Bank Trust Insurance Wealth Management
2013
Annual
Report
CWB Group
Bank
Trust
Insurance
Wealth
Management
CWB Group 2013 Annual Report
i
Five Year Financial Summary ($ thousands, except per share amounts)
Results of Operations
Net interest income (teb) (2)
Less teb adjustment
Net interest income per financial statements
Other income
Total revenues (teb)
Total revenues
Net income available to common shareholders
Return on common shareholders’ equity (3)
Return on average total assets (4)
Per Common Share
2013
IFRS (1)
2012
Canadian GAAP (1)
2011
2010
2009
$
477,501
$
443,572
$
411,452
$
328,664
$
236,354
8,138
469,363
94,982
572,483
564,345
187,163
9,143
434,429
81,910
525,482
516,339
172,197
11,059
400,393
72,103
483,555
472,496
149,538
11,186
317,478
105,595
434,259
423,073
148,413
7,847
228,507
91,612
327,966
320,119
96,223
14.1 %
1.06
15.0 %
1.08
14.7 %
1.09
17.1 %
1.24
13.2 %
0.86
Average common shares outstanding (thousands)
79,147
76,841
72,205
65,757
63,613
Earnings per share
Basic
Diluted
Adjusted cash (5)
Dividends
Book value
Market price
High
Low
Close
$
$
2.36
2.35
2.39
0.70
17.54
33.75
27.04
33.44
$
2.24
2.22
2.30
0.62
15.94
30.10
24.62
29.56
$
2.07
1.95
2.17
0.54
13.87
31.75
24.00
28.50
$
2.26
2.05
2.09
0.44
14.08
26.59
19.85
25.36
1.51
1.47
1.49
0.44
12.16
23.00
7.52
21.38
Balance Sheet and Off-Balance Sheet Summary
Assets
$ 18,520,260
$ 16,873,269
$ 14,849,141
$ 12,701,691
$ 11,635,872
Cash resources, securities and repurchase agreements
2,580,327
2,573,083
2,238,039
1,876,085
Loans
Deposits
Debt
Shareholders’ equity
Assets under administration
Assets under management
Capital Adequacy (6)
Common equity Tier 1 ratio
Tier 1 ratio
Total ratio
Other Information
Efficiency ratio (teb) (7)
Efficiency ratio
Net interest margin (teb) (8)
Net interest margin
Provision for credit losses
as a percentage of average loans
Net impaired loans as a percentage of total loans
Number of full-time equivalent staff (9)
Number of bank branches
(1) Financial
information prepared under
International Financial Reporting Standards (IFRS)
(2013, 2012 and 2011) and Canadian Generally Accepted Accounting Principles (GAAP) (2010 and
2009) may not be directly comparable.
(2) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement
and comparison of net interest income. Net interest income (as presented in the consolidated
statements of income) includes tax-exempt income on certain securities. Since this income is
not taxable, the rate of interest or dividends received is significantly lower than would apply
to a loan or security of the same amount. The adjustment to taxable equivalent basis increases
interest income and the provision for income taxes to what they would have been had the tax-
exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have
a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar
measures presented by other banks.
(3) Return on common shareholders’ equity is calculated as net income available to common
shareholders divided by average common shareholders’ equity.
(4) Return on assets is calculated as net income available to common shareholders divided by average
total assets.
ii
CWB Group 2013 Annual Report
15,576,893
13,953,686
12,293,282
10,496,464
15,526,040
14,144,837
12,394,689
10,812,767
820,650
1,605,427
8,423,972
1,901,146
634,273
1,464,979
7,171,826
855,333
634,877
1,256,613
9,369,589
816,219
315,000
1,148,043
8,530,716
795,467
2,188,512
9,236,193
9,617,238
375,000
986,499
5,467,447
878,095
8.0 %
9.7
13.9
n/a
10.6 %
13.8
n/a
11.1 %
15.4
n/a
11.3 %
14.3
n/a
11.3 %
15.4
45.9 %
44.8 %
44.9 %
44.1 %
48.2 %
46.5
2.70
2.65
0.19
(0.14)
2,037
41
45.6
2.79
2.73
0.19
(0.11)
1,885
41
45.9
2.99
2.91
0.19
0.21
1,796
40
45.3
2.74
2.64
0.21
0.62
1,716
39
49.4
2.10
2.03
0.15
0.68
1,339
37
(5) Diluted earnings per common share excluding the after-tax amortization of acquisition-related intangible
assets and the non-tax deductible charge for the fair value of contingent consideration. These exclusions
represent non-cash charges and are not considered to be indicative of ongoing business performance.
(6) As of January 1, 2013, the Office of the Superintendent of Financial Institutions Canada (OSFI) adopted a
capital management framework called Basel III, and capital is managed and reported in accordance with
these requirements. Capital ratios prior to fiscal 2013 have been calculated using the previous framework,
Basel II. Capital ratios calculated under Basel III are not directly comparable to the equivalent Basel II
measures.
(7) Efficiency ratio is calculated as non-interest expenses divided by total revenues excluding the non-tax
deductible charge for the fair value of contingent consideration.
(8) Net interest margin is calculated as net interest income divided by average total assets.
(9) The significant increase in the number of full-time equivalent staff in 2010 compared to the prior year
reflects CWB’s acquisition of National Leasing Group Inc., effective February 1, 2010.
Financial Performance Summary(1)
Total Loans
($ millions)
Total Assets
($ millions)
Total Revenues (teb)
($ millions)
15,577
13,954
12,293
10,496
9,236
18,520
16,873
14,849
11,636
12,702
434
328
572
525
484
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
GAAP
IFRS
GAAP
IFRS
GAAP
IFRS
Net Income Available to
Common Shareholders
($ millions)
Efficiency Ratio (teb)
(expenses to revenues)
Provision for Credit Losses
( as a percentage of average loans)
187
172
148
150
48.2%
44.1%
44.9% 44.8%
45.9%
96
0.21% 0.19% 0.19% 0.19%
0.15%
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
GAAP
IFRS
GAAP
IFRS
GAAP
IFRS
(1) As of 2011, financial results are reported under IFRS, as opposed to Canadian 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)
(1) Provision for credit losses, divided by average total loans.
(2) Efficiency ratio (teb) calculated as non-interest expenses divided by total revenues (teb).
(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.
2013
Minimum
Targets
2013
Performance
8%
8%
10%
0.18 – 0.23%
46% or less
14%
1.05%
9%
9%
12%
0.19%
45.9%
14.1%
1.06%
CWB Group 2013 Annual Report
iii
Canadian
Western Bank
Group
Canadian Western Bank (TSX: CWB) offers a full range
of business and personal banking services across the
four western provinces and is the largest publicly
traded Canadian bank headquartered in Western
Canada. The Bank, along with its operating affiliates/
divisions — Optimum Mortgage, National Leasing, Canadian Direct Financial,
Canadian Western Trust, Valiant Trust, Canadian Direct Insurance, Adroit Investment
Management, McLean & Partners Wealth Management, and Canadian Western
Financial — collectively offer a diversified range of financial services across Canada
and are together known as the CWB Group.
Table of Contents
CWB Group ......................................................................... i
Five Year Financial Summary ................................................ ii
Financial Performance Summary ......................................... iii
Introduction ........................................................................ 1
Business Strategy and Lines of Business ............................... 2
Interview with the President and CEO, Chris Fowler ............. 4
Message from the Chair, Allan Jackson ............................... 6
Governance Structure, Updates and Initiatives ..................... 8
Management’s Discussion and Analysis ............................. 11
Consolidated Financial Statements .................................... 62
Shareholder Information ................................................. 103
Locations ........................................................................ 104
CWB Group 2013 Annual Report
1
Business Strategy
Lines of
Business
Vision
To be 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 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 within 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 a targeted, cohesive and growth-focused
group of companies.
Goals
Objectives within CWB Group’s Strategic Direction are
further guided by four inter-related financial goals:
• Ensure growth is profitable and accretive to
earnings per share
• Grow and diversify funding sources
•
Increase revenue diversification
• Control growth of non-interest expenses
BANk
Canadian Western Bank (CWB)
Core focus on full service business banking in
Western Canada through 41 branch locations.
Specialized expertise in general commercial
lending, equipment financing and leasing,
commercial real estate financing, real estate
construction financing and energy lending.
Also offer a full range of personal banking
products and services, including chequing
accounts, savings accounts, Guaranteed
Investment Certificates (GICs), Registered
Retirement Savings Plans (RRSPs), Tax-Free
Savings Accounts (TFSAs), mortgages and
personal lending.
National Leasing
Expertise in commercial equipment leasing
with operations across Canada, specializing
in four key verticals: general commercial,
agriculture, health care, and golf and turf.
Optimum Mortgage
Specialty lender focused on broker-sourced
alternative mortgages. Also offer high ratio
insured mortgages, conventional “A”
mortgages and home equity lines of credit.
Canadian Direct Financial (CDF)
Internet-based division of CWB serving
Canadians in all provinces and territories
(except Quebec) who choose to maintain
their banking services online, including
those who don’t have convenient access
to a CWB branch.
Select 2013 Highlights
• Collectively achieved 12% loan growth,
surpassing $15 billion of total loans
• Enhanced business banking services
with the introduction of new cash
management options
• Surpassed $1 billion of total leases
in National Leasing
• Grew the balance of alternative mortgages
outstanding in Optimum by 25%
• Increased the number of clients by 56% and
approached $300 million of total deposits
in CDF
Opportunities
Maintain track record of double-digit annual
loan growth with a focus on core lending sectors,
portfolio diversification and optimized funding
Leverage significant investment in technology
to deliver targeted financial solutions based on
a strong understanding of client needs
Deepen client relationships and increase
products-per-client through successful cross-
selling between business and personal banking,
as well as other CWB Group companies
2
CWB Group 2013 Annual Report
TRUST
Canadian Western Trust (CWT)
Customized pension, trustee and
custodial solutions through two distinct
lines of business: Individual Retirement
Investment Services (IRIS) and Corporate
and Group Services (CGS).
Valiant Trust (Valiant)
Specialty trust services in the areas of
stock transfer, corporate trust, escrow
and employee plan administration for
public and private corporations.
Select 2013 Highlights
• Surpassed $8 billion of trust assets
under administration
• Surpassed 50,000 total IRIS accounts
• Expanded CGS with offering of
custodial services to clients of Adroit
Investment Management
• Approached 600 client appointments
in Valiant
Opportunities
Leverage CWT’s success in servicing
clients of Adroit Investment Management
to grow CGS market share
Strengthen Valiant’s offering in the small- to
mid-size client segment through investment
in proprietary systems technology to improve
revenue capture, control and security
Capitalize on opportunities for brand
alignment and shared services between
trust companies
Deepen client relationships by continuing
to develop private client partnerships and
cross-selling opportunities with other CWB
Group companies
INSURANCE
Canadian Direct Insurance (CDI)
Direct offering of auto, home,
tenant, condo and travel insurance to
clients in British Columbia and Alberta.
Differentiated by highly competitive
products at lower cost owing to proprietary
underwriting system and direct client
service by phone or over the Internet.
Select 2013 Highlights
• Recognized as “Highest in Customer
Satisfaction among Auto Insurers in
Western Canada, three years in a row”
in the J.D. Power & Associates 2013
Canadian Auto Insurance Customer
Satisfaction StudySM*
• Approached 200,000 policies outstanding
• Generated 11th consecutive annual
underwriting profit, despite financial
impact of severe weather events,
including catastrophic Alberta floods
Opportunities
Expand online delivery platform to include
tenant and condo insurance products
Optimize home insurance pricing adequacy
based on results of comprehensive review
of policy coverages and deductibles
Ongoing development of affinity partnership
opportunities
Deepen client relationships by continuing to
promote CWB Group’s brand and products
* Canadian Direct Insurance Incorporated received the highest
numerical score among auto insurance providers in Western
Canada in the proprietary J.D. Power and Associates 2011-2013
Canadian Auto Insurance Customer Satisfaction StudiesSM. 2013 study
based on 11,257 total responses measuring 14 providers in Western
Canada (AB, BC, MB, SK) and measures consumer satisfaction with
auto insurance providers. Proprietary study results are based on
experiences and perceptions of consumers surveyed in
February-March 2013. Your experiences may vary. Visit jdpower.com
WEALTH MANAGEMENT
Adroit Investment Management and
McLean & Partners Wealth Management
Discretionary portfolio management for
high-net-worth investors and institutions
through two investment counselling firms.
Specialize in building customized portfolios of
stocks, bonds and money market instruments.
Canadian Western Financial (CWF)
Mutual fund dealer offering self-directed
investment plans through licensed
mutual fund representatives located in
CWB branches. Complementary wealth
management services through advice and
access to mutual fund products from more
than 20 third-party fund companies.
Select 2013 Highlights
• Invested in 55% ownership of McLean
& Partners Wealth Management
• More than doubled income from
wealth management fees and investment
assets under management
Opportunities
Determine the most effective business
model for delivery of wealth management
services to CWB Group clients
Deepen client relationships and increase
products-per-client through successful cross-
selling between CWB Group companies
Invest in tools and training to enable
CWF account managers to provide financial
planning advice with special relevance to
business owners
Align the geographic footprint of
discretionary wealth management offerings
with CWB's branch network through
additional strategic acquisitions
CWB Group 2013 Annual Report
3
“ We’re eager to build on our
success as we move into the
next phase of growth for our
organization, and for CWB
shareholders.”
An Interview with
the President and CEO,
Chris Fowler
CWB Group had a great year in 2013 – what stands out
the most for you?
Without a doubt, connecting face-to-face with our tremendous group
of employees was the most memorable highlight for me. I dedicated
significant time visiting nearly all of our branches and affiliate company
offices; it was inspiring to see the passionate support for CWB Group’s
unique culture clearly evident at every location. Another thing that
really stood out was the collective response of our employees and
businesses to the catastrophic flooding in June that affected numerous
Alberta communities. It was a very challenging set of circumstances
and our people came through in exceptional ways – first and foremost
in support of their neighbours, communities and clients, but also in
support of CWB Group's response as an organization. Many employees
volunteered with local charities and cleanup crews, and we offered time
off with pay to encourage participation. I really can’t say enough about
the way our people came through to help those in need. I believe we
made an important contribution as a responsible corporate citizen, and
it all started with the individual employees who embody our values.
It was also gratifying to have met or surpassed each of our
performance targets this year, particularly in light of persistent
challenges within our operating environment. Very low interest rates
and elevated competitive pressure continued to impact all our
businesses, further tightening yields and reducing fees compared to
what was possible in the past. Nonetheless, we stabilized net interest
margin in the second half of the year, which, combined with our
success in maintaining double-digit asset growth, contributed to the
achievement of a goal we set at the beginning of 2009 to surpass $200
million of net income within five years. Profitability ratios were ahead of
our targets, and credit quality was once again very solid.
Another highlight was marking our 100th consecutive profitable
quarter. This was a significant milestone, and it was rewarding to
celebrate the achievement. We are, of course, a forward-looking
culture, and we’re eager to build on our success as we move into the
next phase of growth for our organization, and for CWB shareholders.
What have been your primary strategic mandates
since becoming President and CEO?
Many of the decisions we’ve made in recent years support
CWB Group’s ongoing transition from a small regional bank into
a diversified financial institution. As leaders, we’ve asked ourselves:
Does what got us here, get us there? Our strong business model has
served us very well, and we’re determined to preserve our identity as
a successful growth story built on an entrepreneurial culture, where
our people are empowered and know their day-to-day work makes
a difference. However, we’re also determined to become a more
strategically connected group of companies with a collective mandate
that supports our vision to be seen as crucial to our clients’ futures.
Our future growth will be based on our commitment to help more
clients, and our success in doing additional business with those who
have already chosen CWB Group as their preferred financial services
partner. We are also continuing our strategic focus to build a more
diversified and cost-effective funding model, optimize regulatory
capital, and enhance technology and services to better meet our
clients’ evolving needs.
I enjoy tremendous support from our outstanding Board of Directors
and executive team. Together, our leaders provide a wealth of experience,
specialized market knowledge and a consistent management
philosophy, and we’re very confident that our strategic direction is
right for CWB Group.
4
CWB Group 2013 Annual Report
What other strategies and expectations have you
set for CWB Group in 2014 and beyond?
Are there opportunities to expand further via acquisition?
If so, in what areas are these opportunities most likely to arise?
Our strategy and performance targets are set in the context of evolving
client needs, intensifying demands from regulators and highly variable
macroeconomic conditions. In combination, these factors create a
dynamic and often unpredictable operating environment. But whatever
happens externally, our focus on delivering long-term value for CWB
shareholders doesn’t change. Our annual performance targets zero in
on specific measures that tie directly to shareholder value. We’ve always
set targets that are challenging, but attainable, and this year is no
exception. The targets reflect our ambitions to build on our long history
of stable profitability, industry leading efficiency, and double-digit asset
growth, all while maintaining disciplined underwriting practices and
strong credit quality.
Our results are largely driven by our geographic focus and unique
business model, with a primary concentration on business banking
for small- and mid-sized companies. Although we are diversifying
geographically in certain businesses, our overall focus will remain
consistent, and our branch infrastructure will continue to support our
core presence in Western Canada. Our strategic direction comprises
four inter-related financial goals: ensuring growth is profitable and
accretive to earnings per share; growing and diversifying funding
sources; increasing revenue diversification; and controlling the growth of
non-interest expenses. In order to measure our performance against our
goals and strategic objectives, we recently introduced a new strategic
management framework. This process will help align our activities to
support our vision and provide necessary feedback on our actions.
It sounds like you feel good about the organization’s ability
to continue to deliver strong loan growth and consistent credit
performance. Does this become more challenging to accomplish
as the organization gets larger and more complex?
Getting bigger does come with certain challenges, but we’re very
confident we have plenty of room for organic growth within our
business model. Growth actually makes things easier in some ways
too – we’re starting to benefit from economies of scale that weren’t
available just a few years ago. Overall, we expect our ongoing core
focus on Western Canada will continue to pay off for our stakeholders
– there’s plenty of business to do here and lots of new clients for us to
welcome aboard. Our common-sense approach to sustainable growth
will continue focusing on business lines where we are best positioned
to exceed client expectations with our service and expertise.
Can you talk about a few areas in particular where
CWB Group is building momentum?
I think our culture is actually getting stronger as we grow. In the past,
we used the phrase “Think Western” to set ourselves apart. It stood for
hard work, resilience, and a welcoming entrepreneurial spirit, all of
which remain signatures of the way we work today. As our reputation
for getting things done becomes better known, we continue to attract
new employees who share our values and want to be a part
of something unique.
We’re also building momentum with our business banking specialty,
which continues to be a key differentiator and remains at the core
of our strategy. Achieving long-term, profitable growth in business
banking is supported by enhanced offerings in personal banking,
leasing, trust, wealth management and insurance. Within the loan
portfolio, we’ve continued to experience very strong growth in
equipment financing and alternative residential mortgages. Growth in
commercial mortgages and real estate project loans was stronger than
expected this year as we were able to win business without matching
competitors’ aggressive pricing tactics or compromising on quality.
This is a great example of the business value of our culture. I believe our
clients truly appreciate our focus on building long-term relationships, and
they recognize the benefit of working with our committed specialists.
When it comes to strategic acquisitions, we’ve always taken a
patient approach and focused on areas where we can leverage
distinct competitive advantages within our primary geographic
footprints. All of our acquisitions have fit with this approach, including
our investment this year in McLean & Partners Wealth Management.
Expanding the scope of our wealth management business is
something we will continue to look at going forward. In addition to
providing growth opportunities and revenue diversification, wealth
management is a natural complement to our core service offerings in
business banking, where personal relationships are crucial. Adding scale
to our operations in equipment financing and leasing is also of interest,
and we have been active in acquiring portfolios in this area throughout
the last few years. In general, we’ll remain conservative in pursuing
acquisitions. In our view, if the price is too high, we’re happy to be
patient and continue delivering strong organic growth.
CWB Group is making significant investments in infrastructure
and technology to position itself for future growth. Can you provide
some detail on these investments, and what you expect to gain
from them?
Replacement of our core banking system is by far the largest scale
technology investment we’ve ever embarked upon. I’m happy
to report that the design and installation of the new system is
proceeding on-time and on-budget, with implementation anticipated
in 2015. Benefits from this and other technology investments will
mainly come from increased efficiencies, allowing our staff to spend
less time on paperwork and more time focusing on meeting client
needs. We expect that better and more timely access to relevant data
will meaningfully improve our delivery of products and services, as well
as our ability to offer competitive, profitable financial solutions based
on individual client circumstances. It will also enhance our ability to
manage risk at a more granular level, respond to regulatory change,
and eventually facilitate migration to an advanced approach for
calculating risk-weighted assets. Clearly, the expected long-term
benefits of these technology investments are significant.
We also continued to invest in physical infrastructure in 2013.
We added an equipment financing office in Lloydminster, Alberta,
and relocated our branches in Regina and Yorkton, Saskatchewan
to increase our footprint in those areas. In Yorkton, previously one
of our few “retail-only” branches, we broadened our offering to
include CWB’s full suite of business and personal banking services.
Construction is well underway on our new Edmonton Main Branch
premises, with relocation scheduled for the first half of 2014.
This new space is impressive and much better suited to accommodate
the amount of business we generate from this flagship branch.
Could you summarize your current business outlook for
CWB Group with reference to your view of the economy?
Most of our business has been built around serving small and
mid-market commercial entrepreneurs in Western Canada. While our
client base today is quite diverse, and the level of activity within specific
sectors is important, overall economic trends in Western Canada have
the biggest impact on our outlook. With that in mind, we think our core
markets continue to show potential for strong growth. Forecasters are
projecting that activity in the western provinces will continue to lead the
country over the next few years. Consensus economic expectations are
calling for a relatively stable environment for commodity prices, which
further supports a positive outlook for Western Canada. We expect this
will also provide a solid foundation for ongoing growth in our core lines
of business. We’re encouraged by the overall outlook, and very excited
about our future as a growing group of companies.
CWB Group 2013 Annual Report
5
“ We believe a board’s most
important duties are supporting
a culture of ethical behaviour,
getting the right management
team in place, and working with
management to define strategic
objectives that properly balance
risk and reward.”
Message from the Chair,
Allan Jackson
An effective Board of Directors fulfils many important functions,
such as ensuring that adequate controls are in place, regulations
are followed, and reporting is complete and accurate. However, we
believe our Board’s most important duties are supporting a culture of
ethical behaviour, getting the right management team in place, and
working with management to define strategic objectives that properly
balance risk and reward.
CWB Group’s track record of strong growth is extraordinary.
Our ability to grow profitably in challenging market conditions is a
testament to great leadership, a strong organizational culture and
effective strategy. This year was no exception. We delivered another year
of record financial performance, surpassing each of our annual targets
for growth, efficiency and profitability despite the persistent challenges
of low interest rates and competitive factors within our markets.
My goal as Chair is to ensure the effectiveness of the Board in
each of our oversight functions and to set the appropriate tone for
achievement of CWB Group’s strategic direction. In line with this,
we are determined to ensure CWB Group has the right people and
the necessary infrastructure to bring its strategy to life. This means
supporting the organization’s ongoing evolution from the small,
regional bank it was in the 1990s to the larger and more diversified
financial services institution it has become today. I am pleased to
report that we are continuing to build momentum in this regard.
We believe our clients increasingly view CWB Group as a highly valued
strategic financial partner within each of our complementary business
lines. We are also working to deepen our relationships with existing
clients through an expanded offering of financial services.
We are confident that CWB Group’s vision – to be seen as crucial
to our clients’ futures – is the right one to move the organization
forward. As a Board, our job is to make certain we stay on track.
A review of the governance framework:
Ensuring effective oversight
Notwithstanding our focus on guiding strategy, the Board
continually evaluates changing standards and best practices of
corporate governance as we work to build on our culture of ethical
conduct and accountability. We engage with CWB Group’s regulators
and work proactively to assess potential impacts to understand
the requirements and rationale of regulatory change, and develop
responses accordingly.
6
CWB Group 2013 Annual Report
CWB Group’s principal regulator, the Office of the Superintendent
of Financial Institutions (OSFI), finalized revisions to its guideline for
corporate governance in January of this year. The revised guideline
reinforces OSFI’s emphasis on effective risk management as a primary
aspect of governance best practices. Our Board has been focused
on risk governance for a number of years, and management has
made significant progress toward alignment of all risk management
practices through an enterprise-wide risk framework. The intent of
this framework is to ensure we maintain a comprehensive, group-
wide approach to risk by articulating our risk appetite and clarifying
independent oversight of the risk management function.
A review of executive compensation:
Ensuring alignment with the long-term interests of shareholders
One of the Board’s most important responsibilities is to make
certain that the interests of senior executives are aligned with those
of shareholders, while also ensuring executives are properly and fairly
compensated for their contributions. To encourage decision-making
that aligns with the interests of shareholders, directors and senior
officers are required to maintain a minimum level of common share
ownership. To ensure compensation is competitive and fair, the Human
Resources Committee sought the advice of an independent executive
compensation expert this year. The independent advisor reported to
the Committee on market compensation practices, including short-
and long-term incentives. The introduction of a performance share
unit to the long-term incentive plan for executives in 2014 will be a
notable outcome of this engagement. The performance share unit
will represent a meaningful portion of the total long-term incentive
for both the CEO and other named executive officers. We believe this
change further enhances the alignment of executive compensation
with shareholder interests, while providing fair and attractive long-
term incentives for management.
Succession planning:
Ensuring stability of leadership
Much of CWB Group’s success can be attributed to exceptional
leadership. For 23 years, the organization benefited from Larry
Pollock’s unfailing belief in its potential and his ambitious vision
for its future. Long before Larry’s retirement in March 2013, planning
for the selection of a new President and CEO was an area of particular
focus for the Board. Larry developed an extraordinary legacy during
his tenure, and we were determined to identify the strongest possible
successor. I am very happy to say that the Group’s performance during
Chris Fowler’s first year as President and CEO reinforced the confidence
we expressed in selecting him. It’s abundantly clear that Chris possesses
the qualities our employees, clients, and investors expect of our chief
executive, and that he is the right choice to lead CWB Group forward.
The ongoing evolution of the Board:
Ensuring effective governance
Planning for succession is as important at the director level as
it is for management. Through a regular self-evaluation process,
the Board assesses skills and competencies represented through
its membership. Where gaps are identified, or where they are
expected to emerge through retirement, our objective is to augment
our Board with highly qualified business leaders who share our
values, but will also challenge the status quo in their desire for
continuous improvement. This year, for example, we bid farewell to
Gerald McGavin, a Board member who served with us since 1989.
The Board and all CWB Group stakeholders benefited significantly
from Mr. McGavin’s guidance and contributions to the growth and
success of this organization. At the same time, we were pleased to
welcome Andrew Bibby to the team. Among his many attributes,
Mr. Bibby brings a wealth of specialized knowledge in the real estate
development sector.
Coinciding with his appointment to CEO, Chris Fowler replaced
Larry Pollock as our only non-independent director. We continue to
benefit from Larry’s tremendous experience through his two-year
agreement to serve as a special advisor to the Board.
Looking ahead
This is a very exciting time for CWB Group. We have a new leader
with a strong vision for the organization’s future and a clearly
defined strategy for how to achieve it. At the same time, we remain
committed to maintaining the unique culture that has defined us
through our first three decades. I am excited to continue working
closely with the rest of our Board and the senior management team
to profitably grow all of our businesses, and ensure responsible, long-
term value creation for CWB shareholders. The opportunity before us
is significant. While there is still much work to do and many challenges
to overcome, I know we have the people and the resources in place to
achieve our collective goals.
Sincerely,
Allan Jackson
Chair of the Board
CWB Group 2013 Annual Report
7
Governance Structure,
Updates and Initiatives
At CWB Group, we strive to earn the trust of our stakeholders
through high standards of corporate governance and have
embedded rigorous oversight and governance practices into
our business processes. We work continuously to enhance and
improve our governance practices with the recognition that this
commitment directly contributes to the creation of long-term
shareholder value and the sound functioning of our organization.
The Board of Directors (the Board) is responsible for the overall
stewardship of CWB Group, including the development and
monitoring of CWB Group’s governance structure, review and
approval of the risk management framework, and for fostering
a culture of ethical conduct and accountability.
Risk Management
The Board plays an integral role in CWB Group’s risk management
processes and directly oversees risk management to ensure a
comprehensive approach to risk. As part of this oversight, the Board
approves the enterprise risk management framework to ensure that
policies and procedures are in place to measure and manage material
risk exposures. As part of the risk management framework, CWB’s
management provides the Board with quarterly updates on the
framework and risk observations.
Board Independence and Effectiveness
Members of the Board have been carefully selected for their
judgment, integrity, leadership ability and general business
expertise, as well as their knowledge of financial services and/or
key geographic markets and businesses in which CWB Group
operates. During fiscal 2013, the Board was comprised of fourteen
business and community leaders whose diverse backgrounds and
experiences are invaluable in the guidance and monitoring of CWB
Group’s strategy and implementation. Thirteen of the fourteen
directors are independent, with Mr. Fowler, CWB’s President and
CEO, serving as the only non-independent member. 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 has developed a Board skills
and competency evaluation process, the results of which are
reviewed annually and integrated with the overall Board succession
plan. In addition, in alternating years, the effectiveness of the
Board and the contributions of individual directors are assessed
to ensure that the Board maintains an appropriate complement
of skills, experiences and qualifications. In fiscal 2013, the Board
also enhanced this assessment process to require the assistance
of external advisors on a regular basis.
8
CWB Group 2013 Annual Report
Governance Structure
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 Board committee, as well as the Board
mandate, are available in the Corporate Governance section of the
CWB Group website: cwb.com.
Board of
Directors
Audit
Committee
Governance
Committee
Human
Resources
Committee
Loans
Committee
Board Committees
• 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 financial reporting,
this Committee is also responsible for overseeing CWB Group’s
internal controls.
• 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.
This 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.
2013 Board of Directors from left to right: Ian M. Reid, Robert L. Phillips, Raymond J. Protti, Wendy A. Leaney, Alan M. Rowe, Chris H. Fowler, H. Sanford Riley, Allan W. Jackson
(Chair), Arnold J. Shell, Andrew Bibby, Linda M.O. Hohol, Howard E. Pechet, Robert A. Manning, Albrecht W.A. Bellstedt.
Ethical Conduct
Compensation Programs
At CWB Group, ethical conduct is not only a legal and regulatory
requirement, but a core value that facilitates the development
of strong relationships with clients and other stakeholders in the
communities where we operate.
Codes of conduct for all directors, officers and employees are
in place and must be reviewed annually with certification from
each individual that he or she has abided by the code. CWB
Group’s whistleblower policy allows for the anonymous reporting
of complaints and concerns. All concerns and complaints, however
raised, are investigated and appropriate action taken.
CWB Group’s director and executive compensation
policies are strongly aligned with governance best practices.
For the past three 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 independent compensation advisors. In addition,
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.
CWB Group 2013 Annual Report
9
Proactive Approach to Governance
CWB Group takes a proactive approach to ensuring
best practices in corporate governance, and the Board
is committed to continuous improvement of governance
policies and procedures. A few best practices recently
adopted by the Board include the:
• introduction of a compensation recoupment (i.e. clawback)
policy to discourage short-term decision-making and excessive
risk taking;
• retention of a compensation consultant to ensure director and
executive compensation are aligned with best practices; and,
• requirement that the Board and each Board committee
have in camera sessions without management present.
For more information
To encourage open dialogue with shareholders, the Board
can be contacted directly about corporate governance issues by
emailing chairoftheboard@cwbank.com. Detailed information
about CWB Group’s governance practices is available in the
Corporate Governance section of CWB Group’s website:
cwb.com.
Shareholders are also welcome to attend CWB Group’s
annual shareholder meeting in March 2014 to meet with
directors and senior management, and hear about CWB
Group’s future direction. Shareholders wishing to attend the
annual shareholder meeting are encouraged to review CWB
Group’s Management Proxy Circular for information on how
they can attend and participate.
Board of Directors
(October 31, 2013)
•
Albrecht W.A. Bellstedt, Q.C.
President, A.W.A.
Bellstedt Professional
Corporation
• Andrew Bibby
CEO & Director, Grosvenor
Americas Partners
• Chris H. Fowler
President & CEO,
Canadian Western Bank
• Linda M.O. Hohol, FICB
Corporate Director
• Allan W. Jackson (Chair)
President & CEO, ARCI Ltd.
• Wendy A. Leaney, FICB
President, Wyoming
Associates Ltd.
• Robert A. Manning
President, Cathton
Investments Ltd.
• Howard E. Pechet
President, Mayfield
Consulting Inc.
• Robert L. Phillips, Q.C.
President, R.L. Phillips
Investments Inc.
• Raymond J. Protti, ICD.D
Corporate Director
• Ian M. Reid
Corporate Director
• H. Sanford Riley, C.M.
President & CEO,
Richardson Financial
Group Limited
• Alan M. Rowe, CPA, CA
Partner, Crown
Realty Partners
• Arnold J. Shell
President, Arnold J. Shell
Consulting Inc.
10
CWB Group 2013 Annual Report
Management’s Discussion and Analysis (MD&A)
TABLE OF CONTENTS
BUSINESS PROFILE AND STRATEGY 11
FORWARD-LOOkING STATEMENTS
TAXABLE EQUIVALENT BASIS (TEB)
NON-GAAP MEASURES
12
13
13
GROUP FINANCIAL PERFORMANCE 14
OVERVIEW
NET INTEREST INCOME
OTHER INCOME
NON-INTEREST EXPENSES
AND EFFICIENCY
INCOME TAXES
COMPREHENSIVE INCOME
CASH AND SECURITIES
LOANS
CREDIT QUALITY
ALLOWANCE FOR CREDIT LOSSES
DEPOSITS
14
17
18
20
22
22
23
23
27
29
30
OTHER ASSETS AND OTHER LIABILITIES 32
LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT
FINANCIAL INSTRUMENTS AND
OTHER INSTRUMENTS
ACQUISITION
OFF-BALANCE SHEET
SUMMARY OF QUARTERLY
RESULTS AND FOURTH QUARTER
QUARTERLY RESULTS
FOURTH QUARTER OF 2013
ACCOUNTING POLICIES
AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
FUTURE CHANGES IN
ACCOUNTING POLICIES
RISK MANAGEMENT
RISk MANAGEMENT OVERVIEW
32
35
40
40
40
41
41
42
43
43
45
46
46
CREDIT RISk
MARkET RISk
LIQUIDITY AND FUNDING RISk
CAPITAL RISk
OPERATIONAL RISk
REGULATORY RISk
REPUTATION RISk
INSURANCE RISk
OTHER RISk FACTORS
UPDATED SHARE INFORMATION
CONTROLS AND PROCEDURES
50
52
54
57
57
59
59
59
60
61
61
BUSINESS PROFILE AND STRATEGY
Canadian Western Bank (TSX:CWB) offers a diverse range of
financial services and is the largest publicly traded Schedule 1
Canadian bank headquartered in Western Canada. The Bank, along
with its subsidiaries and operating divisions – National Leasing
Group Inc. (National Leasing), Optimum Mortgage, Canadian Direct
Financial (CDF), Canadian Western Trust Company (CWT), Valiant Trust
Company (Valiant), Canadian Direct Insurance Incorporated (CDI),
Adroit Investment Management Ltd. (Adroit), McLean & Partners
Wealth Management Ltd. (McLean & Partners) and Canadian
Western Financial Ltd. (CWF) – are together known as Canadian
Western Bank Group (CWB or CWB Group).
CWB currently operates in the financial services areas of banking,
trust, insurance and wealth management. With a focus on mid-
market commercial banking, real estate and construction financing,
equipment financing and energy lending, the Bank’s 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 to all banking services is primarily provided through a network
of 41 client-focused branches in select locations across the four
western provinces. 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. CDI provides personal auto and home
insurance to customers in British Columbia (BC) and Alberta. Adroit
offers discretionary wealth management for individuals, corporations
and institutional clients, while McLean & Partners specializes in
discretionary wealth management primarily for high net-worth
individuals. Third-party mutual funds are offered in bank branches
through CWF, CWB’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
consistent 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 a targeted, cohesive and growth-focused
group of companies.
CWB Group 2013 Annual Report
11
CWB’s overall strategic direction is based on two overriding themes:
• “Do what we do, only better”
• “Make the whole worth more than the sum of the parts”
Objectives within the strategic direction are further guided
by four inter-related financial goals:
• Ensure growth is profitable and accretive to earnings per share
• Grow and diversify funding sources
•
Increase revenue diversification
• Control growth of non-interest expenses
CWB’s approach to strategic management recognizes that the
development and implementation of strategies cannot be undertaken
in isolation, but need to be part of a cross-functional, group-wide
process. The intent is to focus on key business drivers that contribute
the greatest impact toward the achievement of CWB’s vision, mission
and goals, and are represented by both financial and non-financial
measures. The four inter-dependent pillars of the strategic direction
are summarized as follows:
People
Support
Nurture the organizational culture, promote
teamwork, and enhance the depth and breadth
of internal relationships.
Enable continuous development, growth
and improvement by adding required levels
of capacity, efficiency and stability.
Clients
Provide targeted client solutions and enhance
the depth and breadth of external relationships.
Financial
Ensure strong profitability, growth, value,
efficiency and diversification.
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 CWB, including the Annual
Information Form, is available on SEDAR at sedar.com and
on CWB’s website at cwb.com.
FORWARD-LOOkING STATEMENTS
From time to time, CWB 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 CWB’s objectives and strategies,
targeted and expected financial results and the outlook for CWB’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 management’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 CWB’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, the occurrence of weather-related and other
natural catastrophes, changes in accounting standards and policies,
the accuracy and completeness of information CWB 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 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 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 CWB’s actual results to differ materially
from the expectations expressed in such forward-looking statements.
Unless required by securities law, CWB 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.
12
CWB Group 2013 Annual Report
Assumptions about the performance of the Canadian economy in
2014 and how it will affect CWB’s businesses are material factors
considered when setting organizational objectives and targets.
Performance target ranges for fiscal 2014 consider the following
management assumptions:
• A modest acceleration of economic growth in Canada and
relatively stronger performance in the four western provinces
• Prices for energy and other commodities remaining at levels
comparable with those observed at October 31, 2013
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, 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:
• Sound credit quality with actual losses remaining within
• 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 charge for the
fair value of contingent consideration (the exclusions represent
non-cash charges 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 charge for the fair
value of contingent consideration
• Net interest margin – net interest income divided by average
total assets
• Basel II Tier 1 and total capital adequacy ratios – in accordance
with guidelines issued by the Office of the Superintendent of
Financial Institutions Canada (OSFI)
• Basel III common equity Tier 1, Tier 1 and total capital ratios –
in accordance with guidelines issued by OSFI
• Average balances – average daily balances
CWB’s historical range of acceptable levels
• A relatively stable net interest margin attributed to favourable
deposit costs and shifts in asset mix that help to offset impacts from
the very low interest rate environment and competitive factors
Potential risks that would have a material adverse impact on
current economic expectations and forecasts include a global
recession spurred by a return to negative growth in the euro zone,
a material slowdown of economic growth in the United States
and/or China, or a significant and sustained deterioration in Canadian
residential real estate prices. Unexpected pricing competition and/or
disruptions in domestic or global financial markets that meaningfully
impact the costs of overall deposit funding may also contribute to
adverse financial results compared to expectations.
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 2013 adjustment
to taxable equivalent basis of $8.1 million (2012 – $9.1 million)
increases interest income and the provision for income taxes to
what they would have been had the tax-exempt securities been
taxed at the statutory rate. The taxable equivalent basis does not
have a standardized meaning prescribed by International Financial
Reporting Standards (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.
CWB Group 2013 Annual Report
13
GROUP FINANCIAL PERFORMANCE
OVERVIEW
Highlights of 2013 (compared to 2012)
• Record net income available to common shareholders of
• Efficiency ratio (teb) of 45.9%, up 110 basis points
$187.2 million, up 9%
• Strong loan growth of 12%, marking the achievement
of double-digit loan growth in 23 of the past 24 years
• Total assets and assets under administration surpassed
milestones of $18 billion and $8 billion, respectively
• On April 30, 2013, marked the achievement of 100
• Record diluted earnings per common share of $2.35,
consecutive profitable quarters
up 6% (record adjusted cash earnings per common share
of $2.39, up 4%)
• Record total revenues (teb) of $572.5 million, up 9%
• Solid Basel III capital ratios under the Standardized approach
for calculating risk-weighted assets of 8.0% common equity
Tier 1 (CET1), 9.7% Tier 1, and 13.9% total capital
• Net interest margin (teb) of 2.70%, down nine basis points
• Cash dividends paid to common shareholders of $0.70 per
• Solid credit quality as evidenced by low write-offs and a
consistent provision for credit losses measured as a percentage
of average loans of 19 basis points
• Return on common shareholders’ equity of 14.1%,
down 90 basis points
• Return on assets of 1.06%, down two basis points
share, up 13%
• Invested in 55% ownership of McLean & Partners
Wealth Management
• Obtained initial credit ratings of ‘R-1 (low)’ on short-term
debt and ‘Pfd-3 (high)’ on preferred shares from DBRS
Limited (DBRS), both with stable trends
Table 1 – Select Annual Financial Information (1)
($ thousands, except per share amounts)
Key Performance Indicators
Net income available to common shareholders
$
187,163
$
172,197
$
149,538
$
14,966
9 %
2013
2012
2011
$
%
Change from 2012
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)
Total revenues
Total assets
Debt
Dividends per common share
2.36
2.35
2.39
2.24
2.22
2.30
2.07
1.95
2.17
0.12
0.13
0.09
5
6
4
0.19 %
0.19 %
0.19 %
- bp(2)
2.70
2.65
45.9
46.5
14.1
1.06
2.79
2.73
44.8
45.6
15.0
1.08
2.99
2.91
44.9
45.9
14.7
1.09
$
572,483
$
525,482
$
483,555
$
564,345
516,339
472,496
47,001
48,006
18,520,260
16,873,269
14,849,141
1,646,991
820,650
0.70
634,273
0.62
634,877
0.54
186,377
0.08
(9)
(8)
110
90
(90)
(2)
9 %
9
10
29
13
(1) See page 13 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.
14
CWB Group 2013 Annual Report
Net income available to common shareholders increased 9%
($15.0 million) over 2012 to a record $187.2 million, while
diluted earnings per common share of $2.35 ($2.36 basic) was up
6% from $2.22 ($2.24 basic). Adjusted cash earnings per share,
which is diluted earnings per common share excluding the after-tax
amortization of acquisition-related intangible assets and the
non-tax deductible charge for the fair value of contingent consideration,
was $2.39, up 4%. Record total revenues (teb) of $572.5 million
increased 9% reflecting 8% ($33.9 million) growth in net interest
income (teb) and 16% ($13.1 million) higher other income.
Growth in net interest income was driven by the benefit of strong
loan growth, partially offset by the impact of a nine basis point
reduction in net interest margin (teb) to 2.70%. Margin contraction
in the year mainly reflected lower yields on loans, partially offset by
improved fixed term deposit costs. Lower loan yields primarily resulted
from the combined impact of the sustained very low interest rate
environment and ongoing competitive pressures. Solid credit quality
was maintained throughout the year, and the provision for credit
losses remained unchanged at 19 basis points of average loans.
The efficiency ratio (teb) of 45.9% deteriorated 110 basis points
from last year as the benefit of strong percentage growth in total
revenues was more than offset by an 11% ($25.9 million) increase
in non-interest expenses. The increase in non-interest expenses was
mainly attributed to investments in additional staff complement,
infrastructure and technology to support current and future
business growth.
Return on common shareholders’ equity of 14.1% was down
90 basis points while return on assets decreased two basis points
to 1.06%. The decrease in return on common shareholders’ equity
largely resulted from the impact of margin compression and additional
CWB common shares outstanding from the 2012 settlement of
contingent consideration associated with the 2010 acquisition of
National Leasing. Total cash dividends paid to common shareholders
of $0.70 per share increased 13% from $0.62 per share paid in the
prior year, and resulted in a dividend payout ratio of 30% of total
net income available to common shareholders.
Total assets increased 10% to reach $18,520 million driven by
strong loan growth. Total branch-raised deposits increased 7%
($586 million), while the demand and notice component within
branch-raised deposits was up 12% ($551 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
10% ($1,381 million) in the year to reach $15,526 million, and
included increases in fixed term notes issued in the debt capital
markets and personal fixed rate term deposits raised through the
deposit broker network of $50 million and $496 million, respectively.
During the first quarter, DBRS Limited issued an initial rating of
“R-1 (low)” with a stable trend on CWB’s short-term debt, enabling
access to an additional source of funding through debt capital markets
with the issuance of bearer deposit notes (BDNs). CWB formally
announced its BDN program in July with an internally authorized
limit of $500 million, $254 million of which was outstanding at
year end. Total branch-raised deposits represented 56% of total
deposits at October 31, 2013, compared to 57% a year earlier.
The demand and notice component comprised 32% of total deposits,
unchanged. The ratio of total deposits to total loans at October 31,
2013 was 1:1, relatively unchanged from a year earlier.
The maintenance of solid capital levels is fundamental to CWB’s
objectives to effectively manage risks and support strong growth.
The Basel III common equity Tier 1 (CET1), Tier 1 and total capital
ratios at October 31, 2013 of 8.0%, 9.7% and 13.9%, respectively,
were above both internal and regulatory minimums. CWB’s minimum
Basel III regulatory capital ratios, which include a 250 basis point
capital conservation buffer, are 7.0% CET1 effective January 2013, and
8.5% Tier 1 and 10.5% total capital, both effective January 2014.
CWB Group 2013 Annual Report
15
Performance Targets and Outlook
Table 2 – 2013 Minimum Performance Targets and 2014 Target Ranges (1)
Net income available to common shareholders growth
Adjusted cash earnings per common share growth
Total revenue (teb) growth
Loan growth
Provision for credit losses as a percentage of average loans
Efficiency ratio (teb)
Return on common shareholders’ equity
Return on assets
(1) See page 13 for a discussion of non-GAAP measures.
(2) n/a – not applicable
CWB met or exceeded all of its fiscal 2013 minimum
performance targets with revenue and earnings growth
largely driven by strong 12% loan growth. Measured in dollars,
the strongest loan growth by lending sector was in equipment
financing and leasing, followed by real estate project loans and
commercial mortgages. Growth in both total revenues (teb)
and net income available to common shareholders of 9% was
constrained by the impact of both a nine basis point reduction in
net interest margin. An 11% increase in non-interest expenses
was an additional constraint on both growth in net income
available to common shareholders and the efficiency ratio.
Overall credit quality was stable and the provision for credit
losses was near the low end of the target range at 19 basis
points of average loans. The return on common shareholders’
equity and return on assets were both marginally above the
respective minimum targets at 14.1% and 1.06%. The efficiency
ratio (teb) of 45.9% met the 2013 target of 46% or less.
Fiscal 2014 performance target ranges, as shown in the table
above, are based on expectations for a modest acceleration
in economic growth in Canada and comparatively stronger
performance within key western Canadian markets. The change
in 2014 to a growth target for adjusted cash earnings per share
reflects management’s view that this is a better overall measure
of shareholder value creation compared to net income available
to common shareholders. Growth in adjusted cash earnings
per share is expected to benefit from a combination of revenue
growth, a more efficient regulatory capital structure, stable
credit quality, disciplined management of non-interest expenses
and relatively consistent profitability. Revenue growth will
largely be driven by ongoing lending activity and the anticipated
achievement of another year of double-digit loan growth.
CWB 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 very low
interest rates and competitive influences. Recognizing the
challenges of achieving improvement in net interest margin from
the current level, growth in total revenues will continue to be
constrained compared to what would be expected in a rising or
higher interest rate environment. The provision for credit losses
is targeted between 18 and 23 basis points of average loans and
reflects expectations that overall credit quality will remain sound.
Based on anticipated revenue growth and planned business
investment, the target 2014 efficiency ratio (teb) is 46% or less.
Profitability targets measured by the return on common
shareholders’ equity and return on assets are relatively consistent
with performance in 2013.
2013
Minimum
Targets
2013
Performance
2014
Target Ranges
8 %
9 %
n/a
8
10
0.18 – 0.23
46 or less
14.0
1.05
n/a
9
12
0.19
45.9
14.1
1.06
n/a (2)
12 – 16 %
9 – 11
10 – 12
0.18 – 0.23
46 or less
14.0 – 15.0
1.05 – 1.15
The rate of growth in adjusted cash earnings per share
is partly dependent on CWB’s regulatory capital structure.
A special resolution will be voted upon on December 12, 2013
at a concurrent special meeting of common and preferred
shareholders. If approved, the special resolution will amend
CWB’s By-law Three to permit an unlimited number of First
Preferred shares to be issued, to a maximum aggregate
outstanding consideration of $1,000 million; terms of the
existing By-law Three precludes CWB from issuing any preferred
shares in the future. On April 30, 2014, unless the outstanding
Series 3 preferred shares are redeemed by CWB, subject to
approval of the Office of the Superintendent of Financial
Institutions Canada (OSFI), the corresponding dividend yield will
reset to a rate of 500 basis points over the yield on the applicable
Government of Canada benchmark security. In consideration of
the current capital market environment and CWB’s investment
grade credit rating, management and the Board of Directors
believe it is in the best interests of common shareholders to
redeem these shares. However, in order to maintain CWB’s Tier 1
regulatory capital ratio above internal thresholds, the issuance
of qualifying replacement capital will be required prior to the
anticipated redemption date. In addition to uncertainty about
the results of the special resolution voting, the public market for
preferred shares which qualify as Basel III non-viability contingent
capital (NVCC) has yet to be established in Canada. The 2014
performance target ranges for growth in adjusted cash earnings
per share and the return on common shareholders’ equity assume
existing preferred shares are redeemed and replaced, to the
extent required, with comparatively lower cost capital. Without
both an amendment to By-law Three and a successful issuance
of qualifying NVCC preferred shares, CWB’s only option to raise
replacement capital would be to issue common shares.
The ongoing development of each of CWB Group’s businesses
will remain a key priority to achieve continued strong performance
for shareholders. Potential acquisitions that are both strategic and
accretive for common shareholders will also be closely evaluated.
With its solid capital position under the more conservative
Standardized approach for calculating risk-weighted assets,
CWB will remain well 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. The overall outlook for 2014 and beyond is positive.
16
CWB Group 2013 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 2013
• Net interest income (teb) increased 8% to a record
$477.5 million based on 11% growth in average total
interest bearing assets
• Net interest margin (teb) of 2.70% was down nine basis
points mainly reflecting the impact of the persistent very
low interest rate environment and competitive factors
Table 3 – Net Interest Income (teb) (1)
($ thousands)
2013
2012
Average
Balance
Mix
Interest
Interest
Rate
Average
Balance
Mix
Interest
Interest
Rate
Assets
Cash, securities and deposits with
regulated financial institutions
$ 2,506,616
14 % $
54,410
2.17 % $ 2,227,457
14 %
$
53,849
2.42 %
-
14
70
84
98
2
289
0.97
124,935
94,862
4.00
2,156,539
640,542
735,404
790,103
5.16
11,049,681
4.97
13,206,220
4.56
15,558,612
-
0.00
319,493
1
13
70
83
98
2
1,231
0.99
87,111
599,423
686,534
741,614
-
4.04
5.42
5.20
4.77
0.00
$ 17,680,347
100 % $ 790,103
4.47 % $ 15,878,105
100 %
$ 741,614
4.67 %
Securities purchased under
resale agreements
29,701
Loans
Personal
Business
Total interest bearing assets
Other assets
Total Assets
Liabilities
Deposits
Personal
Business and government
Other liabilities
Debt
Shareholders’ equity
Non-controlling interests
2,371,920
12,419,831
14,791,751
17,328,068
352,279
$ 9,206,767
5,519,044
14,725,811
484,286
830,284
1,534,464
105,502
52 % $ 201,170
2.19 %
$ 8,683,061
55 %
$ 208,929
2.41 %
31
83
3
5
8
1
78,956
1.43
4,627,038
280,126
43
32,433
1.90
0.01
3.91
13,310,099
474,329
632,132
-
-
0.00
1,356,306
0.00
105,239
29
84
3
4
8
1
60,782
269,711
61
28,270
-
-
1.31
2.03
0.01
4.47
0.00
0.00
1.88 %
2.79 %
Total Liabilities and Equity
$ 17,680,347
100 % $ 312,602
1.77 %
$ 15,878,105
100 %
$ 298,042
Total Assets/Net Interest Income
$ 17,680,347
$ 477,501
2.70 %
$ 15,878,105
$ 443,572
(1) See page 13 for a discussion of teb and other non-GAAP measures.
Net interest income (teb) increased 8% ($33.9 million) to reach
a record $477.5 million driven by 11% ($1,769 million) growth
in average interest bearing assets, with the percentage difference
reflecting the impact of a nine basis point reduction in net interest
margin (teb) to 2.70%. Growth in average interest bearing assets
resulted from a combination of strong 12% ($1,586 million) growth
in average total loans and a 13% ($279 million) increase in average
liquid assets. The change in net interest margin mainly resulted
from the combined impact of ongoing very low interest rates and
competitive factors, and is reflected in a 23 basis point lower yield on
average loans, partially offset by a 13 basis point reduction in average
total deposit costs. The yield on average cash, securities and deposits
with regulated financial institutions was down 25 basis points,
primarily reflecting CWB’s strategy to reduce the duration of its portfolio
of liquid assets and the repositioning of a portion of its investments in
preferred shares. The quarterly net interest margin (teb) stabilized in the
latter half of 2013 around the mid point of the two years noted above.
Generally, 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
CWB’s assets. The prime rate was maintained at 3.00% throughout
the year and has been unchanged since the Bank of Canada last
increased rates in September 2010.
CWB Group 2013 Annual Report
17
Outlook for Net Interest Income
Loan growth will continue to have a positive influence on
net interest income, but the combination of the persistent
very low interest rate environment and competitive factors
is expected to constrain any meaningful improvement in net
interest margin from that realized in 2013. The current interest
rate environment diminishes the incremental benefit of low
and no-cost deposits, as well as deposits that are less interest
sensitive. A sustained upward slope in the interest rate curve
would provide incremental benefits to margin from CWB’s
growing base of core deposits that are less interest sensitive,
while also providing a more meaningful positive differential
between the incremental price on loans and the cost of
matched funding based on the duration of certain portfolios.
Changes in average liquidity also have an impact on net interest
margin. Lower liquidity generally enhances margin, while the
opposite is true when higher liquidity is maintained. Going forward,
CWB expects average liquidity will remain relatively consistent with
the level held in the latter half of 2013, which is slightly lower than
the average for the full year. Competitive factors, particularly in
certain business areas, result in lower overall loan pricing and CWB
does not expect material changes in the competitive environment
in the near term. Management believes net interest margin will
continue to be constrained with the absence of increases in the
prime lending interest rate and/or a significant and sustained
steepening of the interest rate curve. Financial target ranges for
2014 assume no change in the prime lending interest rate.
OTHER INCOME
Highlights of 2013
• Other income of $95.0 million, up 16% despite a decline
in net insurance revenues resulting from the impact on claims
of catastrophic flooding in southern Alberta
• Other income represented 17% of total revenues (teb),
up from 16% in 2012
Table 4 – Other Income
($ thousands)
Insurance
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
Net insurance revenues
Trust and wealth management services
Credit related
Gains on securities, net
Retail services
Foreign exchange
Contingent consideration fair value charge
Other (1)
Total Other Income
2013
2012
$
%
Change from 2012
$
126,825
$
123,204
$
3,621
3 %
1,787
(87,008)
(25,325)
16,279
24,511
21,685
15,094
10,272
3,059
-
4,082
1,855
(83,167)
(24,539)
17,353
19,065
19,705
12,449
9,227
3,255
(2,489)
3,345
(68)
(3,841)
(786)
(1,074)
5,446
1,980
2,645
1,045
(196)
2,489
737
(4)
5
3
(6)
29
10
21
11
(6)
(100)
22
$
94,982
$
81,910
$
13,072
16 %
(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.
18
CWB Group 2013 Annual Report
Other income of $95.0 million was up 16% ($13.1 million) as
the combined benefit of a $5.4 million increase in trust and wealth
management income, $2.6 million higher net gains on securities
and continued growth across other categories more than offset
decreases in net insurance revenues and foreign exchange income.
Very strong growth in trust and wealth management income resulted
from the acquisition of McLean & Partners in the third quarter of
2013, and was further supported by ongoing solid performance within
trust services. Net gains on securities were well above expectations
established early in 2013 owing to favourable market opportunities
and the strategic repositioning of certain investments in preferred
shares, common equities and government securities. The sale of
certain securities issued by financial institutions, beginning in 2012
and continuing into the first quarter of 2013, was a response to
changes under the Basel III regulatory capital framework which
requires a deduction from regulatory capital of amounts over a certain
threshold for this type of investment.
The elimination of charges for contingent consideration fair value
changes in the third quarter of 2012 upon the settlement of a
contingent liability related to the 2010 National Leasing acquisition
resulted in a $2.5 million positive difference in other income. Growth
in credit-related and retail services income of 10% ($2.0 million) and
11% ($1.0 million), respectively, was consistent with strong lending
and deposit activity. The 22% ($0.7 million) increase in the ‘other’
category of other income to $4.1 million mainly resulted from the
sale of residential mortgage portfolios totaling $95 million (2012
– $50 million). Net insurance revenues were down 6% ($1.1 million)
as the positive impact of growth in net earned premiums was more
than offset by increased claims expense related to catastrophic southern
Alberta floods.
Other income as a percentage of total revenues (net interest income
and other income) was 17%, up from 16% in 2012.
Outlook for Other Income
Solid growth is expected across most categories of other income
reflecting CWB’s continued focus on enhancing transactional
service capabilities 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
a return to more normal claims experience and continued policy
growth, increased volatility in net claims expense could result
from severe weather-related events, as was the case in both
2012 and 2013. Net gains on securities are expected to be much
lower compared to 2013; however, the magnitude and timing of
such gains are dependent on market factors that are difficult to
predict. Generating additional other income through whole loan
sales of residential mortgage portfolios remains an option and
may be pursued as opportunities arise.
CWT, including Optimum, and Valiant Trust each expect solid
growth in 2014 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 across Canada. The material increase
in trust and wealth management revenues in 2013 mainly
resulted from CWB’s investment in McLean & Partners, and a
full year contribution from this business will further benefit
revenue growth in 2014. Ongoing growth in core wealth
management revenues should also result from introducing
discretionary investment services to more CWB banking clients.
CWB maintains its long-term objective to grow non-interest
revenues as a percentage of total revenues and will continue with
initiatives to further develop and/or acquire additional sources of
complementary fee-based business.
CWB Group 2013 Annual Report
19
NON-INTEREST EXPENSES AND EFFICIENCY
Highlights of 2013
• An efficiency ratio (teb) of 45.9%, up 110 basis points compared to 2012, as growth in total revenues (teb) was more than offset
by an 11% increase in non-interest expenses
Table 5 – Non-interest Expenses and Efficiency Ratio
($ thousands)
Salaries and Employee Benefits
Salaries
Employee benefits
Premises
Rent
Depreciation
Other
Equipment and Furniture
Depreciation
Other
General
Professional fees and services
Marketing and business development
Amortization of acquisition-related intangible assets
Banking charges
Travel
Postage and stationery
Regulatory costs
Community investment
Employee training
Communications
General insurance
Capital and business taxes
Other
Total Non-interest Expenses
Efficiency Ratio (teb) (1)(2)
2013
2012
$
%
Change from 2012
$
144,200
$
127,835
$
16,365
13 %
28,037
172,237
26,009
153,844
2,028
18,393
16,359
5,938
3,124
25,421
8,901
8,503
17,404
7,104
6,846
4,627
3,622
2,726
2,680
2,659
2,337
1,908
1,824
1,035
937
9,130
47,435
15,738
5,212
3,115
24,065
8,108
7,329
15,437
6,379
6,746
5,160
3,253
2,493
2,630
2,131
2,095
1,516
1,770
969
676
7,402
43,220
621
726
9
1,356
793
1,174
1,967
725
100
(533)
369
233
50
528
242
392
54
66
261
1,728
4,215
8
12
4
14
-
6
10
16
13
11
1
(10)
11
9
2
25
12
26
3
7
39
23
10
$
262,497
$
236,566
$
25,931
11 %
45.9 %
44.8 %
110 bp (3)
(1) Non-interest expenses as a percentage of total revenues (net interest income (teb) plus other income) excluding the non-tax deductible charge for the fair value of contingent consideration. See page 13 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.
20
CWB Group 2013 Annual Report
Total non-interest expenses of $262.5 million were up 11%
($25.9 million) reflecting a 12% ($18.4 million) increase in salary
and benefit costs due to a combination of higher staff complement
and annual salary increments. Of the total increase in non-interest
expenses, $2.8 million was attributed to McLean & Partners.
The number of full-time equivalent employees (FTEs) grew 8%
(152 FTEs) from October 31, 2012 to meet requirements for added
client-facing services, corporate support and other business
expansion. Premises and equipment expenses, including depreciation,
increased 8% ($3.3 million) and reflect the impact of a new branch
opened in Winnipeg, Manitoba during the fourth quarter
of 2012, and the relocation and/or expansion of other branches
and corporate office premises. The relocation of branches in
Yorkton and Regina, Saskatchewan meaningfully expanded both
business capacity and services available at these respective locations.
Ongoing investment in technology infrastructure necessary to
position CWB for future growth also contributed to the increase
in non-interest expenses. General non-interest expenses were
up 10% ($4.2 million) as increases in most areas, including
$1.7 million higher ‘other’ expenses, more than offset lower
amortization of acquisition-related intangible assets. The increase in
‘other’ expenses mainly reflects the impacts of an operational loss,
the cost of appraisals to assess the status of properties held as security
on loans following catastrophic southern Alberta floods and certain
expenses incurred by McLean & Partners.
Figure 1 – Number of Full-time Equivalent Staff
2013
2012
2011
2010
2009
+8%
+5%
+5%
2,037
1,885
1,796
+28%
1,716 (1)
1,339
(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
charge for the fair value of contingent consideration – was 45.9%,
compared to 44.8% last year, as the rate of growth in non-interest
expenses exceeded that of total revenues (teb).
Outlook for Non-Interest Expenses and Efficiency
One of management’s key priorities is to maintain effective
control of costs while ensuring CWB 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. Investment in these areas
is aligned with CWB’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 system implementation in 2015 based on a capital
budget of $50 million. The core banking and other technology
investments are expected to provide considerable efficiencies
in the future, which include improving the turnaround time of
credit approvals and affording relationship managers more time
to assist clients. Certain technology investments, including loan
origination systems and the future core banking system,
will also improve data, portfolio and client relationship
management capabilities. Compliance with an increasing level
of regulation and oversight for all Canadian banks requires the
investment of both time and resources, which further contributes
to higher non-interest expenses.
Major expansion plans for 2014 include the relocation of
CWB’s flagship branch in Edmonton to a new, much larger
location. 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, constrained
net interest margin will continue to limit the potential for
improvement in the efficiency ratio compared to 2013.
Overall, the efficiency ratio in 2014 is expected to be
maintained at 46% or better.
CWB Group 2013 Annual Report
21
INCOME TAXES
The effective income tax rate (teb) was 25.6%, down 70 basis
points from 2012, while the tax rate before the teb adjustment
was 23.4%, or 20 basis points lower. Changes primarily reflect the
non-tax deductible charge related to the 2012 fair value contingent
consideration changes. Deferred tax assets and liabilities represent
the cumulative amount of tax applicable to temporary differences
between the carrying amount of assets and liabilities, and their values
for tax purposes. CWB’s deferred income tax assets and liabilities relate
primarily to the collective allowance for credit losses and intangible
assets, 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 (2012 – $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.
Outlook for Income Taxes
CWB’s expected income tax rate (teb) for fiscal 2014 is approximately 26.2%, or 23.6% before the teb adjustment. The increase in the
expected tax rate compared to the prior year reflects the full year impact of a 2013 change in the provincial income tax rate in BC.
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 fair value changes for derivative instruments designated
as cash flow hedges. The 2013 increase in comprehensive income was
driven by 8% ($15.5 million) higher net income, largely offset by a
$14.2 million reduction in fair value, net of tax, of available-for-sale
securities. While the combined dollar investment in preferred shares
and common equities is relatively small in relation to total liquid assets,
it increases the potential for comparatively larger fluctuations in OCI.
Table 6 – Comprehensive Income
($ thousands)
Net Income
Other Comprehensive Income (Loss)
Available-for-sale securities
Gains (losses) from change in fair value, net of tax
Reclassification to net income, net of tax
Derivatives designated as cash flow hedges
Gains from change in fair value, net of tax
Reclassification to net income, net of tax
2013
2012
Change from
2012
$
209,950
$
194,457
$
15,493
(2,553)
(11,160)
(13,713)
2,332
(1,255)
1,077
(12,636)
9,580
(9,129)
451
1,430
(483)
947
1,398
(12,133)
(2,031)
(14,164)
902
(772)
130
(14,034)
Total Comprehensive Income
$
197,314
$
195,855
$
1,459
22
CWB Group 2013 Annual Report
CASH AND SECURITIES
Cash and securities totaled $2,580 million at October 31, 2013,
compared to $2,573 million one year ago.
Total net unrealized losses before tax recorded on the balance sheet at
October 31, 2013 were $7.1 million, compared to net unrealized gains
of $11.3 million last year. Changes in net unrealized gains or losses are
reflected in Table 7.
Table 7 – Unrealized Gains (Losses) on Available-for-Sale Cash and Securities
($ thousands)
Deposits with regulated financial institutions
Government of Canada debt securities
Province or municipality debt securities
Other debt securities
Preferred shares
Common shares
Total
2013
$
569
$
632
161
1,180
(16,301)
6,657
2012
482
176
(67)
1,637
6,971
2,114
$
(7,101)
$
11,313
The cash and securities portfolio is mainly comprised of high quality
debt instruments and a comparatively smaller component of preferred
and common shares. 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.
In the past five years, CWB capitalized on opportunities to realize
significant net gains on the sale of securities resulting from a combination
of investment strategies and market conditions. Realized net gains
on securities in 2013 remained high at $15.1 million, $2.6 million
above those realized in the prior year. Net gains on securities in
2013 were mainly attributed to the sale of common shares following
unexpectedly strong market performance, as well as the sale of certain
government securities.
CWB has no direct investment in any non-Canadian sovereign debt
or other securities issued outside of Canada or the United States (U.S.).
See Table 25 – Valuation of Financial Instruments of this MD&A
for additional information on significant financial assets and liabilities
reported at fair value.
The balance and mix of cash and securities are managed as part of
CWB’s overall liquidity management process; additional information,
including management’s outlook for 2014, is included in the Liquidity
Management discussion of this MD&A.
LOANS
Highlights of 2013
• Strong loan growth of 12%, largely driven by very strong
• Double-digit loan growth achieved in 23 of the past 24 years
performance in equipment financing and leasing, real estate
project loans, and commercial mortgages
(the exception being 2009 when loan growth was 7%)
Table 8 – Outstanding Loans by Portfolio (before the allowance for credit losses)
($ 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 2012
2013
2012
$
3,428
$
3,179
$
3,311
2,942
2,502
2,304
902
274
2,930
2,498
2,292
1,882
912
342
$
249
381
444
210
422
(10)
(68)
$
15,663
$
14,035
$
1,628
%
8 %
13
18
9
22
(1)
(20)
12 %
CWB Group 2013 Annual Report
23
Total loans before the allowance for credit losses increased 12%
($1,628 million) to reach $15,663 million at year end. Measured
in dollar terms and by loan type as shown in Table 8, growth in
equipment financing and leasing of 18% ($444 million) represented
the strongest source of loan growth, followed by growth in real
estate project loans of 22% ($422 million) and commercial mortgages
of 13% ($381 million). The balance of loans in equipment financing
and leasing includes the Bank’s heavy equipment financing business
($1,859 million) and the small and mid-ticket leasing business of
National Leasing ($1,083 million). Growth in real estate project
loans exceeded expectations as solid activity in both residential and
commercial construction continued to provide opportunities to finance
well capitalized developers on the basis of sound loan structures and
acceptable pre-sale levels. General commercial loans increased 8%
($249 million). Based on industry sector as shown in Table 9, general
commercial loans include categories such as manufacturing,
finance and insurance, and wholesale and retail trade. Personal loans
and mortgages, which include combined lending activity in banking
branches and Optimum, showed solid performance with
9% ($210 million) growth. Corporate loans, which represent a
diversified portfolio that is centrally sourced and administered
through a designated lending group located in Edmonton, declined
by 1% ($10 million) reflecting a high level of fourth quarter
payouts. 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
Figure 2 – Outstanding Loans by Portfolio
(October 31, 2012 in brackets)
project loans, and oil and gas production loans, which are both
included as separate classifications in Table 8. The balance of oil
and gas production loans, which represent a relatively small
percentage of the total portfolio, was down 20% ($68 million)
driven by a combination of fewer new lending opportunities,
payouts and write-offs.
Total loans of $1,222 million in Optimum represented growth of
12% ($132 million). Adjusting for $95 million of insured residential
mortgages sold during the year, Optimum’s annual loan growth was
21%. Net 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 70%.
The book value of alternative mortgages represented approximately
79% of Optimum’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 equipment financing and leasing,
and real estate project loans led to slight decreases in the proportion
of general commercial loans, and personal loans and mortgages.
Based on the location of security (see Figure 3), Alberta and BC
represented 42% and 35% of total loans at year end, compared
to 45% and 33%, respectively, in 2012.
Oil and Gas Production Loans
2% (2%)
Corporate Loans
6% (6%)
Real Estate Project Loans
15% (13%)
Personal Loans and Mortgages
16% (17%)
24
CWB Group 2013 Annual Report
General Commercial Loans
22% (23%)
Commercial Mortgages
20% (21%)
Equipment Financing and Leasing
19% (18%)
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. CWB expects to maintain double-digit loan
growth and has set its fiscal 2014 target range at 10 to 12%.
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.
Growth in Canada’s domestic economy is expected to accelerate
modestly in 2014 compared to 2013. 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 2014 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 remained solid due to currently favourable
resource prices, an ongoing U.S. housing sector recovery and
export opportunities to Pacific Rim countries, including China.
Growth in Saskatchewan will mainly be supported by a growing
energy sector 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.
Canadian residential real estate markets have been resilient and
affordability in most geographic areas remains within historical
ranges, largely reflecting very low interest rates. However,
the combination of historically high price levels, elevated 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.
A sustained period of low natural gas prices has adversely
impacted the financial flexibility and cash flows of many
exploration and production companies, but CWB’s direct exposure
to this sector remains low. While fallout from low natural gas
prices is not expected to materially impact overall portfolio quality,
related growth opportunities will continue to be constrained.
The impact of regulatory changes related to more stringent
residential mortgage underwriting criteria resulted in an
improved competitive environment for CWB’s alternative
residential mortgage business in 2013, but the long-term
impacts of these changes remain uncertain. Notwithstanding
reduced competition for alternative mortgages, the level of
demand could moderate as a result of further regulatory changes
and/or an overall slowing of activity in residential markets.
Potential risks that would have a material adverse impact on
current economic expectations and forecasts include a global
economic recession spurred by a return to negative economic
growth in the euro zone, a slowing rate of economic growth in
the United States, 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
The following figure illustrates the geographical distribution of loans advanced based on the location of security:
Figure 3 – Geographical Distribution of Loans
(October 31, 2012 in brackets)
British Columbia
35% (33%)
Ontario
11% (10%)
Manitoba
2% (3%)
Other
3% (3%)
Saskatchewan
7% (6%)
Alberta
42% (45%)
CWB Group 2013 Annual Report
25
The following table illustrates the diversification in lending operations by standard industry sectors:
Table 9 – 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
(1) Table is based on the North American Industry Classification System (NAICS) codes.
(2) Residential mortgages in this table include only single-family properties.
2013
2012
22 %
21
15
6
5
5
4
3
2
2
2
2
2
2
7
23 %
18
15
6
5
5
5
3
3
3
3
2
2
2
5
100 %
100 %
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 by specialized lenders
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 Vancouver, Edmonton and Calgary. 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
Growth is expected across all lending sectors in 2014. While
stronger economic activity in Alberta and the success of
strategic initiatives to increase CWB’s lending exposure
through Optimum and National Leasing in Ontario could
lead to comparatively faster growth in these areas, portfolio
diversification by geography will likely remain relatively consistent
with October 31, 2013. Based on the current view for loans,
management expects relatively higher net growth in the areas
of equipment financing and leasing, personal loans and mortgages,
and general commercial loans.
Commercial mortgages are often subject to a higher level of
pricing competition compared to other types of lending, and
CWB will remain focused on maintaining this portfolio based
on client relationships and adequate returns. Expectations for
considerably slower growth in real estate project loans compared
to that achieved in 2013 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.
26
CWB Group 2013 Annual Report
CREDIT QUALITY
Highlights of 2013
• Continued strong quality and an acceptable level of write-offs
• Gross impaired loans decreased 4% ($2.6 million) from the
prior year and, as a percentage of total loans, represented
41 basis points, compared to 48 basis points one year ago
• The provision for credit losses of $27.8 million represented
19 basis points of average loans, unchanged from the prior
year, and was at the low end of the 2013 target range of
18 to 23 basis points
Impaired Loans
As shown in the table below, gross impaired loans totaled
$64.2 million and represented 0.41% of total loans, compared to
$66.8 million, or 0.48% at the end of 2012. The ten largest accounts
classified as impaired, measured by dollars outstanding, represented
Table 10 - Change in Gross Impaired Loans
($ thousands)
Gross impaired loans, beginning of period
New formations
Reductions, impaired accounts paid down or returned to performing status
Write-offs
Total, end of period (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 (2)
approximately 55% of total gross impaired loans at year end, up
from 52%. New formations of impaired loans totaled $66.9 million,
compared to $80.7 million last year.
2013
2012
$
66,840
$
97,258
$
66,883
(42,860)
(26,652)
80,734
(93,440)
(17,712)
64,211
$
66,840
$
35,619
$
35,034
$
143
135
125
111
$
$
Change from 2012
$
(30,418)
(13,851)
50,580
(8,940)
(2,629)
585
18
24
%
(31)
(17)
(54)
50
(4)
2
14
22
Gross impaired loans as a percentage of total loans (3)
0.41 %
0.48 %
(7) bp (4)
(1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $12,407 (2012 - $10,462). CWB 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 2013 dollar provision for credit losses of $27.8 million
increased 11% ($2.7 million) over the previous year, consistent with
portfolio growth. The provision measured as a percentage of average
loans was unchanged at 19 basis points. As shown below in Figure 4,
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
134%, up from 122% in 2012.
The dollar level of gross impaired loans fluctuates as loans become
impaired and are subsequently resolved, and does not directly reflect
the dollar value of expected write-offs given tangible security held in
support of lending exposures. 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
CWB’s core geographic markets. Actual credit losses as a percentage
of total loans continue to demonstrate the benefits of 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 $9.6 million at year end, compared to $14.4 million a
year earlier. Current estimates of expected write-offs are established
through detailed analyses of both the overall quality and ultimate
marketability of the security held against each impaired account.
CWB Group 2013 Annual Report
27
Figure 4 – Net Impaired Loans as a Percentage of Net Loans Outstanding
-0.14%
2013
-0.11%
2012
2011
0.21%
2010
2009
2008
0.19%
0.62%
0.68%
-0.57%
-0.75%
-0.68%
-0.36%
2007
2006
2005
2004
The overall loan portfolio is reviewed regularly with credit decisions
undertaken on a case-by-case basis to provide early identification
of possible adverse trends. Loans that have become impaired are
monitored closely by a specialized team with regular quarterly,
or more frequent, reviews of each loan and its realization plan.
A report of impaired loans is also reviewed quarterly by the
Loans Committee of the Board.
Outlook for Impaired Loans
Ongoing disciplined underwriting practices, the secured nature
of the loan portfolio and expectations for modest acceleration
of economic activity in Western Canada underpin management's
view that overall credit quality will remain sound. The level of
gross impaired loans will likely increase from the current very
low level reflecting normal fluctuations of the credit cycle.
Overall lending exposures will continue to be closely monitored
and actual losses are expected to remain within CWB’s acceptable
target range. Management remains confident in the strength,
diversity and underwriting structure of the overall loan portfolio.
28
CWB Group 2013 Annual Report
ALLOWANCE FOR CREDIT LOSSES
The year-over-year change in the allowance for credit losses split between the specific provision by category of impaired loans and the collective
allowance for credit risk is provided in the table below.
Table 11 – Allowance for Credit Losses
($ thousands)
Specific Allowance
Commercial
Real estate
Equipment financing and energy
Consumer and personal
Collective Allowance
Total
(1) Recoveries in 2013 totaled $2,869 (2012 - $2,348).
2013
Opening
Balance
Provision
for Credit
Losses
Write-Offs,
net of
Recoveries (1)
2013
Ending
Balance
$
2,791
$
1,361
$
(3,859)
$
2,605
8,524
459
14,379
67,344
9,198
7,061
1,353
18,973
8,873
(5,454)
(13,406)
(1,064)
(23,783)
$
81,723
$
27,846
$
(23,783)
$
85,786
-
76,217
293
6,349
2,179
748
9,569
The allowance for credit losses is maintained to absorb both
identified and unidentified losses in the loan portfolio and,
at October 31, 2013, consisted of $9.6 million of specific allowances
and $76.2 million in the collective allowance for credit losses.
The specific allowance includes the amount of accumulated provisions
for losses required to reduce the carrying value of identified impaired
loans to their estimated realizable value. 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;
• 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.
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 as a result of
portfolio growth and changes in the credit cycle. Lower levels of
specific allowances are expected in strong economic times and
higher levels of specific allowances in weaker economic times.
Based on management’s current outlook for credit performance
and CWB’s 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 2013 Annual Report
29
Provision for Credit Losses
The provision for credit losses represented 19 basis points of average
loans in 2013 (see Table 12), unchanged from the previous year.
Net new specific provisions represented 13 basis points of average
loans, compared to 14 basis points in 2012. CWB has a long history
of strong credit quality and low loan losses, both of which compare
very favourably to the Canadian banking industry. Macroeconomic and
other external factors that may impact core geographic regions
and/or industry sectors in which CWB customers operate are continually
analyzed. The 2010 increase in the provision for credit losses as a
percentage of average loans as shown in Table 12 was attributed to
the acquisition of National Leasing and the relatively higher rate of
losses typical in the small- and mid-market leasing business.
Table 12 – Provision for Credit Losses
($ thousands)
Provision for credit losses (1)
Net new specific provisions (net of recoveries) (2)
Collective allowance
Coverage ratio (3)
IFRS
Canadian GAAP
2013
0.19 %
0.13
2012
0.19 %
0.14
2011
0.19 %
0.20
2010
0.21 %
0.27
2009
0.15 %
0.14
$
76,217
$
67,344
$
61,330
$
59,603
$
61,153
134 %
122 %
74 %
55 %
55 %
(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 2014 is expected to represent
18 to 23 basis points of average loans, consistent with 2013.
The expected provision reflects CWB’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 updated expectations are communicated no
less than quarterly.
DEPOSITS
Highlights of 2013
• Branch-raised demand and notice deposits increased 12%
• Funding sources diversified with the issuance of
• Personal deposits, which include those raised through the
broker deposit network, increased 5%
• Business and government deposits increased 15%
• Branch-raised deposits were 56% of total deposits, down
slightly from 57% a year earlier
$254 million of BDNs and $50 million of senior deposit
notes, net of redemptions, in the debt capital markets to a
broad range of institutional investors
30
CWB Group 2013 Annual Report
Table 13 – Deposits
($ thousands)
Personal
Business and government
Capital markets
Total Deposits
% of Total
Personal
Business and government
Capital markets
Total Deposits
% of Total
Demand
Notice
Term
2013
Total
$
30,337
$ 2,741,951
$ 6,648,466
$ 9,420,754
615,166
1,622,400
-
-
2,613,691
1,254,029
4,851,257
1,254,029
$
645,503
$ 4,364,351
$ 10,516,186
$ 15,526,040
4 %
28 %
68 %
100 %
Demand
Notice
Term
2012
Total
$
31,980
$ 2,382,262
$ 6,545,876
$ 8,960,118
653,213
1,391,349
2,190,157
4,234,719
-
-
950,000
950,000
$
685,193
$ 3,773,611
$ 9,686,033
$ 14,144,837
5 %
27 %
68 %
100 %
% of
Total
61 %
31
8
100 %
% of
Total
63 %
30
7
100 %
Total deposits of $15,526 million increased 10% ($1,381 million)
over 2012 reflecting 15% ($617 million) growth in business and
government deposits, 5% ($461 million) growth in personal deposits,
which include those issued through the deposit broker network, and
a 32% ($304 million) increase in outstanding capital markets deposits.
Table 14 – Deposits by Source
(as a percentage of total deposits at October 31)
Branches
Deposit brokers
Capital markets
Total
2013
2012
56 %
36
8
100 %
57 %
36
7
100 %
References to branch-raised deposits within this MD&A include
all deposits generated through the branch network, as well as those
raised via CWT, CDF and Valiant. Increasing the level of branch-
raised personal deposits and certain types of business deposits is an
ongoing strategic focus for CWB, as success in this area provides
the most reliable and stable source of funding. Success in growing
these funding sources will become even more important as CWB
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 banking division of CWB, currently offers various deposit
products to customers in all provinces and territories except Quebec.
Client deposits in CDF at October 31, 2013 totaled $288 million, a
62% increase compared to a year earlier. Valiant’s status as a federal
deposit-taking institution accounts for CWB’s 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.
Consistent with CWB’s commercial focus, a considerable portion of
branch-raised deposits are generated from corporate clients that tend
to hold larger balances compared to personal clients (see the Liquidity
Management section of this MD&A).
Growth in total branch-raised deposits was 7% ($586 million) in
2013, while the demand and notice component within branch-raised
deposits increased 12% ($551 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 56% of total deposits, compared to 57% in the
previous year. The level of growth in demand and notice deposits
reflects ongoing execution of strategies to further enhance and
diversify CWB’s core sources of funding.
Other types of deposits are primarily sourced through a deposit
broker network and the debt capital markets. Insured deposits raised
through deposit brokers 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 primarily insured fixed term retail deposits over
a wide geographic base. During the first quarter of 2013, DBRS issued
an initial rating of “R-1 (low)” with a stable trend on CWB’s short-
term debt, enabling CWB to issue BDNs in the debt capital markets.
CWB formally announced its BDN program in July with an internally
authorized limit of $500 million. Additional sources of funding in
2013 included securitization of $91 million of equipment leases
(2012 – $226 million) and whole loan sales of $95 million
(2012 – $50 million) of insured residential mortgages.
CWB Group 2013 Annual Report
31
Outlook for Deposits and Funding
A strategic focus on increasing branch-raised deposits will
continue in 2014, with particular emphasis on the demand
and notice component, which is often lower cost and provides
associated transactional fee income. CWB’s expanded market
presence, which includes the expansions and/or openings
of full-service branches, also supports objectives to generate
branch-raised deposits. The Bank’s Edmonton Main branch is
scheduled to relocate to significantly expanded premises in
2014 that reflects the scale of business generated from this
flagship location. Various strategic initiatives, which include
the offering of 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 reliable, 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. National Leasing plans to continue
to utilize securitization channels for a portion of its funding
requirements, provided that both related costs and the regulatory
capital impact remain satisfactory. Utilizing securitization and/or
whole loan sales as added sources of funding for certain other
types of portfolios, most notably residential mortgages, will
also continue to be evaluated in 2014.
OTHER ASSETS AND OTHER LIABILITIES
At October 31, 2013 other assets totaled $363 million (2012 –
$347 million). Insurance-related other assets were $64 million (2012 –
$58 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,
2013 was $49 million (2012 – $46 million) and $70 million
(2012 – $50 million), respectively.
LIQUIDITY MANAGEMENT
Highlights of 2013
• Maintained a strong liquidity position and conservative
investment profile
Other liabilities totaled $462 million at October 31, 2013
(2012 – $524 million), with the decrease mainly due to the absence
of securities sold under repurchase agreements. Insurance-related
other liabilities were $167 million (2012 – $160 million) and consisted
primarily of provisions for unpaid claims and adjustment expenses,
and unearned premiums.
• Stability in Canadian capital markets provided CWB flexibility
to reduce holdings of its lowest yielding liquid assets to levels
consistent with a normal operating environment
A schedule outlining the consolidated securities portfolio at
October 31, 2013 is provided in Note 4 to the consolidated financial
statements. A conservative investment profile is maintained by ensuring:
• all investments are high quality and include government debt
securities, short-term money market instruments, preferred shares,
common shares and other marketable securities;
• specific investment criteria and procedures are in place to manage
the securities portfolio;
• regular review, monitoring and approval of investment policies
is completed by CWB’s Asset Liability Committee (ALCO); and,
• quarterly reports are provided to the Board of Directors (the Board) on
the composition of the securities portfolio, which is further supported
by the Board’s annual review and approval of investment policies.
CWB’s liquidity management is a comprehensive process that
includes, but is not limited to:
• monitoring liquidity reserve levels;
• monitoring microeconomic and macroeconomic factors,
and related key risk indicators;
• comprehensive operating, micro, and macro scenario
stress testing;
• maintaining a pool of high quality liquid assets;
• monitoring the credit profile of the liquidity portfolio;
• monitoring deposit liability diversification;
• monitoring deposit behaviour; and,
• ongoing market surveillance.
32
CWB Group 2013 Annual Report
Table 15 – Liquid Assets
($ thousands)
2013
2012
Change from
2012
Cash and non-interest bearing deposits with financial institutions
$
83,856
$
33,690
$
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
258,466
5,673
347,995
448,442
401,950
487,669
367,961
379,141
147,169
177,028
26,265
236,983
378,253
610,103
470,466
371,044
398,752
107,482
-
(70,089)
50,166
81,438
(20,592)
111,012
70,189
(208,153)
17,203
(3,083)
(19,611)
39,687
70,089
2,232,332
2,266,011
(33,679)
$ 2,580,327
$ 2,502,994
$
77,333
$ 18,520,260
$ 16,873,269
$ 1,646,991
14 %
15 %
(100) bp
$ 15,526,040
$ 14,144,837
$ 1,381,203
17 %
18 %
(100) bp
As shown in Table 15, liquid assets comprised of cash, interbank
deposits, securities purchased (or sold) under resale agreements and
marketable securities totaled $2,580 million at October 31, 2013,
an increase of 3% ($77 million) compared to a year earlier. Liquid
assets represented 14% (2012 – 15%) of total assets and 17%
(2012 – 18%) of total deposit liabilities at year end.
The composition of total liquid assets shifted through the normal
course of prudent liquidity management. This resulted in a significant
increase in the allocation of cash resources, and also contributed to
a lower overall average yield on the cash and securities portfolio.
key changes in the composition of liquid assets at October 31, 2013
compared to the prior year include:
• maturities within one year comprising 52% (2012 – 53%)
of liquid assets;
• Government of Canada, provincial and municipal debt securities
decreasing to 52% (2012 – 58%) of liquid assets;
• deposits with regulated financial institutions, including Bankers’
Acceptances, increasing to 13% (2012 – 8%) of liquid assets;
• preferred shares decreasing to 15% (2012 – 16%) of liquid assets;
and,
• other marketable securities increasing to 20% (2012 – 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
short-term advances from securities dealers, typically no more than a
few days in duration, and require CWB to repurchase the securities
given as collateral. Collateral securities are comprised of government
securities or other high quality liquid investments. These agreements
are primarily used for cash management purposes. Securities sold
under resale agreements are included in other liabilities and were nil
at October 31, 2013, compared to $70 million a year earlier.
Short-term uncommitted and committed facilities have been
arranged with a number of financial institutions. The government
insured/guaranteed mortgage portfolios held by CWB also represent
a potential source of liquidity. As additional sources of liquidity and
funding in 2013, $91 million of equipment leases were securitized
(2012 – $226 million) and $95 million (2012 – $50 million)
of insured residential mortgages were sold via whole loan sales.
The primary source of incremental new funding is the issuance
of deposit instruments. A summary of outstanding deposits by
contractual maturity date is presented in Tables 16 and 17.
CWB Group 2013 Annual Report
33
Table 16 – Deposit Maturities Within One Year
($ millions)
October 31, 2013
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
October 31, 2012 Total
Table 17 – Total Deposit Maturities
($ millions)
Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Cumulative
Within 1 Year
$
$
$
645
$
4,364
997
6,006
5,390
$
$
-
-
932
932
1,106
$
$
$
-
-
4,360
4,360
3,428
$
$
$
645
4,364
6,289
11,298
9,924
October 31, 2013
Demand deposits
Notice deposits
Deposits payable on a fixed date
Within
1 Year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5
Years
More than
5 Years
$
645 $
4,364
6,289
- $
-
2,416
- $
- $
- $
- $
-
887
-
513
-
412
-
-
Total
645
4,364
10,517
Total
$
11,298 $
2,416 $
887 $
513 $
412 $
- $
15,526
October 31, 2012 Total
$
9,924 $
2,057 $
1,262 $
466 $
436 $
- $
14,145
A breakdown of deposits by source is provided in Table 14. 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. Deposits raised through deposit brokers remain a highly
effective and valued funding source. Deposits such as senior and
bearer deposit notes raised in the capital markets provide a further
source of funding and 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 18 – Subordinated Debentures Outstanding
($ thousands)
Interest
Rate
4.389% (1)
3.463% (2)
5.571% (3)
5.950% (4)
Total
Maturity
Date
Earliest Date
Redeemable
by CWB at Par
As at
October 31
2013
As at
October 31
2012
November 30, 2020
November 30, 2015
$
300,000
$
300,000
December 17, 2024
December 17, 2019
March 21, 2022
March 22, 2017
June 27, 2018
June 28, 2013
250,000
75,000
-
-
75,000
50,000
$
625,000
$
425,000
(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 12-year term with a fixed interest rate for the first seven years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers' Acceptance rate plus
160 basis points.
(3) These conventional debentures have a 15-year term with a fixed interest rate for the first ten years. Thereafter, the interest rate will be reset quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus
180 basis points.
(4) These conventional debentures had a 10-year term with a fixed interest rate for the first five years and were redeemed by CWB on June 28, 2013. Thereafter, the interest rate would have reset quarterly at the Canadian
dollar CDOR 90-day Bankers’ Acceptance rate plus 302 basis points.
34
CWB Group 2013 Annual Report
Outlook for Liquidity Management
Internal methodologies for measuring and monitoring
liquidity risk are continuously refined. CWB utilizes dynamic
scenario analysis to monitor and stress liquidity coverage while
maintaining prudent liquidity standards. Liquidity management
directly impacts net interest margin based on the composition
of liquid assets and how much is allocated to cash balances
and low yielding investments, such as government securities.
CWB expects average liquidity in 2014 will remain relatively
consistent with the level held in the latter half of 2013,
which was slightly lower than the year as a whole.
The Liquidity Coverage Ratio (LCR) and Net Stable Funding
Ratio (NSFR) are minimum regulatory liquidity 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 stressed situation.
The NSFR establishes a second common measure of liquidity based
on the ratio of longer term assets to longer term liabilities. OSFI is
currently preparing an enhanced liquidity adequacy guideline. CWB
believes it is well positioned to comply with the new requirements.
CAPITAL MANAGEMENT
Highlights of 2013
• Solid Basel III common equity Tier 1 (CET1), Tier 1 and total
• Cash dividends of $0.70 per share paid to common
capital adequacy ratios of 8.0%, 9.7% and 13.9%, respectively
shareholders, up 13%
• Supported strong loan growth while maintaining a relatively
•
Issued $250 million of subordinated debentures
consistent CET1 capital ratio
Subsequent Highlights
In December 2013, the Board of Directors declared a quarterly cash dividend of $0.19 per common share, an increase of 6% ($0.01)
over the previous quarterly cash dividend and 12% ($0.02 per share) over the quarterly cash dividend declared one year earlier.
The Board of Directors also declared a quarterly 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. Capital management
takes into account forecasted capital needs with consideration
of anticipated profitability, asset growth, market and economic
conditions, regulatory changes, and common and preferred share
dividends. The overriding goal is to remain well capitalized in order
to protect depositors and policyholders, 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. CWB has implemented
an Internal Capital Adequacy Assessment Process (ICAAP) to ensure
capital levels remain adequate in relation to potential impacts of
current and anticipated future risks, as well as changing regulatory
capital requirements.
CWB provides a share incentive plan to officers and employees who
are in a position to materially impact the longer term financial success
of the organization, 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 common
shares and holders of any other class of shares deemed eligible by
the Board are offered the choice to direct cash dividends paid toward
the purchase of common shares through a dividend reinvestment plan
(DRIP). Further details regarding CWB’s DRIP are available at
cwb.com/investor_relations.
Preferred Share Normal Course Issuer Bid
CWB has a Normal Course Issuer Bid (NCIB) outstanding to
purchase, for cancellation, up to up to 826,120 Non-Cumulative
5-Year Rate Reset Preferred Shares Series 3 (“preferred shares”).
The NCIB commenced March 1, 2013 and will expire February 28,
2014. During the year ended October 31, 2013, CWB purchased and
cancelled 37,404 preferred shares under the NCIB. Security holders
may contact CWB to obtain, without charge, a copy of the notice
filed with the Toronto Stock Exchange. Additionally, a copy of the
news release is available on CWB’s website and on SEDAR at
sedar.com.
CWB Group 2013 Annual Report
35
Basel III 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 III Capital Adequacy
Accord (Basel III). OSFI implemented Basel III rules supporting more
stringent standards on capital adequacy for Canadian banks at the
beginning of calendar 2013. Significant Basel III capital changes most
relevant to CWB include the following:
• Increased focus on tangible common equity
• All forms of non-common equity, such as conventional
subordinated debentures and preferred shares, issued after
January 1, 2013, must have non-viability contingent capital
(NVCC) terms in order to qualify for inclusion as regulatory
capital. 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 determined it
necessary to inject “bail out” funding
Minimum Basel III regulatory capital ratios, including a 250 basis
point capital conservation buffer, are 7.0% 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.
CWB currently reports its regulatory capital ratios using the
Standardized approach for calculating risk-weighted assets. This
approach requires CWB to carry significantly more capital for certain
credit exposures compared to requirements under the Advanced
Internal Ratings Based (AIRB) methodology used by larger Canadian
financial institutions. For this reason, regulatory capital ratios of banks
that utilize the Standardized approach versus the AIRB methodology
are not directly comparable.
• Innovative Tier 1 instruments, such as CWB’s WesTS, will no
CWB complied with all internal and external capital requirements in 2013.
longer qualify
• Investment in an insurance subsidiary is no longer deducted
from capital
• Changes in the capital treatment for investments in the regulatory
capital of other financial institutions whereby investment amounts
over a prescribed threshold are treated as a deduction from
regulatory capital
36
CWB Group 2013 Annual Report
Table 19 – Capital Structure and Basel III Regulatory Ratios at Year End
($ thousands)
Regulatory Capital, net of deductions
Common equity Tier 1
Tier 1
Total
Capital ratios
Common equity Tier 1
Tier 1
Total
Asset to capital multiple
2013
2012 (1)
$ 1,285,692
n/a
1,560,801
$ 1,460,776
2,243,654
1,903,790
8.0 %
9.7
13.9
8.1 x
n/a
10.6 %
13.8
8.8 x
(1) Capital ratios prior to fiscal 2013 have been calculated using the previous capital framework, Basel II. Capital ratios calculated under Basel III are not directly comparable to the equivalent Basel II measures.
The total capital ratio reflects the 2013 issuance of $250 million of subordinated debentures, which qualified for the Basel III transition allowance
applicable for Canadian banks, and the redemption of $50 million of subordinated debentures.
Table 20 – Basel III Regulatory Capital
($ thousands)
Common equity Tier 1 capital instruments and reserves
Directly issued qualifying common share capital plus related share-based payment reserve
Retained earnings
Accumulated other comprehensive income and other reserves
Common equity Tier 1 capital before regulatory adjustments
Regulatory adjustments to common equity Tier 1 (1)
Common equity Tier 1 capital
Additional Tier 1 capital instruments
Directly issued capital instruments subject to phase out from Additional Tier 1 (2)
Additional Tier 1 instruments issued by subsidiaries and held by third parties
Additional Tier 1 capital before regulatory adjustments
Regulatory adjustments to Additional Tier 1 capital (3)
Additional Tier 1 capital
Tier 1 capital
Tier 2 Capital instruments and allowances
Directly issued capital instruments subject to phase out from Tier 2 (2)
Tier 2 instruments issued by subsidiaries and held by third parties
Collective allowance for credit losses
Tier 2 capital before regulatory adjustments
Regulatory adjustments to Tier 2 capital (4)
Tier 2 capital
Total capital
2013
$
534,914
865,087
(5,417)
1,394,584
(108,892)
1,285,692
283,275
163
283,438
(8,329)
275,109
1,560,801
607,500
38
76,217
683,755
(902)
682,853
$ 2,243,654
(1) CET1 deductions include goodwill, intangible assets, and non-significant investments in financial institutions above a specific percentage of CET1 capital.
(2) Basel III capital balances exclude 10% of non-common equity instruments outstanding at December 2012 that do not include non-viability contingent capital clauses. At October 31, 2013, a combined $31 million
of outstanding Innovative Tier 1 capital (disclosed in non-controlling interest) and preferred shares as well as $18 million of outstanding subordinated debentures were excluded from regulatory capital.
(3) Additional Tier 1 deduction includes non-significant investments in financial institutions above a specific percentage of CET1 capital.
(4) Tier 2 deduction includes non-significant investments in financial institutions above a specific percentage of CET1 capital.
CWB Group 2013 Annual Report
37
Table 21 – Basel III Risk-Weighted Assets
($ thousands)
Cash,
Securities
and Resale
Agreements
Loans
Other
Items
$
123,312
$ 10,764,461
$
Corporate
Sovereign
Bank
Retail residential mortgages
Other retail
Excluding small business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
As at October 31, 2013
As at October 31, 2012 (1)
2013
Risk-
Weighted
Assets
Total
$ 10,887,773
$ 10,803,610
1,370,577
479,099
2,371,593
13,680
145,911
861,333
189,685
136,402
2,084,218
1,587,195
470,234
372,709
72,760
32,234
437,404
470,234
357,235
909,497
402,925
426,990
-
-
-
-
-
-
-
-
28,794
19,368
2,371,593
189,685
2,084,218
-
372,709
1,341,783
459,731
-
-
-
470,234
-
-
-
-
-
72,760
32,234
79,037
-
358,367
$ 2,395,060
$ 15,942,099
$ 2,344,725
$ 14,216,986
$
$
431,127
$ 18,768,286
$ 16,115,012
404,548
$ 16,966,259
$ 13,775,443
(1) Capital ratios prior to fiscal 2013 have been calculated using the previous capital framework, Basel II. Capital ratios calculated under Basel III are not directly comparable to the equivalent Basel II measures.
Table 22 – Basel III Risk-Weighting Category
($ thousands)
0%
20%
35%
50%
75%
100%
2013
150% and
greater
Balance
Weighted
$
23,664 $
41,331 $
- $
76,548 $
- $ 10,724,551 $
21,679 $ 10,887,773 $ 10,803,610
Corporate
Sovereign
Bank
1,302,177
68,400
-
412,719
-
-
-
6,026
Retail residential mortgages
294,876
-
1,754,275
Other retail
Excluding small
business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
6,701
2,618
2,128
708
-
-
-
-
-
-
-
-
141,952
11,771
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
300,420
-
60,354
22,022
-
-
-
1,370,577
479,099
2,371,593
13,680
145,911
861,333
180,379
46
431
189,685
136,402
1,992,436
79,914
8,542
2,084,218
1,587,195
-
470,234
61,896
310,813
-
-
-
-
12,784
174,796
-
-
72,760
32,234
96,101
470,234
470,234
372,709
72,760
32,234
357,235
909,497
402,925
437,404
426,990
As at October 31, 2013 $ 1,771,988 $
537,057 $ 1,754,275 $
82,574 $ 2,547,915 $ 11,842,730 $
231,747 $ 18,768,286 $ 16,115,012
As at October 31, 2012 (1) $ 1,869,284 $
471,937 $ 1,462,072 $
763,371 $ 1,427,675 $ 10,876,381 $
95,539 $ 16,966,259 $ 13,775,443
(1) Capital ratios prior to fiscal 2013 have been calculated using the previous capital framework, Basel II. Capital ratios calculated under Basel III are not directly comparable to the equivalent Basel II measures.
38
CWB Group 2013 Annual Report
Outlook for Capital Management
CWB will maintain its solid capital position. Currently, Basel III
capital ratios are within CWB’s ICAAP thresholds and above
OSFI’s required minimums, placing CWB in a good position 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 CWB’s comprehensive ICAAP.
With the exception of points noted in the paragraph below
related to CWB’s Tier 1 ratio and potential redemption of existing
preferred shares in 2014, the ongoing retention of earnings,
net of expected common and preferred share dividends, should
support capital requirements associated with the anticipated
achievement of the 2014 performance target ranges.
However, in order to maintain CWB’s Tier 1 regulatory capital ratio
above internal thresholds, the issuance of qualifying replacement
capital will be required prior to the anticipated redemption
date. In addition to uncertainty about the results of the special
resolution voting, the public market for preferred shares which
qualify as NVCC has yet to be established in Canada. The 2014
performance target ranges for growth in adjusted cash earnings
per share and the return on common shareholders’ equity assume
existing preferred shares are redeemed and replaced, to the
extent required, with comparatively lower cost capital. Without
both an amendment to By-law Three and a successful issuance
of qualifying NVCC preferred shares, CWB’s only option to raise
replacement capital would be to issue common shares.
With respect to regulatory capital structure, a special resolution
will be voted upon on December 12, 2013 at a concurrent special
meeting of common and preferred shareholders. If approved,
the special resolution will amend CWB’s By-law Three to permit
an unlimited number of First Preferred shares to be issued, to a
maximum aggregate consideration outstanding of $1,000 million;
terms of the existing By-law Three precludes CWB from issuing
any preferred shares in the future. On April 30, 2014, unless the
outstanding Series 3 preferred shares are redeemed by CWB,
subject to approval of OSFI, the corresponding dividend yield will
reset to a rate of 500 basis points over the yield on the applicable
Government of Canada benchmark security. In consideration of
the current capital market environment and CWB’s investment
grade credit rating, management and the Board believe it is in the
best interests of common shareholders to redeem these shares.
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 existing capital structure are
underway. Required resources, costs and potential timelines
related to CWB’s possible transition to an AIRB methodology
for managing credit risk and calculating risk-weighted assets
are still being evaluated. Preliminary analysis confirms a multi-
year time frame and any future transition would be subject to
OSFI approval. CWB’s new core banking system, expected to
be implemented in 2015, is a critical component for a number
of requirements necessary for AIRB compliance, including the
collection of certain types of data.
CWB Group 2013 Annual Report
39
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,
loans, derivative financial instruments and certain other assets.
Financial instrument liabilities include deposits, debt, derivative
financial instruments and certain other liabilities.
The use of financial instruments exposes CWB 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.
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.
Table 23 – Derivative Financial Instruments
($ thousands)
Notional Amounts
Interest rate contracts (1)
Equity swaps (2)
Foreign exchange contracts (3)
Total
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.
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.
2013
2012
$
800,000
$
225,000
17,470
1,235
15,445
2,450
$
818,705
$
242,895
(1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between December 2013 and April 2015.
(2) Equity swaps designated as hedges mature between June 2014 and June 2016. Equity swaps are used to reduce the earnings volatility from restricted share units linked to CWB’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 December 2013
and April 2014.
The active use of interest rate contracts remains an integral component
in managing the short-term gap position. The significant increase in the
volume of outstanding contracts (measured by the notional amount)
reflects normal course management of interest rate risk and more
favourable costs of certain hedging instruments. Derivative financial
instruments are entered into only for CWB’s own account. CWB does
not act as an intermediary in derivatives markets. Transactions are
entered into on the basis of industry standard contracts with approved
counterparties subject to periodic and at least annual review, including
an assessment of the credit worthiness of the counterparty. Policies
regarding the use of derivative financial instruments are approved,
reviewed and monitored on a regular basis by ALCO, and are reviewed
and approved by the Board no less than annually.
ACQUISITION
Effective May 17, 2013, CWB acquired 54.6% of the outstanding
common shares of Calgary-based McLean & Partners Wealth
Management. The financial products and services of McLean &
Partners are an excellent strategic fit with CWB’s existing banking,
wealth management and trust operations, and provided a modest
positive impact on adjusted cash earnings per common share in
fiscal 2013. The acquisition also supported key strategic objectives to
enhance revenue diversification and sources of fee-based income.
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 $8,424 million
at October 31, 2013, compared to $7,172 million one year ago.
Assets under management held within Adroit and McLean & Partners
were $1,901 million at year end, compared to $855 million last
year. The material increase in assets under management reflects the
addition of McLean & Partners.
Other off-balance sheet items are comprised of standard
industry credit instruments (guarantees, standby letters of credit and
commitments to extend credit). CWB does not utilize, nor does it have
exposure to, collateralized debt obligations or credit default swaps.
For additional information regarding other off-balance sheet items,
refer to Note 20 of the audited consolidated financial statements.
40
CWB Group 2013 Annual Report
SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER
QUARTERLY RESULTS
The financial results for each of the last eight quarters are
summarized in Table 24. In general, CWB’s performance reflects
a consistent growth trend, although the second quarter contains
three fewer revenue-earning days (or two fewer days in a leap
year such as 2012).
Net gains on securities, reflected in other income, were unusually
high in the fourth quarter of 2012 and the third quarter of 2013.
The majority of net gains on securities in these periods resulted from
favourable market conditions and the repositioning of investments in
preferred and common equities.
Quarterly financial results are subject to some fluctuation due to
exposure to property and casualty insurance. Insurance operations,
which are primarily reflected in other income, are subject to seasonal
weather conditions, cyclical patterns of the industry and natural
catastrophes. In the third quarter of 2013, net insurance revenues,
reflected in other income, were materially impacted by claims expense
resulting from catastrophic floods in southern Alberta. In both the
third quarter of 2013 and the fourth quarter of 2012, net insurance
revenues were impacted by claims expense from severe hailstorms in
Alberta. Mandatory participation in the Alberta auto risk sharing pools
can also result in unpredictable quarterly fluctuations.
Table 24 – Quarterly Financial Highlights (1)
($ thousands, except per share amounts)
Among other things, quarterly results can also fluctuate from the
recognition of periodic income tax items.
Detailed management’s discussion and analysis along with unaudited
interim consolidated financial statements for each quarter, except for
the fourth quarters of fiscal 2012 and 2013, are available for review
on SEDAR at sedar.com and on CWB's website at cwb.com. Copies of
the quarterly reports to shareholders can also be obtained, free of
charge, by contacting InvestorRelations@cwbank.com.
Net interest income (teb)
$ 126,475 $ 122,702 $ 113,576 $ 114,749
$ 113,246 $ 115,217 $ 107,600 $ 107,509
2013
2012
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Less teb adjustment
Net interest income
2,062
2,161
2,000
1,915
1,91,979
2,086
2,458
2,620
per financial statements
124,413
120,541
111,576
112,834
111,267
113,131
105,142
104,889
Other income
Total revenues (teb)
Total revenues
Net income available to
26,181
152,656
150,594
23,032
145,734
143,573
23,390
136,966
134,966
22,379
137,128
135,213
19,932
133,178
131,199
22,933
138,150
136,064
20,254
127,854
125,396
18,791
126,300
123,680
common shareholders
51,210
47,484
42,988
45,482
43,046
48,004
39,669
41,478
Earnings per common share
Basic
Diluted
Adjusted cash
Return on common
0.64
0.64
0.65
0.60
0.60
0.61
0.54
0.54
0.55
0.58
0.57
0.58
0.55
0.55
0.56
0.62
0.61
0.63
0.52
0.52
0.55
0.55
0.54
0.57
shareholders' equity (ROE)
14.9 %
14.0 %
13.4 %
14.2 %
13.8 %
16.1 %
14.6 %
15.5 %
Return on average total assets (ROA)
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Provision for credit losses as
1.11
45.0
45.6
2.75
2.71
1.06
45.9
46.6
2.74
2.69
1.00
47.3
48.0
2.65
2.60
1.06
45.3
45.9
2.66
2.62
1.03
46.7
47.4
2.71
2.67
1.19
42.8
43.4
2.85
2.80
1.03
46.2
47.1
2.81
2.74
1.07
43.7
44.6
2.77
2.70
a percentage of average loans
0.19
0.20
0.19
0.18
0.17
0.19
0.19
0.20
(1) See page 13 for a discussion of teb and non-GAAP measures.
CWB Group 2013 Annual Report
41
FOURTH QUARTER OF 2013
Strong fourth quarter financial performance was marked by record
earnings and the achievement of another year of double-digit loan
growth. Record net income available to common shareholders of
$51.2 million was up 19% ($8.2 million) compared to the same
quarter last year while diluted earnings per common share increased
16% to $0.64. Adjusted cash earnings per share, which excludes
the after-tax amortization of acquisition-related intangible assets
and the non-tax deductible charge for the fair value of contingent
consideration, was $0.65, also up 16%. Total revenues (teb) grew
15% ($19.5 million) to reach a record $152.7 million, driven by
the combined benefits of strong 12% year-over-year loan growth,
a four basis point increase in net interest margin to 2.75% and
31% ($6.2 million) higher other income. Very strong growth in
other income mainly reflected a $6.2 million positive change in net
insurance revenues and a $2.5 million increase in trust and wealth
management fee income, partially offset by $3.1 million lower net
gains on securities. Net insurance revenues were impacted in the
fourth quarter of 2012 by increased claims expense related to severe
hailstorms in Alberta. Revenues from trust and wealth management
were materially higher compared to a year earlier, mainly due to the
addition of McLean & Partners, acquired in the third quarter of 2013.
Compared to the prior quarter, net income available to common
shareholders increased 8% ($3.7 million) as positive contributions
from $9.3 million higher net insurance revenues, 2% quarterly
loan growth and a stable net interest margin were partially offset
by a $4.7 million decline in net gains on securities and a $2.5 million
reduction in the ‘other’ component of other income. Net insurance
revenues were negatively impacted in the prior quarter by increased
claims expense related to catastrophic southern Alberta floods and
severe hailstorms. The ‘other’ component of other income was higher
in the third quarter primarily due to gains realized on the sale of
residential mortgages. Diluted and adjusted cash earnings per
common share both increased 7% ($0.04).
The quarterly return on common shareholders’ equity of 14.9%
increased 110 basis points compared to a year earlier and 90 basis
points from the prior quarter. Fourth quarter return on assets was 1.11%,
compared to 1.03% last year and 1.06% in the previous quarter.
The quarterly efficiency ratio (teb) was 45.0%, an improvement of 170
basis points from a year earlier and 90 basis points from the third quarter.
42
CWB Group 2013 Annual Report
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, 2013, the provision for unpaid claims
and adjustment expenses totaled $89.7 million (2012 – $86.2 million).
Additional information on the process and methodology for
determining the provision for unpaid claims and adjustment expenses
can be found in Note 21 to the consolidated financial statements.
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.
CWB 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.
ACCOUNTING POLICIES AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
CWB’s significant accounting policies are outlined in Note 1 to the
audited consolidated financial statements with related financial
note disclosures by major caption. 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, 2013, CWB’s total
allowance for credit losses was $85.8 million (2012 – $81.7 million),
which included specific allowances of $9.6 million (2012 –
$14.4 million) and a collective allowance of $76.2 million (2012 –
$67.3 million). Additional information on the process and methodology
for determining the allowance for credit losses can be found in
the discussion of Credit Quality in this MD&A and in Note 7 to the
consolidated financial statements.
Provision for Unpaid Insurance Claims and
Adjustment Expenses
A provision for unpaid claims is maintained, with the provision
representing the amounts needed to provide for the estimated
ultimate expected cost of settling claims related to insured events
(both reported and unreported) that have occurred on or before
each balance sheet date. A provision for adjustment expenses is
also maintained, which represents the estimated expected costs
of investigating, resolving and processing these claims. Estimated
recoveries of these costs from reinsurance ceded are included in
other assets. The computation of these provisions takes into account
the time value of money using discount rates based on projected
investment income from the assets supporting the provisions.
The process of determining the provision for unpaid claims and
adjustment expenses necessarily involves risks that the actual
results will deviate from the best estimates made. These risks vary
in proportion to the length of the estimation period and the volatility
of each component comprising the liabilities.
CWB Group 2013 Annual Report
43
The following table summarizes the significant financial assets and liabilities reported at fair value:
Table 25 – Valuation of Financial Instruments
($ thousands)
As at October 31, 2013
Financial Assets
Cash resources
Securities
Derivative related
Total Financial Assets
Financial Liabilities
Other liability (1)
Derivative related
Total Financial Liabilities
As at October 31, 2012
Financial Assets
Cash resources
Securities
Derivative related
Total Financial Assets
Financial Liabilities
Derivative related
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
347,995
$
300,995
$
47,000
$
2,232,332
2,232,332
4,509
-
-
4,509
$ 2,584,836
$ 2,533,327
$
51,509
$
-
-
-
-
$
$
1,679
$
36
1,715
$
-
-
-
$
$
-
$
1,679
36
36
-
$
1,679
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
$
-
-
-
-
-
(1) Level 3 financial instruments was comprised of the contingent consideration related to the acquisition of McLean & Partners Wealth Management Ltd.
Notes 3, 4, 5, 11 and 29 to the consolidated financial statements provide additional information regarding these financial instruments.
44
CWB Group 2013 Annual Report
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 CWB’s future financial statements.
CWB is currently reviewing these standards to determine the impact
on the financial statements.
IFRS 13 – Fair Value Measurement
The IASB has issued new guidance on fair value measurement and
disclosure requirements. IFRS 13 applies to other IFRS standards that
require or permit fair value measurements or disclosures about fair
value measurements and sets out a framework on how to measure
fair value using the assumptions that market participants would use
when pricing the asset or liability under current market conditions,
including assumptions about risk. IFRS 13 is effective for annual
periods beginning on or after January 1, 2013 and is to be applied
prospectively. This new standard is not expected to have a material
impact on the financial position, cash flows or earnings of CWB.
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. A key item
for change in accounting under IFRS 10 is the de-consolidation of
the trusts through which CWB issued a certain regulatory capital
instrument. The de-consolidation of the trusts would result in a
reclassification of securities issued through Canadian Western Bank
Capital Trust (see Note 19 of the consolidated financial statements)
from non-controlling interest to deposit liabilities in the consolidated
balance sheets, and the associated income statement charge would
be reclassified from non-controlling interest to interest expense.
Other than this reclassification, the adoption of these standards is not
expected to have a material impact on the financial position, cash
flows or earnings of CWB. IFRS 10 and 12 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 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.
This new standard is not expected to have a material impact on the
financial position, cash flows or earnings of CWB.
IFRS 9 – Financial Instruments
In November 2013, the IASB removed the January 1, 2015
mandatory effective date of IFRS 9 to provide sufficient time for
preparers of financial statements to make the transition to the new
requirements. IFRS 9 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. Additional amendments have
been made to hedge accounting and measuring an entity's own credit
risk, both of which are not expected to materially impact the financial
position, cash flows or earnings of CWB.
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 significant impact on CWB’s future
consolidated financial statements.
CWB Group 2013 Annual Report
45
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 46 to 60 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2013.
Highlights of 2013
Several enhancements to risk governance were made in 2013
as part of the ongoing development of CWB’s risk management
processes. key changes include the:
• finalization of the risk appetite framework;
• formalization of risk appetite statements for principal risks
approaching completion;
• restructuring of CWB’s internal risk management committees;
• development of the three lines of defense model with
particular emphasis on oversight functions; and,
• formalization of a transitional Chief Risk Officer (CRO) role.
RISk MANAGEMENT OVERVIEW
CWB’s risk management processes are designed to complement
the organization’s overall size, level of complexity, risk profile and
philosophy regarding risk. CWB’s risk management philosophy
emphasizes sound controls, effective governance, transparency and
accountability. Selectively choosing and managing acceptable risks has
been integral to CWB’s ability to grow profitably in both favourable
and adverse market conditions. A strong risk culture continues to be a
cornerstone of CWB’s approach to risk management.
As with all financial institutions, CWB is in the business of managing
risk and is therefore exposed to various risk factors that could
adversely affect its operating environment, financial condition and
financial performance. Exposure to risk may also influence a client’s
decision to make deposits and/or an investor’s decision to buy, sell
or hold CWB shares or other securities. Each of CWB’s businesses
is subject to certain risks that require unique mitigation strategies.
CWB has demonstrated its ability to effectively manage risks through
conservative management practices based on a strong risk culture
and a disciplined risk management approach; however, many risks are
beyond CWB’s direct control. A description of key external risk factors
management considers is included in this risk management discussion.
CWB actively evaluates existing and potential risks to develop,
implement and continually enhance appropriate mitigation strategies.
Risk Management Principles
The following principles guide the management of risks across
all operations and companies of CWB (group-wide):
• 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 sound
preventative and detection controls.
• A group-wide view of risk and the acceptance of risks required
to build the business with continuous consideration for how those
risks may affect CWB’s reputation and brand.
• The belief that every employee has some responsibility for risk
management 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.
• Recognition that “knowing your client” reduces risks by
ensuring the services provided are suitable for, and understood
by, the client.
A heightened regulatory focus on risk management was a
notable outcome of the global financial crisis, and the level of active
management related to regulatory risks has continued to increase
since that time. The mandate of CWB’s Group Risk Management
function is to enhance existing processes and structure to help identify
and appropriately mitigate risks across all companies. The intent is
to ensure risk management practices satisfy regulatory requirements
while providing a suitable framework for CWB that properly balances
risk and reward.
Effective risk management requires a well-defined risk
management framework, which includes a strong principles-
based risk culture, clearly understood risk appetites and well
documented risk governance practices. Group Risk Management
is functionally independent of business operations, and is responsible
for maintaining the risk management framework and resulting
policies. Senior management establishes and recommends CWB’s
risk appetite, which is ultimately approved by the Board. Group
Risk Management also assists senior management in developing
and communicating risk appetite, as well as monitoring certain risk
management activities.
46
CWB Group 2013 Annual Report
Risk Management Framework
The primary goal of risk management is to ensure that the outcomes
of risk taking are consistent with CWB’s business activities, strategies
and risk appetite. The 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.
This international standard provides principles and guidelines
for managing risk in a systematic, transparent and credible manner.
The risk framework is subject to continuous evaluation to ensure
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.
CWB’s group-wide risk management framework is comprised of four main elements:
Figure 5 – Risk Management Framework
Risk Governance
Risk Appetite Framework
Principal Risks and Risk Management Processes
Strong Risk Culture
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 the Board understand
the inter-relationships and potential impacts of risks. CWB’s strong
risk culture starts with an appropriate “tone at the top” that
demonstrates and sends consistent and clear messages throughout
the organization. Risk culture is communicated throughout
the organization and is emphasized by the actions of senior
management and the Board.
Principal Risks
The ability to identify, measure and monitor risks is a key component of
effective group-wide risk management. Certain principal risks have been
identified that have the greatest potential to materially impact operations.
Following is a visual representation of CWB’s principal risk exposures by business line:
Figure 6 – Principal Risks
CWB
Liquidity/Funding Risk
Market Risk
Capital Risk
Operational Risk
Bank
Trust
Insurance
Wealth
Management
Credit Risk
Operational Risk
Credit Risk
Operational Risk
Operational Risk
Operational Risk
CWB Group 2013 Annual Report
47
• 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 CWB,
from the Board to senior management to front-line staff.
• A relatively 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 long-term 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 tolerance thresholds, and maintaining high ethical
standards. The businesses are also managed within the confines of
legal and regulatory requirements.
Regulatory risk is a significant risk that is a subset of Operational Risk.
Important risk factors, including related risk management processes,
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 inter-related.
CWB’s risk management processes incorporate various forms of
stress testing to assist in making informed risk management and
capital planning decisions, which are developed and managed as
part of sound business strategy. Stress testing is performed across
key functional areas of CWB and is based on both quantitative and
qualitative inputs.
Risk Appetite
Senior management establishes and recommends CWB’s overall risk
appetite, which is ultimately approved by the Board. Risk appetite is
the formalization of basic business principles such as making decisions
based on risk-reward tradeoffs, understanding potential outcomes of
those decisions, and deciding whether CWB is comfortable with the
risk associated with those outcomes. 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 senior management,
internal risk committees and the Board. key attributes of CWB’s
formalized risk appetite framework include the following:
• An ongoing focus on lower risk intermediary banking
activities, complemented by extensive knowledge and experience
in CWB’s chosen lending sectors, key geographic regions and other
complementary 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.
Risk Management Governance Structure
Management owns the risks CWB takes or is exposed to while
conducting its business activities, while the Board approves
and monitors the framework under which these risks are
managed. This framework places ultimate accountability for
the management of risk with the Group Risk Committee. The
Group Risk Committee, with the assistance of the Group Risk
Management function, is responsible for establishing the overall
risk management framework, identifying risks and developing
appropriate risk management policies. The Board, either directly
or through its committees, reviews or approves the key policies
and implements specific reporting procedures to enable effective
monitoring of significant risk areas. At least annually, a report on
risks and key risk management policies is presented to the Board
and/or Board committees for review, assessment and approval.
During fiscal 2013, CWB implemented new internal risk
management committees to more effectively align committee
structures with business strategy and management of principal
risks. An overview of the management committee structure and
list of key risks for which each committee is responsible follows.
48
CWB Group 2013 Annual Report
Figure 7 – Internal Risk Management Committees
CEO
Group Risk
Committee
Group
Credit Risk
Committee
Group
ALCO
Group
Capital Risk
Committee
Group
Operational
Risk
Committee
Group
Disclosure
Committee
Credit Risk
Market Risk
Liquidity and
Funding Risk
Capital Risk
Operational Risk
(People and
Regulatory)
Group Risk Committee – Comprised of members of the executive and oversees major risk management processes, provides oversight
to internal risk committees and ensures the risk management framework is properly implemented. Also provides executive oversight
for all principal risks, and recommends the risk appetite and overall risk management framework for Board approval.
Group Credit Risk Committee – Approves loans within delegated limits and is responsible for ensuring that appropriate credit
policies are in place. Also monitors the quality, diversification and exposure of the loan portfolio, and recommends actions to ensure
adequacy of the provision for credit losses.
Group Asset Liability Committee (ALCO) – Responsible for the establishment and maintenance of policies and programs
for liquidity management and control, funding sources, investments, foreign exchange risk, interest rate risk and derivatives risk.
Also oversees diversification of product offerings to ensure alignment with strategy and risk tolerances.
Group Capital Risk Committee – Responsible for the oversight of capital adequacy, CWB’s regulatory capital plan, Internal Capital
Adequacy and Assessment Process (ICAAP) and stress testing.
Group Operational Risk Committee – Reviews the group operational risk management framework, operational loss reporting and
business continuity plans. Also reviews action plans for mitigating and improving the management of operational risk.
Group Disclosure Committee – Responsible for reviewing CWB’s internal controls over financial reporting, and disclosure controls
and procedures to help ensure the accuracy, completeness and timeliness of related public disclosures.
CWB Group 2013 Annual Report
49
To support the overall governance structure, CWB has adopted a “three lines of defense” model.
Table 26 – Three Lines of Defense
First Line
Business and Support Areas
- Own risk
- Identify and manage risk through the
Second Line
Oversight Functions
Third Line
Internal Audit
- Establish group-wide frameworks for risk
management and compliance
- Provide independent assurance that risk
management controls and governance
processes are adequate and functioning
as intended
establishment of policies and procedures
- Provide oversight and independent
- Ensure activities conform with risk
challenge to business and support areas
management policies and authorities
- Monitor and report on compliance with
- Develop and maintain effective
internal controls
- Monitor and report activities
risk policies
Internal Audit – Provides independent, objective assurance
and consulting services designed to improve CWB’s operations.
The scope of work includes determining whether the network of
risk management controls and governance processes, as designed
and implemented by management, are adequate and functioning
in the intended manner. The Chief Internal Auditor (CIA) reports
functionally to the Audit Committee.
While CWB’s operations are exposed to numerous types of risk,
certain risks, identified as principal, have the greatest potential to
materially impact operations and financial performance.
The following CWB functional areas provide key support within
the group-wide risk management framework:
Group Risk Management – Provides independent oversight of
enterprise risk management. To assist the Group Risk Committee
and the Board, the head of the Group Risk Management currently
acts in the capacity of CRO and reports functionally to the Board.
Regulatory Compliance – Establishes risk-based processes to
actively manage known and emerging risks related to applicable
regulatory requirements. The General Counsel acts in the capacity of
Chief Compliance Officer (CCO) and reports functionally to the Board.
Finance – Provides independent oversight of processes to manage
financial reporting and capital risk. Provides oversight on financial
reporting, capital adequacy, external credit ratings, regulatory
reporting, tax and accounting-related functions. The Chief Financial
Officer (CFO) reports functionally to the Audit Committee.
CREDIT RISk
Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to discharge its contractual commitment
or obligation to CWB.
Risk Overview
The main source of credit risk exposure for CWB results from its
focus and expertise in granting loans and leases. CWB’s 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 CWB’s relatively stable provision for credit losses
and consistently low write-offs measured as a percentage of total loans.
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CWB Group 2013 Annual Report
Risk Governance
The credit approval process is centrally controlled, with all
significant credit requests submitted to Credit Risk Management
for adjudication. Credit Risk Management is independent of the
function of the originating business. Requests for credit approval
beyond the lending limit of the CEO are referred to the Group
Credit Risk Committee or to the Loans Committee of the Board
for approval, depending on the size of the exposure.
Risk Management
CWB is committed to a number of important principles
to manage credit exposures, which include:
• ongoing development of credit analytics reporting
to assess portfolio risks at a granular level;
• oversight provided by the Loans Committee of the Board;
• pricing of credits commensurate with risk to ensure
• delegated lending authorities that are clearly communicated
to lenders and other personnel engaged in the credit granting
process;
an appropriate financial return;
• management of growth while maintaining the quality
of loans;
• credit policies, guidelines and directives which are
• early recognition of problem accounts and immediate
communicated within all branches and business lines, and
to 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 standard risk-rating classification established
for all credits;
• a review at least annually of credit risk-rating classifications
and 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;
action to protect the safety of CWB’s capital;
• delegation of loans deemed to carry higher risks 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 Internal Audit, which
includes direct reporting of results to senior management,
the CEO and the Audit Committee of the Board; 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 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. The policy is to
limit loans to connected corporate borrowers to not more than
10% of CWB’s shareholders’ equity. Generally, CWB’s lending
limit is $50 million for a single risk exposure.
However, for certain quality connections that confirm debt
service capacity and loan security from more than one source,
the limit is generally $75 million. CWB clients with larger
borrowing requirements can be accommodated through loan
syndications with other financial institutions.
Environmental Risk
Portfolio Quality
While the day-to-day operations of CWB 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 CWB’s satisfaction, the application will
be denied. 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.
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
timely action when problems develop. Lending within the Bank is
largely directed toward small- and medium-sized businesses operating
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 of 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 in select
regions of Ontario.
For additional information, see the Loans and Credit Quality sections
of this MD&A.
CWB Group 2013 Annual Report
51
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
Risk Governance
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, preferred shares and common shares 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.
The Board annually approves asset liability management policies
specifying interest rate and foreign exchange exposure limits, and
regularly reviews actual positions 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
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 CWB’s
position and decide future actions. 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
stress testing 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, 2013 for select time intervals.
The analysis in Note 28 is a static measurement of interest rate
sensitivity gaps at a specific point in time, and there is potential for
these gaps to change significantly over a short period. 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 represented 1.2% of total
assets at October 31, 2013, down from 4.5% one year ago, while
the one-month and under gap decreased to 6.7%, from 9.1% a year
earlier. To the extent possible within CWB’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.
52
CWB Group 2013 Annual Report
Of the $6,289 million in fixed term deposit liabilities maturing within
one year from October 31, 2013, approximately $3,412 million (22%
of total deposit liabilities) mature by April 30, 2014. The term in which
maturing deposits are renewed will have an impact on the future asset
liability structure and, hence, interest rate sensitivity. Approximately
$324 million of the fixed term deposit liabilities maturing within one
month are deposits redeemable at any time.
• a constant structure in the interest sensitive asset/liability portfolios;
• floor levels for various deposit liabilities;
• interest rate changes affecting interest sensitive assets and liabilities
by proportionally the same amount and applied at the appropriate
repricing dates; and,
• no early redemptions.
The estimated sensitivity of net interest income to a change in interest
rates is presented in Table 27. The amounts represent the estimated
change in net interest income over the time period shown resulting
from a one percentage point change in interest rates. The estimates
are based on a number of assumptions and factors, which include:
Table 27 – Estimated Sensitivity of Net Interest Income as a Result of One Percentage
Point Change in Interest Rates
($ thousands)
2013
$
4,176
$
14,545
2012
4,411
15,086
3.3 %
3.8 %
2013
2012
$
(6,796)
$
(6,289)
(23,853)
(21,534)
(5.3) %
(5.4) %
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
section). Assets and liabilities having a term to maturity in excess
of five years are subject to specific review and control, and were
not material.
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
Higher sensitivity to a decrease in rates is due to asymmetry in the
impact of falling rates on loans and deposits. A decrease of one-
percentage point in rates is assumed to reduce loan yields by an
equivalent amount. However, the assumed change in total deposit
costs is lower because deposits yielding less than one percent at the
beginning of the period are only adjusted to zero.
It is estimated that a one percentage point increase in all interest
rates at October 31, 2013 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 $14.4 million,
net of tax (October 31, 2012 – $12.6 million); it is estimated that a
one percentage point decrease in all interest rates at October 31, 2013
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 $14.4 million,
net of tax (October 31, 2012 – $12.6 million).
CWB Group 2013 Annual Report
53
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, CWB has assets
and liabilities denominated in U.S. dollars. At October 31, 2013,
assets denominated in U.S. dollars were 1.2% (2012 – 1.1%) of
total assets and U.S. dollar liabilities were 1.3% (2012 – 1.2%)
of total liabilities. Currencies other than U.S. dollars are not bought
or sold other than to meet specific client needs. Therefore, CWB
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. Any deviations from policy are reported
regularly to ALCO and quarterly to the Board.
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 or 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 company-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
manages liquidity risk within an appropriate threshold.
CWB’s key risk mitigation strategies include:
• 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 high quality liquid assets and
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 CWB under times of stress.
Refer to the Deposit and Liquidity Management sections of this MD&A
for additional information.
Risk Governance
Liquidity management is centralized to better facilitate the
effective management of liquidity risk. The Board annually
approves asset liability management 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 the overall liquidity position,
status and trends.
ALCO annually reviews and endorses the liquidity
management policies and provides primary management
oversight for the treasury management function. The Treasury
department actively monitors liquidity risk with strong support
from senior management.
54
CWB Group 2013 Annual Report
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 – CWB’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 – Oversight by Treasury of all significant liquidity
risks supports 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 company-specific (micro) disruptions on CWB’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 understand the
potential behaviour of various positions on CWB’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 – CWB actively manages the
diversification of its deposit liabilities by source, type of
depositor, instrument and term. Supplementary funding
sources include securitization, capital market issuances and
whole loan sales.
• Core liquidity – CWB 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.
OSFI issued a consultative paper entitled Liquidity Adequacy
Requirements in November 2013 which formalizes many of the
regulations issued by the Bank for International Settlements (BIS) in the
International Framework for Liquidity Risk, Measurement, Standards
and Monitoring. Canadian banks are expected to comply with the
Liquidity Coverage Ratio (LCR) in January 2015, while implementation
of the Net Stable Funding Ratio (NSFR) is delayed until 2018.
OSFI has introduced a monitoring tool called the Net Cumulative
Cash Flow which will be implemented in 2014. Other international
regulations, such as The Monitoring Tools for Intraday Liquidity
Management, will be delayed until OSFI can assess how to most
effectively implement them within the Canadian banking environment.
CWB Group 2013 Annual Report
55
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, 2013:
Table 28 – Contractual Obligations
($ thousands)
Lease commitments
Purchase obligations for capital expenditures
October 31, 2013
October 31, 2012
Credit ratings
Within 1
Year
1 to 3
Years
4 to 5
Years
More than
5 Years
Total
$
$
$
11,893
$
23,395
$
17,706
$
50,910
$
103,904
1,126
13,019
11,714
$
$
2,043
25,438
22,579
$
$
1,689
19,395
16,273
$
$
1,689
52,599
22,459
$
$
6,547
110,451
73,025
CWB’s ability to efficiently access unsecured capital market funding
on a cost-effective basis is partially dependent upon the maintenance
of satisfactory credit ratings. Such credit ratings, accompanied with a
stable or positive outlook, increase the breadth of clients and investors
able to participate in various deposit and debt offerings, while also
lowering CWB’s overall cost of capital.
Credit ratings are largely determined by the quality of earnings, the
adequacy of capital, the effectiveness of risk management programs
and the opinions of rating agencies related to creditworthiness of the
financial sector as a whole. There can be no assurance that CWB’s
credit ratings and the corresponding outlook will not be changed,
potentially resulting in adverse consequences for 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 consider market price
or address the 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, 2013.
Ratings on short-term debt and preferred shares were initiated in fiscal 2013.
Table 29 – Credit Ratings
CWB credit ratings issued by DBRS, along with the corresponding outlook, were last
confirmed on October 16, 2013.
Long-term
senior debt and
deposits
Short-term debt
Subordinated
debentures
Preferred shares
Outlook
DBRS
A (low)
R-1 (low)
BBB (high)
Pfd-3 (high)
Stable
56
CWB Group 2013 Annual Report
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 Overview
Risk Governance
Capital management involves a dynamic and ongoing process to
determine, allocate and maintain appropriate amounts of capital.
The optimal amount and composition of capital must consider
regulatory and economic capital requirements, as well as the
expectations 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 CWB, 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.
The Board at least annually approves the regulatory capital plan,
Internal Capital Adequacy Assessment Process (ICAAP) and capital
management policies. The Group Capital Risk Committee is
responsible for capital risk management. Under the leadership of the
CFO, senior representatives within Finance, Group Risk Management,
Strategy and Communications, and Credit Analytics comprise
the ICAAP core team, which is closely supported by other key
departments, including Treasury and Credit Risk Management.
Risk Management
The following are key elements of capital risk management:
• The regulatory capital plan, inclusive of capital management policies
and three-year capital projections, is completed at least annually.
• Consolidated forecast models are used to analyze and stress test
the likely capital impact of projected operations and/or significant
transactions.
• Regulatory capital ratios are reported to senior management and
the Board on a monthly basis.
For additional information, refer to the Capital Management section
of this MD&A.
OPERATIONAL RISk
Operational risk is the risk of loss resulting from human error, inadequate or failed processes, systems or controls, or external events.
There are two subsets of operational risk: people risk and regulatory risk. People risk is the risk that CWB is not able to retain and
attract sufficient qualified resources to implement its strategies and/or achieve its objectives. Regulatory risk is defined below.
Risk Overview
Operational risk is inherent in all of CWB’s business activities, including
banking, trust, wealth management and insurance operations, and
is embedded in processes that support the management of principal
risks such as credit, liquidity, market, capital and reputational risk.
CWB is exposed to operational risk from internal business activities,
external threats and outsourced business activities. 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. 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 2012 or 2013, and is increasingly utilizing
data to measure, monitor and manage operational risk exposures.
The Basel III regulatory framework requires certain amounts of
capital to be allocated to support operational risk. Under Basel III,
CWB uses the Standardized approach to measure operational risk.
CWB has a group-wide Operational Risk Management Framework to
ensure that all employees understand their responsibilities with respect
to operational risk management. The Operational Risk Management
Framework encompasses a common language of risk coupled with
programs and methodologies for identification, measurement,
control, and management of operational risk.
CWB Group 2013 Annual Report
57
Additional key components include:
• implementation of policies and procedural controls appropriate
to address identified risks (including segregation of duties and
other fundamental checks and balances);
• adoption of the COSO (Committee of Sponsoring Organizations
of the Treadway Commission) for Smaller Business framework
for internal control assessment;
• continual enhancements to fraud prevention processes, policies
and communication of same;
• established “whistleblower” processes and employee codes
of conduct;
• maintenance of an outsourcing management program;
• at least annual assessment and benchmarking of the amount
and type of business insurance to ensure coverage is appropriate;
• human resource policies and processes to ensure staff are
adequately trained for the tasks for which they are responsible;
• a Regulatory Compliance department focused on key regulatory
compliance areas such as privacy, anti-money laundering, anti-
terrorist financing and consumer regulations;
• documented policies and procedures to set minimum control
standards, which are critical communication and training tools;
• enhanced focus on data quality as an important and strategic asset,
particularly in the regulated environment;
• use of technology that incorporates automated systems with
built-in controls, active management of technology configuration
and change management, and information security management
programs;
• 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).
Risk Governance
Business and support areas are fully accountable for the
management and control of significant operational risks to which
they are exposed. The Group Operational Risk Committee has
responsibility for operational risk, with oversight by the Board,
Group Risk Committee and senior management. The Group Risk
Management function is responsible for the continual enhancement
of the Operational Risk Framework and supporting policies.
The Board has ultimate oversight and approves the Group’s
Operational Risk Management Framework with support from
various Board committees.
Risk Management
Following is a summary of strategies and factors that assist with
the effective management of operational risk:
• 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
• Flat organizational 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 operational
risk management to all levels
• Management that is very engaged with promoting
CWB’s operational risk tolerance and appetite
• Ongoing enhancement of group-wide operational risk
management processes
key elements of the Operational Risk Management Framework
include:
• Common 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 key
operational risk exposures and assess whether appropriate risk-
mitigating internal controls are in place and operating effectively.
Action plans may result where additional strategies are identified
to reduce risk exposure.
• Operational risk reporting – Loss data monitoring is important
to maintain awareness of identified operational risks and to assist
management in taking constructive action to reduce exposures
to future losses.
58
CWB Group 2013 Annual Report
REGULATORY RISk
Regulatory risk is the risk of negative impact to business activities, earnings or capital, regulatory relationships or reputation as a result
of non-compliance with applicable regulatory requirements.
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 most sources
of regulatory risk are outside of management’s direct control,
CWB takes what it believes to be reasonable and prudent measures
designed to ensure material 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
REPUTATION RISk
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 and the Board. Notwithstanding the additional
resources, the volume, pace and implementation of new and
amended regulations and standards increases the risk of unintended
consequences for all regulated entities and unintended
non-compliance for CWB.
Reputation risk is the consequence of not managing risks effectively and cannot be considered in isolation from other risks.
Reputation risk is the consequence of not managing risks effectively
and cannot be considered in isolation from other risks. Negative public
opinion can result from actual or alleged misconduct in any number
of activities, either on the part of employees or external partners,
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 CWB’s ability to
attract and retain clients and/or employees, 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 the Board.
All directors, officers and employees have a responsibility
to conduct their activities in accordance with CWB'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.
INSURANCE RISk
Insurance risk is the risk of financial loss due to actual experience being different from that assumed in insurance product pricing and
reserving. Insurance contracts provide financial protection for the insured by transferring risks to the insurer in exchange for premiums.
Unfavourable experience could emerge due to adverse fluctuations in timing, size or frequency of claims, or associated expenses.
CWB is exposed to insurance risk through its wholly owned subsidiary,
CDI, which offers home and auto insurance to customers in BC and
Alberta. Accordingly, CWB’s operations are subject to uncertainties
and fluctuations in earnings based on elements of risk associated with
these lines of business. These elements include cyclical patterns in the
industry and unpredictable developments, including weather-related
and other natural catastrophes. CDI carries reinsurance coverage as
part of its strategy to manage these risks. The insurance 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 and reinsurance
risk. Policies and procedures have been established to manage
insurance-related risk, as well as other categories of risk to which
CWB is exposed through CDI.
The risk that CDI might be exposed to large claims or to an
accumulation of claims resulting from a natural catastrophe,
such as a weather-related or seismic event, is mitigated by reinsurance
treaties that protect it from such risks. Reinsurance risk includes the
risk that reinsurance counterparties are not financially strong and that
underwriting strategies are inappropriately matched with reinsurance
programs. CDI performs financial due diligence on prospective
reinsurers and only purchases coverage from a list of reviewed
and approved companies.
CDI 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 CDI’s perspectives on regulations.
CWB Group 2013 Annual Report
59
OTHER RISk FACTORS
In addition to the risks described above, other risk factors, including
those below and those identified in the forward-looking statements
section, may adversely affect CWB’s businesses and financial results.
General Business and Economic Conditions
The majority of CWB’s business is conducted in Western Canada.
Accordingly, CWB’s overall financial performance is 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 CWB’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.
Information Systems and Technology
CWB is highly dependent upon information technology and
supporting infrastructure, such as voice, data and network access.
In addition to internal resources, various third parties provide key
components of the infrastructure and applications. Disruptions in
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 to conduct regular business and/or deliver products
and services to clients. Ongoing diligence is required to ensure systems
are secure from threats. 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.
Level of Competition
Adequacy of CWB’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 operations, CWB is primarily subject to credit, market
(mainly interest rate and foreign exchange), liquidity and funding,
operational, reputation, regulatory, insurance, environmental, and
other noted 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, CWB could be
materially affected by unexpected financial losses and/or other harm.
Changes in Accounting Standards and Accounting
Policies and Estimates
The IASB 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, many of which are beyond CWB’s control,
may affect future results. Some of these factors 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
associated risks.
CWB’s performance is impacted by the intensity of competition in
the markets in which it operates. 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 it
receives about customers and counterparties. In deciding whether
to extend credit or enter into other transactions, CWB may rely
on information provided by clients and counterparties 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 clients
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.
60
CWB Group 2013 Annual Report
UPDATED SHARE INFORMATION
As at November 25, 2013, there were 79,631,149 common
shares outstanding. Also outstanding were employee stock options,
which are or will be exercisable for up to 4,179,836 common shares
for maximum proceeds of $112.7 million. On December 4, 2013,
the Board of Directors declared a quarterly cash dividend of
$0.19 per common share payable on January 9, 2014, to shareholders
of record on December 17, 2013. The Board of Directors also declared
a cash dividend of $0.453125 per Series 3 Preferred Share payable
on January 31, 2014 to shareholders of record on January 23, 2014.
CONTROLS AND PROCEDURES
As at October 31, 2013, an evaluation was carried out on
the effectiveness of CWB’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, 2013, 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.
CWB’s certifying officers have limited the scope of the design
and operating effectiveness of disclosure controls and procedures
and internal control over financial reporting to exclude the controls,
policies and procedures of McLean & Partners, acquired in the third
quarter of 2013. This limitation will be removed no later than
April 30, 2014.
These evaluations were conducted in accordance with the
standards of Internal Control over Financial Reporting – Guidance
for Smaller Public Companies, 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 CWB’s internal controls over financial
reporting that occurred during the year ended October 31, 2013
that have materially affected, or are reasonably likely to materially
affect, internal controls over financial reporting.
This Management’s Discussion and Analysis is dated
December 4, 2013.
CWB Group 2013 Annual Report
61
Consolidated Financial Statements
MANAGEMENT’S RESPONSIBILITY
FOR FINANCIAL REPORTING
The consolidated financial statements of Canadian Western
Bank (CWB) 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 CWB 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 CWB.
We, as CWB’s Chief Executive Officer and Chief Financial Officer,
will certify CWB’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 CWB’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 CWB. 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 CWB.
Their responsibilities include reviewing related party transactions and
reporting to the Board of Directors those transactions which may
have a material impact on CWB.
The Office of the Superintendent of Financial Institutions Canada,
at least once a year, makes such examination and inquiry into the
affairs of CWB 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 depositors and
policyholders, are being duly observed and that CWB is in a sound
financial condition.
kPMG LLP, the independent auditors appointed by the shareholders
of CWB, 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.
Chris Fowler
President and Chief Executive Officer
December 4, 2013
Tracey C. Ball, FCA, ICD.D
Executive Vice President and Chief Financial Officer
62
CWB Group 2013 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, 2013 and 2012, the consolidated statements
of income, comprehensive income, changes in equity and cash flows
for the years ended October 31, 2013 and 2012, 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.
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 CWB’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 CWB’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 in our audits 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, 2013 and 2012, and its consolidated
financial performance and its consolidated cash flows for the years
ended October 31, 2013 and 2012 in accordance with International
Financial Reporting Standards.
Chartered Accountants
Edmonton, Canada
December 4, 2013
CWB Group 2013 Annual Report
63
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
Loans
Personal
Business
Allowance for credit losses
Other
Property and equipment
Goodwill
Intangible assets
Insurance related
Derivative related
Other assets
Total Assets
Liabilities and Equity
Deposits
Personal
Business and government
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
Total Equity
Total Liabilities and Equity
(Note 3)
$
As at
October 31
2013
As at
October 31
2012
83,856
258,466
5,673
347,995
$
33,690
177,028
26,265
236,983
927,077
410,984
894,271
2,232,332
980,200
478,622
877,278
2,336,100
2,502,295
2,292,388
13,160,384
11,743,021
15,662,679
14,035,409
(85,786)
15,576,893
(81,723)
13,953,686
66,647
49,424
70,197
64,365
4,509
107,898
363,040
$ 18,520,260
68,938
45,536
49,959
57,650
1,951
122,466
346,500
$ 16,873,269
$ 9,420,754
6,105,286
15,526,040
$ 8,960,118
5,184,719
14,144,837
55,290
167,816
36
-
238,939
462,081
195,650
625,000
820,650
54,030
160,302
10
70,089
239,503
523,934
209,273
425,000
634,273
208,815
510,282
865,087
24,632
(3,389)
1,605,427
106,062
1,711,489
$ 18,520,260
209,750
490,218
733,298
22,468
9,247
1,464,981
105,244
1,570,225
$ 16,873,269
(Note 4)
(Note 6)
(Note 7)
(Note 8)
(Note 9)
(Note 9)
(Note 10)
(Note 11)
(Note 12)
(Note 13)
(Note 14)
(Note 11)
(Note 5)
(Note 15)
(Note 16)
(Note 17)
(Note 17)
(Note 19)
The accompanying notes are an integral part of the consolidated financial statements.
Allan W. Jackson
Chair of the Board
64
CWB Group 2013 Annual Report
Chris Fowler
President and 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
Trust and wealth management services
Credit related
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
Net Income before Income Taxes
Income Taxes
Net Income
Net Income Attributable to Non-Controlling Interests
Net Income Attributable to Shareholders of CWB
Preferred share dividends
2013
2012
$
735,404
$
686,534
44,952
1,609
43,548
2,389
781,965
732,471
280,169
32,433
312,602
469,363
27,846
441,517
24,511
21,685
16,279
15,094
10,272
3,059
-
4,082
94,982
536,499
269,772
28,270
298,042
434,429
25,107
409,322
19,065
19,705
17,353
12,449
9,227
3,255
(2,489)
3,345
81,910
491,232
172,237
153,844
42,825
47,435
262,497
274,002
64,052
39,502
43,220
236,566
254,666
60,209
(Note 7)
(Note 21)
(Note 29)
(Note 24)
$
209,950
$
194,457
(Note 19)
7,568
7,052
$
202,382
$
187,405
15,183
15,208
Premium paid on purchase of preferred shares for cancellation
(Note 17)
36
-
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.
$
187,163
$
172,197
79,147
79,544
76,841
77,460
$
2.36
$
2.35
2.24
2.22
(Note 25)
CWB Group 2013 Annual Report
65
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 net income (2)
Derivatives designated as cash flow hedges
Gains from change in fair value (3)
Reclassification to net 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 CWB
Non-controlling interests
Comprehensive Income for the Year
(1) Net of income tax of $866 (2012 – $3,441).
(2) Net of income tax of $3,934 (2012 – $3,320).
(3) Net of income tax of $788 (2012 – $500).
(4) Net of income tax of $424 (2012 – $169).
The accompanying notes are an integral part of the consolidated financial statements.
2013
2012
$
209,950
$
194,457
(2,553)
(11,160)
(13,713)
2,332
(1,255)
1,077
(12,636)
9,580
(9,129)
451
1,430
(483)
947
1,398
$
197,314
$
195,855
$
189,746
$
188,803
7,568
7,052
$
197,314
$
195,855
66
CWB Group 2013 Annual Report
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Year Ended October 31
($ thousands)
Retained Earnings
Balance at beginning of year
Net income attributable to shareholders of CWB
Dividends - Preferred shares
- Common shares
Premium paid on purchase of preferred shares for cancellation
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 of year
Purchase of preferred shares for cancellation
Balance at end of year
Common Shares
Balance at beginning of year
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 settlement of contingent consideration
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
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
Business acquisition
Balance at end of year
Total Equity
The accompanying notes are an integral part of the consolidated financial statements.
2013
2012
(Note 17)
(Note 17)
(Note 17)
$
733,298
$
608,848
202,382
(15,183)
(55,374)
(36)
187,405
(15,208)
(47,747)
-
865,087
733,298
9,247
(13,713)
1,077
(3,389)
7,849
451
947
9,247
209,750
209,750
(935)
-
208,815
209,750
490,218
14,404
3,986
1,674
-
510,282
22,468
6,150
(3,986)
24,632
408,282
12,252
4,432
1,853
63,399
490,218
21,884
5,016
(4,432)
22,468
1,605,427
1,464,981
105,244
105,225
7,568
(7,066)
316
7,052
(7,033)
-
106,062
105,244
$ 1,711,489
$ 1,570,225
(Note 17)
(Note 17)
(Note 18)
(Note 32)
CWB Group 2013 Annual Report
67
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
Change in operating assets and liabilities
Loans, net
Deposits, net
Securities sold under repurchase agreements, net
Other items, net
Cash Flows from Financing Activities
Common shares issued, net of issuance costs
Preferred shares purchased and cancelled
Debentures issued
Debentures redeemed
Debt securities issued
Debt securities repaid
Dividends
Distributions to non-controlling interests
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net
Securities, purchased
Securities, sales proceeds
Securities, matured
Property, equipment and intangibles
Business acquisition
Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year *
* Represented by:
Cash and non-interest bearing deposits with financial institutions
Cheques and other items in transit (included in Cash Resources)
Cheques and other items in transit (included in Other Liabilities)
Cash and Cash Equivalents at End of Year
Supplemental Disclosure of Cash Flow Information
Interest and dividends received
Interest paid
Income taxes paid
The accompanying notes are an integral part of the consolidated financial statements.
68
CWB Group 2013 Annual Report
2013
2012
$
209,950
$
194,457
27,846
21,572
(7,444)
6,150
2,816
5,507
25,107
17,261
8,981
5,016
(3,541)
(695)
(15,094)
(12,449)
(1,651,053)
(1,685,511)
1,381,203
1,750,148
(70,089)
934
70,089
24,283
(87,702)
393,146
16,078
(971)
250,000
(50,000)
90,596
(104,219)
(70,557)
(7,066)
123,861
14,004
-
-
(120,000)
226,249
(106,855)
(62,955)
(7,033)
(56,590)
(81,284)
57,128
(6,004,062)
(4,959,542)
3,839,290
2,275,813
(27,504)
(10,098)
(7,845)
28,314
5,925
34,239
$
2,855,832
1,711,152
(27,586)
-
(363,016)
(26,460)
32,385
5,925
83,856
$
33,690
5,673
(55,290)
26,265
(54,030)
$
$
$
34,239
$
5,925
$
785,643
$
724,759
313,463
65,989
293,871
51,923
(Note 17)
(Note 17)
(Note 16)
(Note 16)
(Note 32)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2013 and 2012
($ thousands, except per share amounts)
1. NATURE OF OPERATIONS AND BASIS
OF PRESENTATION
a) Reporting Entity
e) Basis of Consolidation
Canadian Western Bank (CWB) 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 4, 2013.
b) Statement of Compliance
These consolidated financial statements of CWB 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).
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 CWB 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 CWB
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)
• 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 CWB and all of its subsidiaries, after the
elimination of intercompany transactions and balances. Subsidiaries
are defined as entities whose operations are controlled by CWB and
are corporations in which CWB 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
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, 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.
CWB 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.
g) Functional and Foreign Currencies
The consolidated financial statements are presented in Canadian
dollars, which is CWB’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 2013 Annual Report
69
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. A key item for
change in accounting under IFRS 10 is the de-consolidation of the
trust through which CWB issues certain regulatory capital instruments.
The de-consolidation of the trust would result in a reclassification
of securities issued through Canadian Western Bank Capital Trust
(Note 19) from non-controlling interest to deposit liabilities in the
consolidated balance sheets, and the associated income statement
charge would be reclassified from non-controlling interest to interest
expense. Other than this reclassification, CWB does not expect the
adoption of these standards to have a material impact on the financial
position, cash flows or earnings of CWB. IFRS 10 and 12 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.
This new standard is not expected to have a material impact on the
financial position, cash flows or earnings of CWB.
IFRS 9 – Financial Instruments
In November 2013, the IASB removed the January 1, 2015
mandatory effective date of IFRS 9 to provide sufficient time for
preparers of financial statements to make the transition to the new
requirements. IFRS 9 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. Additional amendments have
been made to hedge accounting and measuring an entity's own credit
risk, both of which are not expected to materially impact the financial
position, cash flows or earnings of CWB.
CWB continues to monitor the IASB's 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 CWB’s future
consolidated financial statements.
h) Specific Accounting Policies
The accounting policies set out below have been applied consistently
to all periods presented in these consolidated financial statements.
To facilitate a better understanding of CWB’s consolidated financial
statements, the significant accounting policies are disclosed in the notes,
where applicable, with related financial disclosures by major caption:
Note
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
34
Topic
Financial instruments
Cash resources
Securities
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
Business acquisition
Subsidiaries
Comparative figures
i) Future Accounting Changes
A number of standards and amendments have been issued by
the IASB, and the following changes may have an impact on CWB’s
future financial statements. CWB is currently reviewing these standards
to determine the impact on the financial statements.
IFRS 13 – Fair Value Measurement
The IASB has issued new guidance on fair value measurement
and disclosure requirements. IFRS 13 applies to other IFRS standards
that require or permit fair value measurements or disclosures about
fair value measurements and sets out a framework on how to measure
fair value using the assumptions that market participants would use
when pricing the asset or liability under current market conditions,
including assumptions about risk. IFRS 13 is effective for annual
periods beginning on or after January 1, 2013 and is to be applied
prospectively. This new standard is not expected to have a material
impact on the financial position, cash flows or earnings of CWB.
70
CWB Group 2013 Annual Report
2. FINANCIAL INSTRUMENTS
4. SECURITIES
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,
loans, derivative financial instruments and certain other assets.
Financial instrument liabilities include deposits, securities sold under
repurchase agreements, derivative financial instruments, debt and
certain other liabilities.
The use of financial instruments exposes CWB to credit, liquidity
and market risk. A discussion of how these are managed can be found
in the Risk Management section of the 2013 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 and
contingent consideration fair value changes are classified to other income.
3. CASH RESOURCES
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 $258,466 (October 31, 2012 –
$177,028), which is $569 (October 31, 2012 – $482) higher than
amortized cost.
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, CWB 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 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.
CWB Group 2013 Annual Report
71
The analysis of securities at carrying value, by type and maturity, is as follows:
Securities issued or guaranteed by
Canada
A province or municipality
Other debt securities
Equity securities
Preferred shares
Common shares (1)
Total
(1) Common shares have no maturity date.
Within
1 Year
Maturities
1 to
3 Years
3 to
5 Years
Over 5
Years
As at
October 31
2013
As at
October 31
2012
$ 570,076 $ 248,497 $ 108,504 $
- $ 927,077 $ 980,200
280,316
179,881
35,487
174,763
90,192
12,386
4,989
931
410,984
367,961
478,622
371,044
127,828
138,244
78,257
34,812
-
-
-
147,169
379,141
147,169
398,752
107,482
$ 1,158,101 $ 596,991 $ 289,339 $ 187,901 $ 2,232,332 $ 2,336,100
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
Amortized
Cost
As at October 31, 2013
Unrealized
Unrealized
Losses
Gains
Fair
Value
Amortized
Cost
As at October 31, 2012
Unrealized
Gains
Unrealized
Losses
Fair
Value
Securities issued or guaranteed by
Canada
$ 926,445 $
652 $
20 $ 927,077 $ 980,024 $
270 $
94 $ 980,200
A province or municipality
Other debt securities
Equity securities
Preferred shares
Common shares
Total
410,823
366,781
395,442
140,512
227
1,284
1,444
8,119
66
104
410,984
367,961
478,689
369,407
17,745
1,462
379,141
147,169
391,781
105,368
93
1,734
8,249
4,701
160
97
478,622
371,044
1,278
2,587
398,752
107,482
$ 2,240,003 $
11,726 $
19,397 $ 2,232,332 $ 2,325,269 $
15,047 $
4,216 $ 2,336,100
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, 2013,
CWB assessed the securities with unrealized losses and, based on
available objective evidence, no impairment charges (2012 – nil)
were included in gains on securities, net.
5. SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS
Securities sold under repurchase agreements represent a sale of
Government of Canada securities by CWB effected with a simultaneous
agreement to buy them back at a specified price on a future date,
which is generally short term. The difference between the proceeds of
the sale and the predetermined cost to be paid on a resale agreement
is recorded as deposit interest expense.
72
CWB Group 2013 Annual Report
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 CWB has commenced realization
proceedings, or where CWB 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 CWB 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.
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.
Outstanding gross loans and impaired loans, net of the allowance for credit losses, by loan type, are as follows:
As at October 31, 2013
As at October 31, 2012
Gross
Amount
Gross
Impaired
Amount (2)
Specific
Allowance
Net
Impaired
Loans
Gross
Amount
Gross
Impaired
Amount (2)
Specific
Allowance
Net
Impaired
Loans
$ 2,502,295 $
17,052 $
748 $
16,304 $ 2,292,388 $
13,404 $
459 $
12,945
Personal
Business
Real estate (1)
5,829,225
Equipment financing and energy
3,239,788
4,091,371
31,937
10,610
4,612
6,349
2,179
293
25,588
5,001,041
8,431
2,874,423
4,319
3,867,557
23,022
14,919
15,495
2,605
8,524
2,791
20,417
6,395
12,704
Commercial
Total
Collective allowance (3)
Net impaired loans after
collective allowance
$ 15,662,679 $
64,211 $
9,569 $
54,642 $ 14,035,409 $
66,840 $
14,379 $
52,461
(76,217)
$
(21,575)
(67,344)
$
(14,883)
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans include foreclosed assets with a carrying value of $12,407 (October 31, 2012 – $10,462). CWB 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 $2,582 (2012 – $5,094).
CWB Group 2013 Annual Report
73
Outstanding impaired loans, net of the allowance for credit losses, by provincial location of security, are as follows:
Alberta
British Columbia
Ontario
Saskatchewan
Manitoba
Other
Total
As at October 31, 2013
As at October 31, 2012
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
$
38,886 $
7,475 $
31,411 $
36,769 $
9,711 $
27,058
17,904
2,886
1,861
1,214
1,460
476
728
381
146
363
17,428
22,629
2,158
1,480
1,068
1,097
3,081
2,309
615
1,437
2,190
1,167
456
203
652
$
64,211 $
9,569
54,642 $
66,840 $
14,379
20,439
1,914
1,853
412
785
52,461
(67,344)
$
(14,883)
Collective allowance (1)
Net impaired loans after collective allowance
(1) The collective allowance for credit risk is not allocated by province.
(76,217)
$
(21,575)
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, 2013
1 - 30 days
31 - 60 days
61 - 90 days
More than
90 days
Personal
Business
As at October 31, 2012
$
$
$
14,130
$
11,239
$
1,066
$
2,400
$
10,580
24,710
25,849
$
$
36,863
48,102
27,799
$
$
1,009
2,075
4,194
$
$
-
2,400
375
$
$
Total
28,835
48,452
77,287
58,217
The composition of CWB’s loan portfolio by geographic region and industry sector is as follows:
October 31, 2013
($ millions)
Personal
Business
Real estate
Commercial
Equipment financing
and energy (1)
Total Loans (2)
Composition
Percentage
October 31, 2013
October 31, 2012
BC
AB
ON
SK
MB
Other
$
830 $
1,049 $
394 $
159 $
69 $
1 $
2,619
1,421
568
4,608
2,303
1,890
1,378
5,571
372
355
572
1,299
399
196
271
866
127
113
105
345
9
116
346
471
Composition Percentage
Oct. 31
Oct. 31
2013
16 %
2012
16 %
37
26
21
84
36
28
20
84
Total
2,502
5,829
4,091
3,240
13,160
$
5,438 $
6,620 $
1,693 $
1,025 $
414 $
472 $
15,662
100 %
100 %
35 %
33 %
42 %
45 %
11 %
10 %
7 %
6 %
2 %
3 %
3 %
3 %
100 %
100 %
(1) Includes securitized leases reported on-balance sheet of $230 (October 31, 2012 – $238).
(2) This table does not include an allocation of the allowance for credit losses.
74
CWB Group 2013 Annual Report
7. ALLOWANCE FOR CREDIT LOSSES
An allowance for credit losses is maintained which, in CWB’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 CWB. 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.
The following table shows the changes in the allowance for credit losses during the year:
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
Specific
Allowance
2013
Collective
Allowance
Specific
Allowance
Total
2012
Collective
Allowance
Total
$
14,379 $
67,344 $
81,723 $
10,650 $
61,330 $
71,980
18,973
8,873
27,846
19,093
6,014
(26,652)
2,869
-
-
(26,652)
(17,712)
2,869
2,348
-
-
25,107
(17,712)
2,348
Balance at end of year
$
9,569 $
76,217 $
85,786 $
14,379 $
67,344 $
81,723
CWB Group 2013 Annual Report
75
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: 20 years
• Equipment and furniture: 3 to 10 years
• 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, 2012
$
59,172
$
23,615
$
24,250
$
32,518
$
139,555
Leasehold
Improvements
Land and
Buildings
Computer
Equipment
Office
Equipment
Total
Additions
Disposals
Balance at October 31, 2013
Accumulated depreciation and impairment
Balance at November 1, 2012
Depreciation for the year
Disposals
Balance at October 31, 2013
2,853
-
62,025
26,373
4,969
-
31,342
133
-
23,748
5,657
651
-
6,308
3,586
(105)
27,731
18,220
2,730
(105)
20,845
2,227
(33)
34,712
20,367
2,740
(33)
23,074
8,799
(138)
148,216
70,617
11,090
(138)
81,569
Net carrying amount at October 31, 2013
$
30,683
$
17,440
$
6,886
$
11,638
$
66,647
Cost
Balance at November 1, 2011
$
50,050
$
23,439
$
21,543
$
28,345
$
123,377
Additions
Disposals
Balance at October 31, 2012
Accumulated depreciation and impairment
Balance at November 1, 2011
Depreciation for the year
Disposals
Balance at October 31, 2012
9,122
-
59,172
22,122
4,251
-
26,373
176
-
23,615
4,975
682
-
5,657
2,707
-
24,250
15,883
2,337
-
18,220
4,265
(92)
32,518
17,898
2,561
(92)
20,367
16,270
(92)
139,555
60,878
9,831
(92)
70,617
Net carrying amount at October 31, 2012
$
32,799
$
17,958
$
6,030
$
12,151
$
68,938
76
CWB Group 2013 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, including identifiable intangible assets, and liabilities
assumed. 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, CWB’s
cash-generating units with goodwill allocated are:
• National Leasing Group Inc. (NL);
• Canadian Direct Insurance Incorporated (CDI);
• Valiant Trust Company (VTC);
• Adroit Investment Management Ltd. (AIM); and,
• McLean & Partners Wealth Management Ltd. (M&P).
Balance at November 1, 2012
$
35,776 $
3,254 $
3,679 $
2,827 $
- $
45,536
NL
CDI
VTC
AIM
M&P
Total
Business acquisition
Goodwill impairment
Balance at October 31, 2013
Balance at November 1, 2011
Partial ownership reduction
Goodwill impairment
Balance at October 31, 2012
Intangible assets
(Note 32)
-
-
-
-
-
-
-
-
3,888
3,888
-
-
$
35,776 $
3,254 $
3,679 $
2,827 $
3,888 $
49,424
$
35,776 $
3,254 $
3,679 $
2,982 $
- $
45,691
-
-
-
-
-
-
(155)
-
-
-
(155)
-
$
35,776 $
3,254 $
3,679 $
2,827 $
- $
45,536
Intangible assets represent identifiable non-monetary assets
and are acquired either separately through a business combination,
or generated internally. 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 and trade names, 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.
Amortization of intangible assets with finite useful lives is
reported in other expenses on the consolidated statements of
income and provided on a straight-line basis as follows:
• Customer relationships: 10 to 15 years
• Computer software: 3 to 15 years
• Non-competition agreements: 4 to 5 years
• Other: 3 to 5 years
CWB Group 2013 Annual Report
77
Cost
Balance at November 1, 2012
$
37,515 $
48,528 $
5,593 $
2,191 $
1,900 $
95,727
Customer
Relationships
Computer
Software
Non-
competition
Agreements Trademarks
Other
Total
Business acquisition
Additions
Balance at October 31, 2013
Accumulated amortization
Balance at November 1, 2012
Amortization
Balance at October 31, 2013
(Note 32)
5,195
-
42,710
10,425
2,767
13,192
16,875
65,403
29,805
4,068
33,873
-
4,126
-
518
-
9,719
2,709
3,858
1,373
5,231
-
-
-
-
1,830
3,730
1,680
98
1,778
9,839
18,705
124,271
45,768
8,306
54,074
Net carrying amount at October 31, 2013
$
29,518 $
31,530 $
4,488 $
2,709 $
1,952 $
70,197
Cost
Balance at November 1, 2011
Partial ownership reduction
Additions
Balance at October 31, 2012
Accumulated amortization
Balance at November 1, 2011
Amortization
Balance at October 31, 2012
$
37,668 $
37,210 $
5,731 $
2,206 $
1,900 $
84,715
(153)
-
37,515
7,856
2,569
10,425
11,318
48,528
24,956
4,849
29,805
-
(138)
-
(15)
-
-
-
5,593
2,191
1,900
2,726
1,132
3,858
-
-
-
1,582
98
1,680
(306)
11,318
95,727
37,120
8,648
45,768
Net carrying amount at October 31, 2012
$
27,090 $
18,723 $
1,735 $
2,191 $
220 $
49,959
Impairment
The carrying amounts of CWB’s goodwill and 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,
CWB tests for impairment. For goodwill and intangible assets with
indefinite useful lives, the impairment tests are performed each year.
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 CWB’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 3%, which is based on the
long-term forecast Canadian gross domestic product growth rates.
The forecast period is based on CWB’s long-term perspective with
respect to the operation of these cash-generating units.
• A pre-tax discount rate of 8% was applied in determining
the recoverable amounts, which was 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. CWB estimates that reasonable
possible changes in these assumptions are not expected to cause
the recoverable amounts of the cash-generating units to decline
below the carrying amounts.
No impairment losses on goodwill or intangible assets were
identified during 2013 or 2012.
78
CWB Group 2013 Annual Report
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
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 CWB’s asset liability
management policies. It is CWB’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 CWB’s common share price.
Foreign exchange contracts are only used for the purposes of
meeting needs of clients or day-to-day business.
Use of Derivatives
CWB 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 CWB 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; and,
• equity swaps, which are agreements where CWB makes periodic
interest payments to a counterparty and receives the capital gain
or loss plus dividends of a CWB common share.
Interest rate swaps are used as hedging instruments to manage
interest rate risk. CWB 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. The Asset Liability
Committee (ALCO) of CWB 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.
As at
October 31
2013
As at
October 31
2012
$
36,615
$
11,905
8,167
6,760
918
33,486
11,369
6,686
5,237
872
$
64,365
$
57,650
Exposure to foreign exchange risk is not material to CWB’s overall
financial position. 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.
Equity swap transactions are used as hedging instruments to
manage risk related to the payout of restricted share units that
have not yet vested. CWB 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
CWB 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 designated as cash flow hedges 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.
CWB Group 2013 Annual Report
79
Embedded Derivatives
Certain derivatives embedded in other financial instruments 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. Identified embedded derivatives 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 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.
Replace-
ment
Cost
As at October 31, 2013
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Notional
Amount
Notional
Amount
Replace-
ment
Cost
As at October 31, 2012
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Interest rate swaps
$ 800,000 $
367 $ 1,494 $ 1,861 $
372 $ 225,000 $
154 $
- $
154 $
Equity swaps
Foreign exchange
contracts
Total
17,470
4,131
45
4,176
835
15,445
1,778
40
1,818
1,235
11
12
23
10
2,450
19
24
43
$ 818,705 $ 4,509 $ 1,551 $ 6,060 $ 1,217 $ 242,895 $ 1,951 $
64 $ 2,015 $
31
363
17
411
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, 2013
As at October 31, 2012
Favourable Contracts
Fair
Value
Notional
Amount
Unfavourable Contracts
Fair
Value
Notional
Amount
Favourable Contracts
Fair
Value
Notional
Amount
Unfavourable Contracts
Notional
Fair
Value
Amount
Interest rate swaps
designated as hedges
$ 675,000 $
367 $ 125,000 $
(32) $ 225,000 $
154 $
- $
Equity swaps designated
as hedges
Foreign exchange contracts
17,470
784
4,131
11
-
451
-
(4)
15,445
1,485
1,778
19
-
965
Total
$ 693,254 $
4,509 $ 125,451 $
(36) $ 241,930 $
1,951 $
965 $
-
-
(10)
(10)
80
CWB Group 2013 Annual Report
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)
2013
1,955
76
$
$
2012
598
210
$
$
The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on contracts:
As at October 31, 2013
Maturity
As at October 31, 2012
Maturity
1 Year or Less
More than 1 Year
1 Year or Less
More than 1 Year
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Interest rate swaps
designated as hedges (1)
$ 525,000
1.24% $ 275,000
1.33% $ 225,000
1.28% $
-
-
Equity swaps designated
as hedges (2)
Foreign exchange contracts (3)
8,215
1,235
2.37%
9,255
2.45%
-
7,494
2,450
2.39%
7,951
2.54%
-
Total
$ 534,450
$ 284,255
$ 234,944
$
7,951
(1) CWB 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 December 2013 and April 2015.
(2) Equity swaps designated as hedges mature between June 2014 and June 2016.
(3) Foreign exchange contracts mature between December 2013 and April 2014. The contractual interest rate is not meaningful for foreign exchange contracts.
During the year, $2,332 net unrealized after-tax gains (2012 – $1,430)
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 (2012 – 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,
$1,255 of net gains after tax (2012 – $483) were reclassified
to net income.
CWB Group 2013 Annual Report
81
(Note 24)
As at
October 31
2013
As at
October 31
2012
$
44,698
$
28,358
19,324
7,410
2,011
6,019
78
48,377
30,831
23,363
6,400
5,290
5,133
3,072
$
107,898
$
122,466
As at October 31, 2013
Business and
Government
Individuals
Total
$
30,337
$
615,166
$
645,503
2,741,951
6,648,466
1,622,400
4,364,351
3,867,720
10,516,186
$ 9,420,754
$ 6,105,286
$ 15,526,040
As at October 31, 2012
Individuals
Business and
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
As at
October 31
2013
October 31
2012
(Note 21)
$
89,742
$
75,481
2,033
560
86,218
71,790
1,737
557
$
167,816
$
160,302
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 $2,108 (2012 – $1,703).
13. DEPOSITS
Deposits are accounted for on an amortized cost basis.
Costs relating to the issuance of fixed term deposits are
amortized over the expected life of the deposit using the
effective interest method.
Payable on demand
Payable after notice
Payable on a fixed date
Total
Payable on demand
Payable after notice
Payable on a fixed date
Total
14. INSURANCE-RELATED OTHER LIABILITIES
Unpaid claims and adjustment expenses
Unearned premiums
Due to insurance companies and policyholders
Unearned commissions
Total
82
CWB Group 2013 Annual Report
15. OTHER LIABILITIES
Accounts payable
Accrued interest payable
Deferred tax liability
Income taxes payable
Deferred revenue
Leasehold inducements
Acquisition contingent consideration
Other
Total
16. DEBT
a) Debt Securities
CWB securitizes leases to third parties. These securitizations do
not qualify for derecognition as CWB 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 removed 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, 2013
was $195,650 (October 31, 2012 – $209,273), and the associated
carrying amount of the lease assets recorded on the balance sheet
was $230,353 (October 31, 2012 – $237,698), which does not
include an allocation of the allowance for credit losses.
As at
October 31
2013
As at
October 31
2012
$
112,500
$
105,790
104,866
10,360
1,663
3,431
3,840
1,679
600
105,728
8,897
12,386
3,068
2,966
-
668
$
238,939
$
239,503
(Note 24)
(Note 29)
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)
3.463% (2)
5.571% (3)
5.950% (4)
Total
Maturity
Date
Earliest Date
Redeemable
by CWB at Par
As at
October 31
2013
As at
October 31
2012
November 30, 2020
November 30, 2015
$
300,000
$
300,000
December 17, 2024
December 17, 2019
March 21, 2022
March 22, 2017
June 27, 2018
June 28, 2013
250,000
75,000
-
-
75,000
50,000
$
625,000
$
425,000
(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 12-year term with a fixed interest rate for the first seven years. Thereafter, the interest rate will be set quarterly at the Canadian dollar CDOR 90-day Bankers’ Acceptance rate plus
160 basis points.
(3) 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.
(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 302 basis points. On June 28, 2013, these conventional debentures were redeemed by CWB.
CWB Group 2013 Annual Report
83
17. CAPITAL STOCk
Authorized:
• An unlimited number of common shares without nominal or
• 25,000,000 first preferred shares without nominal or par value,
par value;
• 33,964,324 class A shares without nominal or par value; and,
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.
Issued and fully paid:
Preferred Shares – Series 3
Outstanding at beginning of year
Purchased for cancellation
Outstanding at end of year
Common Shares
Outstanding at beginning of year
Issued under dividend reinvestment plan
Issued on exercise or exchange of options
Transferred from share-based payment reserve on
exercise or exchange of options
Issued on settlement of contingent consideration
Outstanding at end of year
Share Capital
2013
2012
Number of
Shares
Amount
Number of
Shares
Amount
8,390,000
$
209,750
8,390,000
$
209,750
(37,404)
(935)
-
-
8,352,596
208,815
8,390,000
209,750
78,742,812
490,218
75,461,981
509,969
366,814
14,404
1,674
450,958
573,005
-
-
3,986
-
-
2,256,868
79,619,595
510,282
78,742,812
408,282
12,252
1,853
4,432
63,399
490,218
$
719,097
$
699,968
CWB is prohibited by the Bank Act from declaring any dividends on
common shares when CWB 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 Bank 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), CWB 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 CWB’s Board of Directors and paid by CWB during the year:
$0.70 per common share (2012 – $0.62)
$1.81 per preferred share – Series 3 (2012 – $1.81)
Total
2013
2012
55,374
$
47,749
15,183
70,557
$
15,208
62,957
$
$
Subsequent to October 31, 2013, the Board of Directors of CWB
declared a dividend of $0.19 per common share payable on January 9,
2014 to shareholders of record on December 17, 2013 and a dividend
of $0.453125 per Series 3 preferred share payable on January 31, 2014
to shareholders of record on January 23, 2014. With respect to these
dividend declarations, no liability was recorded in the balance sheet at
October 31, 2013.
84
CWB Group 2013 Annual Report
b) Preferred Shares
c) Dividend Reinvestment Plan
Holders of the Series 3 preferred shares are entitled to receive non-
cumulative quarterly fixed dividends for the initial five-year period
ending April 30, 2014 of 7.25% per annum, payable quarterly, as and
when declared by the Board of Directors. The dividend rate on Series 3
preferred shares will reset May 1, 2014 and every five years thereafter at
a level of 500 basis points over the then current five-year Government
of Canada bond yield. On April 30, 2014, and every five years
thereafter, holders of Series 3 preferred shares will, subject to certain
conditions, have the option to convert their shares to Non-Cumulative
Floating Rate Preferred Shares, Series 4 (Series 4 preferred shares).
Holders of the Series 4 preferred shares will be entitled to a floating
quarterly dividend rate equal to the 90-day Canadian treasury bill rate
plus 500 basis points, as and when declared by the Board of Directors.
The Series 3 preferred shares are not redeemable prior to April 30,
2014. Subject to the provisions of the Bank Act, the prior consent
of OSFI and the provisions described in the prospectus for the public
offering, on April 30, 2014 and on April 30 every five years thereafter,
CWB may redeem all or any part of the then outstanding Series 3
preferred shares at CWB’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.
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, CWB may redeem
all or any part of the then outstanding Series 4 preferred shares at
CWB’s option without the consent of the holder by the payment of
an amount in cash for each such share so redeemed of: (i) $25.00
together with all declared and unpaid dividends to the date fixed for
redemption in the case of redemptions on April 30, 2019 and on
April 30 every five years thereafter; or (ii) $25.50 together with all
declared and unpaid dividends to the date fixed for redemption in the
case of redemptions on any other date on or after April 30, 2014.
Under the dividend reinvestment plan (plan), CWB provides holders
of CWB’s common shares and holders of any other class of shares
deemed eligible by CWB’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 CWB’s Series 3 preferred
shares are also eligible to participate in the plan. The plan is only
open to shareholders residing in Canada.
At the option of CWB, the common shares may be issued from
CWB’s treasury at an average market price based on the closing
prices of a board lot of common shares on the Toronto Stock Exchange
(TSX) for the five trading days immediately preceding the dividend
payment date, with a discount of between 0% to 5% at CWB’s
discretion. CWB also has the option to fund the plan through the
open market at market prices. During the year, 509,969 (2012 –
450,958) common shares were issued under the plan from CWB’s
treasury at a 2% (2012 – 2%) discount.
d) Preferred Share Normal Course Issuer Bid (NCIB)
On February 27, 2013, CWB received approval from the TSX to
institute a Normal Course Issuer Bid (NCIB) to purchase and cancel
up to 826,120 of its Non-Cumulative 5-Year Rate Reset Preferred
Shares Series 3, being 10% of the issued preferred shares. The NCIB
commenced March 1, 2013 and will expire February 28, 2014. During
2013, CWB purchased and cancelled 37,404 preferred shares for
a total of $971, of which $935 reduced the outstanding balance of
preferred shares and the $36 premium paid above book value was
charged to retained earnings.
CWB Group 2013 Annual Report
85
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.
CWB has authorized 5,542,959 common shares (2012 – 4,409,773)
for issuance under the share incentive plan. Of the amount authorized,
options exercisable into 4,217,908 shares (2012 – 3,441,100) are
The details of, and changes in, the issued and outstanding options follow:
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 2013 to June 2018.
Options
Balance at beginning of year
Granted
Exercised or exchanged
Expired
Forfeited
Balance at end of year
Exercisable at end of year
2013
2012
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Number
of Options
Number
of Options
3,441,100
$
1,810,899
(824,068)
(162,075)
(47,948)
4,217,908
501,579
$
$
24.51
28.30
18.80
31.18
27.64
26.96
20.50
3,542,072
$
1,261,378
(1,258,537)
-
(103,813)
3,441,100
878,890
$
$
21.36
25.86
16.88
-
25.89
24.51
19.31
Further details relating to stock options outstanding and exercisable follow:
Range of Exercise Prices
$8.58 to $11.76
$16.89 to $22.09
$23.43 to $26.40
$28.09 to $30.76
Total
Options Outstanding
Weighted
Average
Remaining
Contractual
Weighted
Average
Exercise
Life (years)
0.1
0.9
3.1
3.8
3.4
$
$
Price
11.66
19.64
25.55
28.80
26.96
Number of
Options
32,600
285,904
1,409,540
2,489,864
4,217,908
Options Exercisable
Weighted
Average
Exercise
Number
of Options
32,600
$
285,904
183,075
-
Price
11.66
19.64
23.43
-
501,579
$
20.50
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 CWB 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 824,068 (2012 – 1,258,537) options exercised or exchanged,
option holders exchanged the rights to 737,653 (2012 – 1,133,197)
options and received 280,399 (2012 – 447,665) shares in return under
the cashless settlement alternative.
Salary expense of $6,150 (2012 – $5,016) 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 1.4% (2012 – 1.1%), (ii) expected option life of 4.0
(2012 – 4.0) years, (iii) expected volatility of 22% (2012 – 31%),
and (iv) expected annual dividends of 2.5% (2012 – 2.4%).
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 $3.93 (2012 – $4.92) per share.
During the year, $3,986 (2012 – $4,432) was transferred from
the share-based payment reserve to share capital, representing the
estimated fair value recognized for 824,068 (2012 – 1,258,537)
options exercised during the year.
86
CWB Group 2013 Annual Report
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 CWB’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.
Number of RSUs
Balance at beginning of year
Granted
Vested and paid out
Forfeited
Balance at end of year
During the year, salary expense of $9,796 (2012 – $7,682) was
recognized related to RSUs. As at October 31, 2013, the liability
for the RSUs held under this plan was $12,111 (October 31, 2012 –
$9,336). At the end of each period, the liability and salary expense
are adjusted to reflect changes in the fair value of the RSUs.
2013
594,455
354,491
(281,564)
(16,591)
650,791
2012
535,769
337,273
(263,908)
(14,679)
594,455
c) Deferred Share Units
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
$745 (2012 – $674) related to the DSUs. As at October 31, 2013,
the liability for DSUs held under this plan was $2,782 (October 31,
2012 – $2,328). 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
Paid out
Balance at end of year
2013
78,761
9,059
(4,470)
83,350
2012
51,463
27,298
-
78,761
CWB Group 2013 Annual Report
87
19. NON-CONTROLLING INTERESTS
Non-controlling interests are comprised of the following:
CWB Capital Trust
Adroit Investment Management Ltd.
McLean & Partners Wealth Management Ltd.
Total
As at
October 31
2013
As at
October 31
2012
$
105,000
$
105,000
272
790
244
-
$
106,062
$
105,244
(Note 32)
CWB Capital Trust
The significant terms and conditions of the WesTS are:
In 2006, CWB 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 CWB
under SIC 12 as CWB retains voting control of CWB Capital Trust
through the ownership of the Special Trust Securities. Accordingly,
CWB consolidates CWB Capital Trust and the WesTS issued by CWB
Capital Trust are disclosed under non-controlling interests (2013 and
2012 – $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 CWB 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
• Earliest date exchangeable
at the option of the holder
• Trust capital securities
outstanding
December 31, 2011
Anytime
105,000
• Principal amount
$105,000
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 CWB. 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 CWB, with OSFI approval, on
or after December 31, 2011, but not at the option of the holders.
This exchange right will be effected through the conversion by CWB
Capital Trust of the corresponding amount of the deposit note of
CWB. The WesTS exchanged for CWB’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 CWB, (ii) OSFI takes control of CWB, (iii) CWB has a Tier 1
capital ratio of less than 5% or Total capital ratio of less than 8%,
or (iv) OSFI has directed CWB to increase its capital or provide
additional liquidity and CWB elects such automatic exchange or
CWB fails to comply with such direction. Following the occurrence
of an automatic exchange, CWB 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.
CWB’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 CWB, with OSFI approval,
on or after December 31, 2011, but not at the option of the holders.
88
CWB Group 2013 Annual Report
6) For regulatory capital purposes, effective January 1, 2013,
(see Note 31) 90% (2012 – 100%) 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 the CDOR 180-day Bankers’ Acceptance rate
plus 2.55%.
20. CONTINGENT LIABILITIES AND COMMITMENTS
a) Credit Instruments
In the normal course of business, CWB 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.
As at
October 31
2013
As at
October 31
2012
$
354,083
$
286,676
3,877,989
3,506,408
$ 4,232,072
$ 3,793,084
In the majority of instances, availability of undrawn commercial
commitments is subject to the borrower meeting specified financial
tests or other covenants regarding completion or satisfaction of certain
conditions precedent. It is also usual practice to include the right to
review and withhold funding in the event of a material adverse change
in the financial condition of the borrower. From a liquidity perspective,
undrawn credit authorizations will be funded over time, with draws
in many cases extending over a period of months. In some instances,
authorizations are never advanced or may be reduced because of
changing requirements. Revolving credit authorizations are subject to
repayment which, on a pooled basis, also decreases liquidity risk.
Credit instruments
Guarantees and standby letters of credit
Commitments to extend credit
Total
Guarantees and standby letters of credit represent CWB’s obligation
to make payments to third parties when a customer is unable to
make required payments or meet other contractual obligations. These
instruments carry the same credit risk, recourse and collateral security
requirements as loans extended to customers and generally have a
term that does not exceed one year. Losses, if any, resulting from these
transactions are not expected to be material.
Commitments to extend credit to customers also arise in the
normal course of business and include undrawn availability under
lines of credit and commercial operating loans of $2,085,452
(October 31, 2012 – $2,036,003) and authorized but unfunded loan
commitments of $1,792,537 (October 31, 2012 – $1,470,405).
b) Lease Commitments
CWB 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 five 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:
2014
2015
2016
2017
2018
2019 and thereafter
Total
$
11,893
11,953
11,442
9,475
8,231
50,910
$
103,904
CWB Group 2013 Annual Report
89
c) Guarantees
A guarantee is defined as a contract that contingently requires
the guarantor to make payments to a third party based on (i) changes
in an underlying economic characteristic that is related to an asset,
liability or equity security of the guaranteed party, (ii) failure of another
party to perform under an obligating agreement, or (iii) failure of
another third party to pay indebtedness when due.
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.
Significant guarantees provided to third parties include guarantees
and standby letters of credit as discussed above.
Premiums Earned and Deferred
Policy Acquisition Costs
In the ordinary course of business, CWB enters into contractual
arrangements under which CWB may agree to indemnify the
other party. Under these agreements, CWB 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.
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, CWB and its subsidiaries
are party to legal and regulatory proceedings. Based on current
knowledge, CWB does not expect the outcome of any of these
proceedings to have a material effect on the consolidated financial
position, or results of operations.
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.
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).
90
CWB Group 2013 Annual Report
Unpaid Claims and Adjustment Expenses
Reinsurance Ceded
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.
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
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:
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.
• Significant financial difficulty of the reinsurer
• A breach of contract, such as default or delinquency
in payments
• 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.
2013
2012
$
126,825
$
123,204
1,787
(87,008)
(25,325)
1,855
(83,167)
(24,539)
$
16,279
$
17,353
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
Insurance revenues, net
CWB Group 2013 Annual Report
91
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.
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
2013
2012
$
74,295
$
64,543
86,087
921
(86,488)
74,815
6,760
8,167
84,762
(1,595)
(73,415)
74,295
5,237
6,686
Unpaid claims and adjustment expenses, net, end of year
$
89,742
$
86,218
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 2.50% (2012 – 2.78%).
However, that rate was reduced by a 0.50% (2012 – 0.50%)
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 $585 (2012 – $572) in unpaid claims and adjustment expenses and
related reinsurance recoveries.
Policy balances, included in insurance-related other assets and other liabilities, analyzed by major lines of business are as follows:
Unpaid claims and adjustment expenses
Reinsurers’ share of unpaid claims and adjustment expenses
Unearned premiums
2013
2012
Automobile
Home
Automobile
Home
$
68,532
$
21,210
$
65,964
$
20,254
4,169
50,500
2,591
24,981
4,200
48,598
1,037
23,192
92
CWB Group 2013 Annual Report
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 (2012 – $300,000) is obtained
to protect against certain catastrophic losses. Retention on catastrophic
events is $5,000 (2012 – $5,000), on property per risk events is $1,000
(2012 – $1,000) and on casualty events is $2,000 (2012 – $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 CWB to change a reinsurer during the term of the agreement
if the reinsurer's rating falls below a specified level.
At October 31, 2013, $6,760 (October 31, 2012 – $5,237) of unpaid
claims and adjustment expenses were recorded as recoverable from
reinsurers. Failure of a reinsurer to honour its obligation could result
in losses. The financial condition of reinsurers is regularly evaluated to
minimize the exposure to significant losses from reinsurer insolvency.
The amounts shown in other income are net of the following amounts relating to reinsurance ceded to other insurance companies:
Premiums earned reduced by
Claims incurred reduced by
2013
$
9,976
$
3,732
2012
9,352
1,912
22. DISCLOSURES ON RATE REGULATION
Canadian Direct Insurance Incorporated (Canadian Direct),
a wholly owned subsidiary, is licensed under insurance legislation in
the provinces in which it conducts business. Automobile insurance is a
compulsory product and is subject to different regulations across the
provinces in Canada, including those with respect to rate setting.
Rate setting mechanisms vary across the provinces, but they generally
fall under three categories: “use and file”, “file and use” and “file
and approve”. Under “use and file”, rates are filed following use.
Under “file and use”, insurers file their rates with the relevant
authorities and wait for a prescribed period of time and then
implement the proposed rates. Under “file and approve”, insurers
must wait for specific approval of filed rates before they may be used.
The 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 $46,400
in 2013 (2012 – $43,100) and represented 52% (2012 – 50%) of
direct automobile premiums written.
Province
Alberta
Rate Filing
Regulatory Authority
File and approve or
Alberta Automobile Insurance Rate Board
File and use
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 CWB. As at October 31,
2013 and October 31, 2012, CWB had no such regulatory asset
or liability.
23. EMPLOYEE FUTURE BENEFITS
All employee future benefits related to CWB’s group retirement
savings and employee share purchase plans are recognized in the
periods during which services are rendered by employees. CWB’s
contributions to the group retirement savings plan and employee
share purchase plan totaled $11,685 (2012 – $10,932).
CWB Group 2013 Annual Report
93
24. INCOME TAXES
CWB 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 on derivatives designated as cash flow hedges
Total
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.
2013
2012
$
58,545
$
60,904
5,507
64,052
(695)
60,209
(4,800)
364
(4,436)
121
331
452
$
59,616
$
60,661
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
$
69,620
25.4 % $
65,090
25.6 %
2013
2012
Increase (decrease) arising from:
Tax-exempt income
Stock-based compensation
Contingent consideration fair value charge
Other
(6,072)
1,547
-
(1,043)
(2.2)
0.6
-
(0.4)
(6,744)
1,271
631
(39)
(2.6)
0.5
0.2
(0.1)
Provision for income taxes and effective tax rate
$
64,052
23.4 % $
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
CWB has approximately $11,140 (2012 – $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.
94
CWB Group 2013 Annual Report
2013
2012
$
16,618
$
14,816
9,357
(3,659)
(1,997)
(995)
8,681
(3,962)
281
3,547
$
$
$
19,324
$
23,363
9,197
$
1,163
10,360
$
8,164
733
8,897
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 are used to purchase CWB’s common shares at the average
market price during the period.
The calculation of earnings per common share follows:
Numerator
Net income available to common shareholders
Denominator
2013
2012
$
187,163
$
172,197
Weighted average of common shares outstanding – basic
79,147,496
76,840,532
Dilutive instruments:
Stock options (1)
Weighted average number of common shares outstanding – diluted
Earnings per common share
Basic
Diluted
396,532
619,460
79,544,028
77,459,992
$
$
2.36
2.35
2.24
2.22
(1) At October 31, 2013, the denominator excludes nil (October 31, 2012 – 527,056) employee stock options with an average adjusted exercise price of nil (2012 – $30.89) where the exercise price, adjusted for unrecognized
stock-based compensation, is greater than the average market price.
26. ASSETS UNDER ADMINISTRATION
AND MANAGEMENT
Assets under administration of $8,423,972 (October 31, 2012 –
$7,171,826) and assets under management of $1,901,146
(October 31, 2012 – $855,333) represent the fair value of assets
held for personal, corporate and institutional clients as well as
third-party leases and residential mortgages subject to service
agreements. These assets are kept separate from CWB’s own assets.
Assets under administration and management are not reflected in
the consolidated balance sheets.
27. RELATED PARTY TRANSACTIONS
Transactions with and between subsidiary entities are made at
normal market prices and are eliminated on consolidation.
Preferred Rates and Terms
Key Management Personnel
CWB makes loans, primarily residential mortgages, to its officers
and employees at various preferred rates and terms. The total amount
outstanding for these types of loans is $106,085 (October 31, 2012 –
$113,967). CWB offers deposits, primarily fixed term deposits, to its
officers and employees and their immediate family at preferred rates.
The total amount outstanding for these deposits is $256,136
(October 31, 2012 – $219,647).
Compensation of key management personnel is as follows:
Salaries, benefits and directors' compensation
Share-based payments (stock options, 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 $146
as at October 31, 2013 (October 31, 2012 – $630). CWB’s policies
preclude lending to CWB’s independent directors.
key management personnel of CWB are those that have authority
and responsibility for planning, directing and controlling the activities
of CWB and include independent directors of CWB.
2013
6,129
$
3,644
9,773
$
2012
5,611
3,276
8,887
$
$
CWB Group 2013 Annual Report
95
28. INTEREST RATE SENSITIVITY
CWB is exposed to interest rate risk as a result of a difference, or gap,
between the maturity or repricing behaviour of interest sensitive assets
and liabilities. The interest rate gap is managed by forecasting core
balance trends. The repricing profile of these assets and liabilities has
been incorporated in the table following showing the gap position
at October 31 for select time intervals. Figures in brackets represent
an excess of liabilities over assets or a negative gap position.
Asset Liability Gap Positions
($ millions)
October 31, 2013
Assets
Floating Rate
and Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Total
Within
1 Year
1 Year to
5 Years
More than
5 Years
Non-
interest
Sensitive
Total
Cash resources and securities
$
371 $
710 $
619 $
1,700 $
591 $
178 $
111 $
2,580
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
$
$
7,281
-
-
7,652
5,535
3
7
-
818
6,363
606
-
150
1,466
949
7
14
-
-
1,980
9,867
5,638
125
(53)
15,577
-
384
2,983
-
534
12,101
-
284
6,513
4,434
10,918
4,624
30
64
-
-
40
85
-
818
39
486
105
-
-
-
303
-
11
250
-
-
363
1
422
363
819
19,339
(16)
15,526
372
-
1,606
1
462
821
1,711
819
970
4,528
11,861
5,254
261
1,963
19,339
1,289 $
496 $
(1,545) $
240 $
1,259 $
42 $
(1,541) $
1,289 $
1,785 $
240 $
240 $
1,499 $
1,541 $
- $
Percentage of Total Assets
6.7 %
9.2 %
1.2 %
1.2 %
7.8 %
8.0 %
-
October 31, 2012
Cumulative Gap
Cumulative Gap as a
$
1,560 $
1,586 $
773 $
773 $
1,211 $
1,437 $
(1,437) $
Percentage of Total Assets
9.1 %
9.3 %
4.5 %
4.5 %
7.1 %
8.4 %
-
-
-
-
-
-
(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.
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CWB Group 2013 Annual Report
The effective, weighted average interest rates for each class of financial asset and liability are shown below:
Weighted Average Effective Interest Rates
(%)
October 31, 2013
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
October 31, 2012
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
Floating Rate
and Within
1 to 3
1 Month Months
3 Months
to 1 Year
3.8 %
1.3
2.5 %
3.8 %
1.3
2.5 %
2.3 %
1.9
0.4 %
2.7 %
2.1
0.6 %
4.0 %
2.0
2.0 %
3.7 %
2.3
1.4 %
Total
Within
1 Year
3.6 %
1.6
2.0 %
3.6 %
1.7
1.9 %
1 Year to More than
5 Years
5 Years
4.6 %
2.4
2.2 %
5.0 %
2.5
2.5 %
4.8 %
3.3
1.5 %
5.0 %
-
5.0 %
Total
4.0 %
1.9
2.1 %
4.1 %
2.0
2.1 %
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 3.3% or $14,545 (October 31,
2012 – 3.8% or $15,086) and decrease other comprehensive income
$14,418 (October 31, 2012 – $12,594) 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
5.3% or $23,853 (October 31, 2012 – 5.4% or $21,534) and increase
other comprehensive income $14,418 (October 31, 2012 – $12,594),
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 CWB’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 CWB’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
CWB’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 2013 Annual Report
97
Total Financial Liabilities
$
36 $ 16,729,175 $
- $ 16,729,211 $ 16,756,131 $
26,920
(Note 3)
(Note 4)
October 31, 2013
Financial Assets
Cash resources
Securities
Loans (1)
Other assets (2)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits (1)
Other liabilities (3)
Debt
Derivative related
(Note 3)
(Note 4)
October 31, 2012
Financial Assets
Cash resources
Securities
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
Loans and
Receivables, and
Derivatives
Non-trading Available-
for-sale
Liabilities
Total
Carrying
Amount
Fair Value
Over (Under)
Carrying
Amount
Fair Value
$
- $
- $ 347,995 $ 347,995 $ 347,995 $
-
2,232,322
2,232,322
2,232,322
-
-
-
15,629,443
120,845
4,509
-
-
-
-
15,629,443
15,614,937
(14,506)
120,845
120,845
4,509
4,509
-
-
$
4,509 $ 15,750,288 $ 2,580,317 $ 18,335,114 $ 18,320,608 $
(14,506)
$
- $ 15,541,831 $
- $ 15,541,831 $ 15,553,762 $
11,931
-
-
36
366,694
820,650
-
-
-
-
366,694
820,650
36
366,694
835,639
36
-
14,989
-
Loans and
Receivables, and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
Over (Under)
Carrying
Amount
Fair Value
$
- $
- $ 236,983 $ 236,983 $ 236,983 $
-
2,336,100
2,336,100
2,336,100
-
-
-
14,016,609
128,614
1,951
-
-
-
-
14,016,609
14,051,651
35,042
128,614
128,614
1,951
1,951
-
-
$
1,951 $ 14,145,223 $ 2,573,083 $ 16,720,257 $ 16,755,299 $
35,042
$
- $ 14,160,114 $
- $ 14,160,114 $ 14,189,398 $
29,284
-
-
-
10
366,557
70,089
634,273
-
-
-
-
-
366,557
366,557
70,089
70,089
-
-
634,273
652,929
18,656
10
10
-
-
-
-
-
Total Financial Liabilities
$
10 $ 15,231,033 $
- $ 15,231,043 $ 15,278,983 $
47,940
(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.
• Loans reflect changes in the general level of interest rates that
have occurred since the loans were originated and are net of the
allowance for credit losses. For floating rate loans, fair value is
assumed to be equal to book value as the interest rates on these
loans automatically reprice to market. For all other loans, fair value
is estimated by discounting the expected future cash flows of these
loans at current market rates for loans with similar terms and risks.
• Other assets and other liabilities, with the exception of derivative
financial instruments 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.
• 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.
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CWB Group 2013 Annual Report
• deposits with no stated maturity are assumed to be equal to their
carrying values. The estimated fair values of fixed rate deposits are
determined by discounting the contractual cash flows at current
market rates for deposits of similar terms; and
• the fair values of debt are determined by reference to current
market prices for debt with similar terms and risks.
Fair values are based on management’s best estimates based on market
conditions and pricing policies at a certain point in time. The estimates
are subjective and involve particular assumptions and matters of
judgment and, as such, may not be reflective of future fair values.
Fair Value Hierarchy
CWB 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.
As at October 31, 2013
Financial Assets
Cash resources
Securities
Derivative related
Total Financial Assets
Financial Liabilities
Other liability
Derivative related
Total Financial Liabilities
As at October 31, 2012
Financial Assets
Cash resources
Securities
Derivative related
Total Financial Assets
Financial Liabilities
Derivative related
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
347,995
$
300,995
$
47,000
$
2,232,332
2,232,332
4,509
-
-
4,509
$ 2,584,836
$ 2,533,327
$
51,509
$
-
-
-
-
$
$
1,679
$
36
1,715
$
-
-
-
$
$
-
$
1,679
36
36
-
$
1,679
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
$
-
-
-
-
-
b) Level 3 Financial Instruments
The Level 3 financial instrument at October 31, 2013 was comprised
of the contingent consideration related to a 2013 subsidiary
acquisition (see Note 32). The following table shows a reconciliation of
the fair value measurements related to the Level 3 valued instrument:
Balance at beginning of year
Business acquisition
Change in fair value charged to other income
Settlement
Balance at end of year
2013
2012
$
-
$
61,011
(Note 32)
1,679
-
-
-
2,489
(63,500)
$
1,679
$
-
CWB Group 2013 Annual Report
99
30. RISk MANAGEMENT
Basel III Capital Adequacy Accord
As part of CWB’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 the MD&A. The relevant MD&A sections are identified
by shading, 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.
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.
CWB 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 CWB 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.
Significant capital transactions during fiscal 2013 include the
December 2012 issue of $250,000 of conventional subordinated
debentures, which qualify as total capital, subject to a Basel III
transitional allowance. In June 2013, CWB redeemed $50,000 of
subordinated debentures with a fixed interest rate of 5.95%.
Regulatory capital and capital ratios are calculated in accordance
with the requirements of OSFI and, effective January 1, 2013,
capital is managed and reported in accordance with the requirements
of the Basel III Capital Adequacy Accord (Basel III). 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 CWB’s risk of loss is nil, while uninsured
commercial loans are assigned a risk weighting of 100% to reflect
the higher level of risk associated with this type of asset. The ratio
of regulatory capital to risk-weighted assets is calculated and
compared to OSFI’s standards for Canadian financial institutions.
Off-balance sheet assets, such as the notional amount of derivatives
and some credit commitments, are included in the calculation of
risk-weighted assets and both the credit risk equivalent and the
risk-weighted calculations are prescribed by OSFI. As CDI is subject to
separate OSFI capital requirements specific to insurance companies,
CWB’s investment in CDI is consolidated and risk-weighted using the
equity accounting method and CDI’s underlying assets are excluded
from the calculation of risk-weighted assets.
The required minimum regulatory capital ratios, including a 250
basis point capital conservation buffer, are 7.0% common equity
Tier 1 (CET1), effective in 2013, and 8.5% Tier 1 and 10.5% total
capital effective in 2014.
The Basel III rules provide for transitional adjustments with
certain aspects of the new rules phased in between 2013
and 2019. The only available transition allowance in the Basel III
capital standards permitted by OSFI for Canadian banks relates to
the multi-year phase out of non-qualifying capital instruments.
The 2013 inclusion of non-qualifying capital instruments in non-
common Tier 1 (preferred shares and WesTS) and total capital
(subordinated debt) under Basel III are capped at $283,275 and
$607,500, respectively, based on 90% of the January 1, 2013
outstanding balances. The June redemption of subordinated
debentures had no impact on total capital as the balance of
subordinated debentures after the redemption still exceeded
the $607,500 cap.
During the year, CWB complied with all internal and external
capital requirements.
Capital Structure and Regulatory Ratios
Regulatory Capital, net of deductions
Common equity Tier 1
Tier 1
Total
Capital ratios
Common equity Tier 1
Tier 1
Total
Asset to capital multiple
2013
2012 (1)
$ 1,285,692
n/a
1,560,801
$ 1,460,776
2,243,654
1,903,790
8.0 %
9.7
13.9
8.1 x
n/a
10.6 %
13.8
8.8 x
(1) Capital ratios prior to fiscal 2013 have been calculated using the previous capital framework, Basel II. Capital ratios calculated under Basel III are not directly comparable to the equivalent Basel II measures.
100
CWB Group 2013 Annual Report
32. BUSINESS ACQUISITION
Effective May 17, 2013, CWB acquired 54.6% of the outstanding
common shares of McLean & Partners Wealth Management Ltd.
(McLean & Partners), a Calgary, Alberta-based wealth management
firm, in exchange for $10,098 of cash and contingent consideration
for a total acquisition cost of $11,777. Additional contingent
consideration, to a maximum of $1,639, will be paid in cash if
earnings targets are achieved over a two-year period. The results
of operations for McLean & Partners have been included in CWB’s
consolidated financial statements since the effective acquisition date.
The following table summarizes the fair value of the assets acquired and liabilities assumed:
Fair value of consideration transferred
Identifiable assets acquired and liabilities assumed
Intangible assets
Other items, net
Deferred income tax liability
Non-controlling interest
Goodwill
Intangible assets include customer relationships, non-competition
agreements and a trade name. The trade name, which has an
estimated value of $518, is not subject to amortization. The total
amount of goodwill and intangible assets is not deductible for income
tax purposes.
$
11,777
9,839
696
(2,330)
(316)
3,888
$
CWB Group 2013 Annual Report
101
33. SUBSIDIARIES
Canadian Western Bank Subsidiaries (1)
(annexed in accordance with subsection 308 (3) of the Bank Act)
October 31, 2013
National Leasing Group Inc.
Canadian Direct Insurance Incorporated
Canadian Western Trust Company
McLean & Partners Wealth Management Ltd.
Valiant Trust Company
Adroit Investment Management Ltd.
Canadian Western Bank Capital Trust
Canadian Western Bank Leasing Inc.
Canadian Western Financial Ltd.
Address of
Head office
1525 Buffalo Place
Winnipeg, Manitoba
Suite 600, 750 Cambie Street
Vancouver, British Columbia
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
801 10th Avenue S.W.
Calgary, Alberta
Suite 310, 606 4th Street S.W.
Calgary, Alberta
Suite 1250, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Carrying Value of
Voting Shares Owned
by the Bank (2)
$
134,458
25,766
19,136
11,777
8,080
6,927
1,000
1
1
(1) CWB owns 100% of the voting shares of each entity, with the exception of Adroit Investment Management Ltd. (72.75% ownership) and McLean & Partners Wealth Management Ltd. (54.6% ownership).
(2) The carrying value of voting shares is stated at CWB’s equity in the subsidiaries.
34. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in the balance
sheets to conform to the current period’s presentation.
102
CWB Group 2013 Annual Report
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, change
in share registration or address, lost
share certificates, tax forms or estate
transfers, please write or call the
Transfer Agent and Registrar, or
email inquiries@valianttrust.com.
Duplicated Communications
If you receive, but do not require,
more than one mailing for the same
ownership, please contact the Transfer
Agent 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.
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 at cwb.com.
This 2013 Annual Report, along with
our Annual Information Form, Notice
of Annual Meeting of Shareholders
and Proxy Circular, is available on our
website. For additional printed copies
of these reports, please contact the
Investor Relations Department.
Filings are available on the Canadian
Securities Administrator’s website at
www.sedar.com
2014 Annual and
Special Meeting
The Annual and Special Meeting
of the common shareholders of
Canadian Western Bank will be held in
Edmonton, Alberta, on March 6, 2014
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, 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
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
SENIOR OFFICERS
Group Executive Officers
Chris H. Fowler
President and
Chief Executive Officer
Tracey C. Ball, FCA, ICD.D
Executive Vice President and
Chief Financial Officer
Randy W. Garvey, FCMA
Executive Vice President
Gregory J. Sprung
Executive Vice President, Banking
Brian J. Young
Executive Vice President
Darrell Jones, FCMA
Senior Vice President and
Chief Information Officer
Uve Knaak
Senior Vice President
Culture, Leadership and
Succession Management
Jack C. Wright
Senior Vice President
Commercial and
Retail Banking
Glen Eastwood
Senior Vice President and
Regional General Manager
Michael N. Halliwell
Senior Vice President and
Regional General Manager
Mario Furlan
Senior Vice President and
Regional General Manager
National Leasing
Nick R. Logan
Chief Executive Officer
Tom Pundyk
President
Canadian Western Trust
Matt Colpitts
Vice President and
General Manager
Valiant Trust
Jay Campbell
General Manager
Senior Corporate Officers
William J. Addington, FCMA, ICD.D
Executive Director, Corporate &
Business Development
Canadian Direct Insurance
Brian J. Young
President and Chief
Executive Officer
Kelly Blackett
Senior Vice President
Human Resources
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
Adroit Investment
Management
Maria Holowinsky
President and Chief
Investment Officer
McLean & Partners
Wealth Management
Brent McLean
Chief Executive Officer
Kevin Dehod
President
Ombudsman
R. Graham Gilbert
CWB Group 2013 Annual Report
103
Locations
Canadian Western Bank
Regional Offices
British Columbia
2200, 666 Burrard Street
Vancouver
(604) 669-0081
Mario Furlan
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
6127 Barlow Trail S.E.
Calgary
(403) 267-9882
Michael Docherty
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
Dustin Jones
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
Westjet Banking
Centre
22 Aerial Place N.W.
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 S
(403) 328-9199
Daryn Wenaas
Lloydminster
Suite C, 6209 - 44 Street
(780) 874-9555
Ethan Walker
Medicine Hat
102, 1111 kingsway
Avenue S.E.
(403) 527-7321
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
Pat Rennison
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
Dave McGregor
Courtenay
200, 470 Puntledge Road
(250) 334-8888
Jean-Marc Jaquier
Cranbrook
202, 828 Baker Street
(250) 426-1140
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
Prince George
300 Victoria Street
(250) 612-0123
David Duck
Richmond
4991 No. 3 Road
(604) 238-2800
Michael Yeung
104
CWB Group 2013 Annual Report
Optimum Mortgage
Edmonton
3000, 10303 Jasper Avenue
(780) 423-9748
(Representation across
Western Canada and in
Ontario)
(866) 441-3775
Canadian Direct
Insurance
Edmonton
500, 10115 - 100A Street
(780) 413-5933
(888) 225-5234
Vancouver
600, 750 Cambie Street
(604) 699-3678
(888) 225-5234
Valiant Trust
Calgary
310, 606 - 4 Street S.W.
(403) 233-2801
(866) 313-1872
Edmonton
3000, 10303 Jasper Avenue
(780) 441-2267
Toronto
710, 130 king Street W
(416) 360-1481
Vancouver
600, 750 Cambie Street
(604) 699-4880
Adroit Investment
Management
Edmonton
1250, 10303 Jasper Avenue
(780) 429-3500
McLean & Partners
Wealth Management
Calgary
801-10 Avenue S.W.
(403) 234-0005
National Leasing
Winnipeg
1525 Buffalo Place
(204) 954-9000
(Representation across all
provinces and territories in
Canada)
(800) 665-1326
Canadian Western
Financial
Edmonton
3000, 10303 Jasper Avenue
(780) 423-8888
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 Street
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
5, 259 Hamilton Road
(306) 782-1002
kelly Price
Manitoba
Winnipeg
Winnipeg
230 Portage Avenue
(204) 956-4669
Robert Bean
Winnipeg Kenaston
125 Nature Park Way
(204) 452-0939
Christopher Voogt
Canadian Direct Financial
Edmonton
3000, 10303 Jasper Avenue
(780) 441-2249
www.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 W
(416) 360-1301
Vancouver
600, 750 Cambie Street
(604) 685-2081
(800) 663-1124
cwb.com