risk management. The key elements of
managing liquidity risk for CWB include the following:
• Policies – Liquidity risk management policies establish targets for
minimum liquidity, set the monitoring regime, and define authority
levels and responsibilities. Policies are reviewed at a minimum
annually by ALCO and the Board. Limit setting establishes
acceptable thresholds for liquidity risk.
• Monitoring – Trends and behaviours regarding how clients manage
their deposits and loans are monitored to determine appropriate
liquidity levels. Active monitoring of the external environment
is performed using a wide range of sources and economic
barometers.
• Measurement and modeling – The Bank’s liquidity model
measures and forecasts cash inflows and outflows, including any
cash flows related to applicable off-balance sheet activities over
various risk scenarios.
• Reporting – Treasury oversight of all significant liquidity risks that
support analysis, risk measurement, stress testing, monitoring and
reporting to both ALCO and the Board.
• Stress testing – CWB performs liquidity stress testing on a regular
basis to evaluate the potential effect of both industry (macro)
and Bank-specific (micro) disruptions on the Bank’s liquidity
position. Liquidity stress tests consider the effect of changes
in funding assumptions, depositor behaviour and the market
behaviour of liquid assets. Industry standard stress tests are also
completed as required by regulators and rating agencies. Stress
test results are reviewed by ALCO and are considered in making
liquidity management decisions. Liquidity stress testing has many
purposes, including, but not limited to:
• helping the Board and senior management to understand the
potential behavior of various positions on the Bank’s balance
sheet in circumstances of stress; and,
• facilitating the development of effective risk mitigation and
contingency plans.
• Contingency planning – A liquidity contingency plan is maintained
that specifies the desired approaches for analyzing and responding
to actual and potential liquidity events. The plan outlines an
appropriate governance structure for the management and
monitoring of liquidity events, processes for effective internal and
external communication, and identifies potential countermeasures
to be considered at various stages of an event.
• Funding diversification – The Bank actively manages the
diversification of its deposit liabilities by source, type of depositor,
instrument and term. Supplementary funding sources include
securitization and whole loan sales.
• Core liquidity – The Bank maintains a pool of highly liquid,
unencumbered assets that can be readily sold, or pledged to
secure borrowings, under stressed market conditions or due to
company specific events.
The Bank for International Settlements (BIS) liquidity regulations
described in the document “International Framework for Liquidity
Risk, Measurement, Standards and Monitoring” remain subject to
significant transition and monitoring activities, and revisions are
expected. The new liquidity coverage ratio (LCR) and net stable
funding ratio (NSFR) are presently subject to an observation
period and will include a review clause to address any unintended
consequences. BIS is currently expected to introduce the LCR
effective January 1, 2015 and the NSFR effective January 1, 2018.
58
CWB Group 2012 Annual Report
Contractual Obligations
CWB enters into contracts in the normal course of business that give
rise to commitments of future minimum payments that affect the
liquidity position. In addition to the obligations related to deposits
and subordinated debentures discussed in the Deposits and Liquidity
Management sections of this MD&A, as well as Notes 13, 16, 20 and
28 of the consolidated financial statements, the following contractual
obligations are outstanding at October 31, 2012:
table 26 – contractual obligations
($ ThOUSANDS)
Lease commitments
Purchase obligations for capital expenditures
october 31, 2012
October 31, 2011
within 1
year
1 to 3
years
4 to 5
years
more than
5 years
$
$
$
10,839
$
20,709
$
14,653
$
21,649
$
875
11,714
12,199
$
$
1,870
22,579
21,907
$
$
1,620
16,273
18,580
$
$
810
22,459
23,745
$
$
total
67,850
5,175
73,025
76,431
Credit Ratings
CWB’s ability to efficiently access unsecured funding on a cost-
effective basis is partially dependent upon the Bank maintaining
satisfactory credit ratings. Management believes the maintenance
of satisfactory credit ratings with a stable outlook will increase the
breadth of clients and investors able to participate in CWB’s deposit
and debt offerings, while also lowering the Bank’s overall cost of capital.
Credit ratings are largely determined by the quality of earnings,
the adequacy of capital and the effectiveness of risk management
programs. There can be no assurance that CWB’s credit ratings and
the corresponding outlook will not be changed, potentially resulting
in adverse consequences for the Bank’s funding capacity or access
to capital markets. Changes in credit ratings may also affect the
ability and/or the cost of establishing normal course derivative or
hedging transactions. Credit ratings do not comment on market price
or suitability of any financial instrument for a particular investor, and
are not recommendations to purchase, sell or hold securities. Ratings
are subject to revision or withdrawal at any time by the rating
organization.
The following table summarizes the credit ratings issued for CWB, as well as the corresponding rating agency outlook at October 31, 2012:
table 27 – creDit ratings
As at October 31, 2012 (Unchanged from October 31, 201 1)
DBRS Limited
A (low)
BBB (high)
Long-term senior debt and deposits
Subordinated debentures
Outlook
stable
capital risk
Capital risk is the risk that CWB has insufficient capital resources, in either quantity or quality, to support strategic initiatives and current
or planned operations.
Risk Governance
The Board annually approves the regulatory capital plan,
Internal Capital Adequacy Assessment Process (ICAAP) and
capital management policies. ALCO is responsible for capital
risk management. Under the leadership of the CFO, senior
representatives within Finance, Group Risk Management and the
Credit Analytics departments are the key representatives comprising
the ICAAP core team, which is closely supported by other key
departments, including Treasury.
Risk Overview
CWB follows three main principles to facilitate the effective
management of capital risk:
• Capital management involves a dynamic and ongoing process to
determine, allocate and maintain appropriate amounts of capital.
• The “optimal” amount of capital must consider regulatory and
economic capital requirements, as well as the expectation of CWB
shareholders and other stakeholders.
• The objective of capital management is to ensure:
• Capital is, and will continue to be, adequate to maintain
confidence in the safety and stability of the institution while
also complying with required regulatory standards;
• CWB has the capability to access appropriate sources of capital
in a timely and cost-effective manner; and,
• Return on capital is sufficient to support projected business
growth and satisfy the expectations of investors.
CWB Group 2012 Annual Report
59
Risk Management:
The following are key elements of capital risk management:
• The regulatory capital plan, inclusive of the capital management
policy and three-year capital projections, are completed at least
annually.
• Consolidated forecast models are used to analyze the likely capital
impact of projected operations, stress testing and/or significant
transactions.
• Capital ratios are reported to senior management and the Board
on a monthly basis, with additional analysis and discussion
provided in the quarterly reports of the CFO.
operational risk
• A robust process is in place to calculate regulatory capital, risk-
weighted assets under the Standardized Approach and regulatory
capital ratios; results are reviewed by knowledgeable and senior
individuals within the Bank. The lead-up to implementation of
Basel III capital requirements was supported by active capital
management and quarterly updates for the Board, as well as
investors and other stakeholders.
For additional information, please refer to the Capital Management
section of this MD&A.
Operational risk is the risk of loss resulting from human error, inadequate or failed processes, systems or controls, or external events.
A subset of operational risk is people risk, which is the risk that CWB is not able to retain and attract sufficient qualified resources to
implement its strategies and/or achieve its objectives.
Risk Overview
Operational risk is inherent in all business activities including
banking, trust, wealth management and insurance operations, and
is embedded in processes that support the management of other
risks such as credit, liquidity, market, capital and reputational risk. Its
impact can be financial loss, loss of reputation, loss of competitive
position, regulatory penalties, or failure in the management of other
risks, such as credit or liquidity risk. CWB is exposed to operational
risk from internal business activities, external threats and outsourced
business activities. While operational risk cannot be completely
eliminated, proactive operational risk management is a key strategy
to mitigate this risk. The primary financial measure of operational risk
is actual losses incurred. CWB incurred no material losses related to
operational risk in 2011 or 2012.
The Basel II regulatory framework requires that certain amounts
of capital be allocated to mitigate operational risk. Under Basel II,
CWB uses the Standardized Approach to measure operational risk.
CWB has a group-wide Operational Risk Management Framework
to ensure that all staff understand their responsibilities with respect
to operational risk management. The Operational Risk Management
Framework encompasses a common language of risk coupled
with group-wide programs and methodologies for identification,
measurement, control, and management of operational risk.
With oversight by the Board and senior management, Group Risk
Management is responsible for the continual enhancement of the
Operational Risk Framework and the ongoing evolution of CWB’s
approach to operational risk management.
Risk Governance
Business and support areas are fully accountable for the
management and control of significant operational risks to which
they are exposed.
ALCO has oversight responsibility for operational risk with support
from CWB’s Operations Committee and the Risk Committees of
subsidiary companies. Where a subsidiary company does not have
a Risk Committee, support for operational risk management is
provided by the senior management of that company.
The Board has ultimate oversight and approves the Group’s
Operational Risk Management Framework with support from the
various Board Committees.
Risk Management
Strategies and factors that assist with the effective management
of operational risk include, but are not limited to:
• a knowledgeable and experienced management team committed
to sound management practices and the promotion of a highly
ethical culture;
• very clear communication of “tone at the top”, which supports
effective risk management reporting;
• a flat organization structure with management close to their
respective operations, which helps to facilitate effective internal
communication;
• organizational surveys on employee engagement and corporate
culture (including CWB’s ongoing participation in the 50 Best
Employers in Canada survey);
• communication of the importance of effective risk management
to all levels through a combination of training and policy
implementation; and,
• management that is very engaged with promoting the Bank’s
operational risk tolerance and appetite.
key elements of the Operational Risk Management Framework include:
• Enterprise–wide Definitions of Operational Risk – CWB
incorporates standard risk terms and certain key operational risk
definitions as part of its Risk Assessment Policy;
• Risk Assessments – risk control self-assessments are utilized
throughout CWB with the objective to proactively identify the
exposures to key operational risks and assess whether appropriate
internal controls are in place to mitigate these risks. The
probability of negative outcomes and estimates of the resulting
impacts are measured against internal controls. Action plans may
result where additional strategies are identified to reduce risk
exposure;
• Operational Risk Reporting – loss data monitoring is important
to maintain the Bank’s awareness of identified operational risks
and to assist management in taking constructive action to reduce
exposures to future losses. A centralized reporting system is used
to monitor and report on internal and external operational risk loss
events to senior management and the Audit Committee;
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CWB Group 2012 Annual Report
• implementation of policies and procedural controls appropriate to
address identified risks (including segregation of duties and other
checks and balances);
• adoption of the COSO (Committee of Sponsoring Organizations
of the Treadway Commission) for Smaller Business framework for
internal control assessment;
• ongoing enhancements to fraud prevention processes and policies;
• human resource policies and processes to ensure staff are
adequately trained in the tasks for which they are responsible;
• ongoing succession planning;
• a Regulatory Compliance department focused on key regulatory
compliance areas such as privacy, anti-money laundering, anti-
terrorist financing and consumer regulations;
• use of technology that incorporates automated systems with built-
• established “whistleblower” processes and employee codes of
in controls;
conduct;
• maintenance of a group-wide outsourcing risk management
program;
• at least annual assessment and benchmarking of the amount and
type of business insurance to ensure coverage is appropriate;
• effective project management processes supported by a
designated committee comprised of representatives of senior
management; and,
• continual updating and testing of procedures and contingency
plans for disaster recovery and business continuity (including
pandemic planning).
reputation risk
Reputation risk is the risk to earnings and capital from negative public opinion.
Negative public opinion can result from actual or alleged misconduct
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 clients and could
expose CWB to litigation and/or regulatory action. Responsibility
for governance and management of reputation risk falls to all CWB
employees, including senior management and members of the Board.
All directors, officers and employees have a responsibility to conduct
their activities in accordance with the CWB Group’s personal
conduct policies and in a manner that minimizes reputational risk.
In addition to members of senior management, the Legal, Strategy
and Communications, and Regulatory Compliance departments are
particularly involved in the management of reputation risk.
regulatory risk
The businesses operated by CWB and its affiliates 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 earnings and
damage reputation. Although regulatory risks are largely outside of
management’s direct control and cannot be completely eliminated,
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.
Over the past several years, the intensity of supervisory oversight of
all federally regulated Canadian financial institutions has increased
significantly in terms of both regulation and new standards. This
includes amplified supervisory activities, an increase in the volume
of regulation, more frequent data and information requests from
regulators, and shorter implementation time frames for regulatory
requirements, including the Basel III capital and liquidity standards.
Certain regulations may also impact CWB’s ability to compete
against both non-OSFI and other OSFI regulated entities. Effective
management of regulatory risk and compliance in the current
environment requires, and is expected to continue to require,
considerable internal resources and the active involvement of senior
management. Notwithstanding the additional resources, the volume,
pace and implementation of new and amended regulations and
standards increases the risk of unintended non-compliance.
insurance risk
The Bank is exposed to insurance risk through its wholly owned
subsidiary, Canadian Direct, which offers home and auto insurance
to customers in BC and Alberta. Accordingly, Canadian Direct’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. Canadian Direct 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 Canadian Direct is exposed.
The risk that Canadian Direct 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 Canadian Direct 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. Canadian Direct performs
financial due diligence on prospective reinsurers and only purchases
coverage from a list of reviewed and approved companies.
Canadian Direct is exposed to regulatory risk as the insurance
business is regulated by both federal and provincial authorities. This
risk is managed mainly by monitoring current developments and
actively participating in relevant bodies and associations in order to
contribute Canadian Direct’s perspectives on regulations.
CWB Group 2012 Annual Report
61
ability to attract and retain emPloyees
Competition for qualified employees is intense reflecting the
recruitment needs of other financial services companies and those
outside of the financial industry. The goal is to continually retain and
attract qualified employees, but there is no assurance that CWB will
be able to do so.
information systems and technology
CWB is highly dependent upon information technology and
supporting infrastructure, such as voice, data and network access.
Various third parties provide key components of the infrastructure
and applications. Disruptions in the Bank’s information technology
and infrastructure, whether attributed to internal or external factors,
and including potential disruptions in the services provided by
various third parties, could adversely affect the ability of CWB Group
to conduct regular business and/or deliver products and services to
customers. In addition, CWB currently has a number of significant
technology projects underway, including the replacement of its
core banking system (expected to be completed in 2015), which
further increases risk exposure related to information systems and
technology.
adeQuacy of the bank’s risk
management framework
The Risk Management Framework is made up of various processes
and strategies for managing risk exposure. Given its structure and
scope of its operations, CWB is primarily subject to credit, market
(mainly interest rate and foreign exchange), liquidity, operational,
reputation, regulatory, insurance, strategic, legal, environmental,
and other risks. There can be no assurance that the framework to
manage risks, including the framework’s underlying assumptions and
models, will be effective under all conditions and circumstances. If
the risk management framework proves ineffective, the Bank could
be materially affected by unexpected financial losses and/or other
harm.
changes in accounting standards
and accounting Policies and estimates
The International Accounting Standards Board continues to change
the financial accounting and reporting standards that govern the
preparation of CWB’s financial statements. These types of changes
can be significant and may materially impact how CWB records and
reports its financial condition and results of operations. Where CWB
is required to retroactively apply a new or revised standard, it may be
required to restate prior period financial statements.
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.
other risk factors
In addition to the risks described above, other risk factors,
including those below, may adversely affect CWB’s businesses
and financial results.
general business and economic conditions
CWB primarily operates in Western Canada. As a result, its
earnings are largely impacted by the general business and economic
conditions of the four western provinces. Several factors that could
impact general business and economic conditions in the Bank’s
core markets include, but are not limited to: changes in short-
term and long-term interest rates; energy and other commodity
prices; inflation; exchange rates; levels of consumer, business and
government spending; levels of consumer, business and government
debt; consumer confidence; real estate prices; and, adverse global
economic events and/or elevated economic uncertainties.
leVel of comPetition
CWB’s performance is impacted by the intensity of competition
in the markets in which it operates. Each of CWB’s businesses
operates in highly competitive markets. Client 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.
accuracy and comPleteness of
information on clients 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 clients and
counterparties, CWB may rely on information furnished by
them, including financial statements, appraisals, external credit
ratings and other financial information. CWB may also rely on the
representations of clients 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 standard accounting
practices, that are materially misleading, or that do not fairly present,
in all material respects, the financial condition and results
of operations of the customer or counterparties.
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
effective 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 successfully
manage acquisition strategies could have a material adverse impact
on CWB’s business, financial condition and results of operations.
62
CWB Group 2012 Annual Report
uPdated share information
As at November 29, 2012, there were 78,745,223 common shares
outstanding. Also outstanding were employee stock options, which
are or will be exercisable for up to 3,435,150 common shares for
maximum proceeds of $84.2 million. On December 3, 2012, the
Board of Directors declared a quarterly cash dividend of $0.17 per
common share payable on January 4, 2013, to shareholders of record
on December 17, 2012. The Board of Directors also declared a cash
dividend of $0.453125 per Series 3 Preferred Share payable on
January 31, 2013 to shareholders of record on January 24, 2013.
controls and Procedures
As of October 31, 2012, an evaluation was carried out on the
effectiveness of the Bank’s disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have certified that the
design and operating effectiveness of those disclosure controls and
procedures were effective.
Also at October 31, 2012, an evaluation was carried out on the
effectiveness of internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting
and financial statement compliance with IFRS. Based on that
evaluation, the CEO and CFO have certified that the design and
operating effectiveness of internal controls over financial reporting
were effective.
The foregoing evaluations were conducted in accordance with
the standards of COSO for Smaller Business, a recognized control
model, and the requirements of Multilateral Instrument 52-109 of
the Canadian Securities Administrators. A Disclosure Committee,
comprised of members of senior management, assists the CEO and
CFO 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, 2012 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, 2012.
CWB Group 2012 Annual Report
63
consoliDateD 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 International Financial Reporting Standards, 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
represented 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 our internal
audit department, which carries out periodic internal audits 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
the MD&A, 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 Governance 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 themselves 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
Chief Executive Officer
December 3, 2012
Tracey C. Ball, FCA, ICD.D
Executive Vice President and Chief Financial Officer
64
CWB Group 2012 Annual Report
inDePenDent auDitors’ rePort
to the shareholders
of canadian western bank
We have audited the accompanying consolidated financial
statements of Canadian Western Bank, which comprise
the consolidated balance sheets as at October 31, 2012, October
31, 2011 and November 1, 2010, the consolidated statements
of income, comprehensive income, changes in shareholders’
equity and cash flows for the years ended October 31, 2012 and
October 31, 2011, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Management’s responsibility
for the consolidated Financial statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the
preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
auditors’ responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
kPMG LLP
Chartered Accountants
Edmonton, Alberta
December 3, 2012
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment,
including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, we consider internal
control relevant to the Bank’s preparation and fair presentation
of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Bank’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial
position of Canadian Western Bank as at October 31, 2012,
October 31, 2011, and November 1, 2010, and its consolidated
financial performance and its consolidated cash flows for the
years ended October 31, 2012 and October 31, 2011 in accordance
with International Financial Reporting Standards.
CWB Group 2012 Annual Report
65
consolidated balance sheets
($ ThOUSANDS)
assets
cash resources
Cash and non-interest bearing deposits with financial institutions
Interest bearing 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
Property and equipment
Goodwill
Intangible assets
Insurance related
Derivative related
Other assets
total assets
liabilities and equity
deposits
Payable on demand
Payable after notice
Payable on a fixed date
other
Cheques and other items in transit
Insurance related
Derivative related
Securities sold under repurchase agreements
Other liabilities
debt
Debt securities
Subordinated debentures
equity
Preferred shares
Common shares
Retained earnings
Share-based payment reserve
Other reserves
total shareholders’ equity
Non-controlling interests
As at
october 31, 2012 October 31, 2011 November 1, 2010
as at
As at
(Note 3)
$
(Note 4)
(Note 5)
(Note 6)
(Note 7)
(Note 8)
(Note 9)
(Note 9)
(Note 10)
(Note 1 1)
(Note 12)
(Note 13)
(Note 14)
(Note 1 1)
(Note 5)
(Note 15)
(Note 16)
(Note 17)
(Note 17)
$
$
33,690
177,028
26,265
236,983
980,200
478,622
877,278
2,336,100
–
3,352,735
10,682,674
14,035,409
(81,723)
13,953,686
86,941
45,536
31,956
57,650
1,951
122,466
346,500
16,873,269
685,193
3,773,611
9,686,033
14,144,837
54,030
160,302
10
70,089
239,503
523,934
209,273
425,000
634,273
209,750
490,218
733,298
22,468
9,247
1,464,981
$
$
73,318
233,964
5,053
312,335
$
$
644,356
380,031
901,317
1,925,704
–
3,008,545
9,356,717
12,365,262
(71,980)
12,293,282
72,674
45,691
37,420
56,734
–
105,301
317,820
14,849,141
583,267
3,407,590
8,403,832
12,394,689
45,986
149,130
436
–
262,185
457,737
89,877
545,000
634,877
209,750
408,282
608,848
21,884
7,849
1,256,613
$
$
(Note 19)
105,244
105,225
1,361,838
14,849,141
$
8,965
168,998
9,981
187,944
564,694
88,478
857,015
1,510,187
177,954
2,479,957
8,276,263
10,756,220
(81,523)
10,674,697
65,978
45,562
43,420
59,652
134
1 16,200
330,946
12,881,728
530,608
2,999,599
7,177,560
10,707,767
39,628
149,396
992
–
239,474
429,490
202,006
315,000
517,006
209,750
279,620
586,933
21,291
24,692
1,122,286
105,179
1,227,465
12,881,728
total equity
total liabilities and equity
The accompanying notes are an integral part of the consolidated financial statements.
1,570,225
16,873,269
$
$
Allan W. Jackson
Chair
66
CWB Group 2012 Annual Report
Larry M. Pollock
Chief Executive Officer
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
Debt
net interest income
Provision for credit losses
net interest income after Provision for credit losses
other income
Credit related
Trust and wealth management services
Insurance, net
Gains on securities, net
Retail services
Foreign exchange gains
Contingent consideration fair value change
Other
net interest and other income
non-interest expenses
Salaries and employee benefits
Premises and equipment
Other expenses
Provincial capital taxes
net income before income taxes
income taxes
net income
Net income attributable to non-controlling interests
net income attributable to shareholders of the bank
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
The accompanying notes are an integral part of the consolidated financial statements.
(Note 7)
(Note 21)
(Note 29)
(Note 24)
(Note 19)
(Note 25)
$
$
$
$
2012
2011
$
686,534 $
43,548
2,389
732,471
625,048
44,177
4,062
673,287
238,701
34,193
272,894
400,393
21,783
378,610
18,307
19,050
20,250
7,283
9,486
3,488
(12,305)
6,544
72,103
450,713
141,865
36,738
42,449
1,399
222,451
228,262
56,541
171,721
6,975
164,746
15,208
149,538
72,205
76,705
269,772
28,270
298,042
434,429
25,107
409,322
19,705
19,065
17,353
12,449
9,227
3,255
(2,489)
3,345
81,910
491,232
153,844
39,502
42,720
500
236,566
254,666
60,209
194,457 $
7,052
187,405 $
15,208
172,197 $
76,841
77,460
2.24 $
2.22
2.07
1.95
CWB Group 2012 Annual Report
67
consolidated statements of comPrehensiVe income
FOR ThE YEAR ENDED OCTOBER 31
($ ThOUSANDS)
net income
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)
other comprehensive income (loss), net of tax, for the year
comprehensive income for the year
Comprehensive income for the year attributable to:
Shareholders of the Bank
Non-controlling interests
comprehensive income for the year
(1) Net of income tax of $3,441 (2011 – $4,731).
(2) Net of income tax of $3,320 (201 1 – $2,093).
(3) Net of income tax of $500 (2011 – nil).
(4) Net of income tax of $169 (2011 – nil).
The accompanying notes are an integral part of the consolidated financial statements.
2012
194,457 $
$
2011
171,721
9,580
(9,129)
451
1,430
(483)
947
1,398
195,855 $
188,803 $
7,052
195,855 $
(11,710)
(5,133)
(16,843)
–
–
–
(16,843)
154,878
147,903
6,975
154,878
$
$
$
68
CWB Group 2012 Annual Report
consolidated statements of changes in shareholders’ eQuity
FOR ThE YEAR ENDED OCTOBER 31
($ ThOUSANDS)
retained earnings
Balance at beginning of year
Net income attributable to shareholders of the Bank
Dividends - Preferred shares
- Common shares
Warrants purchased and cancelled
Balance at end of year
other reserves
Balance at beginning of year
Changes in available-for-sale securities
Changes in derivatives designated as cash flow hedges
Balance at end of year
Preferred shares
Balance at beginning and end of year
common shares
Balance at beginning of year
(Note 17)
(Note 17)
(Note 17)
Issued on settlement of contingent consideration
Issued under dividend reinvestment plan
Transferred from share-based payment reserve on the exercise or exchange of options
Issued on exercise of options
Issued on exercise of warrants
Balance at end of year
share-based Payment reserve
Balance at beginning of year
Amortization of fair value of options
Transferred to common shares on the exercise or exchange of options
(Note 18)
Balance at end of year
total shareholders’ equity
non-controlling interests
Balance at beginning of year
Net income attributable to non-controlling interests
Dividends to non-controlling interests
Balance at end of year
total equity
The accompanying notes are an integral part of the consolidated financial statements.
2012
2011
$
608,848 $
187,405
(15,208)
(47,747)
–
733,298
7,849
451
947
9,247
586,933
164,746
(15,208)
(39,177)
(88,446)
608,848
24,692
(16,843)
–
7,849
209,750
209,750
408,282
63,399
12,252
4,432
1,853
–
490,218
21,884
5,016
(4,432)
22,468
1,464,981
105,225
7,052
(7,033)
105,244
$
1,570,225 $
279,620
–
5,941
4,009
2,996
115,716
408,282
21,291
4,602
(4,009)
21,884
1,256,613
105,179
6,975
(6,929)
105,225
1,361,838
CWB Group 2012 Annual Report
69
consolidated statements of cash flows
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
Current income taxes receivable and payable
Amortization of fair value of employee stock options
Accrued interest receivable and payable, net
Deferred taxes, net
Gain on securities, net
Other items, net
cash flows from financing activities
Deposits, net
Securities sold under repurchase agreements, net
Common shares issued, net of issuance costs
Debt securities issued
Debt securities repaid
Debentures issued
Debentures redeemed
Dividends
Dividends to non-controlling interests
Warrants purchased and cancelled
cash flows from investing activities
Interest bearing deposits with regulated financial institutions, net
Securities, purchased
Securities, sales proceeds
Securities, matured
Loans, net
Property and equipment
Securities purchased under resale agreements, net
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
Interest and dividends received
Interest paid
Income taxes paid
The accompanying notes are an integral part of the consolidated financial statements.
70
CWB Group 2012 Annual Report
(Note 17)
(Note 16)
(Note 16)
(Note 17)
2012
2011
$
194,457
$
171,721
25,107
17,261
8,981
5,016
(3,541)
(695)
(12,449)
24,283
258,420
1,750,148
70,089
14,004
226,249
(106,855)
–
(120,000)
(62,955)
(7,033)
–
1,763,647
57,128
(4,959,542)
2,855,832
1,711,152
(1,685,511)
(27,586)
–
(2,048,527)
(26,460)
32,385
5,925
33,690
26,265
(54,030)
5,925
724,759
293,871
51,923
$
$
$
$
21,783
19,748
5,036
4,602
2,529
(11,146)
(7,283)
51,352
258,342
1,686,922
–
124,653
–
(112,129)
300,000
(70,000)
(54,385)
(6,930)
(88,446)
1,779,685
(65,414)
(4,725,843)
2,095,077
2,192,675
(1,640,368)
(19,041)
177,954
(1,984,960)
53,067
(20,682)
32,385
73,318
5,053
(45,986)
32,385
672,271
268,272
63,034
$
$
$
$
notes to consolidated financial statements
FOR ThE YEARS ENDED OCTOBER 31, 2012 AND 2011
($ ThOUSANDS, ExCEPT PER ShARE AMOUNTS)
1. nature of oPerations and basis of Presentation
a) reporting entity
e) basis of consolidation
Canadian Western Bank (CWB or the Bank) is a publicly traded
Canadian bank headquartered in Edmonton, Alberta. CWB offers a
diversified range of financial services.
The consolidated financial statements were authorized for issue by
the Board of Directors on December 3, 2012.
b) statement of compliance
These consolidated financial statements of Canadian Western
Bank have been prepared in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB) and in accordance with subsection 308 (4)
of the Bank Act and the accounting requirements of the Office of the
Superintendent of Financial Institutions Canada (OSFI).
These are the Bank’s first annual financial statements prepared in
accordance with IFRS, and IFRS 1 – First time Adoption of IFRS has
been applied. In preparing the opening IFRS consolidated balance
sheet as at November 1, 2010, the Bank has adjusted amounts
reported previously in the consolidated financial statements
prepared in accordance with Canadian Generally Accepted
Accounting Principles (Canadian GAAP). An explanation of how
the transition to IFRS has affected the Bank’s consolidated financial
statements is provided in Note 32.
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.
c) use of estimates and assumptions
The preparation of financial statements in conformity with IFRS
requires the Bank to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as at the date of the consolidated
financial statements as well as the reported amount of revenues
and expenses during the period. key areas of estimation where the
Bank 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, deferred tax assets and liabilities, impairment of available-
for-sale securities and fair value of stock options. Therefore, actual
results could differ from these estimates.
d) significant judgments
Information of critical judgments in applying accounting policies that
have the most significant effect on the amounts recognized
in the consolidated financial statements are described in the
following notes:
• Impairment of loans (Note 6)
• Allowance for credit losses (Note 7)
• Derecognition of securitization transactions (Note 16)
• Provision for unpaid claims and adjustment expenses (Note 21)
• Financial instruments measured at fair value (Note 29)
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 33 for details of the subsidiaries. In the context
of special purpose entities (SPEs), an SPE is consolidated when the
substance of the relationship between the SPE and CWB indicates
that the SPE is controlled by CWB. See Note 19 for details of the SPE.
f) business combinations
Acquisitions on or after February 1, 2010
Business combinations are accounted for using the acquisition
method. The cost of an acquisition is measured at the fair value of
the consideration, including contingent consideration, given at the
acquisition date. Contingent consideration is considered a financial
instrument, and as such it is remeasured each period thereafter
with the adjustment recorded to other income. Acquisition related
costs are recognized as an expense in the income statement in the
period in which they are incurred. The acquired identifiable assets,
liabilities and contingent liabilities are measured at their fair values
at the date of acquisition. Goodwill is measured as the excess of the
aggregate of the consideration transferred, including any amount
of any non-controlling interest in the acquiree, over the net of the
recognized amounts of the identifiable assets acquired and the
liabilities assumed.
The Bank elects on a transaction-by-transaction basis whether
to measure non-controlling interest at its fair value or at its
proportionate share of the recognized amount of the identifiable net
assets, at the acquisition date.
Acquisitions prior to February 1, 2010
As part of the transition to IFRS, the Bank elected to restate only
those business combinations that occurred on or after February 1,
2010. See Note 32 for details of the transition impact. In respect of
business combinations prior to February 1, 2010, goodwill represents
the amount recognized under Canadian GAAP. Under Canadian
GAAP, business acquisitions were accounted for using the purchase
method.
g) functional and foreign currencies
The consolidated financial statements are presented in Canadian
dollars, which is the Bank’s functional currency. 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 period. 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 equity securities that are included in other
comprehensive income.
CWB Group 2012 Annual Report
71
h) specific accounting Policies
i) future accounting changes
The accounting policies set out below have been applied consistently
to all periods presented in these consolidated financial statements
and in preparing the opening IFRS balance sheet at November 1,
2010 for the purposes of the transition to IFRS. To facilitate a better
understanding of the Bank’s consolidated financial statements, the
significant accounting policies are disclosed in the notes, where
applicable, with related financial disclosures by major caption:
Note
Topic
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Financial instruments
Cash resources
Securities
Securities purchased under resale agreements and
securities sold under repurchase agreements
Loans
Allowance for credit losses
Property and equipment
Goodwill and intangible assets
Insurance related other assets
Derivative financial instruments
Other assets
Deposits
Insurance related other liabilities
Other liabilities
Debt
Capital stock
Share-based payments
Non-controlling interests
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
Transition to IFRS
Subsidiaries
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 sold under repurchase agreements, derivative financial
instruments and debt.
3. cash resources
A number of standards and amendments have been issued by the
IASB, and the following changes may have an impact on the Bank’s
future financial statements. CWB is currently reviewing these
standards to determine the impact on the financial statements.
IFRS 9 – Financial Instruments
The IASB deferred the mandatory effective date of IFRS 9 to annual
periods beginning on or after January 1, 2015. The new standard
specifies that financial assets be classified into one of two categories
on initial recognition: financial assets measured at amortized
cost or financial assets measured at fair value. Gains or losses on
remeasurement of financial assets measured at fair value will generally
be recognized in profit or loss.
IFRS 10 – Consolidated Financial Statements and IFRS 12 – Disclosure of
Interests in Other Entities
The IASB has issued IFRS 10 and 12, which establish principles for
the presentation and preparation of consolidated financial statements
when an entity controls one or more other entities, and new disclosure
requirements for all forms of interests in other entities. IFRS 10 and 12
are effective for annual periods beginning on or after January 1, 2013.
IFRS 13 – Fair Value Measurement
The IASB has issued new guidance on fair value measurement and
disclosure requirements for IFRS. The amendments are effective for
annual periods beginning on or after January 1, 2013.
Amendments to IAS 32 and IFRS 7 – Offsetting Financial
Assets and Liabilities
In December 2011, the IASB published Offsetting Financial Assets
and Financial Liabilities and issued new disclosure requirements
in IFRS 7 – Financial Instruments: Disclosures. The effective date for
the amendments to IAS 32 – Financial Instruments: Presentation is
annual periods beginning on or after January 1, 2014. The effective
date for the amendments to IFRS 7 is annual periods beginning
on or after January 1, 2013. These amendments are to be applied
retrospectively.
CWB continues to monitor IASB ongoing activity and proposed
changes to IFRS. Several accounting standards that are in the
process of being amended by the IASB (i.e. loan impairment, macro-
hedging, leases and insurance) may have a significant impact on the
Bank’s future consolidated financial statements.
The use of financial instruments exposes the Bank to credit, liquidity
and market risk. A discussion of how these are managed can be
found in the Risk Management section of the 2012 Annual Report.
Income and expenses are classified as to source, either securities or
loans for income, and deposits or debt for expense. Gains on the sale
of securities, net, and fair value changes in certain derivatives are
classified to other income.
Cash resources 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, and include highly liquid investments that are readily
convertible to cash and which are subject to an insignificant risk of
change in value.
Included in deposits with regulated financial institutions are
available-for-sale financial instruments reported on the consolidated
balance sheets at the fair value of $236,983 (October 31, 201 1
- $233,964 and November 1, 2010 - $168,998), which is $482
(October 31, 2011 - $815 and November 1, 2010 - $2,104) higher
than amortized cost.
72
CWB Group 2012 Annual Report
4. securities
Securities have been designated as available-for-sale, are accounted
for at settlement date and recorded on the consolidated balance
sheets at fair value with changes in fair value recorded in other
comprehensive income, net of income taxes, until the security is sold
or becomes impaired. Interest income from securities, which includes
amortization of premiums and discounts, is recognized using the
effective interest method in the consolidated statements of income.
Dividend income is recognized on the ex-dividend date.
Securities are purchased with the original intention to hold the
instrument to maturity or until market conditions render alternative
investments more attractive. Gains and losses realized on disposal
of securities and adjustments to record any impairment in value are
included in other income.
At each reporting date, the Bank assesses whether there is objective
evidence that securities designated as available-for-sale are
impaired. Objective evidence that a security is impaired can include
significant financial difficulty of the issuer, indications that an issuer
The analysis of securities at carrying value, by type and maturity, is as follows:
will enter bankruptcy or the lack of an active market for a security. In
addition, for an equity security, a significant or prolonged decline in
fair value below amortized cost is objective evidence of impairment.
Impairment losses on available-for-sale securities are recognized by
reclassifying the cumulative loss recognized in other comprehensive
income to the income statement as “gains on securities, net”. The
reclassified amount is the difference between the amortized cost, net
of any principal repayment and amortization, and the fair value, less
any impairment previously recognized in net income.
If, in a subsequent period, the fair value of an impaired available-
for-sale debt security increases and the increase can be objectively
related to an event occurring after the impairment loss was
recognized in net income, the impairment loss is reversed, with
the reversal recognized in net income. however, if, in a subsequent
period, the fair value of an impaired available-for-sale equity security
increases, the recovery is recognized in other comprehensive income
until the equity security is sold or redeemed.
within
1 year
maturities
as at
As at
As at
1 to
3 to
over 5
october 31
October 31
November 1
3 years
5 years
years
2012
2011
2010
securities issued or guaranteed by
Canada
$
673,005
$
247,119
$
60,076
$
315,350
201,179
83,211
149,009
80,061
14,649
–
–
6,207
$ 980,200
$ 644,356
$
564,694
478,622
371,044
380,031
88,478
303,545
256,544
19,808
211,766
120,666
46,512
–
–
–
107,482
398,752
107,482
497,130
100,642
511,228
89,243
$ 1,209,342
$
691,105
$
275,452
$
160,201
$ 2,336,100
$ 1,925,704
$
1,510,187
A province or municipality
other debt securities
equity securities
Preferred shares
Common shares (1)
total
(1) Common shares have no maturity date.
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
as at october 31, 2012
As at October 31, 2011
amortized
unrealized
unrealized
fair
Amortized
Unrealized
Unrealized
cost
gains
losses
Value
Cost
Gains
Losses
Fair
Value
securities issued or
guaranteed by
Canada
$ 980,024
$
270
$
94
$ 980,200
$ 645,001
$
25
$
670
$ 644,356
A province or
municipality
other debt securities
equity securities
Preferred shares
Common shares
478,689
369,407
391,781
105,368
93
1,734
8,249
4,701
160
97
478,622
371,044
380,510
301,718
522
2,087
1,001
260
380,031
303,545
1,278
2,587
398,752
107,482
487,818
100,614
10,448
5,718
1,136
5,690
497,130
100,642
total
$ 2,325,269
$
15,047
$
4,216
$ 2,336,100
$ 1,915,661
$
18,800
$
8,757
$ 1,925,704
CWB Group 2012 Annual Report
73
securities issued or guaranteed by
Canada
A province or municipality
other debt securities
equity securities
Preferred shares
Common shares
total
As at November 1, 2010
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$ 564,833
$
69
$
208
$ 564,694
87,755
253,132
490,497
81,574
737
3,493
20,731
9,305
14
81
88,478
256,544
–
1,636
51 1,228
89,243
$ 1,477,791
$
34,335
$
1,939
$ 1,510,187
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 credit spreads and shifts in the interest rate
curve. Volatility in equity markets also leads to fluctuations in value,
particularly for common shares. For the year ended October 31,
2012, the Bank has assessed the securities and, based on available
objective evidence, nil (2011 – $3,023) impairment charges were
included in gains on securities, net.
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.
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.
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 original effective interest rate of the loan.
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. Impaired loans are returned to performing status when the
timely collection of both principal and interest is reasonably assured,
all delinquent principal and interest payments are brought current,
and all charges for loan impairment have been reversed.
Loan fees integral to the yield on the loan, net of directly related
costs, are amortized to interest income using the effective interest
method. Premiums paid on the acquisition of loan portfolios are
amortized to interest income using the effective interest method.
5.
securities Purchased under resale agreements
and securities sold under rePurchase agreements
Securities purchased under resale agreements represent a purchase
of Government of Canada securities by the Bank effected with a
simultaneous agreement to sell them back at a specified price on a
future date, which is generally short term. The difference between
the cost of the purchase and the predetermined proceeds to be
received on a resale agreement is recorded as securities interest
income.
Securities sold under repurchase agreements represent a sale
of Government of Canada securities by the Bank effected with a
6.
loans
Loans, including leases, are recorded at amortized cost and stated
net of unearned income, unamortized premiums and allowance
for credit losses (Note 7). Interest income is recorded using the
effective interest method.
Loans are determined to be impaired when payments are
contractually past due 90 days, or where the Bank has commenced
realization proceedings, or where the Bank is of the opinion that the
loan should be regarded as impaired based on objective evidence.
Objective evidence that a loan is impaired can include significant
financial difficulty of the borrower, default or delinquency of a
borrower, breach of loan covenants or conditions, or indications that
a borrower will enter bankruptcy. An exception may be made where
the Bank 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 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, a province or a Canadian government
agency. These loans are classified as impaired when payment is 365
days in arrears.
74
CWB Group 2012 Annual Report
Outstanding gross loans and impaired loans, net of allowances for credit losses, by loan type, are as follows:
as at october 31, 2012
As at October 31, 201 1
gross
net
Gross
Net
gross
impaired
specific
impaired
Gross
Impaired
Specific
Impaired
amount
amount(2)
allowance
loans
Amount
Amount(2)
Allowance
Loans
Consumer and personal
$ 2,292,388 $
13,404
$
459 $
12,945 $ 2,018,627 $
24,983
$
1,173
$
23,810
Real estate (1)
5,001,041
23,022
2,605
20,417
4,722,018
46,638
2,516
44,122
Equipment financing
and energy
Commercial
total
collective allowance (3)
net impaired loans after
collective allowance
2,874,423
8,133
3,867,557
22,281
3,570
7,745
4,563
2,502,620
14,536
3,121,997
15,596
10,041
5,592
1,369
10,004
8,672
$ 14,035,409 $ 66,840
$
14,379
52,461 $ 12,365,262 $
97,258
$
10,650
86,608
(67,344)
$
(14,883)
(61,330)
$
25,278
Consumer and personal
Real estate (1)
Equipment financing and energy
Commercial
total
collective allowance (3)
net impaired loans after collective allowance
As at November 1, 2010
Gross
Net
Gross
Impaired
Specific
Impaired
Amount
Amount(2)
Allowance
Loans
$
1,793,181 $ 24,534
$
1,288 $
23,246
4,115,560
82,799
2,141,276
28,411
2,706,203
7,956
4,880
10,708
2,655
77,919
17,703
5,301
$ 10,756,220 $ 143,700
$
19,531
124,169
(61,992)
$
62,177
(1) Multi-family residential mortgages are presented as real estate loans in this table.
(2) Gross impaired loans include foreclosed assets with a carrying value of $10,462 (October 31, 2011 – $3,241 and November 1, 2010 – $867). The Bank pursues timely realization on foreclosed
assets and does not use the assets for its own operations.
(3) The collective allowance for credit risk is not allocated by loan type.
During the year, interest recognized as income on impaired loans totaled $5,094 (2011 – $2,620).
Outstanding impaired loans, net of allowance for credit losses, by provincial location of security, are as follows:
Alberta
British Columbia
Ontario
Saskatchewan
Manitoba
Other
total
collective allowance (1)
net impaired loans after
collective allowance
as at october 31, 2012
As at October 31, 2011
gross
impaired
amount
specific
allowance
net
impaired
loans
Gross
Impaired
Amount
Specific
Allowance
$
36,769
$
9,711
$
27,058
$
53,725
$
5,208
$
22,629
3,081
2,309
615
1,437
2,190
1,167
456
203
652
20,439
1,914
1,853
412
785
35,762
2,170
2,809
953
1,839
1,441
1,549
823
328
1,301
$
66,840
$
14,379
52,461
$
97,258
$
10,650
Net
Impaired
Loans
48,517
34,321
621
1,986
625
538
86,608
(61,330)
(67,344)
$
(14,883)
$
25,278
CWB Group 2012 Annual Report
75
Alberta
British Columbia
Ontario
Saskatchewan
Manitoba
Other
total
collective allowance (1)
net impaired loans after collective allowance
(1) The collective allowance for credit risk is not allocated by province.
As at November 1, 2010
Gross
Impaired
Amount
Specific
Allowance
$
99,067
$
14,609
$
38,587
1,801
2,178
364
1,703
$
143,700
$
1,303
1,113
1,183
268
1,055
19,531
Net
Impaired
Loans
84,458
37,284
688
995
96
648
124,169
(61,992)
$
62,177
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, 2012
Residential mortgages
Other loans
As at October 31, 2011
As at November 1, 2010
1 - 30 days
31 - 60 days
61 - 90 days
more than
90 days
14,151 $
9,709 $
2,628 $
375 $
11,698
18,090
1,566
-
25,849 $
27,799 $
4,194 $
375 $
23,970 $
16,424 $
23,639 $
41,871 $
1,796 $
9,643 $
352 $
4 $
$
$
$
$
total
26,863
31,354
58,217
42,542
75,157
76
CWB Group 2012 Annual Report
The composition of the Bank’s loan portfolio by geographic region and industry sector is as follows:
october 31, 2012
($ MILLIONS)
loans to individuals
bc
ab
on
sk
mb
other
total (1)
2012
2011
2010
Composition Percentage
oct. 31
Oct. 31
Nov. 1
Residential mortgages (1) $ 1,461
$ 1,204
$ 407
$ 203
$
Other loans
64
106
1,525
1,310
2
409
13
216
78
3
81
$
– $ 3,353
24%
24%
23%
1
1
189
3,542
1
25
2
26
2
25
loans to businesses
Commercial
Construction
and real estate (2)
Equipment financing (3)
Energy
1,178
1,849
426
191
107
103
3,854
28
25
26
1,471
473
–
1,770
1,013
342
145
485
–
3,122
4,974
1,056
262
208
–
661
88
92
–
29
261
–
3,765
2,532
342
287
393
10,493
27
18
2
75
29
17
3
74
31
16
2
75
total loans (4)
$ 4,647
$ 6,284
$ 1,465
$ 877
$
368
$ 394 $ 14,035
100%
100%
100%
composition Percentage
October 31, 2012
October 31, 2011
November 1, 2010
33%
33%
33%
45%
46%
48%
10%
10%
8%
6%
6%
6%
3%
3%
3%
3%
2%
2%
100%
100%
100%
(1) Includes single- and multi-unit residential mortgages and project (interim) mortgages on residential property.
(2) Includes commercial term mortgages and project (interim) mortgages for non-residential property.
(3) Includes securitized leases reported on-balance sheet of $209 (October 31, 2011 – $91 and November 1, 2010 – $199).
(4) This table does not include an allocation of the allowance for credit losses.
7. allowance for credit losses
An allowance for credit losses is maintained which, in the Bank’s
opinion, is adequate to absorb credit related impairment losses
incurred in its loan portfolio. The allowance for credit losses is
calculated on individual loans (specific allowance) and on groups
of loans assessed collectively (collective allowance). 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. Losses expected from future events are not recognized.
Specific Allowance
The specific allowance includes all the accumulated provisions for
losses on identified impaired loans required to reduce the carrying
value of those loans to their estimated realizable amount. See Note 6
for the identification process of impaired loans.
If the amount of an impairment loss decreases in a subsequent
period, and the decrease can be objectively related to an event
occurring after the impairment was recognized, the specific loan
impairment allowance is reduced accordingly. The reversal of
impairment is recognized in the consolidated statements of income
in provision for credit losses.
Collective Allowance
The collective allowance for credit risk includes provisions for losses
that have been incurred but have not yet been identified on an
individual loan or account basis by the Bank. As soon as information
becomes available which identifies losses on individual loans within
the collective group, those loans are removed from the group and
assessed on an individual basis for impairment.
The collective allowance for credit risk is established by taking into
consideration:
• historical trends in the loss experience during economic cycles;
• The current portfolio profile;
• historical loss experience in portfolios of similar credit
risk characteristics;
• The estimated period between impairment occurring and the loss
being identified; and
• CWB’s management judgment as to whether current economic
and credit conditions are such that the actual level of inherent
losses at the balance sheet date is likely to be greater or less than
that suggested by historical experience.
CWB Group 2012 Annual Report
77
The following table shows the changes in the allowance for credit losses during the year:
specific
allowance
2012
collective
allowance
Specific
total
Allowance
2011
Collective
Allowance
Balance at beginning of year
$
10,650
$
61,330
$
71,980
$
19,531
$
61,992
$
Provision for credit losses
Write-offs
Recoveries
19,093
(17,712)
2,348
6,014
–
–
25,107
(17,712)
2,348
22,445
(33,387)
2,061
(662)
–
–
balance at end of year
$
14,379
$
67,344
$
81,723
$
10,650
$
61,330
$
Total
81,523
21,783
(33,387)
2,061
71,980
8. ProPerty and eQuiPment
Land is carried at cost. Buildings, equipment and furniture, and
leasehold improvements are carried at cost less accumulated
depreciation and impairment.
Depreciation is calculated primarily using the straight-line method
over the estimated useful life of the asset, as follows:
Buildings
Equipment and furniture
20 years;
3 to 10 years; and
Leasehold improvements
over the shorter of the
term of the lease and the
remaining useful life.
When components of an item of property and equipment have
different useful lives, they are accounted for as separate items. Gains
and losses on disposal are recorded in other income in the period of
disposal. Property and equipment is subject to an impairment review
if there are events or changes in circumstances which indicate that
the carrying amount may not be recoverable.
cost
Balance at November 1, 2011
$
50,050 $
23,439 $
55,075 $
28,345 $
156,909
leasehold
improvements
land and
buildings
computer
equipment
office
equipment
total
Additions
Disposals
Balance at October 31, 2012
accumulated depreciation and impairment
Balance at November 1, 2011
Depreciation for the period
Disposals
Balance at October 31, 2012
net carrying amount at october 31, 2012
cost
Balance at November 1, 2010
Additions
Disposals
balance at october 31, 2011
accumulated depreciation and impairment
Balance at November 1, 2010
Depreciation for the period
Disposals
Balance at October 31, 2011
$
$
9,122
–
59,172
22,122
4,251
–
26,373
176
–
23,615
4,975
682
–
5,657
14,025
–
69,100
39,240
5,827
–
45,067
4,265
(92)
32,518
17,898
2,561
(92)
20,367
32,799 $
17,958 $
24,033 $
12,151 $
43,618 $
22,780 $
46,967 $
24,571 $
6,432
–
50,050
18,289
3,833
–
22,122
659
–
23,439
4,309
666
–
4,975
8,133
(25)
55,075
33,958
5,307
(25)
39,240
3,800
(26)
28,345
15,402
2,522
(26)
17,898
net carrying amount at october 31, 2011
$
27,928 $
18,464 $
15,835 $
10,447 $
27,588
(92)
184,405
84,235
13,321
(92)
97,464
86,941
137,936
19,024
(51)
156,909
71,958
12,328
(51)
84,235
72,674
78
CWB Group 2012 Annual Report
9. goodwill and intangible assets
Goodwill
On the date of acquisition, goodwill arises on the acquisition of
subsidiaries and represents the excess of the fair value of the
purchase consideration, including any amount of any non-controlling
interest in the acquiree, over the net recognized amounts of
the identifiable assets, liabilities assumed, including identifiable
intangible assets. For the purposes of calculating goodwill, fair
values of acquired assets and liabilities are determined by reference
to market values or by discounting expected future cash flows to
present value. This discounting is performed using either market
rates, or risk-free rates with risk-adjusted expected future cash flows.
Goodwill is stated at cost less accumulated impairment losses.
Goodwill is reviewed for impairment annually or more frequently if
there are indications that impairment may have occurred. Goodwill
is allocated to cash-generating units for the purpose of impairment
testing considering the business level at which goodwill is monitored
for internal management purposes. On this basis, the Bank’s cash-
generating units with goodwill allocated are:
• National Leasing Group Inc. (NL);
• Canadian Direct Insurance Incorporated (CDI);
• Valiant Trust Company (VTC); and
• Adroit Investment Management Ltd. (AIM).
Balance at November 1, 2011
Partial ownership reduction
Goodwill impairment
Balance at October 31, 2012
Balance at November 1, 2010
Additions
Goodwill impairment
Balance at October 31, 2011
nl
cdi
Vtc
aim
$
35,776
$
3,254
$
3,679
$
2,982
$
–
–
–
–
–
–
(155)
–
total
45,691
(155)
–
$
$
35,776
$
3,254
$
3,679
$
2,827
$
45,536
35,776
$
3,254
$
3,679
$
2,853
$
45,562
–
–
–
–
–
–
129
–
129
–
$
35,776
$
3,254
$
3,679
$
2,982
$
45,691
Intangible assets
Intangible assets arise from contractual or other legal rights and
are recognized separately from goodwill when their fair value can
be reliably measured. Intangible assets with a finite useful life are
recorded at cost less any accumulated amortization and impairment
losses. The assets’ useful lives are confirmed at least annually.
Certain intangible assets, such as trademarks, have an indefinite useful
life. These indefinite life intangibles are not amortized but are tested
for impairment at least annually or more frequently if events or changes
in circumstances indicate that impairment may have occurred.
Intangible assets with finite useful lives are reported in other
expenses on the consolidated statements of income and amortized
on a straight line basis as follows:
• Customer relationships
10 to 15 years;
• Non-competition agreements
4 to 5 years; and
• Other
3 to 5 years.
cost
Balance at November 1, 2011
Partial ownership reduction
Balance at October 31, 2012
accumulated amortization
Balance at November 1, 2011
Amortization
Balance at October 31, 2012
customer non-competition
relationships
agreements
trademarks
other
total
$
37,668 $
5,731 $
2,206 $
5,578 $
(153)
37,515
7,856
2,569
10,425
(138)
5,593
2,726
1,132
3,858
(15)
2,191
–
–
–
–
5,578
3,181
1,457
4,638
51,183
(306)
50,877
13,763
5,158
18,921
net carrying amount at october 31, 2012
$
27,090 $
1,735 $
2,191 $
940 $
31,956
CWB Group 2012 Annual Report
79
Customer Non-competition
Relationships
Agreements
Trademarks
Other
Total
cost
Balance at November 1, 2010 and
October 31, 2011
$
37,668 $
5,731 $
2,206 $
5,578 $
51,183
accumulated amortization
Balance at November 1, 2010
Amortization
Balance at October 31, 2011
net carrying amount at october 31, 2011
$
$
5,162
2,694
1,594
1,132
–
–
1,007
2,174
7,856 $
2,726 $
– $
3,181 $
7,763
6,000
13,763
29,812 $
3,005 $
2,206 $
2,397 $
37,420
Impairment
The carrying amounts of the Bank’s intangible assets with finite useful
lives are reviewed at each reporting date to determine whether there
is any indication of impairment. If an indication exists, the Bank tests
for impairment. For goodwill and intangible assets with indefinite
useful lives, the impairment tests are performed each year. Goodwill
is allocated to cash-generating units for the purpose of impairment
testing considering the business level at which goodwill is monitored for
internal management purposes.
Impairment testing is performed by comparing the estimated recoverable
amount from a cash-generating unit with the carrying amount of its net
assets, including attributable goodwill. The recoverable amount of an
asset is the higher of its fair value less cost to sell, and its value in use. If
the recoverable amount is less than the carrying value, an impairment loss
is charged to the consolidated statements of income.
The recoverable amounts for the Bank’s cash-generating units have
been calculated based on their value in use. Value in use for each
unit was determined by discounting the future cash flows expected
to be generated from the continuing use of the cash-generating unit.
Unless indicated otherwise, value in use was determined similarly
as in the comparative year. The calculation of the value in use was
based on the following key assumptions:
• Cash flows were projected based on past experience, actual
operating results and the three year future business plan. Cash
flows for a further 17-year period were extrapolated using a
constant growth rate of three percent, which is based on the long-
term forecast Canadian gross domestic product growth rates. The
forecast period is based on the Bank’s long-term perspective with
respect to the operation of these cash-generating units.
• A pre-tax discount rate of 10 percent was applied in determining
the recoverable amounts, which is comprised of a risk-free interest
rate and a market risk premium.
The key assumptions described above may change as economic
and market conditions change. The Bank estimates that reasonable
possible changes in these assumptions are not expected to cause the
recoverable amount of the cash-generating units to decline below
the carrying amount.
No impairment losses on goodwill or intangible assets were
identified during 2012 or 2011.
10.
insurance related other assets
Instalment premiums receivable
Deferred policy acquisition costs
Recoverable on unpaid claims
Reinsurers’ share of unpaid claims and adjustment expenses
Due from reinsurers
total
as at
As at
As at
october 31
October 31
November 1
2012
2011
$
33,486
$
31,361
$
11,369
6,686
5,237
872
11,011
6,196
6,153
2,013
$
57,650
$
56,734
$
2010
29,391
10,510
6,326
10,949
2,476
59,652
80
CWB Group 2012 Annual Report
11. deriVatiVe financial instruments
Interest rate, foreign exchange and equity swaps/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 swaps are used to reduce the
earnings volatility from restricted share units linked to the Bank’s
common share price. Equity contracts are used to economically
offset the return paid on 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.
Use of Derivatives
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;
• 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;
• equity swaps, which are agreements where CWB makes periodic
interest payments to a counterparty and receives the capital gain/
(loss) plus dividends of a CWB common share; and
• equity 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.
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 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.
Equity swap transactions are used as hedging devices to control
risk related to the pay out of restricted share units that have not
yet vested. The Bank enters into equity swap instruments only
for its own account and does not act as an intermediary in this
market. The risk is limited to the amount of an increase in CWB’s
share price applied on the notional contract amount should the
counterparty default.
Designated Hedges
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). On an ongoing basis, the
derivatives used in hedging transactions are assessed to determine
whether they are effective in offsetting changes in fair values or
cash flows of the hedged items. If a hedging transaction becomes
ineffective or if the derivative is not designated as a cash flow hedge,
any subsequent change in the fair value of the hedging instrument is
recognized in net income.
Interest income received or interest expense paid on derivative
financial instruments is accounted for on the accrual basis and
recognized as interest expense 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.
When a hedging instrument expires or is sold, or when a hedge
no longer meets the criteria for hedge accounting, any cumulative
gain or loss existing in other comprehensive income at that time is
held separately in accumulated other comprehensive income until
the forecast transaction is eventually recognized in the income
statement. When a forecasted transaction is no longer expected to
occur, the cumulative gain or loss that was reported in accumulated
other comprehensive income is immediately reclassified to the
income statement.
Embedded Derivatives
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 risk are not closely related to those of the host contract and the
combined contract is not carried at fair value. Embedded derivatives
identified are separated from the host contract and are recorded at
fair value.
Fair Value
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 a
designated hedge, a derivative not designated as a hedge and all
other derivative financial instruments are reported in other income
on the consolidated statements of income.
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
CWB Group 2012 Annual Report
81
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 within the Capital
Management section of Management’s Discussion and Analysis.
as at october 31, 2012
As at October 31, 2011
notional
amount
replace-
ment
future
credit
credit
risk-
Replace-
risk weighted
Notional
ment
Future
Credit
Credit
Risk-
Risk Weighted
cost exposure equivalent
balance
Amount
Cost
Exposure Equivalent
Balance
Interest rate swaps
$ 225,000 $
154 $
– $
154 $
31 $
19,400 $
– $
97 $
97 $
Equity swaps
15,445
1,778
Foreign exchange contracts
2,450
19
40
24
1,818
43
363
17
–
6,384
–
62
–
64
–
126
total
$ 242,895 $
1,951 $
64 $
2,015 $
411 $ 25,784 $
62 $
161 $
223 $
19
–
53
72
Interest rate swaps
Foreign exchange contracts
Equity contracts
total
As at November 1, 2010
Notional
Amount
Replace-
ment
Future
Credit
Credit
Risk-
Risk Weighted
Cost
Exposure Equivalent
Balance
$ 47,550 $
– $
234 $
234 $
57,032
500
132
2
570
30
702
32
$ 105,082 $
134 $
834 $
968 $
49
181
6
236
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):
as at october 31, 2012
As at October 31, 2011
favourable contracts unfavourable contracts Favourable Contracts Unfavourable Contracts
Interest rate swaps designated as hedges
$ 225,000 $
154 $
– $
– $
– $
– $
– $
notional
amount
fair
notional
fair
Notional
Fair
Notional
Value
amount
Value
Amount
Value
Amount
Fair
Value
–
–
Equity swaps designated as hedges
15,445
1,778
Foreign exchange contracts
Equity swaps designated as hedges
Other forecasted transactions
1,485
–
19
–
–
–
965
–
–
–
–
(10)
3,189
–
–
–
–
–
–
–
–
3,195
(16)
19,400
(420)
–
–
total
$ 241,930 $
1,951 $
965 $
(10) $
3,189 $
– $ 22,595 $
(436)
Interest rate swaps not designated as hedges
Foreign exchange contracts
Equity contracts
Embedded derivatives in equity linked deposits
Other forecasted transactions
total
82
CWB Group 2012 Annual Report
As at November 1, 2010
Favourable Contracts Unfavourable Contracts
Notional
Amount
Fair
Notional
Value
Amount
Fair
Value
$
– $
– $ 47,550 $
(930)
51,739
132
5,293
(59)
500
n/a
–
n/a
2
–
–
–
(3)
–
$ 52,239 $
134 $ 52,843 $
(992)
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)
2012
598
210
$
$
$
$
2011
192
722
$
$
2010
625
1,168
The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on contracts.
as at october 31, 2012
maturity
As at October 31, 201 1
Maturity
1 year or less
more than 1 year
1 Year or Less
More than 1 Year
contractual
contractual
Contractual
Contractual
notional
interest
notional
interest
Notional
Interest
Notional
Interest
amount
rate
amount
rate
Amount
Rate
Amount
Rate
Interest rate swaps designated
as hedges (1)
$ 225,000
1.28% $
–
– $
Equity swaps designated as hedges (2)
Foreign exchange contracts (3)
7,494
2,450
Interest rate swaps not
designated as hedges
–
–
–
-
2.39%
7,951
2.54%
–
–
6,384
– $
–
–
–
–
–
–
–
–
–
19,400
3.39%
total
$ 234,944
$
7,951
$
6,384
$
19,400
Interest rate swaps not designated
as hedges
Foreign exchange contracts
Equity contracts
total
As at November 1, 2010
Maturity
1 Year or Less
More than 1 Year
Contractual
Contractual
Notional
Amount
Interest
Notional
Interest
Rate
Amount
Rate
$
750
4.19%
$ 46,800
2.73%
57,032
500
–
–
$ 58,282
$ 46,800
(1) The Bank receives interest at a fixed contractual rate and pays interest on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps designated as hedges mature
between January and October 2013.
(2) Equity swaps designated as hedges mature between June 2013 and June 2015. Equity swaps are used to reduce the earnings volatility from restricted share units linked to the Bank’s common
share price.
(3) The contractual interest rate is not meaningful for foreign exchange contracts. Foreign exchange contracts mature between November 2012 and July 2013.
During the year, $1,430 net unrealized after tax losses (2011 – nil)
were recorded in other comprehensive income for changes in
fair value of the effective portion of derivatives designated as
cash flow hedges, and no amounts (2011 – nil) were 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 the hedged items affect income. During the year,
$483 net gains after tax amounts (2011 – nil) were reclassified to
net income.
CWB Group 2012 Annual Report
83
12. other assets
Accrued interest receivable
Accounts receivable
Deferred tax asset
Prepaid expenses
Income taxes receivable
Financing costs(1)
Other
total
(1) Amortization for the year amounted to $1,703 (201 1 – $1,403).
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.
(Note 24)
as at
As at
As at
october 31
October 31
November 1
2012
2011
$
48,377
$
40,665
$
30,831
23,363
6,400
5,290
5,133
3,072
26,801
23,538
5,494
3,902
4,685
216
2010
39,566
45,220
19,290
7,928
293
2,910
993
$
122,466
$
105,301
$
116,200
as at october 31, 2012
business and
individuals
government
total
$
31,980 $
653,213 $
685,193
2,382,262
6,545,876
1,391,349
3,140,157
3,773,611
9,686,033
$
8,960,118 $
5,184,719 $
14,144,837
As at October 31, 2011
Business and
Individuals
Government
Total
$
30,440 $
552,827 $
583,267
2,086,231
6,229,158
1,321,359
2,174,674
3,407,590
8,403,832
$
8,345,829 $
4,048,860 $
12,394,689
As at November 1, 2010
Business and
Individuals
Government
Total
$
23,308 $
507,300 $
530,608
1,840,026
5,462,231
1,159,573
1,715,329
2,999,599
7,177,560
$
7,325,565
$
3,382,202
$
10,707,767
Payable on demand
Payable after notice
Payable on a fixed date
total
Payable on demand
Payable after notice
Payable on a fixed date
total
Payable on demand
Payable after notice
Payable on a fixed date
total
84
CWB Group 2012 Annual Report
14.
insurance related other liabilities
as at
As at
As at
october 31
October 31
November 1
Unpaid claims and adjustment expenses
(Note 21)
$
86,218 $
76,892 $
2012
2011
Unearned premiums
Due to insurance companies and policyholders
Unearned commissions
total
15. other liabilities
Accounts payable
Accrued interest payable
Income taxes payable
Deferred tax liability
Deferred revenue
Leasehold inducements
Acquisition contingent consideration
Other
total
71,790
1,737
557
69,584
2,087
567
2010
80,086
66,444
2,305
561
$
160,302 $
149,130 $
149,396
as at
As at
As at
october 31
October 31
November 1
2012
2011
$
105,790 $
81,523 $
105,728
12,386
8,897
3,068
2,966
–
668
101,557
2,017
9,767
2,708
3,297
61,011
305
2010
67,770
97,929
637
16,665
3,437
2,446
48,991
1,599
$
239,503 $
262,185 $
239,474
(Note 24)
(Note 29)
CWB Group 2012 Annual Report
85
16. debt
a) debt securities
The Bank securitizes leases to third parties. These securitizations do
not qualify for derecognition as the Bank continues to be exposed
to certain risks associated with the leases, including an obligation
to remit contractual cash flow payments regardless of whether the
underlying cash flows are collected from lessees, and therefore has
not transferred substantially all of the risk and rewards of ownership.
As the leases do not qualify for derecognition, the assets are not
derecognized from the balance sheet and a securitization liability is
recognized for the cash proceeds received.
The carrying amount of the liability as at October 31, 2012
was $209,273 (October 31, 2011 – $89,877 and November 1, 2010 –
$202,006), and the associated carrying amount of the lease assets
recorded on the balance sheet was $237,698 (October 31, 2011 –
$91,293 and November 1, 2010 – $199,097), which does not include
an allocation of the allowance for credit losses.
b) 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
4.389% (1)
5.571% (2)
5.950% (3)
5.070% (4)
5.426% (5)
total
Earliest Date
as at
As at
As at
Maturity
Redeemable
october 31
October 31
November 1
Date
by CWB at Par
2012
2011
November 30, 2020
November 30, 2015
$
300,000 $
300,000 $
March 21, 2022
March 22, 2017
June 27, 2018
June 28, 2013
March 21, 2017
March 22, 2012
November 21, 2015
November 22, 2010
75,000
50,000
–
–
75,000
50,000
120,000
–
$
425,000
$
545,000
$
2010
–
75,000
50,000
120,000
70,000
315,000
(1) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 193 basis points.
(2) 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.
(3) These conventional debentures have a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 302 basis points.
(4) These conventional debentures had a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate would have 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 held by Canadian Direct Insurance Incorporated, a wholly owned subsidiary, and had been
eliminated on consolidation. On March 22, 2012, these conventional debentures were redeemed by the Bank.
(5) These conventional debentures had a 10-year term with a fixed interest rate for the first five years. Thereafter, the interest rate would have reset quarterly at the Canadian dollar CDOR 90-day
Bankers’ Acceptance rate plus 180 basis points. On November 22, 2010, these conventional debentures were redeemed by the Bank.
86
CWB Group 2012 Annual Report
17. caPital stock
Authorized:
• An unlimited number of common shares without nominal or
par value;
• 33,964,324 class A shares without nominal or par value; and
• 25,000,000 first preferred shares without nominal or par value,
Issued and fully paid:
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 19). In addition, 8,390,000 first preferred shares Series
3 have been issued and are convertible to first preferred shares
Series 4 as noted below.
2012
number of
shares
amount
2011
Number of
Shares
Amount
Preferred shares – series 3
Outstanding at beginning and end of year
8,390,000 $
209,750
8,390,000 $
209,750
common shares
Outstanding at beginning of year
Issued on settlement of contingent consideration
(Note 29(c))
Issued on exercise or exchange of options
Issued under dividend reinvestment plan
Transferred from share-based payment reserve on
75,461,981
2,256,868
573,005
450,958
exercise or exchange of options
Issued on exercise of warrants
Outstanding at end of year
share capital
408,282
66,641,362
279,620
63,399
1,853
12,252
–
341,541
213,654
–
2,996
5,941
4,009
115,716
–
–
4,432
–
–
8,265,424
78,742,812
490,218
75,461,981
408,282
$
699,968
$
618,032
During the year, the Bank settled the contingent consideration related
to a 2010 subsidiary acquisition with the issuance of 2,256,868
CWB common shares valued at $63,399, net of issuance costs.
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 19), 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) dividends
The following dividends were declared by the Bank’s Board of Directors and paid by the Bank during the year:
$0.62 per common share (2011 – $0.54)
$1.81 per preferred share - Series 3 (2011 – $1.81)
total
Subsequent to October 31, 2012, the Board of Directors of the Bank
declared a dividend of $0.17 per common share payable on January
4, 2013 to shareholders of record on December 18, 2012 and a
dividend of $0.453125 per Series 3 preferred share – Series 3 payable
on January 31, 2013 to shareholders of record on January 24, 2013.
With respect to these dividend declarations, no liability was recorded
in the balance sheet at October 31, 2012.
b) Preferred shares
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,
2012
47,749 $
15,208
62,957 $
2011
39,177
15,208
54,385
$
$
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 Group 2012 Annual Report
87
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
c) warrants to Purchase common shares
Each warrant was exercisable at a price of $14.00 to purchase
one common share in the capital of the Bank until March 3, 2014.
number of warrants
Outstanding at beginning of year
Exercised
Purchased and cancelled
Purchased and cancelled under Normal Course Issuer Bid
outstanding at end of year
During 2011, holders of the Bank’s common share purchase warrants
approved a resolution to amend the terms of the warrant indenture,
which allowed the Bank to redeem all of the outstanding warrants.
The Bank immediately redeemed for cash 4,206,187 warrants for an
aggregate cost of $72,461, which was charged to retained earnings.
The Bank received approval from the Toronto Stock Exchange on
January 18, 201 1 to institute a Normal Course Issuer Bid (NCIB)
to purchase and cancel up to 1,029,108 of its warrants. The NCIB
commenced January 20, 2011 and was extinguished on August
19, 201 1 in conjunction with the warrant redemption discussed
above. During 201 1, the Bank purchased and cancelled 1,000,000
warrants at an aggregate cost of $15,985, which was charged to
retained earnings.
d) dividend reinvestment Plan
Under the dividend reinvestment plan (plan), the Bank 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 also eligible to participate in the plan.
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.
2012
2011
–
–
–
–
–
13,471,611
(8,265,424)
(4,206,187)
(1,000,000)
–
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, 450,958
(2011 – 213,654) common shares were issued under the plan from
the Bank’s treasury at a 2% discount (2011 – 2%).
e) common share normal course issuer bid (ncib)
On October 31, 2011, the Bank received approval from the Toronto
Stock Exchange to institute a NCIB to purchase and cancel up to
2,261,434 of its common shares. The NCIB commenced November
2, 2011 and expired November 1, 2012. No common shares were
purchased under this NCIB.
88
CWB Group 2012 Annual Report
18. share-based Payments
a) stock options
Stock options are accounted for using the fair value method. The
estimated value is recognized over the applicable vesting period
as an increase to both salary expense and share-based payment
reserve. When options are exercised, the proceeds received and the
applicable amount in share-based payment reserve are credited to
common shares.
The details of, and changes in, the issued and outstanding options follow:
options
Balance at beginning of year
Granted
Exercised or exchanged
Forfeited
balance at end of year
exercisable at end of year
Further details relating to stock options outstanding and exercisable follow:
The Bank has authorized 4,409,773 common shares (2011 –
4,982,778) for issuance under the share incentive plan. Of the
amount authorized, options exercisable into 3,441,100 shares (201 1
– 3,542,072) 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 five years of
date of grant. Outstanding options expire from December 2012 to
June 2017.
2012
2011
weighted
average
exercise
Price
21.36
25.86
16.88
25.89
24.51
number
of options
3,542,072
$
1,261,378
(1,258,537)
(103,813)
3,441,100
$
Weighted
Average
Exercise
Price
19.93
30.10
22.13
23.68
21.36
Number
of Options
3,834,433
$
729,314
(943,399)
(78,276)
3,542,072
$
878,890
$
19.31
687,570
$
26.45
options outstanding
options exercisable
weighted
average
remaining
number of
contractual
options
282,950
308,365
1,973,989
875,796
3,441,100
life (years)
1.1 $
1.6
3.5
2.3
2.8 $
weighted
average
exercise
Price
11.72
17.25
24.91
30.31
24.51
weighted
average
exercise
Price
11.72
17.25
26.06
31.18
19.31
number
of options
282,950 $
308,365
124,000
163,575
878,890 $
range of exercise Prices
$8.58 to $11.76
$16.89 to $21.46
$22.09 to $26.40
$29.42 to $31.18
total
The terms of the share incentive plan allow the holders of vested
options a cashless settlement alternative whereby the option holder
can elect to (a) receive shares by delivering cash to the Bank in the
amount of the option exercise price or (b) receive the number of
shares equivalent to the excess of the market value of the shares
under option, determined at the exercise date, over the exercise
price. Of the 1,258,537 (2011 – 943,399) options exercised or
exchanged, option holders exchanged the rights to 1,133,197 (2011 –
810,899) options and received 447,665 (2011 – 209,041) shares in
return under the cashless settlement alternative.
Salary expense of $5,016 (2011 – $4,602) was recognized relating
to the estimated fair value of options granted. 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 1.1% (2011 – 2.1%), (ii) expected option life of 4.0 (2011 –
4.0) years, (iii) expected volatility of 31% (2011 – 36%), and (iv)
expected annual dividends of 2.4% (2011 – 1.8%). Expected volatility
is estimated by evaluating historical volatility of the share price
over multi-year periods. The weighted average fair value of options
granted was estimated at $4.92 (2011 – $7.69) per share.
During the year, $4,432 (2011 – $4,009) was transferred from the
share-based payment reserve to share capital, representing the
estimated fair value recognized for 1,258,537 (2011 – 943,399)
options exercised during the year.
CWB Group 2012 Annual Report
89
b) restricted share units
Under the Restricted Share Unit (RSU) 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 instalments over a period of three years. Salary expense
is recognized 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 $7,682 (2011 – $8,351) was
recognized related to RSUs. As at October 31, 2012, the liability for
the RSUs held under this plan was $9,336 (2011 – $8,922). At the
end of each period, the liability and salary expense are adjusted to
reflect changes in the fair value of the RSUs.
number of rsus
Balance at beginning of year
Granted
Vested and paid out
Forfeited
balance at end of year
c) deferred share units
2012
535,769
337,273
(263,908)
(14,679)
594,455
2011
469,941
259,820
(183,573)
(10,419)
535,769
Under the Deferred Share Unit (DSU) plan, non-employee directors
receive at least 50% of their annual retainer in DSUs. The DSUs are
not redeemable until the individual is no longer a director and must
be redeemed for cash. Common share dividend equivalents accrue
to the directors in the form of additional units. The expense related
to the DSUs is recorded in the period the award is earned by the
director.
During the year, non-interest expenses “other expenses” included
$674 (2011 – $1,048) related to the DSUs. As at October 31,
2012, the liability for DSUs held under this plan was $2,328 (201 1
– $1,467). At the end of each period, the liability and expense are
adjusted to reflect changes in the market value of the DSUs.
number of dsus
Balance at beginning of year
Granted
balance at end of year
19. non-controlling interests
Non-controlling interests are comprised of the following:
CWB Capital Trust
Adroit Investment Management Ltd.
total
CWB Capital Trust
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 with a December 31 year-end. CWB Capital
Trust, an open-end trust, issued non-voting WesTS and the proceeds
were used to purchase a senior deposit note from CWB.
Standard Interpretations Committee 12 – Consolidation – Special
Purpose Entities (SIC 12) requires consolidation of special purpose
entities (SPEs) when the substance of the relationship between the
SPE and the reporting entity indicate that the SPE is controlled by
that entity. CWB Capital Trust qualifies as an SPE that is controlled
by the Bank under SIC 12 as the Bank retains voting control of CWB
Capital Trust through the ownership of the Special Trust Securities.
Accordingly, the Bank consolidates CWB Capital Trust and the
WesTS issued by CWB Capital Trust under non-controlling interests
90
CWB Group 2012 Annual Report
2012
51,463
27,298
78,761
2011
24,046
27,417
51,463
october 31
October 31
November 1
2012
2011
2010
105,000 $
105,000 $
105,000
244
225
179
105,244 $
105,225 $
105,179
$
$
(2012 and 2011 – $105,000), and the senior deposit note issued by
CWB is eliminated on consolidation.
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.
The following information presents the outstanding WesTS:
Issuance date ................................................................... August 31, 2006
Distribution dates .................................................June 30, December 31
Annual yield ........................................................................................ 6.199%
Earliest date redeemable
at the option of the issuer ........................................December 31, 2011
Earliest date exchangeable
at the option of the holder ........................................................... Anytime
Trust capital securities outstanding .......................................... 105,000
Principal amount ...........................................................................$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, 201 1, 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%.
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
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.
as at
As at
As at
october 31
October 31
November 1
2012
2011
2010
$
286,676 $
276,323 $
261,438
5,117,869
4,101,250
3,375,690
$
5,404,545 $
4,377,573 $
3,637,128
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 $2,036,003 (October
31, 2011 - $1,590,678 and November 1, 2010 - $1,468,325) and
recently authorized but unfunded loan commitments of $3,081,866
(October 31, 2011 - $2,510,572 and November 1, 2010 - $1,907,365).
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
CWB Group 2012 Annual Report
91
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. The leases typically run 10 to 15
years, with an option to renew the lease for an additional 5 years.
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.
Minimum future lease commitments for each of the five succeeding years and thereafter are as follows:
2013
2014
2015
2016
2017
2018 and thereafter
total
c) guarantees
$
$
10,839
10,390
10,319
8,203
6,450
21,649
67,850
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.
Prior to January 1, 2012, the Bank issued both personal and business
credit cards through an agreement with a third party card issuer.
The Bank 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 under the initial agreement was
nil (October 31, 2011 - $12,996 and November 1, 2010 - $13,153),
and the balance outstanding was nil (October 31, 2011 - $2,933
and November 1, 2010 - $2,927). During 2012, the Bank cancelled
the aforementioned agreement to issue business credit cards and
entered into a new business credit card agreement with another third
party issuer. Outstanding balances related to this new agreement are
reported on the balance sheet in “other loans”.
No amounts are reflected in the consolidated financial statements
related to these guarantees and indemnifications.
d) legal and regulatory Proceedings
In the ordinary course of business, the Bank and its subsidiaries
are party to legal and regulatory 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
Insurance Contracts – Classification
Contracts where CWB accepts significant insurance risk from
another party by agreeing to compensate the policyholder or other
beneficiary if a specified uncertain future event adversely affects
the policyholder or other beneficiaries are classified as insurance
contracts.
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. Insurance premiums are shown before
deduction of commissions and are gross of any taxes and dues levied
on premiums.
92
CWB Group 2012 Annual Report
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, broker commissions, 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.
Liability Adequacy Test
At the end of each reporting period, liability adequacy tests are
performed to ensure the adequacy of the contract liabilities, net of
related deferred policy acquisition costs (DPAC). In performing these
tests, current best estimates of future contractual cash flows and
claims handling and administration expenses, as well as investment
income from the assets supporting the provisions, are used. Any
deficiency is immediately charged to profit or loss by writing off
DPAC and, if required, establishing a provision for losses arising from
liability adequacy tests (the premium deficiency).
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 but not been settled 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.
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 provisions for adverse deviation in assumptions for asset
defaults, reinvestment risk, claims development and recoverability of
reinsurance balances.
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
insurance revenues, net
The 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 separately from estimated
amounts payable to policyholders. Amounts recoverable from
reinsurers are estimated in a manner consistent with the liabilities
associated with the reinsured policies.
These assets consist of short-term balances due from reinsurers,
as well as longer term receivables that are dependent on the
expected claims and benefits arising under the related reinsured
insurance contracts. Amounts recoverable from or due to reinsurers
are measured consistently with the amounts associated with the
reinsured insurance contracts and in accordance with the terms
of each reinsurance contract. Reinsurance liabilities are primarily
premiums payable for reinsurance contracts and are recognized as an
expense when due.
Reinsurance assets are assessed for impairment on an annual
basis. If there is objective evidence that the reinsurance asset is
impaired, the carrying amount of the reinsurance asset is reduced
to its recoverable amount and the impairment loss is recognized in
the income statement. Objective evidence that a reinsurance asset
is impaired is gathered using observable data about the following
criteria:
• Significant financial difficulty of the reinsurer;
• A breach of contract, such as default or delinquency in payments;
and
• Observable data indicating that there is a measurable decrease in
the estimated future cash flow from the reinsurance asset since its
initial recognition.
a) insurance revenues, net
Insurance revenues, net, reported in other income on the
consolidated statements of income are presented net of claims,
adjustment expenses and policy acquisition costs.
2012
2011
$
123,204
$
117,632
1,855
(83,167)
(24,539)
1,869
(74,734)
(24,517)
$
17,353
$
20,250
b) unpaid claims and adjustment expenses
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.
CWB Group 2012 Annual Report
93
Other factors include the continually evolving and changing
regulatory and legal environment, actuarial studies, professional
experience and expertise of the claims department personnel and
independent adjusters retained to handle individual claims, quality of
the data used for projection purposes, existing claims management
practices, including claims handling and settlement practices, effect
of inflationary trends on future claims settlement costs, investment
rates of return, court decisions, economic conditions and public
attitudes. In addition, time can be a critical part of the provision
determination since, the longer the span between the incidence
of a loss and the payment or settlement of the claim, the more
variable the ultimate settlement amount can be. Accordingly, short-
tailed claims, such as property claims, tend to be more reasonably
predictable than long-tailed claims, such as liability claims.
Consequently, the establishment of the provision for unpaid claims
and adjustment expenses relies on the judgment and opinions of
a large number of individuals, on historical precedent and trends,
on prevailing legal, economic, social and regulatory trends and on
expectations as to future developments. The process of determining
the provisions necessarily involves risks that the actual results will
deviate, perhaps substantially, from the best estimates made.
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
2012
$
64,543
$
84,762
(1,595)
(73,415)
74,295
5,237
6,686
2011
62,81 1
75,694
(960)
(73,002)
64,543
6,153
6,196
unpaid claims and adjustment expenses, net, end of year
$
86,218
$
76,892
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 2.78% (2011 – 2.76%).
however, that rate was reduced by a 0.50% (2011 – 0.75%)
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 $572 (2011 – $790) 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
$
65,964 $
20,254 $
63,371 $
Reinsurers’ share of unpaid claims and adjustment expenses
Unearned premiums
4,200
48,598
1,037
23,192
6,132
47,922
2012
2011
automobile
home
Automobile
home
13,521
21
21,662
c) underwriting Policy and reinsurance ceded
Reinsurance contracts with coverage up to maximum policy limits
are entered into to protect against losses in excess of certain
amounts that may arise from automobile, personal property and
liability claims.
Reinsurance with a limit of $300,000 (2011 – $300,000) is
obtained to protect against certain catastrophic losses. Retention on
catastrophic events is $5,000 (2011 – $2,000), on property per risk
events is $1,000 (2011 – $1,000) and on casualty events is $2,000
(201 1 – $2,000). For the British Columbia automobile insurance
product, retentions are further reduced by the underlying mandatory
coverage provided by the provincially governed Crown corporation.
Reinsurance coverage is diversified across many reinsurers in order
to spread risk and reduce reinsurer concentration risk in the event
of a very large loss, such as an earthquake. The reinsurers selected
to participate in the program have a minimum rating of A- from
Standard & Poor’s or A.M. Best. In addition, reinsurance treaties have
a special termination clause allowing the Bank to change a reinsurer
during the term of the agreement if their rating falls below the
specified level.
At October 31, 2012, $5,237 (2011 – $6,153) 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.
94
CWB Group 2012 Annual Report
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
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
Province
Alberta
rate filing
File and approve or
File and use
2012
$
9,352 $
1,912
2011
8,898
102
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 authority that regulates automobile insurance rates, in the
province in which Canadian Direct is writing that business, is listed
below. Automobile direct written premiums in Alberta totaled
$43,100 in 2012 (2011 – $40,800) and represented 50% (201 1 –
49%) of direct automobile premiums written.
regulatory authority
Alberta Automobile Insurance Rate Board
While regulatory authorities generally approve rates and rate
adjustments prospectively, in some circumstances retroactive
rate adjustments in respect of historical results may be required,
which could result in a regulatory asset or liability for the Bank. As
at October 31, 2012 and October 31, 2011, the Bank had no such
regulatory asset or liability.
23. emPloyee future benefits
All employee future benefits related to the Bank’s group retirement
savings and employee share purchase plans are recognized in the
periods during which services are rendered by employees. The Bank’s
24.
income taxes
The Bank follows the deferred method of accounting for income
taxes whereby current income taxes are recognized for the estimated
income taxes payable for the current period. Deferred 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. Deferred tax assets
and liabilities are measured using enacted or substantively enacted
The provision for income taxes consists of the following:
Consolidated statements of income
Current
Deferred
Shareholders’ equity
Deferred tax expense related to:
Unrealized gains (losses) on available-for-sale securities
Gains (losses) on derivatives designated as cash flow hedges
total
contributions to the group retirement savings plan and employee
share purchase plan totaled $10,932 (2011 – $10,217).
tax rates anticipated to apply to taxable income in the years in
which those temporary differences are anticipated to be recovered
or settled. Changes in deferred taxes related to a change in tax rates
are recognized in income in the period of the tax rate change. All
deferred tax assets and liabilities are expected to be realized in the
normal course of operations.
2012
2011
$
60,904 $
(695)
60,209
67,687
(11,146)
56,541
121
331
452
$
60,661 $
(6,824)
–
(6,824)
49,717
CWB Group 2012 Annual Report
95
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
reported in the consolidated statements of income follows:
Combined Canadian federal and provincial income taxes
and statutory tax rate
Increase (decrease) arising from:
Tax-exempt income
Stock-based compensation
Contingent consideration fair value change
Other
2012
2011
$
65,090
25.6% $
61,859
27.1%
(6,744)
1,271
631
(39)
(2.6)
0.5
0.2
(0.1)
(8,849)
1,236
3,310
(1,015)
56,541
(3.9)
0.5
1.5
(0.4)
24.8%
Provision for income taxes and effective tax rate
$
60,209
23.6% $
Deferred tax balances are comprised of the following:
deferred tax assets
Allowance for credit losses
Deferred loan fees
Deferred deposit broker commission
Leasing income
Other temporary differences
deferred tax liabilities
Intangible assets
Other temporary differences
The Bank has approximately $11,140 (2011 – $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.
2012
2011
$
14,816
$
8,681
(3,962)
281
3,547
23,363
$
8,164
$
733
8,897
$
$
$
$
13,659
9,089
(3,843)
1,851
2,782
23,538
9,736
31
9,767
96
CWB Group 2012 Annual Report
25. earnings Per common share
Basic earnings per common share is calculated based on the average
number of common shares outstanding during the period. Diluted
earnings per share is calculated based on the treasury stock method,
which assumes that any proceeds from in-the-money stock options
The calculation of earnings per common share follows:
or the exercise of warrants on common shares are used to purchase
the Bank’s common shares at the average market price during
the period.
numerator
Net income available to common shareholders
$
172,197 $
149,538
2012
2011
denominator
Weighted average of common shares outstanding – basic
Dilutive instruments:
Stock options (1)
Warrants (2)
weighted average number of common shares outstanding – diluted
Earnings per common share
Basic
Diluted
76,840,532
72,205,180
619,460
-
77,459,992
1,171,801
3,328,444
76,705,425
$
2.24 $
2.22
2.07
1.95
(1) At October 31, 2012, the denominator excludes 527,056 (201 1 – 911,449) employee stock options with an average adjusted exercise price of $30.89 (2011 – $30.32) where the exercise
price, adjusted for unrecognized stock-based compensation, is greater than the average market price.
(2) All outstanding warrants were redeemed in 201 1.
26. assets under administration and management
Assets under administration of $7,171,826 (2011 – $9,369,589) and
assets under management of $855,333 (2011 – $816,219) represent
the fair value of assets held for personal, corporate and institutional
clients as well as third party leases and residential mortgages subject
27. related Party transactions
Transactions between subsidiary entities are made at normal market
prices and are eliminated on consolidation.
Preferred Rates and Terms
The Bank makes loans, primarily residential mortgages, to its
officers and employees, including key management personnel, at
various preferred rates and terms. The total amount outstanding for
these types of loans is $113,967 (2011 – $111,474). The Bank offers
deposits, primarily fixed term deposits, to its officers, employees,
Compensation of key management personnel is as follows:
Salaries, benefits and directors’ compensation
Share-based payments (stock option, RSUs and DSUs) (1)
total
(1) Share-based payments are based on the estimated fair value on grant date.
Loans outstanding with key management personnel totaled $630
as at October 31, 2012 (2011 – $961). The Bank’s policies preclude
lending to independent directors of CWB.
to service agreements. The assets are kept separate from the Bank’s
own assets. Assets under administration and management are not
reflected in the consolidated balance sheets.
including key management personnel, and their immediate family
at preferred rates. The total amount outstanding for these types of
deposits is $219,647 (2011 – $187,733).
Key Management Personnel
key management personnel of the Bank are those that have authority
and responsibility for planning, directing and controlling the activities
of the Bank and include independent directors of CWB.
2012
5,611 $
3,276
8,887 $
2011
5,303
3,046
8,349
$
$
CWB Group 2012 Annual Report
97
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)
floating rate
total
non-
and within
1 to 3
3 months
within
1 year to more than
interest
october 31, 2012
1 month
months
to 1 year
1 year
5 years
5 years
sensitive
total
assets
Cash resources and securities
$
249
$
515
$
950
$
1,714
$
601
$
159
76
–
–
235
–
9
–
–
–
9
$
99
$
2,573
(63)
346
2
384
(15)
369
–
1,465
2
1,821
13,954
346
243
17,116
14,145
524
634
1,570
243
17,116
Loans
Other assets (2)
Derivative financial instruments (1)
Total
liabilities and equity
Deposits
Other liabilities (2)
Debt (3)
Equity
Derivative financial instruments (1)
Total
interest rate sensitive gap
cumulative gap
cumulative gap as a
$
$
6,568
–
–
583
–
70
1,713
8,864
5,077
–
163
–
233
–
8
6,817
1,168
2,826
10,811
5,686
4,936
1,122
3,499
9,557
4,603
73
7
–
241
5,257
1,560
1,560
6
14
–
–
1,142
26
1,586
$
$
29
111
–
–
108
132
–
241
38
502
105
–
3,639
10,038
5,248
–
–
–
–
–
–
–
$
$
(813)
773
$
$
773
773
$ 438
$
226
$
1,211
$ 1,437
$
$
(1,437) $
–
$
Percentage of total assets
9.1%
9.3%
4.5%
4.5%
7.1%
8.4%
–
October 31, 2011
Cumulative Gap
$
1,415
$
1,251
$
(59)
$
(59)
$ 1,224
$
1,254
$
–
$
Cumulative Gap as a
Percentage of Total Assets
9.5%
8.4%
(0.4)%
(0.4)%
8.2%
8.4%
–
November 1, 2010
Cumulative Gap
Cumulative Gap as a
$
1,002
$
808
$
188
$
188
$ 1,082
$
1,128
$
–
$
Percentage of Total Assets
7.7%
6.2%
1.4%
1.4%
8.3%
8.7%
–
(1) Derivative financial instruments are included in this table at the notional amount.
(2) Accrued interest is excluded in calculating interest sensitive assets and liabilities.
(3) Potential prepayments of fixed rate loans and early redemption of redeemable fixed term deposits have not been estimated. Redemptions of fixed term deposits where depositors have this
option are not expected to be material. The majority of fixed rate loans, mortgages and leases are either closed or carry prepayment penalties.
98
CWB Group 2012 Annual Report
The effective, weighted average interest rates for each class of financial asset and liability are shown below:
weighteD average eFFective interest rates
(%)
floating rate
and within
1 to 3
october 31, 2012
1 month
months
3 months
to 1 year
total
within
1 year
1 year to
5 years
more than
5 years
Total assets
Total liabilities
Interest Rate Sensitive Gap
October 31, 2011
Total assets
Total liabilities
Interest Rate Sensitive Gap
November 1, 2010
Total assets
Total liabilities
Interest Rate Sensitive Gap
3.8%
1.3
2.5%
4.0%
1.2
2.8%
3.9%
1.2
2.7%
2.7%
2.1
0.6%
2.4%
1.9
0.5%
2.8%
2.0
0.8%
3.7%
2.3
1.4%
4.6%
2.5
2.1%
4.9%
2.6
2.3%
3.6%
1.7
1.9%
3.9%
1.7
2.2%
4.0%
1.7
2.3%
5.0%
2.5
2.5%
5.2%
2.8
2.4%
5.5%
3.2
2.3%
5.0%
–
5.0%
5.1%
5.8
(0.7)%
5.2%
5.8
(0.6)%
total
4.1%
2.0
2.1%
4.4%
2.1
2.3%
4.6%
2.3
2.3%
Based on the current interest rate gap position, it is estimated that
a one-percentage point increase in all interest rates would increase
net interest income by approximately 3.8% or $15,086 (October 31,
2011 - 3.0% or $11,024) and decrease other comprehensive income
$12,594 (October 31, 2011 – $9,017) net of tax, respectively, over
the following twelve months. A one-percentage point decrease in all
interest rates would decrease net interest income by approximately
5.4% or $21,534 (October 31, 2011 – 3.7% or $13,436) and increase
other comprehensive income $12,594 (October 31, 2011 – $9,017)
net of tax.
29. fair Value of financial instruments
a) financial assets and liabilities by measurement basis
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 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, and non-market observable inputs.
Several of the Bank’s significant financial instruments, such as
loans and deposits, lack an available trading market as they are not
typically exchanged. Therefore, these instruments have been valued
assuming they will not be sold, using present value or other suitable
techniques and are not necessarily representative of the amounts
realizable in an immediate settlement of the instrument.
Changes in interest rates are the main cause of changes in the fair
value of the Bank’s financial instruments. The carrying value of loans,
deposits and subordinated debentures are not adjusted to reflect
increases or decreases in fair value due to interest rate changes as
the Bank’s intention is to realize their value over time by holding
them to maturity.
The table below provides the carrying amount of financial
instruments by category as defined in IAS 39 – Financial Instruments:
Recognition and Measurement and by balance sheet heading. The
table sets out the fair values of financial instruments (including
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.
CWB Group 2012 Annual Report
99
loans and
receivables, and
non-trading
derivatives
liabilities
available-
for-sale
total
carrying
amount
fair value
fair value
over (under)
carrying
amount
$
–
–
14,016,609
128,614
–
$
236,983
$
236,983
$
236,983
$
2,336,100
2,336,100
2,336,100
–
–
14,016,609
14,051,651
35,042
–
–
–
128,614
1,951
128,614
1,951
$ 14,145,223
$ 2,573,083
$ 16,720,257
$ 16,755,299
$ 14,160,114
$
366,557
70,089
634,273
–
$ 15,231,033
$
–
–
–
–
–
–
$ 14,160,114
$ 14,189,398
366,557
366,557
70,089
634,273
10
70,089
652,929
10
$ 15,231,043
$ 15,278,983
$
47,940
Loans and
receivables, and
non-trading
Derivatives
liabilities
Available-
for-sale
Total
carrying
amount
Fair value
$
–
–
12,354,275
111,154
$
312,335
$
312,335
$
312,335
$
1,925,704
1,925,704
1,925,704
–
–
12,354,275
12,419,441
111,154
111,154
$ 12,465,429
$ 2,238,039
$ 14,703,468
$ 14,768,634
$ 12,409,774
$
310,367
634,877
–
$ 13,355,018
$
–
–
–
–
–
$ 12,409,774
$ 12,466,443
310,367
634,877
436
310,367
657,198
436
$ 13,355,454
$ 13,434,444
$
78,990
$
$
–
–
35,042
29,284
–
–
18,656
–
Fair value
over (under)
carrying
amount
–
–
65,166
–
65,166
56,669
–
22,321
–
$
$
–
–
–
–
1,951
1,951
–
–
–
–
10
10
–
–
–
–
–
–
–
–
436
436
october 31, 2012
financial assets
Cash resources (Note 3)
$
Securities
(Note 4)
Loans (1)
Other assets (2)
Derivative related
total financial assets
financial liabilities
Deposits (1)
Other liabilities (3)
Securities sold under
$
$
repurchase agreements
Debt
Derivative related
total financial liabilities
$
October 31, 2011
financial assets
Cash resources (Note 3)
$
Securities
(Note 4)
Loans (1)
Other assets (2)
total financial assets
financial liabilities
Deposits (1)
Other liabilities (3)
Debt
Derivative related
$
$
total financial liabilities
$
100
CWB Group 2012 Annual Report
Fair value
over (under)
carrying
amount
–
–
–
Loans and
receivables, and
non-trading
Derivatives
liabilities
Available-
for-sale
Total
carrying
amount
Fair value
November 1, 2010
financial assets
Cash resources (Note 3)
$
– $
– $
187,944 $
187,944 $
187,944 $
Securities
(Note 4)
Securities purchased under
resale agreements
Loans (1)
Other assets (2)
Derivative related
total financial assets
financial liabilities
Deposits (1)
Other liabilities (3)
Debt
Derivative related
$
$
–
–
–
–
–
–
10,749,477
124,265
134
–
1,510,187
1,510,187
1,510,187
177,954
177,954
177,954
–
–
–
10,749,477
10,788,315
38,838
124,265
134
124,265
134
–
–
134 $
10,873,742 $
1,876,085 $
12,749,961 $
12,788,799 $
38,838
– $
10,721,670 $
– $
10,721,670 $
10,775,576 $
53,906
–
–
992
289,954
517,006
–
–
–
–
289,954
517,006
992
289,954
522,971
992
–
5,965
–
total financial liabilities
$
992 $
11,528,630 $
– $
11,529,622 $
11,589,493 $
59,871
(1) Loans and deposits exclude deferred premiums and deferred revenue, which are not financial instruments.
(2) Other assets exclude property and equipment, goodwill and other intangible assets, reinsurers’ share of unpaid claims and adjustment expenses, deferred tax asset, prepaid and deferred
expenses, financing costs and other items that are not financial instruments.
(3) Other liabilities exclude deferred tax liability, deferred revenue, unearned insurance premiums and other items that are not financial instruments.
(4) For further information on interest rates associated with financial assets and liabilities, including derivative instruments, refer to Note 28.
The methods and assumptions used to estimate the fair values of
financial instruments are as follows:
• cash resources and securities are reported on the consolidated
balance sheets at the fair value disclosed in Notes 3 and 4. These
values are based on quoted market prices, if available. Where
a quoted market price is not readily available, other valuation
techniques are based on observable market rates used to estimate
fair value;
• for the acquisition contingent consideration, included in other
liabilities, where an active market does not exist, fair value is
determined using valuation techniques that refer to non-market
observable inputs;
• 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
• loans reflect changes in the general level of interest rates that
• the fair values of debt are determined by reference to current
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 and acquisition contingent consideration, 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;
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.
b) fair Value hierarchy
The Bank categorizes its fair value measurements of financial
instruments recorded on the consolidated balance sheets according
to a three-level hierarchy. Level 1 fair value measurements reflect
published market prices quoted in active markets. Level 2 fair value
measurements were estimated using a valuation technique based
on observable market data. Level 3 fair value measurements were
determined using a valuation technique based on non-market
observable input.
CWB Group 2012 Annual Report
101
as at october 31, 2012
Financial Assets
Cash resources
Securities
Derivative related
Total Financial Assets
Financial Liabilities
Derivative related
As at October 31, 2011
Financial Assets
Cash resources
Securities
Total Financial Assets
Financial Liabilities
Other liability
Derivative related
Total Financial Liabilities
As at November 1, 2010
Financial Assets
Cash resources
Securities
Securities purchased under resale agreements
Derivative related
Total Financial Assets
Financial Liabilities
Other liability
Derivative related
Total Financial Liabilities
fair Value
level 1
level 2
level 3
Valuation technique
$
236,983 $
236,983 $
– $
2,336,100
2,336,100
1,951
–
–
1,951
$
2,575,034 $
2,573,083 $
1,951 $
$
10 $
– $
10 $
–
–
–
–
–
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
312,335 $
272,704 $
39,631 $
1,925,704
1,925,704
–
$
2,238,039 $
2,198,408 $
39,631 $
–
–
–
$
$
61,011 $
436
61,447 $
– $
–
– $
– $
61,011
436
–
436 $
61,011
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
187,944 $
181,143 $
6,801 $
1,510,187
177,954
134
1,510,187
–
–
–
177,954
134
$
1,876,219 $
1,691,330 $
184,889 $
–
–
–
–
–
$
$
48,706 $
992
49,698 $
– $
–
– $
– $
48,706
992
–
992 $
48,706
102
CWB Group 2012 Annual Report
c) level 3 financial instruments
Level 3 financial instruments were comprised of the contingent
consideration related to a 2010 subsidiary acquisition (see Note 17).
The following table shows a reconciliation of the fair value measurements related to the Level 3 valued instrument:
Balance at beginning of year
Change in fair value charged to other income
Settlement
Balance at end of year
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 regulatory and legal risk. The
nature of these risks and how they are managed is provided in the
Risk Management section of Management’s Discussion and Analysis
(MD&A).
As permitted by the IASB, certain of the risk management disclosure
related to risks inherent with financial instruments is included in
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 impact the longer term financial
success of the Bank as measured by share price appreciation and
dividend yield. Note 18 to the consolidated financial statements
details the number of shares under options outstanding, the
weighted average exercise price and the amounts exercisable at
year end.
Basel II Capital Adequacy Accord
Regulatory capital and capital ratios are calculated in accordance
with the requirements of OSFI, and capital is managed and reported
in accordance with the requirements of the Basel II Capital Adequacy
Accord (Basel II). OSFI requires banks to measure capital adequacy
in accordance with instructions for determining risk-adjusted capital
and risk-weighted assets, including off-balance sheet commitments.
Based on the deemed credit risk of each type of asset, a standardized
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
2012
61,011 $
2,489
(63,500)
2011
48,706
12,305
–
– $
61,011
$
$
(Note 17)
the MD&A. The relevant MD&A sections are identified by shading
within boxes and the content forms 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.
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 Insurance (CDI) is subject to separate OSFI capital
requirements specific to insurance companies, the Bank’s investment
in CDI is deducted from 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 collective allowance for credit losses (to the
regulatory maximum) and any innovative capital not included in Tier 1.
Capital for Canadian financial institutions is managed and reported
until December 2012 in accordance with Basel II. A revised capital
framework (called Basel III) is effective for Canadian financial
institutions beginning on January 1, 2013. Further details are available
in the Capital Management section in the 2012 Management’s
Discussion and Analysis.
During the year, the Bank complied with all internal and external
capital requirements.
CWB Group 2012 Annual Report
103
caPital structure anD basel ii regulatory ratios at year enD
tier 1 capital
Retained earnings
Common shares
Preferred shares
Share-based payment reserve
Innovative capital instrument (2)
Non-controlling interest in subsidiary
Less goodwill of subsidiaries
Less investment in insurance subsidiary (3)
Less securitization
Total
tier 2 capital
Collective allowance for credit losses (Tier 2A) (4)
Accumulated unrealized gains on available-for-sale equity securities, net of tax (5)
Subordinated debentures (Tier 2B) (6)
Less investment in insurance subsidiary (3)
Less securitization
Total
total regulatory capital
regulatory capital to risk-weighted assets
Tier 1 capital
Tier 2 capital
total regulatory capital adequacy ratio
assets to regulatory capital multiple (7)
2012
2011(1)
$
733,298
$
650,028
490,218
209,750
22,468
105,000
266
(45,536)
(35,699)
(18,989)
408,014
209,750
21,884
105,000
225
(37,852)
–
(6,583)
1,460,776
1,350,466
67,344
5,358
425,000
(35,699)
(18,989)
443,014
60,429
1,509
545,000
(80,941)
(6,583)
519,414
$
1,903,790
$
1,869,880
10.6%
3.2
13.8%
8.8
11.1%
4.3
15.4%
7.9
(1) The 201 1 capital structure and regulatory ratios reflect the returns filed and have not been restated to International Financial Reporting Standards (IFRS).
(2) The innovative capital instrument consists of CWB’s WesTS and may be included in Tier 1 capital to a maximum of 15% of net Tier 1 capital. Any excess innovative capital outstanding is
included in Tier 2B capital.
(3) 2012 Tier 1 capital, compared to 2011, reflects the expiration of a Basel II transition provision that permitted the capital deduction related to CWB’s insurance subsidiary to be deducted from
Tier 2 capital. Beginning in 2012, the deduction is recorded 50% against Tier 1 capital and 50% against Tier 2 capital.
(4) Banks are allowed to include their collective allowance for credit losses up to a prescribed percentage of risk-weighted assets in Tier 2A capital. At October 31, 2012, the Bank’s collective
allowance represented 0.49% (2011 – 0.50%) of risk-weighted assets.
(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.
(6) Tier 2B capital may be included in Tier 2 capital to a maximum of 50% of net Tier 1 capital. Any excess Tier 2B capital is included in capital as net Tier 1 capital increases. At October 31, 2012
and 2011, all subordinated debentures are included in Tier 2B capital.
(7) Total assets plus off-balance sheet credit instruments, such as letters of credit and guarantees, less goodwill divided by regulatory capital.
104
CWB Group 2012 Annual Report
32. transition to ifrs
As stated in Note 1, these are the Bank’s first annual financial
statements prepared in accordance with IFRS. In preparing the
opening IFRS consolidated balance sheet as at November 1,
2010, the Bank has adjusted amounts reported previously in the
consolidated financial statements prepared in accordance with
Canadian GAAP. An explanation of how the transition from Canadian
GAAP to IFRS has affected the Bank is set out in the following
tables and accompanying footnotes. No material adjustments to the
consolidated statement of cash flows were required.
IFRS has been applied retrospectively, except for certain optional
and mandatory exemptions from full retrospective application
provided for under IFRS 1 - First time Adoption of IFRS (IFRS 1), as
described below.
Optional exemption
Business combinations – The Bank has elected to apply IFRS 3 –
Business Combinations prospectively only to business combinations
on or after February 1, 2010. As a result, business combinations prior
to February 1, 2010 have not been restated.
Mandatory exemptions
The Bank has applied all mandatory exemptions as required under
IFRS 1.
a) business combinations
The Bank elected to apply IFRS retrospectively to business
combinations that occurred on or after February 1, 2010. This
election resulted in the adjustment of the February 1, 2010
acquisition of National Leasing. The following transition adjustments
were required:
• Under Canadian GAAP, contingent consideration is recorded only
when it is determinable beyond a reasonable doubt. Under IFRS,
certain contingent consideration arrangements are reported at
fair value as at the acquisition date, and each period thereafter,
the contingent consideration fair value is re-measured and any
adjustments are recorded in the other income – “other” (non-
tax deductible);
• Under Canadian GAAP, acquisition-related costs are included in
the cost of the acquisition, while under IFRS, acquisition-related
costs are expensed; and
• Under Canadian GAAP, the valuation of the Bank’s shares issued
as part of the consideration for the acquisition is based on a
reasonable time frame before and after the acquisition date. Under
IFRS, the valuation is completed on the acquisition date.
The impact arising from the change is detailed in the following
statements under the heading “(a) Business Combinations”. The
increase noted in other assets relates to goodwill, and the increase
noted in other liabilities relates to the acquisition contingent
consideration obligation.
b) derecognition of securitized financial assets
The Bank participates in securitization activities. Securitization
consists of the transfer of equipment leases to an independent trust
or other third party, which purchases the cash flows associated with
the leases and may issue securities to investors. Under Canadian
GAAP, securitized assets are accounted for as sales and removed
from the consolidated balance sheet as the Bank surrenders control
of the transferred assets and receives consideration other than
beneficial interests in the transferred assets. Under IFRS, because
the bank has an obligation to remit contractual cash flow payments
regardless of whether the underlying cash flows are collected from
lessees, the Bank has not transferred substantially all of the risks and
rewards relating to the leases. As a result, the derecognition criteria
within IAS 39 – Financial Instruments: Recognition and Measurement
are not met and the leases are accounted for as a secured borrowing
with the underlying leases of the securitization remaining on the
consolidated balance sheet and a debt security recognized for the
funding received.
The impact arising from the change is detailed in the following
statements under the heading “(b) Derecognition”.
c) consolidation
Under IFRS, a special purpose entity (SPE) is consolidated if it is
deemed to be controlled by the reporting entity, as determined
under specific criteria. Canadian Western Bank Capital Trust is
consolidated under IFRS, which resulted in a $105 million decrease
in deposits and the presentation of the CWB Capital Trust Capital
Securities Series 1 (WesTS) as equity attributed to non-controlling
interests. Distributions on the WesTS that were effectively reported
as deposit interest expense under Canadian GAAP are now
presented as an equity dividend within IFRS “net income attributable
to non-controlling interests.” For more information about this special
purpose entity, refer to Note 19.
The impact arising from the change is detailed in the following
statements under the heading “(c) Consolidation”.
d) impairment of available-for-sale securities
Under both Canadian GAAP and IFRS, available-for-sale securities
(AFS) are reported on the balance sheet at fair value with changes
in fair value generally reported in other comprehensive income.
An unrealized loss is recognized in net income when a security
is considered impaired; a subsequent recovery in the value of an
equity security is not reversed through net income until the security
is either sold or redeemed. Under Canadian GAAP, a significant or
prolonged decline in the fair value of an investment below its cost
is assessed in the context of whether it is considered an “other than
temporary impairment” (OTTI). Under IFRS, the concept of OTTI
does not exist and either a significant or prolonged decline in fair
value is considered objective evidence of impairment. The differences
between Canadian GAAP and IFRS will generally result in earlier
recognition of impairment losses through net income under IFRS.
The impact arising from the change is detailed in the following
statements under the heading “(d) AFS Impairment”.
e) other reclassifications
Certain other financial statement reclassifications have been made
on the transition to IFRS. An example includes the presentation of
the non-controlling interest in Adroit Investment Management Ltd.
which has been reclassified from other liabilities under Canadian
GAAP to non-controlling interests (presented in equity) under IFRS.
In addition to the IFRS transition adjustments previously described,
the recognition of certain credit related fees was also amended.
Certain credit related fees, previously recognized in other income, are
now reflected as part of the loan yield and amortized to net interest
income over the expected life of the loan. Because total loans are
reported net of deferred loan fees, this change resulted in a decrease
in total loans of $17,982 and a reduction in retained earnings of
$13,450. While the change had no impact on 2011 net income,
approximately $14,514 was reclassified from other income to net
interest income.
The impact arising from the changes above are detailed in the
following statements under the heading “(e) Other Reclassifications”.
CWB Group 2012 Annual Report
105
reconciliation oF conDenseD consoliDateD balance sheets
As at November 1, 2010
IFRS Adjustments
(a)
(b)
(c)
Canadian
Business
(d)
AFS
(e)
Other
GAAP Combinations Derecognition Consolidation
Impairment
Reclassifications
IFRS
–
–
–
–
–
–
–
–
–
–
–
1,752
–
–
–
–
$
–
$ 1,876,085
(17,982)
10,674,697
4,532
330,946
$
(13,450) $ 12,881,728
$
–
$ 10,707,767
(179)
–
429,490
517,006
(179)
11,654,263
–
–
–
–
209,750
279,620
586,933
21,291
24,692
(13,450)
1,122,286
179
105,179
(13,271)
1,227,465
$
(13,450) $ 12,881,728
(1,752)
(13,450)
assets
Cash resources, securities
and securities under
resale agreements
Loans
Other assets
total assets
liabilities
Deposits
Other liabilities
Debt
$ 1,876,085
$
10,496,464
–
–
329,142
7,839
$
–
$
196,215
(10,567)
$ 12,701,691
$
7,839
$
185,648 $
–
–
–
–
$
$
$ 10,812,767
$
–
$
– $ (105,000)
$
425,881
315,000
17,835
–
(14,047)
202,006
–
–
total liabilities
11,553,648
17,835
187,959
(105,000)
equity
Preferred shares
Common shares
Retained earnings
Share-based
payment reserve
Other reserves
209,750
279,352
614,710
21,291
22,940
total shareholders’ equity
1,148,043
(9,996)
Non-controlling interests
–
–
total equity
1,148,043
(9,996)
–
268
–
–
(10,264)
(2,311)
–
–
–
–
(2,311)
–
(2,311)
–
–
–
–
–
–
105,000
105,000
total liabilities and equity
$ 12,701,691
$
7,839
$
185,648 $
–
$
106
CWB Group 2012 Annual Report
reconciliation oF conDenseD consoliDateD balance sheets
As at October 31, 201 1
IFRS Adjustments
(a)
(b)
(c)
Canadian
Business
(d)
AFS
(e)
Other
GAAP Combinations Derecognition Consolidation
Impairment Reclassifications
IFRS
assets
Cash resources and securities
$ 2,238,039 $
12,221,143
312,853
– $
–
7,839
– $
– $
– $
–
$ 2,238,039
90,121
(7,404)
–
–
–
–
(17,982)
12,293,282
4,532
317,820
$ 14,772,035 $
7,839 $
82,717 $
– $
– $
(13,450) $ 14,849,141
$ 12,499,689 $
– $
– $
(105,000) $
– $
–
$ 12,394,689
433,780
545,000
30,140
–
13,478,469
30,140
(5,958)
89,877
83,919
–
–
(105,000)
Loans
Other assets
total assets
liabilities
Deposits
Other liabilities
Debt
total liabilities
equity
Preferred shares
Common shares
Retained earnings
Share-based payment reserve
Other reserves
209,750
408,014
650,028
21,884
3,890
–
268
–
–
(22,569)
(1,202)
–
–
–
–
total shareholders’ equity
1,293,566
(22,301)
(1,202)
Non-controlling interests
–
–
–
total equity
1,293,566
(22,301)
(1,202)
–
–
–
–
–
–
105,000
105,000
–
–
–
–
–
–
3,959
–
–
–
(225)
–
457,737
634,877
(225)
13,487,303
–
–
–
–
209,750
408,282
608,848
21,884
7,849
(13,450)
1,256,613
225
105,225
(13,225)
1,361,838
(3,959)
(13,450)
total liabilities and equity
$ 14,772,035 $
7,839 $
82,717 $
– $
– $
(13,450) $ 14,849,141
CWB Group 2012 Annual Report
107
reconciliation oF conDenseD consoliDateD stateMent oF incoMe
FOR ThE YEAR ENDED OCTOBER 31, 2011
Net interest income
Provision for credit losses
Other income
Non-interest expenses
Income taxes
Non-controlling interest
in subsidiary
net income
Net income attributable to
non-controlling interests
Net income attributable to
shareholders of the Bank
Preferred share dividends
net income available
Canadian
GAAP
$ 373,624
22,179
106,331
222,451
56,948
$
$
228
178,149
–
178,149
15,208
IFRS Adjustments
(b)
(c)
(a)
Business
$
Combinations Derecognition Consolidation
6,747
$
–
–
–
–
–
–
(12,305)
–
–
5,508
(396)
(4,386)
–
409
$
(d)
AFS
(e)
Other
Impairment Reclassifications
14,514
$
–
(14,514)
–
–
–
–
(3,023)
–
(816)
$
IFRS
$ 400,393
21,783
72,103
222,451
56,541
$
$
–
(12,305)
–
(12,305)
–
$
$
–
1,109
–
1,109
–
$
$
–
6,747
6,747
–
–
–
$
$
–
(2,207)
–
(2,207)
–
$
$
$
(2,207)
$
(228)
228
$
–
171,721
228
6,975
–
–
–
$
164,746
15,208
$
149,538
to common shareholders
$
162,941
$
(12,305)
$
1,109
$
reconciliation oF conDenseD consoliDateD stateMent oF coMPrehensive incoMe
FOR ThE YEAR ENDED OCTOBER 31, 2011
IFRS Adjustments
(a)
(b)
(c)
Canadian
Business
(d)
AFS
(e)
Other
Net income
$
178,149
$
(12,305) $
1,109
$
6,747
$
(2,207) $
228 $
171,721
GAAP
Combinations Derecognition
Impairment
Consolidation Reclassifications
IFRS
Available-for-sale securities
(19,050)
Derivatives designated
as cash flow hedges
Other comprehensive income
–
for the year
(19,050)
comprehensive income
–
–
–
–
–
–
–
–
–
for the year
$
159,099
$
(12,305) $
1,109
$
6,747
$
Attributable to shareholders
of the bank
$
159,099
$
(12,305) $
1,109
$
–
$
Attributable to non-controlling
interests
comprehensive income
–
–
–
6,747
for the year
$
159,099
$
(12,305) $
1,109
$
6,747
$
2,207
–
2,207
–
–
–
–
–
–
–
(16,843)
–
(16,843)
$
$
228 $
154,878
–
$
147,903
228
6,975
$
228 $
154,878
108
CWB Group 2012 Annual Report
33. subsidiaries
canaDian western bank subsiDiaries (1)
(ANNExED IN ACCORDANCE WITh SUBSECTION 308 (3) OF ThE BANk ACT)
OCTOBER 31, 2012
National Leasing Group Inc.
Address of
head Office
1525 Buffalo Place
Winnipeg, Manitoba
Canadian Direct Insurance Incorporated
Suite 600, 750 Cambie Street
Vancouver, British Columbia
Canadian Western Trust Company
Suite 3000, 10303 Jasper Avenue
Valiant Trust Company
Edmonton, Alberta
Suite 310, 606 4th St. S.W.
Calgary, Alberta
Adroit Investment Management Ltd.
Suite 1250, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Bank Capital Trust
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Bank Leasing Inc.
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Canadian Western Financial Ltd.
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. (72.75% ownership).
(2) The carrying value of voting shares is stated at the Bank’s equity in the subsidiaries.
Carrying Value of
Voting Shares Owned
by the Bank(2)
$
134,458
25,766
19,136
8,080
6,927
1,000
1
1
CWB Group 2012 Annual Report
109
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: cwb.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: valianttrust.com
stock exchange listings
The Toronto Stock Exchange (TSx)
Common Shares: CWB
Series 3 Preferred Shares: CWB.PR.A
shareholder administration
Valiant Trust Company, with offices in Calgary,
Edmonton, Vancouver and Toronto, serves as
Transfer Agent and Registrar for the common
shares and preferred shares of CWB.
For dividend information, changes 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 and Registrar to combine the
accounts.
direct deposit services
Shareholders may choose to have cash dividends
paid on CWB common and preferred shares
deposited directly into accounts held at their
financial institution. To arrange direct deposit
service, please contact the Transfer Agent and
Registrar.
110
CWB Group 2012 Annual Report
eligible dividend designation
CWB designates all common and preferred share
dividends 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 cwbankgroup.com.
This 2012 Annual Report, the Annual Information
Form, Notice of Annual and Special Meeting of
Shareholders and Proxy Circular will be available
on CWB’s 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
2013 annual and special meeting
of shareholders
The Annual and Special Meeting of
Shareholders of Canadian Western Bank will
be held in Edmonton, Alberta, on March 7, 2013
at The Fairmont hotel Macdonald
(Empire Ballroom)
at 3:00 p.m. MT (5:00 p.m. ET).
corporate secretary
Gail L. harding, Q.C.
Senior Vice President, General Counsel
and Corporate Secretary
Canadian Western Bank
Suite 3000, Canadian Western Bank Place
10303 Jasper Avenue
Edmonton, Alberta T5J 3x6
Telephone: (780) 423-8855
Fax: (780) 438-2632
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
Suite 3000, Canadian Western Bank Place
10303 Jasper Avenue
Edmonton, Alberta T5J 3x6
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
hard working.
enthusiastic. responsive.
Dedicated.
These are characteristics exemplified by
the recipients of the Award of Excellence,
an annual recognition for employees who
demonstrate the qualities for which CWB
Group is known.
awarD oF
excellence
recipients for 2012
Exceeding the expectations of both
clients and colleagues, these individuals
consistently take initiative to innovate
and inspire.
Congratulations to the 2012 recipients of
the Award of Excellence:
• charles cheng, CDI, Vancouver
• Deb Price, CDI, Edmonton
• sylvia thiessen, CWB, Winnipeg
• therese lavallee, CWB, Calgary
• Dawn argent, CWB, Edmonton
• David hofer, CWB, Edmonton
• shirley Falls, Adroit, Edmonton
• tammy Dorais, CWB, Surrey
• Maria sastrillo, CWB, Vancouver
• robyn stone, CWB, Red Deer
• kim wong, Valiant, Vancouver
• ryan green, CWT, Vancouver
eco auDit
This Annual Report uses 10% Post Consumer Recycled
fiber instead of virgin paper, the following savings
to our natural resources were realized:(1)
trees saved
19
wood saved (Tonnes)
4
energy not consumed (Million BTU’s)
8
net greenhouse gases Prevented (lbs. C02 Equiv.)
1,688
waste water (Water Saved gals.)
solid waste (Landfill Reduced lbs.)
613
(1) Above information is based on use of the following products:
8,500 sheets of 28 x 40 Sterling Premium 80lb Matte Cover 346M
163,000 sheets of 23 x 35 Sterling Premium 60lb Matte Text 102M
Data research provided by www.environmentalpaper.org.
9,155
CWB Group 2012 Annual Report
111
locations
canadian western bank
british columbia
2200, 666 Burrard Street
Vancouver
(604) 669.0081
Greg Sprung
northern alberta
3000, 10303 Jasper Avenue
Edmonton
(780) 423.8888
Michael Halliwell
Prairies
606, 4 Street S.W.
Calgary
(403) 262.8700
Glen Eastwood
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
George Bawden
• Old Strathcona
7933, 104 Street
(780) 433.4286
Donna Austin
• South Edmonton Common
2142, 99 Street
(780) 988.8607
Robert Ovics
• West Point
17603 100 Avenue
(780) 484.7407
David Hardy
calgary
• Calgary Main
606, 4 Street S.W.
(403) 262.8700
Jeff Bowling
• Calgary Chinook
6606 MacLeod Trail S.W.
(403) 252.2299
Lew Christie
• Calgary Foothills
6127 Barlow Trail S.E.
(403) 269.9882
Colin Errmann
• 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
Rick Vandergraaf
• Broker Buying Centre
285, 2880 Glenmore
Trail S.E.
(403) 720.8960
David Miller
• Calgary Westjet
Banking Centre
22 Aerial Place NE
Westjet Campus
(403) 452.5869
Christina French
grande Prairie
11226 100 Avenue
(780) 831.1888
Todd Kramer
leduc
5407 Discovery Way
(780) 986.9858
Michael White
lethbridge
744, 4 Avenue South
(403) 328.9199
Les Erickson
medicine hat
102, 1111 Kingsway Avenue S.E.
(403) 527.7321
Connelly Sherwick
red deer
4822 51 Avenue
(403) 341.4000
Don Odell
sherwood Park
251 Palisades Way
(780) 449.6699
Blair Zahara
st. albert
300, 700 St. Albert Trail
(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
Brian Korpan
• Vancouver Real Estate
2200, 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
Hugh Ellis
coquitlam
310, 101 Schoolhouse Street
(604) 540.8829
Ron Baker
courtenay
200, 470 Puntledge Road
(250) 334.8888
Jason Zaichkowsky
cranbrook
2nd Floor, Suite A
828 Baker Street
(250) 417.4560
Mike Eckersley
kamloops
101, 1211 Summit Drive
(250) 828.1070
Joshua Knaak
kelowna
• Kelowna
1674 Bertram Street
(250) 862.8008
Bob Brown
• Kelowna Industrial
101, 1505 Harvey Avenue
(250) 860.0088
Jim Kruiper
langley
100, 19915 64 Avenue
(604) 539.5088
Craig Martin
nanaimo
101, 6475 Metral Drive
(250) 390.0088
Russ Burke
Designed by Vision Creative Inc. visioncreativeinc.com
112
CWB Group 2012 Annual Report
Prince george
300 Victoria Street
(250) 612.0123
David Duck
richmond
4991 No. 3 Road
(604) 238.2800
Michael Yeung
surrey
• Panorama Ridge
103, 15230 Highway 10
(604) 575.3783
Greg Noga
• Strawberry Hill
1, 7548 120 Street
(604) 591.1898
Bob Duffield
Victoria
1201 Douglas Street
(250) 383.1206
Bob Granger
saskatchewan
regina
1866 Hamilton St.
Hill Tower III
(306) 757.8888
Kelly Dennis
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
• Winnipeg
230 Portage Avenue
(204) 956.4669
Robert Bean
• Winnipeg Kenaston
125 Nature Park Way
(204) 452.0933
Christopher Voogt
canadian direct financial
• Edmonton
3000, 10303 Jasper Avenue
(780) 441.2249
canadiandirectfinancial.com
canadian western trust
• Calgary
310, 606 4 Street S.W.
(403) 717.3145
• Edmonton
3000, 10303 Jasper Avenue
(780) 969.8332
• Toronto
710, 130 King Street West
(416) 360.1301
• Vancouver
600, 750 Cambie Street
(604) 685.2081
optimum mortgage
• Edmonton
3000, 10303 Jasper Avenue
(780) 423.9748
(Representation across Western
Canada and in Ontario)
canadian direct insurance
• Edmonton
500, 10115 100A Street
(780) 413.5933
• Vancouver
600, 750 Cambie Street
(604) 699.3678
Valiant trust
• Calgary
310, 606 4 Street S.W.
(403) 233.2801
• Edmonton
3000, 10303 Jasper Avenue
(780) 441.2267
• Toronto
710, 130 King Street West
(416) 360.1481
• Vancouver
600, 750 Cambie Street
(604) 699.4880
adroit investment
management
• Edmonton
1250, 10303 Jasper Avenue
(780) 429.3500
national leasing
• Winnipeg
1525 Buffalo Place
(204) 954.9000
(Representation across all
provinces and territories in Canada)
canadian western financial
• Edmonton
3000, 10303 Jasper Avenue
(780) 423.8888
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