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2014 Annual Report
CWB Group
Bank
Trust
Insurance
Wealth
Management
CWB Group 2014 Annual Report
i
Five Year Financial Summary ($ thousands, except per share amounts)
Results of Operations
Net interest income (teb)(3)
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(4)
Return on average total assets(5)
Per Common Share
IFRS(1)
Canadian GAAP(1)
2014
2013(2)
2012
2011
2010
$
513,196
$
470,757
$
443,572
$
411,452
$
328,664
7,676
505,520
113,409
626,605
618,929
218,549
14.8%
1.10
8,138
462,619
94,982
565,739
557,601
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
14.2%
1.06
15.0%
1.08
14.7%
1.09
11,186
317,478
105,595
434,259
423,073
148,413
17.1%
1.24
Average common shares outstanding (thousands)
80,034
79,147
76,841
72,205
65,757
Earnings per share
Basic
Diluted
Adjusted cash(6)
Dividends
Book value
Market price
High
Low
Close
$
$
2.73
2.70
2.76
0.78
19.52
43.30
32.61
37.75
$
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
Balance Sheet and Off-Balance Sheet Summary
Assets
$ 20,608,656
$ 18,513,340
$ 16,873,269
$ 14,849,141
$
12,701,691
Cash resources, securities and repurchase agreements
2,697,185
2,580,327
2,573,083
2,238,039
Loans
Deposits
Debt
Shareholders’ equity
Assets under administration
Assets under management
Capital Adequacy(7)
Common equity Tier 1 ratio
Tier 1 ratio
Total ratio
Other Information
Efficiency ratio (teb)(8)
Efficiency ratio
Net interest margin (teb)(9)
Net interest margin
Provision for credit losses
as a percentage of average loans
Net impaired loans as a percentage of total loans
Number of full-time equivalent staff
Number of bank branches
17,510,099
15,567,440
13,953,686
12,293,282
17,373,014
15,631,040
14,144,837
12,394,689
1,036,990
1,693,527
10,101,698
820,650
1,598,507
8,423,972
634,273
1,464,979
7,171,826
634,877
1,256,613
9,369,589
1,795,975
1,901,146
855,333
816,219
8.0%
9.3
12.8
46.0
46.6
2.59
2.55
0.15
(0.19)
2,094
41
8.0%
9.7
13.9
46.4
47.1
2.66
2.62
0.19
(0.14)
2,037
41
n/a
10.6%
13.8
44.8%
45.6
2.79
2.73
0.19
(0.11)
1,885
41
n/a
11.1%
15.4
44.9%
45.9
2.99
2.91
0.19
0.21
1,796
40
1,876,085
10,496,464
10,812,767
315,000
1,148,043
8,530,716
795,467
n/a
11.3%
14.3
44.1%
45.3
2.74
2.64
0.21
0.62
1,716
39
(1) Financial information prepared under IFRS (2011–2014) and Canadian GAAP (2010) may not be
(4) Return on common shareholders’ equity is calculated as net income available to common shareholders
directly comparable.
divided by average common shareholders’ equity.
(2) During 2014, CWB adopted IFRS 10 Consolidated Financial Statements and applied a change
(5) Return on assets is calculated as net income available to common shareholders divided by average
in accounting policy for indirect leasing costs, both as described in Note 1 of the consolidated
financial statements. The 2013 comparative figures reflect the retrospective application of these
changes, and 2010–2012 have not been restated.
(3) Most banks analyze revenue on a taxable equivalent basis (teb) to permit uniform measurement
and comparison of net interest income. Net interest income (as presented in the consolidated
statement of income) includes tax-exempt income on certain securities. Since this income is
not taxable, the rate of interest or dividend received is significantly lower than would apply
to a loan or security of the same amount. The adjustment to taxable equivalent basis increases
interest income and the provision for income taxes to what they would have been had the tax-
exempt securities been taxed at the statutory rate. The taxable equivalent basis does not have
a standardized meaning prescribed by generally accepted accounting principles and, therefore,
may not be comparable to similar measures presented by other banks.
total assets.
(6) Diluted earnings per common share excluding the after-tax amortization of acquisition-related
intangible assets and the non-tax deductible change in fair value of contingent consideration.
These exclusions represent non-cash charges are not considered to be indicative of ongoing business
performance.
(7) As of January 1, 2013, the Office of the Superintendent of Financial Institutions Canada (OSFI) adopted
a new capital management framework called Basel III and capital is managed and reported in accordance
with those 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.
(8) Efficiency ratio is calculated as non-interest expenses divided by total revenues excluding the non-tax
deductible change in fair value of contingent consideration.
(9) Net interest margin is calculated as net interest income divided by average total assets.
ii
CWB Group 2014 Annual Report
Financial Performance Summary(1)(2)
Total Loans
($ millions)
Total Assets
($ millions)
17,510
15,567
13,953
12,293
10,496
16,873
14,849
12,701
Total Revenues (teb)
($ millions)
626
565
18,513
20,608
525
483
434
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
GAAP
IFRS
GAAP
IFRS
GAAP
IFRS
Net Income Available to
Common Shareholders
($ millions)
218
187
172
148
149
Efficiency Ratio (teb)
(expenses to revenues)
Provision for Credit Losses
( as a percentage of average loans)
44.1%
44.9%
44.8%
46.4% 46.0%
0.21%
0.19% 0.19%
0.19%
0.15%
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
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.
(2) During 2014, CWB adopted IFRS 10 Consolidated Financial Statements and applied a change in accounting policy for indirect leasing costs,
both as described in Note 1 of the Consolidated Financial Statements. The 2013 comparative figures reflect the retrospective application of these
changes and 2010–2012 have not been restated.
2014 Performance Target Ranges(1)
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-IFRS measures.
2014
Target
Ranges
12 – 16%
10 – 12
10 – 12
0.18 to 0.23
≤ 46
14.0 – 15.0
1.05 – 1.15
2014
Performance
15%
11
12
0.15
46.0
14.8
1.10
CWB Group 2014 Annual Report
iii
About CWB
Group
Canadian Western Bank (TSX: CWB) offers highly
personalized business and personal banking services,
primarily across the four western provinces, and is the
largest publicly traded Canadian bank headquartered
in Western Canada. The Bank, along with its operating
affiliates and divisions – National Leasing, Optimum Mortgage, 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 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
Corporate Governance ........................................................ 8
Management’s Discussion and Analysis ............................. 11
Consolidated Financial Statements .................................... 62
Shareholder Information ................................................. 103
Locations ........................................................................ 104
1
CWB Group 2014 Annual Report Business Strategy
Lines of
Business
Vision
To be seen as crucial to our clients’ futures.
CWB Group is focused on becoming the trusted financial
partner to a growing base of clients by delivering
responsive service and sensible solutions, while preserving
its fundamental identity as a conservative, growth-oriented
organization built on a results-oriented culture. In doing
so, management maintains a supportive environment for
employees, aims to provide strong long-term returns for
shareholders and gives back in the communities where
clients and employees work and live.
CWB Group’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
Group’s vision, and are represented by both financial
and non-financial measures.
This approach is facilitated through a focus on four
inter-dependent pillars within CWB Group’s strategic
direction, summarized as follows:
People
Invest in our people, build lasting
relationships and live our values.
Support
Build funding sources, drive
operational excellence, and balance
risk and reward.
Clients
Be responsive, deliver sensible
solutions and be the trusted
financial partner.
Financial
Sustain profitable growth, build
revenue sources and maintain our
efficiency.
2
BANK
Canadian Western Bank (CWB)
Offers comprehensive business banking services
in branches located throughout Western Canada,
with specialized expertise in general commercial
banking, equipment financing and leasing,
commercial real estate financing, real estate
construction financing, and energy lending.
Complementary full-service personal banking
options include chequing and savings accounts,
mortgages, personal loans and investment
products.
National Leasing
Delivers small- and mid-ticket equipment
leasing solutions 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 across Canada, with
the exception of Quebec. Also offers high
ratio insured mortgages, conventional “A”
mortgages and competitive home equity lines
of credit.
Canadian Direct Financial (CDF)
CWB’s Internet-based division offers personal
banking services to clients across Canada, with
the exception of Quebec, including chequing,
savings and investment products.
Select 2014 Highlights
• Collectively achieved 12% loan growth,
surpassing $17.6 billion of total loans
• Generated 15% growth in branch-raised
demand and notice deposits
• Surpassed $3 billion of total equipment
financing loans and leases
• Expanded the geographic footprint of
Optimum Mortage to include Atlantic
Canada, and surpassed $1.4 billion of total
mortgages outstanding in this business
•
Increased the number of CDF clients by 20%,
and approached $375 million of total deposits
through this channel
Opportunities
• Profitably support ongoing double-digit loan
growth with a focus on optimized funding,
lending yields and targeted diversification
• Leverage significant investment in technology
and employee training 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 areas, as well as other CWB Group
companies
CWB Group 2014 Annual Report INSURANCE
Canadian Direct Insurance (CDI)
Offers auto, home, tenant, condominium
and travel insurance at highly competitive
rates by phone or over the Internet.
Select 2014 Highlights
• Realized an underwriting profit for the
12th consecutive year, despite the financial
impact of severe weather events
Opportunities
• Optimize home insurance pricing adequacy
based on results of comprehensive review
of policy coverages and deductibles
• Expand online delivery platform to include
tenant and condo insurance products
• Ongoing development of affinity
partnership opportunities
• Deepen client relationships by continuing
to promote CWB Group’s brand and
products
TRUST
Canadian Western Trust (CWT)
Delivers customized pension, trustee and
custodial solutions for individuals and
businesses through two distinct lines of
business: Individual Retirement Investment
Services (IRIS) and Corporate and Group
Services (CGS).
Valiant Trust (Valiant)
Offers specialty trust services for public and
private corporations, including stock transfer,
corporate trust, escrow and employee plan
administration.
Select 2014 Highlights
• Surpassed $10 billion of trust assets under
administration
• CWT introduced French-language services,
both online and by phone
• Completed nearly 700 client appointments
in Valiant
Opportunities
• Deepen client relationships by continuing
to develop private client partnerships and
cross-sell opportunities with other CWB
Group companies
• Build on CWT’s successes serving clients of
Adroit Investment Management to grow
CGS market share
WEALTH MANAGEMENT
Adroit Investment Management
Offers discretionary wealth management for
high-net-worth individuals, corporations and
institutions, with core investments in Canadian
equities, non-Canadian equities and fixed
income products.
McLean & Partners Wealth Management
Offers discretionary wealth management for
high-net-worth individuals based on distinct
strategies that offer balanced trade-offs
between risk and reward.
Canadian Western Financial (CWF)
Offers investment planning services through
licensed mutual fund representatives located
in CWB branches. Provides access to a full
range of investment products from Canada’s
leading mutual fund companies.
Select 2014 Highlights
• Engaged an experienced wealth
management executive to refine CWB’s
wealth management strategy and provide
a clear road map for future expansion and
growth
• Added regional wealth management
specialists in Alberta
Opportunities
• Align geographic footprint of discretionary
wealth management segment with CWB
branch network through additional wealth
management specialists and ongoing
consideration of strategic acquisitions
•
Invest in tools and training to improve
financial planning advice specific to
business owners
• Deepen client relationships and increase
products-per-client through successful
cross-selling between CWB Group
companies
3
CWB Group 2014 Annual Report
Interview with
the President and CEO,
Chris Fowler
CWB Group had a great year in 2014 – what stands out
the most for you?
What are your primary strategic priorities as CEO
and what are your expectations for 2015 and beyond?
To achieve record financial performance in a year where few things
came easily is very gratifying. Thanks to the collaborative efforts of our
tremendous people, our results were in line with or better than each of our
financial performance target ranges in spite of ongoing challenges related
to very low interest rates and elevated competitive pressures. We have
a relatively simple business model and the spread we earn on loans has
a big impact on our overall financial results. Our 2014 performance target
ranges were underpinned by the expectation that net interest margin
would remain stable compared to the second half of 2013. Although this
was not the case, we still delivered great results across each of our lines
of business.
The issuance of $125 million of Series 5 preferred shares in February, and
subsequent redemption of $209 million of higher cost Series 3 preferred
shares in April, was another highlight. Taken together, these transactions
support our strategic focus to optimize regulatory capital while developing
a more cost-effective capital structure, which positively impacts earnings
per share. It was satisfying to see the very strong market reception for our
new preferred shares as it reinforces the recognition we’ve earned within
the investment community. This recognition also helps us diversify and
enhance our funding mix with cost-effective deposits raised through the
capital markets.
Exceptional credit quality continues to be a strength for us. This is primarily
a function of our secured lending model and disciplined underwriting
practices, and it also ties back to strong economic fundamentals within our
key markets.
There’s a lot of ground to cover here. I’ll begin by saying that at the highest
level we continue to focus on delivering exceptional service to our clients,
which will ultimately drive CWB Group’s ongoing transition into a larger,
diversified financial institution. Our overall strategic direction supports
our vision to be seen as crucial to our clients’ futures while preserving our
fundamental identity as a conservative, growth-oriented organization built
on an entrepreneurial culture.
We view the business through four interrelated strategic pillars, beginning
with our people. It’s our people who create and evolve our unique culture.
We work hard, we’re resilient and we get things done for our clients.
In doing so, we ensure we earn an appropriate return for our shareholders
while continuing to make a positive difference in the communities where
we work and live. Our culture is the foundation of everything we do,
but we recognize that culture alone is not enough to attract and retain
the most qualified employees. To ensure that we’re staffed with the
best available talent amidst a very competitive labour market, especially
here in Western Canada, we initiated a formal review of non-executive
compensation this year. Changes to the level and structure of total rewards
for all non-executive bank employees will increase total compensation
expense in 2015, but we know it’s the right thing to do to position
us for ongoing success.
Our next strategic pillar relates to technology, infrastructure and processes
required to maintain and improve our client offerings and service capacity.
With respect to physical infrastructure, we relocated our Edmonton Main
Branch to significantly expanded premises and broke ground on new
premises in Medicine Hat, Alberta. We also plan to open an expanded
branch in Prince George, British Columbia, in 2015.
4
CWB Group 2014 Annual Report We continue to work toward completion of the most significant
technology investment we’ve ever undertaken, deployment of a new core
banking system. The new system will allow our teams to spend less time
on paperwork and more time focusing on building relationships to meet
our clients’ financial needs. Implementation is scheduled for early fiscal
2016 and I’m pleased to say that the project continues to go very well.
The next strategic pillar is all about our clients. By delivering responsive
service and sensible solutions, we have become the trusted financial
partner to a growing base of clients in Western Canada and other select
markets. We have lots of room to gain market share within all of our
lines of business and we’re excited about our opportunities to attract
new clients while becoming more crucial to those we already serve.
We’re doing this by leveraging our traditional strengths in commercial
lending while continuing to expand and enhance our product and service
offerings. We’ve improved our suite of cash management products, for
example, making it easier for business owners to manage their day-to-
day banking needs. We’ve also enhanced our service offering through an
ongoing commitment to employee training and development. Our teams
have always provided great service, and we want to augment this strength
by ensuring our clients are aware of everything we can do for them. It’s
not about pushing products. Instead, it’s about helping our teams discover
client needs we can meet with sensible financial solutions.
All of these factors contribute to long-term value creation for CWB
shareholders, which is our fourth strategic pillar. Our financial performance
targets emphasize specific measures that we believe tie directly to
shareholder value. This year’s targets reflect our ambitions to build on our
long history of double-digit asset growth, stable profitability and strong
efficiency, all while maintaining disciplined underwriting practices and
strong credit quality.
There have been a number of changes to the Executive
Committee this year. What were the reasons for these changes
and how do you expect them to benefit CWB Group and its
stakeholders?
A key change was the retirement of Tracey Ball after many years of
exceptional leadership as our chief financial officer (CFO). Tracey had an
enormous impact on the development and success of CWB Group during
her 27-year tenure. Carolyn Graham, our chief accountant since 2006,
worked closely with Tracey since joining CWB Group in 2000, and she was
appointed our new executive vice president and CFO effective October 1.
With her unique combination of leadership, experience, insight, and
determination, Carolyn is without question the right person for this job.
In addition to welcoming Carolyn into her new role, we further augmented
our Executive Committee to ensure we execute on our strategy while
continuing to support CWB Group’s ongoing growth. To complement
the significant contributions and depth of expertise provided to the
Executive Committee by executive vice presidents, Randy Garvey, Greg
Sprung and Brian Young, in October 2014, we appointed Kelly Blackett
to Executive Vice President, Human Resources. Kelly’s appointment
reflects her considerable experience and the important contributions she
has made during her time with CWB Group. It is also aligned with our
commitment to foster an exceptional culture which emphasizes quality
training and unique career development opportunities. In December
2014, we introduced Bogie Ozdemir as Executive Vice President and Chief
Risk Officer (CRO). Bogie’s role addresses our objective to take a more
integrated approach to risk management across our organization, and to
support our strategic focus to optimize regulatory capital, including plans
for an eventual transition to an advanced methodology for calculating
risk-weighted assets.
Are there opportunities for CWB Group to expand further via
acquisition? And if so, in what areas are these opportunities most
likely to arise?
We’ve always taken a patient approach to strategic acquisitions. We’re
determined to focus on areas where CWB can foster distinct competitive
advantages within our primary geographic and business footprints.
We reviewed a number of opportunities in the past year and will
continue to do so going forward. Wealth management is an area of
particular interest for us as it offers revenue diversification and a natural
complement to our core service offerings in business banking, where
personal relationships are crucial. We’re also interested in adding scale
to our operations in equipment financing and leasing. Through National
Leasing, our small ticket equipment leasing company, we’ve acquired three
regional equipment brokers in as many years, one in Quebec, another
in Saskatchewan and the most recent in New Brunswick. These tuck-in
acquisitions were sound from a strategic standpoint, offered strong cultural
fits and strengthened our market position in each region. In general, our
proven ability to deliver strong organic growth across our lines of business
has allowed us to remain conservative in pursuing acquisitions and we
don’t see anything changing in that respect.
Can you explain what you are currently seeing in your markets as
it relates to competition?
Competition has always been a challenge within our chosen operating
environments. Western Canada is an attractive place to do business,
a fact which has certainly not escaped the attention of our competitors.
One new wrinkle in the competitive landscape relates to regulation and
deposit pricing. With enforcement of Basel III liquidity guidelines due to
commence in 2015, regulated financial institutions have taken steps to
attract preferred funding sources, creating increased pricing competition
for those deposits. Without an offset from loan pricing in a persistently low
interest rate environment, lending spreads have been compressed. This
was another factor which challenged net interest margin through 2014.
We’re confident the steps we’re taking to build and diversify our funding
sources, including an ongoing strategic focus on branch-raised deposit
growth, will help to mitigate this pressure over time.
Western Canada continues to lead the country in economic
growth. Could you comment on your business outlook for the
coming year?
Western Canada remains the strongest economic region of the country.
Expansion in the western provinces has brought growth in population,
employment and personal income that require support through new
housing and infrastructure. The resource sector has been a significant
catalyst for this ongoing development. However, this is an international
sector, where global market dynamics affect local decisions. We will
continue to monitor movements in oil prices and assess the impact on
our clients and their businesses. We have built our business around small
to mid-market entrepreneurs and have a diverse mix of clients. The large
resource companies are not our core clientele; we’re focused on the
contractors that work for them and businesses that emerge from the
broad range of economic opportunities created by resource-related activity.
A sustained period of lower oil prices may impact certain near-term
decisions to expand, but the long-term nature of existing oil sands
investment requires continued capital expenditures to maintain production
levels. The economy in Western Canada has demonstrated impressive
resilience in the face of commodity price volatility in the past. We’re
encouraged by the recent clarification of the royalty regime in British
Columbia and optimistic about the outlook for development of liquefied
natural gas infrastructure on the West Coast. Our core geographic
footprint will remain an attractive investment jurisdiction for a long time to
come. We’re maintaining our bullish outlook for Western Canada and are
very excited about CWB Group’s future!
5
CWB Group 2014 Annual Report Message from the Chair,
Allan Jackson
The CWB Board of Directors remains focused on maintaining an
effective governance framework in support of CWB Group’s strategic
direction and ongoing growth. The Board believes that its role in
supporting a culture of ethical behaviour is just as important as its
obligation to ensure the right management team is in place, and
works proactively to ensure that key strategic objectives properly
balance risk and reward.
The Right Culture
A well-known Canadian businessman once said that he did not
understand why business schools waste a whole year talking about
ethics, when all students need to do is understand and obey the
law. Although I do not believe this is a widely held viewpoint, one
does not have to look far to observe instances where businesses and
governments check with their lawyers before embarking on a course
of action. While it is essential to obey the law and follow regulations,
many activities that are legal are neither right nor ethical.
I am proud to say that at CWB Group, one of the first things we
confirm is whether a proposed course of action is right, fair and
ethical based on a commitment to our strong corporate values. This
imperative has always guided CWB Group, and is applied consistently
whether the actions involve one of our companies or our people,
clients or shareholders. I have no doubt that this ethical standard and
commitment to maintaining strong corporate values are foundations
supporting CWB Group’s achievement of record financial performance
in 2014.
The Right People
This year, we continued to focus on depth of leadership and planning
for succession. The Board worked with our CEO, Chris Fowler, to
further strengthen the Executive Committee and appoint three new
executive vice presidents (EVP) - two promoted from within and the
third recruited externally. Kelly Blackett, EVP, Human Resources, and
Carolyn Graham, EVP and Chief Financial Officer, were promoted from
their prior key roles, while Bogie Ozdemir joins CWB Group, in a new
role for us, as EVP and Chief Risk Officer.
Kelly was promoted from her prior position as Senior Vice President,
Human Resources, in recognition of the skill she has demonstrated
as an executive, the depth of her experience and the valuable
contributions she has made to the CWB Group.
Carolyn is a well-established leader and succeeds our long-time EVP
and CFO, Tracey Ball. The Board thanks Tracey for the very important
role she played in the success of CWB Group, and in fostering
our unique corporate culture. One of Tracey’s many talents is the
ability to find and develop equally talented people, and Carolyn is a
reflection of this. The Board came to know Carolyn well in her role as
chief accountant, where she consistently demonstrated the unique
combination of leadership and insight required of a CFO.
Bogie brings a wealth of knowledge and experience in Canadian
financial services risk governance and, as our chief risk officer, will
play a key role in supporting our growth while facilitating the critical
balance of risk and reward. We are very pleased to welcome him.
6
CWB Group 2014 Annual Report The Right Board Complement
Next year, two long serving directors will retire from the Board.
Howard Pechet was one of the founding shareholders of the Bank
of Alberta, CWB’s predecessor, and has been a director since 1984.
He has been an exceptional director and has significantly influenced
CWB Group’s evolution from a small, regional bank to the integrated
financial services institution we are today.
Wendy Leaney will also retire after 13 years as director. Her knowledge
of banking and clarity of thought greatly contributed to the incredible
growth we have achieved. During her tenure, she served on each of
our board committees and, since the beginning of 2013, chaired our
Loans Committee.
Our newest director, Sarah Morgan-Silvester, was elected to the Board
in March 2014. She is a leader in the Canadian banking industry
with particular expertise in personal banking, trust and wealth
management, and is a welcome addition to our group.
The Board decided many years ago that 12 directors was the
appropriate number to most effectively and efficiently provide
oversight to CWB Group and, in this year’s assessment of board
effectiveness, this conclusion was reaffirmed. Over the past two years,
we deliberately increased the size of the Board to provide a smooth
transition for anticipated retirements. With two directors not standing
for re-election this year, the Board complement will return to 12.
The Right Strategy
CWB Group continues to make history as the first successful publicly
traded Schedule 1 bank headquartered in Western Canada. We are
optimistic about the significant potential for future growth in our
core lines of business and are taking appropriate steps to realize that
potential. We have exceptional, highly motivated people, led by an
outstanding management team, and we are confident that we have
the right strategy and culture to achieve our collective goals.
Sincerely,
Allan Jackson
Chair of the Board
7
CWB Group 2014 Annual Report Corporate Governance
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.
Governance Structure
To ensure strong governance in the areas of audit, governance,
human resources and loans, committees made up of directors are
given specific oversight roles in which they report back to the overall
Board. Risk is overseen by the Board as a whole. Full mandates of
each committee, as well as the Board mandate, are available in the
Corporate Governance section at cwb.com.
Board Committees
Audit
Committee
Governance
Committee
• Discusses and reviews CWB Group’s financial
disclosures with management and external
auditors
• Recommends the external auditor to
shareholders
• Oversees the organization’s internal controls
• Reviews existing governance practices to
ensure alignment with legal requirements,
regulatory requirements and industry best
practices
• Works with CWB Group management to
foster a culture of ethical conduct
• Acts as the conduct review committee and
the nominating committee
Human
Resources
Committee
• Oversees CWB Group’s human capital and
ensures that the organization’s succession
plans are adequate
• Leads compensation review and
recommendation process
• Oversees the structure of executive
compensation
Loans
Committee
• Establishes lending policies and guidelines
for CWB Group
• Establishes lending limits for management,
and evaluates and approves loan applications
above these limits
The Board of Directors (the Board) is responsible for the overall
stewardship of CWB Group, including the development and
monitoring of the organization’s governance structure, review and
approval of the risk management framework, and 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. Quarterly updates on the framework and risk
observations are provided by CWB Group’s management team.
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 where CWB Group operates. During fiscal 2014,
the Board was comprised of fourteen business and community
leaders who guided and monitored 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.
Because succession planning is integral to the sound functioning
of an evolving board, CWB’s directors have developed a skills and
competency evaluation process for their team. Results are reviewed
annually, and are used to inform 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 the
Board maintains an appropriate complement of skills, experiences and
qualifications.
8
CWB Group 2014 Annual Report Board of Directors from left to right (October 31, 2014): Linda M.O. Hohol; Howard E. Pechet; Andrew J. Bibby; Albrecht W. A. Bellstedt; Alan M. Rowe; Sarah A. Morgan-Silvester;
Robert A. Manning; Allan W. Jackson (Chair); Chris H. Fowler; Wendy A. Leaney; H. Sanford Riley; Raymond J. Protti; Robert L. Phillips; and, Ian M. Reid.
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 are reviewed and signed off on annually to ensure compliance.
A whistleblower policy that allows for the anonymous reporting of
complaints and concerns is also in place. 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 four
years, CWB Group has asked shareholders to vote on the Board’s
approach to executive compensation and has received support.
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.
9
CWB Group 2014 Annual Report 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:
•
introduction of a diversity policy which aims to have at least
25% of both the Board and the Executive Committee consist
of female members, and which requires the Board to consider
age, gender and ethnic diversity in the nomination of directors
and members of the Executive;
•
introduction of a compensation recoupment policy to
discourage short-term decision-making and excessive risk
taking;
• retention of a compensation consultant to ensure executive
compensation is aligned with best practices; and,
• the requirement for the Board and each Board committee to
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 at cwb.com.
Shareholders are also welcome to attend CWB Group’s annual
shareholder meeting on March 5, 2015, 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, 2014)
• Albrecht W.A. Bellstedt, Q.C.
• Sarah A. Morgan-Silvester
President, A.W.A.
Bellstedt Professional
Corporation
• Andrew Bibby
CEO and Director, Grosvenor
Americas Partners
• Chris H. Fowler
President and CEO,
Canadian Western Bank
• Linda M.O. Hohol
Corporate Director
• Allan W. Jackson (Chair)
President and CEO, ARCI Ltd.
• Wendy A. Leaney, FICB
President, Wyoming
Associates Ltd.
• Robert A. Manning
President, Cathton
Investments Ltd.
Corporate Director
• 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 and CEO,
Richardson Financial
Group Limited
• Alan M. Rowe, CPA, CA
Partner, Crown
Realty Partners
CWB Group Executive Committee
(October 31, 2014)
• Chris Fowler
President and
Chief Executive Officer
• Carolyn Graham, FCA
Executive Vice President
and Chief Financial Officer
• Greg Sprung
Executive Vice President,
Banking
• Kelly Blackett
Executive Vice President,
Human Resources
• Randy Garvey, FCMA, CFA, CDir
• Brian J. Young
Executive Vice President,
Corporate Services
Executive Vice President,
Canadian Western Bank,
and President and CEO,
Canadian Direct Insurance
10
CWB Group 2014 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-IFRS MEASURES
12
13
13
GROUP FINANCIAL PERFORMANCE 14
OVERVIEW
NET INTEREST INCOME
NON-INTEREST 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
RISK MANAGEMENT
LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT
FINANCIAL INSTRUMENTS AND
OTHER INSTRUMENTS
ACQUISITIONS
OFF-BALANCE SHEET
SUMMARY OF QUARTERLY
RESULTS AND FOURTH QUARTER
QUARTERLY RESULTS
FOURTH QUARTER OF 2014
ACCOUNTING POLICIES
AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
CHANGES IN ACCOUNTING POLICIES
FUTURE CHANGES IN
ACCOUNTING POLICIES
32
35
38
39
39
40
40
41
42
42
44
44
RISK MANAGEMENT OVERVIEW
CREDIT RISK
MARKET RISK
LIQUIDITY AND FUNDING RISK
CAPITAL RISK
OPERATIONAL RISK
REGULATORY RISK
TECHNOLOGY RISK
PEOPLE RISK
REPUTATION RISK
INSURANCE RISK
OTHER RISK FACTORS
UPDATED SHARE INFORMATION
CONTROLS AND PROCEDURES
45
45
49
51
53
56
56
58
58
58
59
59
59
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 I Canadian
bank headquartered in Western Canada. The Bank, along with its
subsidiaries, National Leasing Group Inc. (National Leasing), Canadian
Western Trust Company (CWT), Valiant Trust Company (Valiant),
Canadian Direct Insurance Incorporated (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 client 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. Canadian Direct Financial® (CDF) is an Internet-based
division of the Bank that offers a range of deposit and registered
savings products directly to customers in all provinces and territories
except Quebec. National Leasing specializes in commercial equipment
leasing for small- and mid-sized transactions and is represented
across all provinces of Canada. CWT provides trustee and custody
services to independent financial advisors, corporations, brokerage
firms and individuals. Optimum Mortgage (Optimum), 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 and Atlantic Canada. Valiant’s
operations include stock transfer and corporate trust services. CDI
underwrites and delivers personal auto and home insurance policies
for customers in British Columbia (BC) and Alberta. Adroit provides
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 with financial and
investment planning advice in bank branches through CWF, CWB’s
mutual fund dealer subsidiary.
Vision
To be seen as crucial to our clients’ futures.
CWB is focused on becoming the trusted financial partner to a
growing base of clients by delivering responsive service and sensible
solutions, while preserving its fundamental identity as a conservative,
growth-oriented organization built on a results-oriented culture.
In doing so, management maintains a supportive environment for
employees, aims to provide strong long-term returns for shareholders
and gives back in the communities where clients and employees work
and live.
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, and are
represented by both financial and non-financial measures.
11
CWB Group 2014 Annual Report This approach is facilitated through a focus on four inter-dependent
pillars within CWB’s strategic direction, summarized as follows:
People
Invest in our people, build lasting
relationships and live our values.
Support
Build funding sources, drive operational
excellence, and balance risk and reward.
Clients
Be responsive, deliver sensible solutions
and be the trusted financial partner.
Financial
Sustain profitable growth, build revenue
sources and maintain our efficiency.
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 Management’s Discussion and Analysis
(MD&A). These and other factors should be considered carefully,
and readers are cautioned not to place undue reliance on these
forward-looking statements as a number of important factors could
cause 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.
Assumptions about the performance of the Canadian economy in
2015 and how it will affect CWB’s businesses are material factors
considered when setting organizational objectives and targets.
Performance target ranges for fiscal 2015 consider the following
management assumptions:
• Moderate economic growth in Canada and relatively stronger
performance in the four western provinces;
• A relatively stable net interest margin compared to the level
achieved in the fourth quarter of 2014, primarily attributed to
treasury management strategies and shifts in asset mix that help
to offset impacts from the very low interest rate environment,
a flat interest rate curve and competitive factors;
• Sound credit quality with actual losses remaining within CWB’s
historical range of acceptable levels.
Potential risks that may have a material adverse impact on current
economic expectations and forecasts include a sustained period of
materially lower energy and other commodity prices compared to
average levels observed in fiscal 2014, a slowing rate of economic
growth in the United States, a significant and sustained deterioration
in Canadian residential real estate prices, or a significant disruption in
major global economies. Greater than expected pricing competition
and/or disruptions in domestic or global financial markets that
meaningfully impact average loan yields and/or the overall costs
of deposit funding may also contribute to adverse financial results
compared to expectations.
12
CWB Group 2014 Annual Report TAXABLE EQUIVALENT BASIS (TEB)
NON-IFRS MEASURES
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 2014 adjustment to taxable equivalent basis of
$7.7 million (2013 – $8.1 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 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.
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-IFRS measures used in this MD&A are calculated
as follows:
• Taxable equivalent basis – described above.
• Adjusted cash earnings per common share – diluted earnings per
common share excluding the after-tax amortization of acquisition-
related intangible assets and the non-tax deductible change in fair
value of contingent consideration. These exclusions represent non-
cash charges 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.
• Common equity Tier 1, Tier 1 and total capital ratios – in accordance
with guidelines issued by the Office of the Superintendent of Financial
Institutions Canada (OSFI).
• Average balances – average daily balances.
Adjusted net income available to common shareholders
($ thousands)
Net income available to common shareholders
Adjustments:
Amortization of acquisition-related intangible assets (after tax)
Contingent consideration fair value change
2014
2013
$
218,549
$
187,163
3,527
1,000
3,262
–
Adjusted net income available to common shareholders
$
223,076
$
190,425
13
CWB Group 2014 Annual Report
GROUP FINANCIAL PERFORMANCE
OVERVIEW
Highlights of 2014 (compared to 2013)
• Record net income available to common shareholders of
$218.5 million, up 17%.
• Record diluted and adjusted cash earnings per common share
• Solid credit quality as evidenced by very low write-offs and
a provision for credit losses measured as a percentage of
average loans of 15 basis points, down four basis points.
of $2.70 and $2.76, respectively, both up 15%.
• Efficiency ratio (teb) of 46.0%, an improvement of
• Return on common shareholders’ equity of 14.8%,
up 60 basis points.
• Return on assets of 1.10%, up four basis points.
• Strong loan growth of 12%, marking the achievement of
double-digit loan growth in 24 of the past 25 years.
•
Issued $125 million of 4.40% Series 5 preferred shares and
redeemed $209 million of 7.25% Series 3 preferred shares,
resulting in a more efficient capital structure.
• Cash dividends paid to common shareholders of $0.78 per
share, up 11%.
• Record total revenues (teb) of $626.6 million, up 11%, with
net interest margin (teb) of 2.59%, down seven basis points.
40 basis points.
• Solid Basel III capital ratios under the Standardized approach
for calculating risk-weighted assets of 8.0% common equity
Tier 1 (CET1), 9.3% Tier 1, and 12.8% total capital.
• Total assets and assets under administration surpassed
milestones of $20 billion and $10 billion, respectively.
• Following completion of analysis and design phases of CWB’s
core banking system implementation, management revised
the project’s capital budget to $62 million, from an initial
estimate of $50 million, and scheduled deployment for early
fiscal 2016.
Table 1 – Select Annual Financial Information(1)
($ thousands, except per share amounts)
Key Performance Indicators
Net income available to common shareholders
$
218,549
$
187,163
$
172,197
$
31,386
17%
2014
2013(2)
2012
$
%
Change from 2013
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)(4)
Efficiency ratio
Return on common shareholders’ equity
Return on assets
Other Financial Information
Total revenues (teb)
Total revenues
Total assets
Debt
2.73
2.70
2.76
2.36
2.35
2.39
2.24
2.22
2.30
0.37
0.35
0.37
16
15
15
0.15%
0.19%
0.19%
(4)bp(3)
2.59
2.55
46.0
46.6
14.8
1.10
2.66
2.62
46.4
47.1
14.2
1.06
2.79
2.73
44.8
45.6
15.0
1.08
(7)
(7)
(40)
(50)
60
4
$
626,605
$
565,739
$
525,482
$
60,866
11%
618,929
557,601
516,339
61,328
20,608,656
18,513,340
16,873,269
2,095,316
1,036,990
820,650
634,273
216,340
11
11
26
11
Dividends per common share
0.78
0.70
0.62
0.08
(1) See page 13 for a discussion of teb and non-IFRS measures.
(2) During 2014, CWB adopted IFRS 10 Consolidated Financial Statements and applied a change in accounting policy for internal direct leasing costs, both as described in Note 1 of the consolidated financial statements.
The 2013 comparative figures reflect the retrospective application of these changes.
(3) bp – basis points.
(4) A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
14
CWB Group 2014 Annual Report
Net income available to common shareholders increased 17% over
2013 to a record $218.5 million, while diluted earnings per common
share of $2.70 ($2.73 basic) was up 15% from $2.35 ($2.36 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 change in fair
value of contingent consideration, was $2.76, also up 15%. Growth
in both net income available to common shareholders and earnings
per share reflects the combined benefits of record total revenues (teb)
of $626.6 million, lower preferred share dividends and a decrease in
the provision for credit losses, partially offset by higher non-interest
expenses. Growth in total revenues was based on increases in net
interest income (teb) and non-interest income of 9% and 19%,
respectively. Growth in net interest income was driven by strong loan
growth, partially offset by a seven basis point reduction in net interest
margin (teb) to 2.59%. 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. The level of preferred share dividends was
reduced following the issuance of $125 million of 4.40% preferred
shares in February 2014, and subsequent redemption of $209 million
of 7.25% preferred shares in April 2014. Strong credit quality was
maintained throughout the year and the provision for credit losses as
a percentage of average loans declined four basis points to 15 basis
points.
The efficiency ratio (teb) – which measures non-interest expenses as
a percentage of total revenues (teb) excluding the non-tax deductible
charge for the change in fair value of contingent consideration – of
46.0% improved 40 basis points from last year, as growth in total
revenues (teb) surpassed growth in non-interest expenses. Growth
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 14.8% was up 60 basis
points while return on assets increased four basis points to 1.10%.
The increase in return on common shareholders’ equity largely resulted
from the same combination of factors driving growth in net income
available to common shareholders and earnings per share described
above. Total cash dividends paid to common shareholders of $0.78
per share increased 11% from $0.70 per share paid in the prior year,
and resulted in a dividend payout ratio of 29% of total net income
available to common shareholders.
Total assets increased 11% to reach $20,609 million driven by strong
loan growth. Total branch-raised deposits increased 11%, while the
demand and notice component within branch-raised deposits was up
15%. 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 11% in the year to reach $17,373 million, including an increase
in capital markets deposits of $1,011 million to reach 14% of total
deposits. The balance of personal fixed rate term deposits raised
through the deposit broker network declined by $204 million. Total
branch-raised deposits represented 55% of total deposits at October
31, 2014, unchanged from a year earlier. The demand and notice
component comprised 33% of total deposits, up from 32% last year.
The ratio of total deposits to total loans at October 31, 2014 was
effectively 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
common equity Tier 1 (CET1), Tier 1 and total capital ratios at October
31, 2014 of 8.0%, 9.3% and 12.8%, respectively, were above both
internal and regulatory minimums. CWB’s minimum regulatory capital
ratios, which include a 250 basis point capital conservation buffer, are
7.0% CET1, 8.5% Tier 1 and 10.5% total capital.
15
CWB Group 2014 Annual Report 2014
Target
Ranges
12 – 16%
10 – 12
10 – 12
2014
Performance
15%
11
12
2015
Target
Ranges
5 – 8%
n/a(2)
10 – 12
0.18 to 0.23
46% or less
14.0 – 15.0
1.05 – 1.15
0.15
0.17 – 0.22
46.0
47% or less
14.8
1.10
14.0 – 15.0
1.07 – 1.12
and 22 basis points of average loans and reflects expectations
that overall credit quality will remain sound. In consideration
of constrained revenues owing to net interest margin pressure
and strategic investment necessary to support CWB’s long-term
growth, the 2015 efficiency ratio (teb) target is 47% or less.
While this represents an increase from 2014, management
remains committed to disciplined management of all discretionary
expenses based on total revenue growth, and expects the
efficiency ratio will show improvement over the medium term.
The most notable incremental expense contributing to the higher
2015 efficiency ratio target relates to changes in non-executive
compensation to align the level and structure of CWB’s employee
offering with industry benchmarks. Profitability targets measured
by the return on common shareholders’ equity and return on
assets are consistent with 2014.
Ongoing assessment and development of each of CWB Group’s
core businesses will remain a key priority, while potential
acquisitions continue to be evaluated. With its solid capital
position under the more conservative Standardized approach for
calculating risk-weighted assets, CWB remains well positioned to
support continued growth and manage unforeseen challenges.
Management will maintain its focus on creating value for
shareholders over the long term. Although the overall outlook
for 2015 is positive, a sustained period of materially lower energy
and other commodity prices compared to average levels observed
in fiscal 2014 could have an adverse impact on economic
expectations.
Performance Targets and Outlook
Table 2 – 2014 and 2015 Performance Target Ranges(1)
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 teb and non-IFRS measures.
(2) n/a – no target range set for 2015.
2014 Performance
CWB achieved favourable results compared to all fiscal 2014
performance target ranges. Growth in net income available
to common shareholders and earnings per common share
was largely driven by strong 12% loan growth, higher
contributions from non-interest income, lower preferred share
dividends, and a decrease in the provision for credit losses. A
seven basis point reduction in net interest margin and a 10%
increase in non-interest expenses were constraints on further
growth in net income available to common shareholders and
more pronounced improvement in the efficiency ratio. Overall
credit quality was better than expected with the annual
provision for credit losses as a percentage of average loans
coming in below the target range at 15 basis points. The
return on common shareholders’ equity and return on assets
were both within the respective target ranges at 14.8% and
1.10%. The efficiency ratio (teb) of 46.0% met the 2014
target of 46% or less.
2015 Performance Target Ranges
Fiscal 2015 performance target ranges, as shown in the table
above, are based on expectations for moderate economic growth
in Canada and comparatively stronger performance within key
western Canadian markets. Achievement of 2015 targets for the
important shareholder value metrics of adjusted cash earnings
per share growth and profitability ratios will be largely driven
by management’s commitment to deliver ongoing strong loan
growth, stable credit quality and effective expense management.
Lower preferred share dividends compared to 2014 will also
benefit earnings and profitability. CWB will maintain its focus on
further enhancing its funding base and growing 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, a flat interest rate curve and competitive
influences. The provision for credit losses is targeted between 17
16
CWB Group 2014 Annual Report
NET INTEREST INCOME
Net interest income is the difference between interest and dividends
earned on assets, and interest paid on deposits and other liabilities,
including debt. Net interest margin is net interest income
as a percentage of average total assets.
Highlights of 2014
• Net interest income (teb) increased 9% to a record $513.2
million based on 12% growth in average total interest
earning assets.
• Net interest margin (teb) of 2.59% was down seven basis
points mainly reflecting the impact of the persistent very
low interest rate environment, a relatively flat interest rate
curve and competitive factors.
Table 3 – Net Interest Income (teb)(1)
($ thousands)
2014
2013(2)
Average
Balance
Mix
Interest
Interest
Rate
Average
Balance
Mix
Interest
Interest
Rate
Assets
Cash, securities and deposits with
regulated financial institutions
$ 2,739,295
14% $ 56,495
2.06% $ 2,506,616
14% $ 54,410
2.17%
Securities purchased under
resale agreements
43,495
–
419
0.96
29,701
–
289
0.97
Loans
Personal
Business
Total interest bearing assets
Other assets
Total Assets
Liabilities
Deposits
Personal
2,674,108
13,960,477
16,634,585
19,417,375
384,334
14
70
84
98
2
106,832
693,077
799,909
856,823
–
4.00
4.96
4.81
4.41
0.00
2,371,920
12,410,378
14,782,298
17,318,615
354,812
14
70
84
98
2
94,862
640,542
735,404
790,103
–
4.00
5.16
4.97
4.56
0.00
$ 19,801,709
100% $ 856,823
4.33% $ 17,673,427
100% $ 790,103
4.47%
$ 9,926,667
50% $ 204,035
2.06% $ 9,206,767
52% $ 201,170
2.19%
Business and government
6,836,427
Other liabilities
Debt
Shareholders’ equity
Non-controlling interests
16,763,094
486,596
887,737
1,663,248
1,034
35
85
3
4
8
–
107,004
311,039
36
32,552
–
–
1.57
5,624,044
1.86
14,830,811
0.01
3.67
0.00
0.00
484,286
830,284
1,527,544
502
32
84
3
5
8
–
85,700
286,870
43
32,433
–
–
Total Liabilities and Equity
$ 19,801,709
100% $ 343,627
1.74% $ 17,673,427
100% $ 319,346
Total Assets/Net Interest Income
$ 19,801,709
$ 513,196
2.59% $ 17,673,427
$ 470,757
1.52
1.93
0.01
3.91
0.00
0.00
1.81%
2.66%
(1) See page 13 for a discussion of teb and non-IFRS measures.
(2) During 2014, CWB adopted IFRS 10 Consolidated Financial Statements and applied a change in accounting policy for internal direct leasing costs, both as described in Note 1 of the consolidated financial statements.
The 2013 comparative figures reflect the retrospective application of these changes.
Net interest income (teb) increased 9% to reach a record $513.2
million driven by 12% growth in average interest earning assets, with
the percentage difference reflecting the impact of a seven basis point
reduction in net interest margin (teb) to 2.59%. Growth in average
interest earning assets resulted from a combination of strong 12%
growth in average loans and a 10% increase in average balances of
cash and securities. The change in net interest margin mainly resulted
from the combined impact of ongoing very low interest rates, a
relatively flat yield curve and competitive factors, and is reflected in a
16 basis point lower yield on average loans, partially offset by a seven
basis point reduction in average deposit costs. The yield on average
cash, securities and deposits with regulated financial institutions was
down 11 basis points, primarily reflecting an increase in the proportion
of debt securities held compared to higher yielding preferred shares
and common equities.
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.
17
CWB Group 2014 Annual Report
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, a relatively flat yield curve
and competitive factors is expected to constrain meaningful
improvement in net interest margin from the level of 2.56%
realized in the fourth quarter of 2014. 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,
and/or an increase in the prime lending interest rate would
benefit CWB’s net interest margin. CWB projections for
2015 assume no change in the prime lending interest rate.
Competitive factors, particularly in certain business areas,
can result in lower overall loan pricing and higher overall
deposit costs. CWB does not expect material change in the
competitive environment in the near term. Changes in average
balances of cash and securities also have an impact on net
interest margin, with lower average balances generally enhancing
margin, and higher average balances having the opposite effect.
Consistent with its liquidity risk appetite CWB will maintain
prudent levels of cash and securities while complying with OSFI’s
Liquidity Adequacy Requirements Guideline.
NON-INTEREST INCOME
Highlights of 2014
• Record non-interest income of $113.4 million, up 19%.
• Non-interest income represented 18% of total revenues
(teb), up from 17% in 2013.
Table 4 – Non-Interest Income
($ 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
Other(1)
2014
2013
$
%
Change from 2013
$
130,410
$
126,825
$
1,580
(85,997)
(25,079)
20,914
33,866
25,014
13,999
11,399
8,217
1,787
(87,008)
(25,325)
16,279
24,511
21,685
15,094
10,272
7,141
3,585
(207)
1,011
246
4,635
9,355
3,329
(1,095)
1,127
1,076
3%
(12)
(1)
(1)
28
38
15
(7)
11
15
Total Non-Interest Income
$
113,409
$
94,982
$
18,427
19%
(1) Includes foreign exchange gains/losses, contingent consideration fair value charges, 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.
Non-interest income of $113.4 million was up 19% as the combined
benefit of a $9.4 million increase in trust and wealth management
revenues, $4.6 million higher net insurance revenues, a $3.3 million
increase in credit-related income and continued growth across other
categories more than offset lower net gains on securities. Very strong
growth in trust and wealth management primarily resulted from
the acquisition of McLean & Partners completed in the third quarter
of 2013 and was further supported by ongoing solid performance
within trust services. Growth in net insurance revenues primarily
reflects the positive impact of higher net earned premiums and lower
claims expense. Insurance results in both years include claims expense
resulting from catastrophic weather events, although the combined
impact on claims in 2013 related to southern Alberta floods and
severe hailstorms exceeded hail-related claims experienced in 2014.
Growth in credit-related and retail services income of 15% and 11%,
respectively, was consistent with strong lending and deposit gathering
activity. Although net gains on securities remained high at $14.0
million, they were $1.1 million lower than 2013. The 15% increase in
‘other’ non-interest income to $8.2 million mainly resulted from the
gain on sale of CWB’s former Edmonton Main Branch location.
Non-interest income as a percentage of total revenues (net interest
income and other income) was 18%, up from 17% in 2013.
18
CWB Group 2014 Annual Report
Outlook for Non-Interest Income
Solid growth is expected across most categories of non-interest
income, reflecting CWB’s continued focus on enhancing
transactional service capabilities and increasing other sources
of fee-based revenues. 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 with a return to more normal
claims experience and continued policy growth, volatility in
net claims expense could result from severe weather-related
events, as was the case in each of the past three years. Net
gains on securities are expected to be lower compared to
2014; however, the magnitude and timing of such gains are
dependent on market factors that are difficult to predict.
Management will continue to realize gains on the sale of non-
core residential mortgage portfolios as opportunities become
available.
Such gains are expected to be a recurring, although periodic,
source of non-interest income. Solid growth is expected from
trust services in 2015, resulting from increased market share
and ongoing business development. Further increases in core
wealth management revenues are expected to result from
ongoing strong organic growth at McLean & Partners and
Adroit, as well as the introduction of discretionary investment
services to more CWB banking clients. CWB’s branch-based
mutual fund dealer, Canadian Western Financial (CWF), also
continues to perform well. The addition of regional wealth
management specialists is expected to improve CWF’s ability
to attract mutual fund inflows through enhanced delivery of
value-added financial and investment planning services.
CWB maintains its long-term objective to diversify total
revenues and will continue with initiatives to further develop
and/or acquire additional sources of complementary non-
interest income.
19
CWB Group 2014 Annual Report NON-INTEREST EXPENSES AND EFFICIENCY
Highlights of 2014
• The efficiency ratio (teb) of 46.0% improved 40 basis points compared to 2013, reflecting the benefit of positive operating leverage.
Table 5 – Non-Interest Expenses and Efficiency Ratio
($ thousands)
2014
2013
$
%
Change from 2013
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
$
156,885
$
144,200
$
30,986
187,871
28,037
172,237
19,667
6,131
3,570
29,368
10,430
9,267
19,697
9,334
7,402
5,125
3,724
2,885
2,971
3,845
2,127
1,819
1,857
1,044
1,004
8,899
52,036
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
Total Non-Interest Expenses
$
288,972
$
262,497
$
12,685
2,949
15,634
3,308
193
446
3,947
1,529
764
2,293
2,230
556
498
102
159
291
1,186
(210)
(89)
33
9
67
(231)
4,601
26,475
Efficiency Ratio (teb)(1)(2)
46.0%
46.4%
(1) Non-interest expenses as a percentage of total revenues (net interest income (teb) plus other income) excluding the non-tax deductible change in fair value of contingent consideration.
9%
11
9
20
3
–
16
17
9
13
31
8
11
3
6
11
45
(9)
(5)
2
1
7
(3)
10
10%
(40)bp(3)
See page 13 for a discussion of non-IFRS measures.
(2) A decrease in this ratio reflects improved efficiency, while an increase reflects deterioration.
(3) bp – basis points.
Total non-interest expenses of $289.0 million were up 10% reflecting
a 9% increase in salary and benefit costs due to a combination of
higher staff complement and annual salary increments. Full-year
inclusion of McLean & Partners accounted for 15% of the total
increase in non-interest expenses. The number of full-time equivalent
employees (FTEs) grew 3% (57 FTEs) in 2014 to meet requirements
20
for added client-facing services, corporate support and other business
expansion. Premises and equipment expenses, including depreciation,
increased 16%, reflecting the impact of expanded corporate office
facilities to support business growth and the relocation of CWB’s
Edmonton Main Branch to significantly expanded premises.
CWB Group 2014 Annual Report
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% due to increases
in most areas, including $2.3 million higher costs for professional fees
and services, and a $1.2 million increase in regulatory costs. Higher
professional services costs relate to external consultant fees in support
of several strategic initiatives, including implementation of a new
strategic management framework and a compensation review. The
increase in regulatory costs primarily resulted from higher Canada
Deposit Insurance Corporation (CDIC) premiums.
Figure 1 – Number of Full-time Equivalent Staff
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 46.0%,
compared to 46.4% last year, reflecting the benefit of positive operating
leverage.
2014
+3%
2,094
Outlook for Non-Interest Expenses and Efficiency
One of management’s key priorities is to deliver strong long-term
growth through strategic investment in people, technology, and
infrastructure while maintaining effective control of costs. This
strategy is aligned with a commitment to maximize long-term
shareholder value and is expected to provide material benefits in
future periods.
portfolio and client relationship management capabilities and
improved turnaround of credit approvals. Certain technology
investments, including loan origination systems and the future
core banking system, are also key requirements to facilitate an
eventual transition to an advanced methodology for calculating
risk-weighted assets.
A formal review was completed in 2014 to ensure non-executive
compensation is competitive within key markets and enables
CWB to continue to attract and retain qualified employees
who fit the organization’s culture. This review has resulted in
changes which will better align the level and structure of total
compensation with industry benchmarks, reduce CWB’s issuance
of dilutive stock options, and facilitate the alignment of short-
term incentive compensation with both individual performance
and CWB Group’s strategic objectives. While the net impact is an
increase in salary expense in 2015, these changes are relatively
cost-neutral in subsequent years.
The major program to implement a new core banking system is
progressing as planned. Following completion of comprehensive
analysis and design phases in 2014, management has confirmed
the program scope and established an implementation date
supportive of planned training, service continuity objectives and
program control requirements. Implementation is scheduled
for early fiscal 2016 based on a capital budget of $62 million,
revised from an initial estimate of $50 million. The core banking
and other technology investments are expected to provide
considerable efficiencies in the future, including enhanced data,
Relocation of CWB’s Medicine Hat, Alberta branch and expansion
of the branch in Prince George, British Columbia are scheduled
for completion in 2015. Additional opportunities to upgrade and
expand branch infrastructure continue to be reviewed.
Compliance with an increasing level of regulatory rules and
oversight for all Canadian banks also requires the investment
of both time and resources.
Anticipated growth in total revenues (teb) should largely offset
the impact of increased investment necessary for effective
execution of CWB’s strategic plan over the mid to long term.
However, in consideration of investment in growth initiatives
over the short term, including those discussed above, and
expectations for constrained net interest margin in the absence
of increases in the prime lending interest rate and/or sustained
steepening of the yield curve, the expected efficiency ratio
is 47% or better in 2015. While this represents an increase
from 2014, management remains committed to disciplined
management of all discretionary expenses based on total revenue
growth, and expects the efficiency ratio will show improvement
over the medium term.
21
CWB Group 2014 Annual Report INCOME TAXES
The 2014 effective income tax rate (teb) was 26.0%, unchanged from
2013, while the effective tax rate before the teb adjustment was
24.1%. 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. 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 $8.2 million (2013 – $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 in the financial
statements. Capital losses of $2.9 million carried forward from prior
years were applied to the gain resulting on the sale of CWB’s former
Edmonton Main Branch location.
Outlook for Income Taxes
CWB’s expected income tax rate (teb) for fiscal 2015 is approximately 26.0%, or 24.3% before the teb adjustment.
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 2014 increase in comprehensive income was
driven by 14% ($28.1 million) higher net income, and a $15.4 million
increase in fair value, net of tax, of available-for-sale securities. While
the combined dollar investment in preferred shares and common
equities is relatively small in relation to total liquid assets, it increases
the potential for comparatively larger fluctuations in OCI.
Table 6 – Comprehensive Income
($ 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
2014
2013
2013
Change from
$
231,299
$
203,206
$
28,093
12,882
(10,287)
2,595
3,372
(3,575)
(203)
2,392
(2,553)
(11,160)
(13,713)
2,332
(1,255)
1,077
(12,636)
15,435
873
16,308
1,040
(2,320)
(1,280)
15,028
Total Comprehensive Income
$
233,691
$
190,570
$
43,121
22
CWB Group 2014 Annual Report
CASH AND SECURITIES
Cash, securities and securities purchased under resale agreements
totalled $2,697 million at October 31, 2014, compared to $2,580
million one year ago. Total net unrealized losses before tax recorded
on the balance sheet at October 31, 2014 were $3.4 million,
compared to $7.1 million last year. Net unrealized gains or losses are
reflected in Table 7.
Table 7 – Unrealized Gains (Losses) on Available-for-Sale Cash and Securities
($ thousands)
Deposits with regulated financial institutions
Government of Canada
Province or municipality
Other debt securities
Preferred shares
Common shares
Total
2014
$
91
$
347
559
872
(3,834)
(1,428)
$
(3,393)
$
2013
569
632
161
1,180
(16,301)
6,657
(7,102)
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 and movements in market
credit spreads. Volatility in equity markets causes fluctuations in the
value of common shares.
Realized net gains on securities remained high at $14.0 million,
$1.1 million below those realized in the prior year. Unrealized
losses on securities are regularly reviewed and, based on available
objective evidence, CWB reflected $1.2 million (2013 – nil) of pre-tax
impairment charges in net gains on securities in 2014. Net gains
on securities were mainly attributed to the sale of common shares
following strong market performance, partially offset by losses
realized on the sale of preferred shares.
CWB has no direct investment in any non-Canadian sovereign debt or
other securities issued outside of Canada or the United States.
See Table 25 – Valuation of Financial Instruments of this MD&A for
additional information on significant financial assets and liabilities
reported at fair value.
The balance and mix of cash and securities are managed as part of
CWB’s overall liquidity management process; additional information,
including management’s outlook for 2015, is included in the Liquidity
Management discussion of this MD&A.
LOANS
Highlights of 2014
• Strong 12% loan growth, largely driven by very strong
performance in real estate project loans, equipment financing
and leasing, and personal loans and mortgages.
• Double-digit loan growth achieved in 24 of the past 25 years
(the exception being 2009 when loan growth during the
global credit crisis was 7%).
Table 8 – Outstanding Loans by Portfolio
($ millions)
Commercial mortgages
General commercial loans
Equipment financing and leasing
Real estate project loans
Personal loans and mortgages
Corporate lending
Oil and gas production loans
Total Outstanding Loans
2014
2013
$
Change from 2013
$
3,574
$
3,311
$
3,525
3,394
2,871
2,841
1,147
254
3,428
2,932
2,304
2,502
902
274
263
97
462
567
339
245
(20)
%
8%
3
16
25
14
27
(7)
$
17,606
$
15,653
$
1,953
12%
23
CWB Group 2014 Annual Report
Total loans before the allowance for credit losses increased 12% to
reach $17,606 million at year end. Measured in dollars and by loan
type as shown in Table 8, growth in real estate project loans of 25%
represented the strongest source, followed by equipment financing
and leasing at 16%, and personal loans and mortgages at 14%.
Growth in real estate project loans exceeded expectations as CWB has
continued to finance well-capitalized developers on the basis of sound
loan structures and acceptable pre-sale/lease levels. Although recent
growth in this area has been very strong, total exposure to real estate
remains within CWB’s established risk appetite. The balance of loans in
equipment financing and leasing includes the Bank’s heavy equipment
financing business and the small- and mid-ticket leasing business of
National Leasing.
Personal loans and mortgages include CWB’s broker-sourced
residential mortgage business, Optimum, and lending activity
in banking branches. Total loans of $1,470 million in Optimum
represented net growth of 20%. Adjusting for $36 million (2013 –
$95 million) of residential mortgages sold during the year, Optimum’s
annual loan growth was 23%. 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 71%. The book value of alternative mortgages
represented approximately 85% of Optimum’s total portfolio at year
end. Management remains committed to the ongoing development
of this mortgage business, including further expansion in Ontario
and Atlantic Canada, as it continues to produce solid returns while
maintaining an acceptable risk profile.
Corporate lending represents a diversified portfolio that is centrally
sourced and administered through designated lending groups.
Corporate lending includes participation in select syndications
structured and led primarily by the major Canadian banks, but
excludes participation in various other syndicated facilities sourced
through relationships developed at CWB branches. Syndicated
facilities sourced in branches are primarily real estate project loans,
and oil and gas production loans, which are both included as separate
classifications in Table 8.
General commercial loans increased 3%. 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.
CWB’s promising pipeline of new commercial loans and a strategic
focus on a customized training program for commercial relationship
managers support management’s expectations for accelerated growth
in this portfolio over time. The balance of oil and gas production loans,
which represent a relatively small percentage of the total portfolio,
was down 7% driven by a combination of fewer new lending
opportunities, payouts and write-offs.
The mix of the portfolio (see Figure 2) shifted slightly during the year
as strong growth in real estate project loans and corporate lending
led to a slight decrease in the proportion of general commercial
loans. Based on the location of security (see Figure 3), Alberta and
BC represented 41% and 34% of total loans at year end, compared
to 42% and 35%, respectively, in 2013, with the shift resulting from
strong relative growth in Manitoba and Ontario.
Figure 2 – Outstanding Loans by Portfolio
(October 31, 2013 in brackets)
Oil and Gas Production Loans
2% (2%)
Corporate Loans
7% (6%)
Real Estate Project Loans
16% (15%)
Personal Loans and Mortgages
16% (16%)
24
General Commercial Loans
20% (22%)
Commercial Mortgages
20% (20%)
Equipment Financing and Leasing
19% (19%)
CWB Group 2014 Annual Report Outlook for Loans
While strong competition from domestic banks and other
financial services firms is expected to persist, the current overall
outlook for generating new business opportunities continues
to be positive. CWB expects to maintain double-digit loan
growth and has set its fiscal 2015 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, and the
effective execution of CWB’s strategic plan focused on targeted
client solutions and superior customer service.
Growth in Canada’s domestic economy is expected to continue
at a moderate pace in 2015, in part due to continued strength
in U.S. markets. The western Canadian economy is 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,
notwithstanding recent oil price declines. However, a prolonged
period of materially lower energy and other commodity prices
poses a risk to the outlook for economic growth in Canada
overall, and within Western Canada in particular.
In Alberta, the forecast for 2015 is supported by significant
long-term capital investment in the oil sands, as well as a
relatively positive long-term outlook for activity related to
conventional oil production. Activity related to the resource
sector in BC, including forestry, has remained solid due to the
ongoing U.S. economic recovery and export opportunities to
Pacific Rim countries, including China. Growth in Saskatchewan
will be supported by a growing energy sector, increased
mining output and potash production, and the potential for
improvement in agriculture following constrained output
due to flooding in 2014. Manitoba’s economy is diverse with
positive economic growth contributions mainly expected from
agriculture, mining, energy and non-residential construction
related to infrastructure investment. Continued economic
strength in the U.S. and a lower Canadian dollar are expected
to support an escalation of manufacturing and exporting
activity in all provinces.
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 over time, particularly in specific areas
of Vancouver, Calgary and Toronto. Price volatility and ongoing
uncertainty surrounding long-term transportation solutions
for both natural gas and heavy oil could lead to moderated
growth in capital investment related to natural gas production
and oil sands development in the near term. However, recent
clarification of the royalty regime in British Columbia is a
positive development with respect to the outlook for expansion
of liquefied natural gas infrastructure on the west coast, and
opportunities related to the maintenance of existing facilities
within the resource sector remain abundant. The current
overall economic outlook remains supportive of management’s
expectations for continued strong loan growth.
Potential risks that may have a material adverse impact
on current economic expectations and forecasts include
a sustained period of materially lower energy and other
commodity prices, a slowing rate of economic growth in
the United States, a significant and sustained deterioration
in Canadian residential real estate prices, or a significant
disruption in major global economies.
Diversification of Portfolio
Total advances based on location of security
Figure 3 – Geographical Distribution of Loans
(October 31, 2013 in brackets)
Manitoba
3% (2%)
Saskatchewan
7% (7%)
Ontario
12% (11%)
Other
3% (3%)
British Columbia
34% (35%)
Alberta
41% (42%)
25
CWB Group 2014 Annual Report 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
Health and social services
Finance and insurance
Hotel/motel
Oil and gas service
Oil and gas production
Manufacturing
Retail trade
Wholesale trade
Other services
Logging/forestry
All other
Total
2014
2013
22%
22
15
7
5
5
4
3
2
2
2
2
2
2
5
100%
22%
21
15
6
5
4
5
2
3
2
2
2
2
2
7
100%
(1) Table is based on the North American Industry Classification System (NAICS) codes.
(2) Residential mortgages in this table include only single-family properties.
The loan portfolio is focused on areas of demonstrated lending
expertise, while concentrations measured by geographic area and
industry sector are managed within specified tolerance levels. The
portfolio is well diversified with a mix of business and personal loans.
Heavy equipment financing is primarily sourced 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.
Outlook for Diversification of Portfolio
Growth is expected across all lending sectors in 2015. While
stronger economic activity in Alberta and increased lending
exposure in Ontario and Atlantic Canada are expected to
lead to comparatively faster growth in these areas, portfolio
diversification by geography will likely remain relatively
consistent with October 31, 2014. Based on the current
view, management expects higher net growth in areas
such as equipment financing and leasing, personal loans
and mortgages, and general commercial loans compared
to commercial mortgages and real estate project loans.
Commercial mortgages are often subject to a higher level of
pricing competition compared to other types of lending and
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 and Atlantic Canada through
an established network of mortgage brokers.
CWB will remain focused on maintaining this portfolio based
on client relationships and adequate returns. Expectations
for slower growth in real estate project loans compared to
that achieved in 2014 reflect the combined impact of this
portfolio’s relatively short duration and forecasted moderation
in Canadian residential real estate activity, particularly in
certain geographical areas. Within the parameters of its
established risk appetite, CWB will continue to finance well-
capitalized developers on the basis of sound loan structures
and acceptable pre-sale/lease levels as such opportunities
arise.
26
CWB Group 2014 Annual Report
CREDIT QUALITY
Highlights of 2014
• Continued strong credit quality and an acceptable level
• The provision for credit losses of $25.1 million represented
of write-offs.
• Gross impaired loans decreased 3% from the prior year and,
as a percentage of total loans, represented 35 basis points,
compared to 41 basis points one year ago.
15 basis points of average loans, down from 19 basis points
in the prior year, three basis points beneath the low end of
the 2014 target range of 18 to 23 basis points.
Impaired Loans
As shown in the table below, gross impaired loans totalled $62.1
million and represented 0.35% of total loans, compared to $64.2
million or 0.41% at the end of 2013. The ten largest accounts
classified as impaired, measured by dollars outstanding, represented
Table 10 – Change in Gross Impaired Loans
($ thousands)
approximately 50% of total gross impaired loans at year end, down
from 55%. New formations of impaired loans totalled $63.8 million,
compared to $66.9 million last year.
Change from 2013
2014
2013
Gross impaired loans, beginning of period
$
64,211
$
66,840
$
New formations
63,840
66,883
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)
(48,862)
(17,069)
$
$
62,120
31,308
$
$
120
110
(42,860)
(26,652)
64,211
35,619
143
135
$
$
$
(2,629)
(3,043)
(6,002)
9,583
(2,091)
(4,311)
(23)
(25)
%
(4)
(5)
14
(36)
(3)
(12)
(16)
(19)
Gross impaired loans as a percentage of total loans(3)
0.35%
0.41%
(6)bp(4)
(1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $2,393 (2013 – $12,407). 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 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
totalled $5.5 million at year end, compared to $9.6 million a year
earlier. Estimates are established through detailed analyses of both the
overall quality and ultimate marketability of the security held against
each impaired account.
The 2014 dollar provision for credit losses of $25.1 million decreased
10% from the previous year despite 12% loan growth. The provision
measured as a percentage of average loans of 15 basis points was
lower by four basis points. However, as shown in Figure 4, the
collective allowance for credit losses exceeded the balance of impaired
loans, net of specific allowances. Growth in the collective allowance of
18% exceeded loan growth despite a decrease in the dollar provision for
credit losses. The total allowance for credit losses as a percentage of gross
impaired loans (coverage ratio) was 154%, up from 134% in 2013.
27
CWB Group 2014 Annual Report
Figure 4 – Net Impaired Loans as a Percentage of Net Loans Outstanding
2014
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. An
impaired loans report is reviewed quarterly by the Loans Committee
of the Board of Directors.
Outlook for Impaired Loans
The combination of ongoing disciplined underwriting
practices, the secured nature of the loan portfolio and
expectations for moderate economic growth in Canada with
comparatively stronger performance within key western
Canadian markets underpins 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
range. Management remains confident in the strength, diversity
and underwriting structure of the overall loan portfolio.
28
CWB Group 2014 Annual Report ALLOWANCE FOR CREDIT LOSSES
The year-over-year change in the allowance for credit losses split
between the specific allowance by category of impaired loans and
Table 11 – Allowance for Credit Losses
($ thousands)
the collective allowance for credit risk is provided in the table below.
2014
Opening
Balance
Provision
for Credit
Losses
Write-Offs,
net of
Recoveries(1)
2014
Ending
Balance
Specific Allowance
Commercial
Real estate
Equipment financing and energy
Consumer and personal
Collective Allowance
Total
(1) Recoveries in 2014 totalled $1,824.
$
293
$
1,140
$
(802)
$
6,349
2,179
748
9,569
76,217
(525)
9,871
713
11,199
13,858
(4,915)
(8,585)
(943)
(15,245)
$
85,786
$
25,057
$
(15,245)
$
95,598
–
90,075
631
909
3,465
518
5,523
Allowances for credit losses are maintained to absorb both
identified and unidentified losses in the loan portfolio and, at
October 31, 2014, consisted of $5.5 million (2013 – $9.6 million)
of specific allowances and $90.1 million (2013 – $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 composition and 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 current rating system
has twelve 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.
Lower levels of specific allowances are expected in strong
economic times and higher levels of specific allowances
in weaker economic times. The collective allowance is
expected to fluctuate as a result of normal portfolio
growth. 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.
29
CWB Group 2014 Annual Report
Provision for Credit Losses
The provision for credit losses represented 15 basis points of average
loans in 2014 (see Table 12), down four basis points from the previous
year. Net new specific provisions represented seven basis points of
average loans, compared to 13 basis points in 2013. CWB has a
long history of strong credit quality and low loan losses, both of
Table 12 – Provision for Credit Losses
($ thousands)
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 clients
operate are continually analyzed.
Provision for credit losses(1)
Net new specific provisions (net of recoveries)(2)
2014
0.15%
0.07
IFRS
2013
0.19%
0.13
2012
0.19%
0.14
Canadian GAAP(4)
2011
0.19%
0.20
2010
0.21%
0.27
Collective allowance
Coverage ratio(3)
$
90,075
$
76,217
$
67,344
$
61,330
$
59,603
154%
134%
122%
74%
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.
(4) Canadian GAAP – Canadian Generally Accepted Accounting Principles.
Outlook for the Provision for Credit Losses
The provision for credit losses in 2015 is expected to represent
17 to 22 basis points of average loans. 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 2014
• Branch-raised demand and notice deposits increased 15%.
• Branch-raised deposits were 55% of total deposits, consistent
issued in the debt capital markets to a broad range of
institutional investors.
with 2013.
• Funding sources were diversified with the expansion of CWB’s
bearer deposit note (BDN) and senior deposit note programs
• Capital markets deposits increased to 14% of total deposits
by source (2013 – 9%), while higher cost broker deposits
decreased to 31% (2013 – 36%).
30
CWB Group 2014 Annual Report
Table 13 – Deposits
($ thousands)
Demand
Notice
Term
2014
Total
Personal
$
33,060
$
2,957,970
$
6,841,639
$
9,832,669
Business and government
637,025
2,134,295
2,399,068
5,170,388
Capital markets
Total Deposits
% of Total
–
–
2,369,957
2,369,957
$
670,085
$
5,092,265
$ 11,610,664
$ 17,373,014
4%
29%
67%
100%
Demand
Notice
Term
2013
Total
Personal
$
30,337
$
2,741,951
$
6,648,466
$
9,420,754
Business and government
615,166
1,622,400
2,613,691
4,851,257
Capital markets
Total Deposits
% of Total
–
–
1,359,029
1,359,029
$
645,503
$
4,364,351
$ 10,621,186
$ 15,631,040
4%
28%
68%
100%
% of
Total
56%
30
14
100%
% of
Total
60%
31
9
100%
Total deposits of $17,373 million increased 11% over 2013 reflecting
7% growth in business and government deposits, 4% growth in
personal deposits, which include those issued through the deposit
broker network, and a 75% increase in capital markets deposits
outstanding.
Table 14 – Deposits by Source
(as a percentage of total deposits at October 31)
Branches
Deposit brokers
Capital markets
Total
2014
55%
31
14
100%
2013
55%
36
9
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 sources of funding. Success in growing
these funding sources will become even more important under 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 clients in all
provinces and territories except Quebec. Client deposits in CDF at
October 31, 2014 totalled $371 million, a 29% increase compared
to a year earlier. Valiant’s status as a federal deposit-taking institution
accounts for CWB’s third 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 11% in 2014, while
the demand and notice component within branch-raised deposits
increased 15%. Demand and notice deposits, which include lower
cost funding sources, comprised 33% of total deposits at year end,
up from 32% in the previous year. Branch-raised deposits comprised
55% of total deposits, unchanged from 2013. 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 debt capital markets. Insured deposits raised through
deposit brokers remain an efficient source of funding. Although these
funds are subject to commissions, this cost is countered by a reduced
dependence on a more extensive branch network and the benefit of
generating insured fixed term retail deposits over a wide geographic
base. Additional sources of funding in 2014 included expansion of
CWB’s BDN program to $365 million, issuances of $900 million of
senior deposit notes, net of maturities, securitization of $363 million
of equipment leases (2013 – $91 million) and whole loan sales of $36
million (2013 – $95 million) of residential mortgages.
31
CWB Group 2014 Annual Report
Outlook for Deposits and Funding
The strategic focus to increase branch-raised deposits will
continue, with particular emphasis on the demand and notice
component, which is often lower cost and provides associated
transactional fee income. CWB’s growing market presence,
which includes the expansion and/or opening of full-service
branches, also supports objectives to generate branch-raised
deposits. Various strategic initiatives, which include the offering
of enhanced cash management products and a competitive
business savings account, as well as the creation of a new role
in senior management for integrated leadership of business and
personal banking, are also intended to further augment growth
of desired branch-raised funding. The deposit broker network
remains an efficient source for raising insured fixed term retail
deposits and has proven to be a reliable and effective 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 will 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
2015.
Other liabilities totalled $504 million at October 31, 2014 (2013 – $462
million). Insurance-related other liabilities were $166 million (2013 –
$168 million) and consisted primarily of provisions for unpaid claims and
adjustment expenses and unearned premiums.
OTHER ASSETS AND OTHER LIABILITIES
Other assets at October 31, 2014 totalled $401 million (2013 – $366
million). Insurance-related other assets were $66 million (2013 – $64
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, 2014
was $50 million (2013 – $49 million) and $85 million (2013 – $70
million), respectively. The increase in intangible assets primarily relates
to investment in CWB’s new banking system.
LIQUIDITY MANAGEMENT
Highlights of 2014
• Maintained a prudent liquidity position and conservative
• CWB expects to be compliant with the new
investment profile.
OSFI Liquidity Adequacy Requirements Guideline.
A schedule outlining the consolidated securities portfolio
at October 31, 2014 is provided in Note 4 to the consolidated
financial statements. A conservative investment profile
is maintained by ensuring:
• all investments are high quality and include government debt
securities, short-term money market instruments, preferred shares,
common shares and other marketable securities;
CWB’s liquidity management is a comprehensive process
that includes, but is not limited to:
• maintaining a pool of high quality liquid assets;
• comprehensive liquidity scenario stress testing;
• monitoring the quality of the cash and securities portfolio;
• monitoring liability diversification and maturity profile;
• specific investment criteria and procedures are in place to manage
• monitoring deposit behaviour;
the securities portfolio;
• regular review, monitoring and approval of investment policies is
completed by CWB’s Asset Liability Committee (ALCO); and,
• quarterly reports are provided to the Board on the composition of
the securities portfolio, which is further supported by the Board’s
annual review and approval of investment policies.
• maintaining access to deposit and capital market funding sources;
and,
• monitoring microeconomic and macroeconomic factors and early
warning indicators.
32
CWB Group 2014 Annual Report Table 15 – Liquid Assets
($ thousands)
2014
2013
2013
Change from
Cash and non-interest bearing deposits with financial institutions
$
13,320
$
83,856
$
(70,536)
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
491,255
258,466
232,789
3,839
5,673
(1,834)
508,414
347,995
160,419
134,383
22,541
448,442
(314,059)
401,950
(379,409)
Government of Canada, provincial and municipal debt, term to maturity more than 1 year
1,167,771
487,669
680,102
Other debt securities
Preferred shares
Common shares
Securities purchased under resale agreements
Total Securities Purchased Under Resale Agreements
and Marketable Securities
Total Liquid Assets
Total Assets
290,363
321,216
152,931
99,566
367,961
379,141
147,169
–
(77,598)
(57,925)
5,762
99,566
$ 2,188,771
$ 2,232,332
$
(43,561)
$ 2,697,185
$ 2,580,327
$ 116,858
$ 20,608,656
$ 18,513,340
$ 2,095,316
Liquid Assets as a Percentage of Total Assets
13%
14%
(100)bp(1)
Total Deposit Liabilities
$ 17,373,014
$ 15,631,040
$ 1,741,974
Liquid Assets as a Percentage of Total Deposit Liabilities
16%
17%
(100)bp
Additional sources of liquidity and funding in 2014 included $332
million of equipment leases securitized (2013 – $91 million) and $36
million (2013 – $95 million) of residential mortgages sold via whole
loan sales. The primary source of incremental new funding was the
issuance of capital markets deposit instruments. A summary of all
outstanding deposits by contractual maturity date is presented in
Tables 16 and 17.
(1) bp – basis points.
As shown in Table 15, liquid assets comprised of cash, deposits,
securities purchased (or sold) under resale agreements and marketable
securities totalled $2,697 million at October 31, 2014, an increase of
5% compared to a year earlier. Liquid assets represented 13% (2013 –
14%) of total assets and 16% (2013 – 17%) of total deposit liabilities
at year end.
The composition of total liquid assets changed over the course of the
year as the book was positioned to comply with new OSFI Liquidity
Adequacy Requirements Guideline. The duration of the book was
also lengthened to reflect a more neutral interest rate risk position.
Key changes in the composition of liquid assets at October 31, 2014
compared to the prior year include:
• maturities within one year comprising 17% (2013 – 48%);
• Government of Canada, provincial and municipal debt securities
decreasing to 49% (2013 – 52%);
• deposits with regulated financial institutions increasing
to 18% (2013 – 13%);
• preferred shares decreasing to 12% (2013 – 15%); and,
• other marketable securities decreasing to 16% (2013 – 20%).
33
CWB Group 2014 Annual Report
Table 16 – Deposit Maturities Within One Year
($ millions)
October 31, 2014
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
October 31, 2013 Total
Table 17 – Total Deposit Maturities
($ millions)
Within 1
1 to 3
Month
Months
3 Months
to 1 Year
Cumulative
Within 1 Year
$
670
$
5,092
1,157
$
–
–
–
–
1,297
3,754
$
670
5,092
6,208
$
$
6,919
$
1,297
$
3,754
$
11,970
6,006
$
932
$
4,360
$
11,298
Within
1 year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5
Years
More than
5 Years
Total
October 31, 2014
Demand deposits
Notice deposits
Deposits payable on a fixed date
$
670
$
5,092
6,208
$
–
–
$
–
–
$
–
–
$
–
–
2,375
1,605
843
580
Total
$
11,970
$
2,375
$
1,605
$
843
$
580
$
October 31, 2013 Total
$
11,298
$
2,416
$
887
$
618
$
412
$
–
–
–
–
–
$
670
5,092
11,611
17,373
15,631
$
$
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. Deposits raised through deposit
brokers remain an effective incremental funding source. Senior and
bearer deposit notes raised in the capital markets provide a further
source of funding and liquidity.
Table 18 – Subordinated Debentures Outstanding
($ thousands)
In addition to deposit liabilities, CWB has subordinated debentures
and debt securities related to the securitization of leases to third
parties (refer to Note 17 of the consolidated financial statements
for additional information). A summary of subordinated debentures
outstanding is presented in the following table:
Interest Rate
4.389%(1)
3.463%(2)
5.571%(3)
Total
Maturity
Date
Earliest Date
Redeemable
by CWB at Par
As at
October 31
2014
As at
October 31
2013
November 30, 2020
November 30, 2015
$
300,000
$
300,000
December 17, 2024
December 17, 2019
March 21, 2022
March 22, 2017
250,000
75,000
250,000
75,000
$
625,000
$
625,000
(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 90-day Canadian dollar CDOR 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.
34
CWB Group 2014 Annual Report
Outlook for Liquidity Management
Internal methodologies for managing liquidity risk are
continuously refined. CWB utilizes comprehensive stress
testing to manage, measure and monitor liquidity risk to
ensure a prudent approach. CWB will maintain prudent
liquidity levels in 2015 while complying with OSFI’s Liquidity
Adequacy Requirements Guideline.
CAPITAL MANAGEMENT
Highlights of 2014
• Solid common equity Tier 1, Tier 1 and total capital adequacy
ratios of 8.0%, 9.3% and 12.8%, respectively.
• Cash dividends of $0.78 per share paid to common
• Cash dividends of $0.78 per share paid to common
shareholders, up 11%.
shareholders, up 11%.
• Supported strong loan growth while maintaining a consistent
•
common equity Tier 1 (CET1) capital ratio.
Issued $125 million of Basel III compliant 4.40% 5-year rate
•
reset preferred shares and redeemed $209 million of 7.25%
5-year rate reset preferred shares.
Issued $125 million of Basel III compliant 4.40% 5-year rate
reset preferred shares and redeemed $209 million of 7.25%
5-year rate reset preferred shares.
Subsequent Highlights
•
In December 2014, the Board of Directors declared a quarterly
cash dividend of $0.21 per common share, an increase of 5%
over the prior quarter and 11% over the dividend declared a
year earlier. The Board of Directors also declared a quarterly
cash dividend of $0.275 per Series 5 Preferred Share.
year earlier. The Board of Directors also declared a quarterly
cash dividend of $0.275 per Series 5 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 establish
target capital levels deemed prudent to effectively manage risks,
including potential capital shocks from unexpected macroeconomic
and/or CWB-specific events.
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 overall profitability,
earnings growth, share price appreciation and dividends. Note 19 to
the consolidated financial statements details the number of options
outstanding, the weighted average exercise price and the amounts
exercisable at year end. 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.
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).
CWB’s minimum regulatory capital ratios, including a 250 basis point
capital conservation buffer, are 7.0% CET1, 8.5% Tier 1 and 10.5%
total capital. 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.
CWB complied with all internal and external capital requirements
in 2014.
35
CWB Group 2014 Annual Report Table 19 – Capital Structure and 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
2014
2013
$ 1,443,841
$ 1,285,692
1,673,996
1,560,801
2,304,108
2,243,654
8.0%
9.3
12.8
8.8x
8%
9.7
13.9
8.1x
Changes in the Tier 1 and total capital ratios reflect the 2014 issuance
of $125 million of 4.40% 5-year rate reset preferred shares, which
qualify as Tier 1 capital under Basel III, and the redemption of $209
million of non-qualifying 7.25% 5-year rate reset preferred shares. The
required amortization relating to the phase out of existing, non-qualifying
subordinated debentures also contributed to the decrease in the total
capital ratio.
Table 20 – Regulatory Capital
($ thousands)
Common equity Tier 1 capital instruments and reserves
2014
2013
Directly issued qualifying common share capital plus related share-based payment reserve
$
558,377
$
534,914
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 qualifying as Additional Tier 1 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
1,011,147
865,087
(2,822)
(5,417)
1,566,702
1,394,584
(122,861)
(108,892)
1,443,841
1,285,692
125,000
105,000
155
–
283,275
163
230,155
283,438
–
230,155
(8,329)
275,109
1,673,996
1,560,801
Directly issued capital instruments subject to phase out from Tier 2(2)
540,000
607,500
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
37
90,075
630,112
–
38
76,217
683,755
(902)
630,112
682,853
$
2,304,108
$
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) Capital balances exclude 20% (2013 – 10%) of non-common equity instruments outstanding at January 1, 2013 that do not include non-viability contingent capital clauses. At October 31, 2014, there was no
exclusion from Tier 1 regulatory capital related to the Innovative Tier 1 capital (disclosed in deposits). At October 31, 2013, a combined $31 million of outstanding Innovative Tier 1 capital and preferred shares were
excluded from regulatory capital. At October 31, 2014, $85 million of outstanding subordinated debentures (October 31, 2013 – $18 million) were excluded from regulatory capital.
(3) Additional Tier 1 deduction includes non-significant investments in financial institutions above a specific percentage of CET1 capital.
(4) Tier 2 deduction includes non-significant investments in financial institutions above a specific percentage of CET1 capital.
36
CWB Group 2014 Annual Report
Table 21 – Risk-Weighted Assets
($ thousands)
Corporate
Sovereign
Bank
Retail residential mortgages
Other retail
Excluding small business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
As at October 31, 2014
As at October 31, 2013
Table 22 – Risk-Weighting Category
($ thousands)
Cash,
Securities
and Resale
Agreements
Loans
Other
Items
$
152,027
$ 12,011,130
$
1,329,179
613,873
–
–
–
426,769
–
–
–
–
30,968
17,797
2,708,015
201,252
2,204,002
–
415,797
48,558
90,810
2014
Risk-
Weighted
Total
Assets
$ 12,163,157
$ 12,073,249
1,360,147
631,670
2,708,015
40,604
200,385
980,774
201,252
144,790
2,204,002
1,680,572
426,769
415,797
78,985
48,558
426,769
406,073
987,317
606,975
478,314
–
–
–
–
–
–
–
–
–
–
78,985
389,077
479,887
$
$
2,521,848
$ 17,728,329
2,395,060
$ 15,942,099
$
$
468,062
$ 20,718,239
$ 18,025,822
431,127
$ 18,768,286
$ 16,115,012
0%
20%
35%
50%
75%
100%
greater
Balance
Weighted
$ 30,251
$ 31,436
$
–
$101,990
$
–
$ 11,966,506
$ 32,974 $ 12,163,157 $ 12,073,249
2014
150% and
Corporate
Sovereign
Bank
1,157,125
203,022
–
461,614
–
–
–
123,988
–
–
Retail residential mortgages
312,599
–
2,053,594
–
319,224
–
46,068
22,598
–
–
–
1,360,147
40,604
631,670
200,385
2,708,015
980,774
Other retail
Excluding small
business entities
7,917
1,374
Small business entities
2,362
707
Equity
Undrawn commitments
Operational risk
Securitization risk
–
–
–
–
–
–
–
–
Other
148,047
16,769
–
–
–
–
–
–
–
–
–
–
–
–
–
–
191,181
82
698
201,252
144,790
2,098,118
94,760
8,055
2,204,002
1,680,572
–
426,769
38,898
376,899
–
–
426,769
426,769
415,797
406,073
–
–
–
–
78,985
78,985
987,317
48,558
48,558
606,975
16,808
189,917
108,346
479,887
478,314
As at October 31, 2014 $ 1,658,301 $ 714,922 $ 2,053,594 $ 225,978 $ 2,664,229 $ 13,123,599 $ 277,616 $ 20,718,239 $ 18,025,822
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
37
CWB Group 2014 Annual Report
Outlook for Capital Management
CWB will maintain solid capital ratios above its target
ICAAP thresholds and OSFI’s required minimums, and is well
positioned to manage future business growth and unexpected
events. Target capital ratios, including an appropriate capital
buffer over the prescribed OSFI minimums, are reconfirmed
at least annually through CWB’s comprehensive ICAAP. The
ongoing retention of earnings, net of expected common
and preferred share dividends, is expected to support capital
requirements associated with the anticipated achievement
of performance within the 2015 target ranges. OSFI’s stated
requirement for banks to maintain a minimum leverage ratio
of 3% at all times effective January 2015 is not expected to
be a constraint for CWB.
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
revenues, expenses, gains and losses related to the same.
Financial instrument assets include cash resources, securities, securities
purchased under resale agreements, 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.
Management continues to evaluate alternatives to deploy
capital for the long-term benefit of CWB shareholders, which
includes the potential for strategic acquisitions. 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 will continue to be
evaluated under the direction of CWB’s newly appointed chief
risk officer. Preliminary analysis confirms a multi-year time frame
which requires OSFI approval. Implementation of CWB’s new
core banking system is scheduled for early fiscal 2016. This new
system is a critical component for a number of requirements
necessary for AIRB compliance, including the collection of
certain types of data.
Further information on how the fair value of financial instruments is
determined is included in the Financial Instruments Measured at Fair
Value discussion in the Critical Accounting Estimates section of this
MD&A.
Income and expenses are classified as to source, either securities or
loans for income, and deposits or borrower funds for expense. Net
realized gains (losses) on securities are shown separately in non-
interest 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.
Table 23 – Derivative Financial Instruments
($ thousands)
Notional Amounts
Interest rate contracts(1)
Equity swaps designated as hedges(2)
Equity swaps not designated as hedges(3)
Foreign exchange contracts(4)
Total
2014
2013
$
1,725,000 $
800,000
19,205
3,754
1,964
17,470
–
1,235
$
1,749,923 $
818,705
(1) Interest rate contracts are used as hedging devices to manage interest rate risk. The outstanding contracts mature between December 2014 and July 2017.
(2) Equity swaps designated as hedges mature between June 2015 and June 2017. Equity swaps are used to reduce the earnings volatility from restricted share units linked to CWB’s common share price.
(3) Equity swaps not designated as hedges mature in June 2015. Equity swaps are used to reduce the earnings volatility from deferred share units linked to CWB’s common share price.
(4) U.S. dollar foreign exchange contracts are used from time to time to manage the difference between U.S. dollar assets and liabilities. Forward foreign exchange contracts outstanding mature
between November 2014 and July 2015.
38
CWB Group 2014 Annual Report
The active use of interest rate contracts remains an integral component
to manage the interest rate gap position. The increase in the volume
of outstanding contracts (measured by the notional amount) reflects
normal course management of interest rate risk. 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 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.
ACQUISITIONS
No material acquisitions were completed in 2014.
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 administration, as well as mortgages under service agreements
totalled $10,102 million at October 31, 2014, compared to $8,424
million one year ago.
Assets under management held within Adroit and McLean & Partners
were $1,796 million at year end, compared to $1,901 million last year.
Lower assets under management primarily reflect the redemption of a
single institutional account at Adroit.
Other off-balance sheet items are comprised of standard industry
credit instruments (guarantees, standby letters of credit and
commitments to extend credit). CWB does not utilize, nor does it have
exposure to, collateralized debt obligations or credit default swaps. For
additional information regarding other off-balance sheet items, refer
to Note 21 of the consolidated financial statements.
39
CWB Group 2014 Annual Report
SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER
QUARTERLY RESULTS
The financial results for each of the last eight quarters are summarized
in Table 24. In general, CWB’s performance reflects a consistent
growth trend, although the second quarter contains three fewer
revenue-earning days.
Quarterly financial results are subject to some fluctuation due to
exposure to property and casualty insurance. Insurance operations,
which are primarily reflected in non-interest income, are subject to
seasonal weather conditions, cyclical patterns of the industry and
natural catastrophes. In the third quarter of 2013, net insurance
revenues, reflected in non-interest income, were materially impacted
by claims expense resulting from catastrophic floods in southern
Alberta. In the fourth quarter of 2014, net insurance revenues were
materially impacted by claims expense resulting from severe Alberta
hailstorms. Mandatory participation in the Alberta auto risk sharing
pools can also result in unpredictable quarterly fluctuations.
Table 24 – Quarterly Financial Highlights(1)
($ thousands, except per share amounts)
Net gains on securities, reflected in non-interest income, were
unusually high in 2013 and 2014. The majority of net gains on
securities in these periods resulted from favourable market conditions
and the repositioning of investments in preferred shares and common
equities.
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 2013 and 2014, 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)
$ 132,479
$ 131,751
$ 123,727
$ 125,239
$ 124,775
$ 121,002
$ 111,929
$ 113,052
2014
2013
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Less teb adjustment
Net interest income
1,709
1,888
1,989
2,090
2,062
2,161
2,000
1,915
per financial statements
130,770
129,863
121,738
123,149
122,713
118,841
109,929
111,137
Non-interest income
Total revenues (teb)
Total revenues
Net income available to
27,057
28,027
29,794
28,531
26,181
23,032
23,390
22,379
159,536
159,778
153,521
153,770
150,956
144,034
135,319
135,431
157,827
157,890
151,532
151,680
148,894
141,873
133,319
133,516
common shareholders
58,150
56,580
51,191
52,628
51,210
47,484
42,988
45,482
Earnings per common share
Basic
Diluted
Adjusted cash
Return on common
0.72
0.72
0.73
0.71
0.70
0.71
0.64
0.63
0.65
0.66
0.65
0.67
0.64
0.64
0.65
0.60
0.60
0.61
0.54
0.54
0.55
0.58
0.57
0.58
shareholders’ equity (ROE)
15.0%
14.9%
14.4%
14.8%
14.9%
14.1%
13.5%
14.2%
Return on average total assets (ROA)
Efficiency ratio (teb)
Efficiency ratio
Net interest margin (teb)
Net interest margin
Provision for credit losses as
1.12
47.2
47.7
2.56
2.53
1.11
45.9
46.4
2.58
2.54
1.07
46.0
46.6
2.59
2.55
1.11
45.1
45.7
2.64
2.60
1.11
45.5
46.1
2.72
2.67
1.06
46.5
47.2
2.70
2.65
1.00
47.9
48.6
2.61
2.56
1.06
45.8
46.5
2.62
2.58
a percentage of average loans
0.09
0.16
0.16
0.19
0.19
0.20
0.19
0.18
(1) See page 13 for a discussion of teb and non-IFRS measures.
40
CWB Group 2014 Annual Report
FOURTH QUARTER OF 2014
Q4 2014 vs. Q4 2013
ROE and ROA
Strong fourth quarter financial performance was marked by record
earnings and double-digit loan growth. Record net income available
to common shareholders of $58.2 million was up 14% while diluted
earnings per common share increased 13% to $0.72. Adjusted cash
earnings per common share, which excludes the after-tax amortization
of acquisition-related intangible assets and the non-tax deductible
change in fair value of contingent consideration, was a record
$0.73, up 12%. Earnings growth was based on a 6% increase in
total revenues (teb) to $159.5 million, a decrease in preferred share
dividends and a lower provision for credit losses, partially offset by
higher non-interest expenses. Higher total revenues primarily resulted
from the benefit of strong 12% loan growth and 3% higher non-
interest income, partially offset by a 16 basis point decrease in net
interest margin (teb) to 2.56%. Growth in almost all categories of
non-interest income more than offset notable declines in both net
insurance revenues and net gains on securities. ‘Other’ non-interest
income was $4.5 million higher, primarily due to a gain on the sale
of CWB’s former Edmonton Main Branch premises. Credit-related fee
income and trust and wealth management fees increased $1.0 million
and $0.9 million, respectively, while net insurance revenues were $3.6
million lower due to the impact of claims expense related to severe
hailstorms in Alberta. Net gains on securities were $1.8 million lower.
Q4 2014 vs. Q3 2014
Net income available to common shareholders increased 3%, mainly
due to a lower provision for credit losses and higher ‘other’ non-
interest income, partially offset by a $3.6 million decline in net gains
on securities, a $2.0 million reduction in net insurance revenues and
higher non-interest expenses. Changes in ‘other’ non-interest income
and net insurance revenues primarily resulted from the same factors
discussed above. Diluted and adjusted cash earnings per common
share both increased 3%.
The quarterly return on common shareholders’ equity of 15.0%
increased 10 basis points from both a year earlier and the prior
quarter. Fourth quarter return on assets was 1.12%, compared to
1.11% both last year and in the previous quarter.
Efficiency
The quarterly 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 47.2%, up from 45.5% a year earlier, primarily reflecting the
revenue impact of lower net interest margin.
Loan Growth
Total loans of $17,606 million grew 2% in the quarter and 12% over
the past twelve months.
Credit Quality
Overall credit quality continued to reflect sound underwriting,
secured lending practices and strong economic activity in CWB’s key
geographic markets. Gross impaired loans totalled $62.1 million at
quarter end, compared to $58.1 million last quarter and $64.2 million
a year earlier. The quarterly provision for credit losses represented
nine basis points of average loans, compared to 16 basis points in
the prior quarter and 19 basis points last year. Despite the sequential
decline, the dollar provision for credit losses exceeded net new specific
provisions and led to a slight increase in the level of the collective
allowance for credit losses compared to last quarter.
41
CWB Group 2014 Annual Report 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, 2014, the provision
for unpaid claims and adjustment expenses totalled $85.5 million
(2013 – $89.7 million). Additional information on the process and
methodology for determining the provision for unpaid claims and
adjustment expenses can be found in Note 22 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, 2014, CWB’s total
allowance for credit losses was $95.6 million (2013 – $85.8 million)
which included specific allowances of $5.5 million (2013 – $9.6
million) and a collective allowance of $90.1 million (2013 – $76.2
million). Additional information on the process and methodology
for determining the allowance for credit losses can be found in
the discussion of Credit Quality in this MD&A and in Note 7 to the
consolidated financial statements.
Provision for Unpaid Insurance Claims
and Adjustment Expenses
A provision for unpaid claims is maintained, with the provision
representing the amounts needed to provide for the estimated
ultimate expected cost of settling claims related to insured events
(both reported and unreported) that have occurred on or before
each balance sheet date. A provision for adjustment expenses is
also maintained, which represents the estimated expected costs
of investigating, resolving and processing these claims. Estimated
recoveries of these costs from reinsurance ceded are included in
other assets. The computation of these provisions takes into account
the time value of money using discount rates based on projected
investment income from the assets supporting the provisions. The
process of determining the provision for unpaid claims and adjustment
expenses necessarily involves risks that the actual results will deviate
from the best estimates made. These risks vary in proportion to the
length of the estimation period and the volatility of each component
comprising the liabilities. To recognize the uncertainty in establishing
these best estimates and to allow for possible deterioration in
experience, actuaries are required to include explicit margins for
adverse deviation in assumptions for asset defaults, reinvestment
risk, claims development and recoverability of reinsurance balances.
42
CWB Group 2014 Annual Report The following table summarizes the significant financial assets and liabilities recorded on the consolidated balance sheets at fair value.
Table 25 – Valuation of Financial Instruments
($ thousands)
As at October 31, 2014
Financial Assets
Cash resources
Securities
Securities purchased under resale agreements
Derivative related
Total Financial Assets
Financial Liabilities
Other liability(1)
Derivative related
Total Financial Liabilities
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
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
508,414
$
471,643
$
36,771
$
2,089,205
2,089,205
99,566
5,420
99,566
–
5,420
–
–
$
2,702,605
$
2,660,414
$
42,191
$
–
–
–
–
–
$
$
2,679
$
386
3,065
$
–
–
–
$
$
–
$
2,679
386
–
386
$
2,679
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
(1) Level 3 financial instruments are comprised of the contingent consideration related to the acquisition of McLean & Partners Wealth Management Ltd.
Notes 3, 4, 5, 11 and 30 to the consolidated financial statements provide additional information regarding these financial instruments.
43
CWB Group 2014 Annual Report CHANGES IN ACCOUNTING POLICIES
FUTURE CHANGES IN ACCOUNTING POLICIES
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, if any, on the financial statements.
IFRS 9 – Financial Instruments
During 2014, the IASB issued the complete version of IFRS 9.
Under the finalized guidance, IFRS 9 specifies that financial assets
be classified into one of three categories: financial assets measured
at amortized cost, financial assets measured at fair value through
profit or loss, or financial assets measured at fair value through other
comprehensive income. IFRS 9 introduces changes to measuring an
entity’s own credit risk in the valuation of financial liabilities. The
final standard also introduces a new expected credit loss model
for calculating impairment, and new general hedge accounting
requirements that align more closely with an entity’s risk management
model. Compliance with IFRS 9 is mandatory for CWB’s fiscal year
beginning on November 1, 2018, and early adoption is permitted.
OSFI is currently assessing whether it will require federally regulated
Canadian banks, including CWB, to adopt IFRS 9 effective
November 1, 2017, in advance of IASB requirements.
IFRS 15 – Revenue from Contracts with Customers
During 2014, the IASB established principles for reporting about
the nature, amount, timing and uncertainty of revenue and cash
flows arising from an entity’s contracts with customers. The standard
provides a single, principles-based model for revenue recognition
to be applied to all contracts with customers. IFRS 15 will be effective
for CWB’s fiscal year beginning November 1, 2017, with earlier
adoption permitted.
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. macro-hedging, leases
and insurance) may have a significant impact on CWB’s future
consolidated financial statements.
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,
if any, on the financial statements.
Consolidated Financial Statements
Effective November 1, 2013, CWB retrospectively adopted IFRS 10
Consolidated Financial Statements and IFRS 12 Disclosures of Interests
in Other Entities, 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. As a result of the application
of IFRS 10, CWB has changed its accounting policy for determining
whether it has control over its investees and, consequently, has
de-consolidated Canadian Western Bank Capital Trust (the Trust)
through which certain regulatory capital instruments are issued. In
accordance with the transitional provisions, CWB has applied IFRS
10 retrospectively and comparative figures have been restated to
reflect the de-consolidation of the Trust. The de-consolidation of the
Trust resulted in a $105 million decrease in CWB Capital Trust Capital
Securities Series 1 (WesTS) previously classified as non-controlling
interest and an increase of $105 million in deposit liabilities, and
reclassification of the associated distribution, which totalled $6.7
million for the year ended October 31, 2013, from non-controlling
interest to interest expense. The annual disclosures required by
IFRS 12 are included in Notes 14, 20 and 33.
Accounting for Internal Direct Leasing Costs
IAS 17 Leases requires that the lessor capitalize initial direct leasing
costs in the initial measurement of the lease, and defines initial direct
costs as incremental costs directly attributable to negotiating and
arranging a lease. Prior to 2014, CWB capitalized costs of certain
employees and other internal costs directly attributable to arranging
new leases within initial direct leasing costs on initial measurement of
a lease. During 2014, the IFRS Interpretations Committee has issued
clarification that certain internal costs do not qualify as incremental
costs. As a result, during the year CWB changed its accounting policy
to expense, rather than capitalize, non-incremental internal costs for
negotiating and arranging new leases as incurred. CWB has applied
this accounting policy retrospectively, resulting in a decrease of $9.5
million in loans, an increase in other assets of $2.5 million for deferred
income taxes, and a decrease of $6.9 million in retained earnings for
all presented comparative periods. This change did not result in
a change to the consolidated statements of income.
Fair Value Measurement
Effective November 1, 2013, CWB adopted IFRS 13 Fair Value
Measurement, which 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. In accordance with the transitional provisions
of IFRS 13, CWB has applied the new fair value measurement
guidance prospectively. This new standard had no impact on the
measurement of CWB’s assets and liabilities. Additional disclosures
required by IFRS 13 are included in Note 30.
44
CWB Group 2014 Annual Report 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 45 to 54
of this MD&A form an integral part of the audited consolidated
financial statements for the year ended October 31, 2014.
Highlights of 2014
Several enhancements to CWB’s risk management framework
were undertaken in 2014 as part of the ongoing development
and implementation of CWB’s risk management processes. Key
changes included:
• Completion of the CWB Group Risk Appetite Statement;
•
Inclusion of technology risk as a discrete subset of operational
risk in recognition of CWB’s increasing reliance on technology;
and,
• Recruitment of an executive chief risk officer to take office
in fiscal 2015;
•
Implementation of a group-wide operational risk training
initiative.
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, not all risks are
within 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 risk 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 preventive 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.
• The belief that every employee is accountable to understand 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.
The mandate of CWB’s Group Risk Management function is to enhance
existing processes and structure to help identify and appropriately
mitigate risks on a group-wide basis. The intent is to provide a suitable
framework for CWB to properly balance risk and reward while ensuring risk
management practices satisfy regulatory requirements.
45
CWB Group 2014 Annual Report CWB Group Risk Appetite StatementCWB Group’s vision – to be seen as crucial to our clients’ futures – requires continuous consideration, understanding and responsible management of all key risks at both the strategic and operational levels. Our core strategic objective to balance risk and reward requires each of us to make common-sense business decisions by assessing risk and reward trade-offs considering CWB Group strategy, risk appetite and regulatory/legal requirements. Our Risk Appetite Statement considers all risks we manage as we seek to deliver value and growth for each of our key stakeholder groups: clients, shareholders, employees and communities and is summarized as follows:At CWB Group, we consciously accept risks to add value for stakeholders and support the responsible and efficient delivery of products and services provided those risks:• Help us become more crucial to our clients’ futures • Are thoroughly understood and managed within the confines of well-communicated CWB Group risk tolerances, including the highest ethical standards. 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 (Figure 5) 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
interrelationships 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 (Figure 6) 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
Business
and Personal
Banking
Trust
Services
Insurance
Wealth
Management
Credit Risk
Operational Risk
Credit Risk
Operational Risk
Operational Risk
Operational Risk
46
CWB Group 2014 Annual Report
Reputational risk is also a principal risk, which arises as a consequence
of not managing other risks effectively. Regulatory, technology and
people risks are significant subsets 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, many of the factors and risks discussed may
also be interrelated.
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 decisions. It provides a context to discuss
potential risks and reach a shared understanding of appropriate risk
thresholds. Setting 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:
• A conservative culture that is prevalent throughout CWB, from the
Board to senior management to front-line staff.
• 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.
• 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 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 and has
extensive knowledge and experience in CWB’s chosen lending
sectors, key geographic regions and other complementary business
areas.
47
CWB Group 2014 Annual Report 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 CWB Group Executive Committee.
The Executive 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.
Figure 7 – Internal Risk Management Committees
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.
An overview of the management committee structure and list of
key risks for which each committee is responsible follows.
CEO
Executive
Committee
Reputational
Regulatory
Group
Credit Risk
Committee
Group
ALCO
Group
Capital Risk
Committee
Group
Operational
Risk
Committee
Group
Disclosure
Committee
Credit
Market
Liquidity
Funding
Capital
Operational
• Regulatory
• Technology
• People
Group Capital Risk Committee – Responsible for the oversight
of capital adequacy, CWB’s regulatory capital plan, ICAAP and
stress testing.
Group Operational Risk Committee – Reviews the group
operational risk management framework, operational loss
reporting and business continuity plans. Reviews action plans for
mitigating and improving the management of operational risk.
Group Disclosure Committee – Supports CEO/CFO certification
over public disclosures. Responsible for reviewing CWB’s
internal control over financial reports and disclosure controls
and procedures to help ensure the accuracy, completeness and
timeliness of related public disclosures.
Executive Committee – Oversees major risk management
processes, provides oversight to internal risk committees
and ensures the risk management framework is properly
implemented. 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. 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.
Oversees diversification of product offerings to ensure alignment
with strategy and risk tolerances.
48
CWB Group 2014 Annual Report Additional information on these committees is provided below in principal risk governance sections.
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
establishment of policies and procedures
- Ensure activities conform to risk
management policies and authorities
- Develop and maintain effective internal
controls
- Monitor and report activities
Second Line
Oversight Functions
Third Line
Internal Audit
- Establish group-wide frameworks and
training for risk management and
compliance
- Provide oversight and independent
challenge to business and support areas
- Monitor and report on compliance with
risk policies
- Provide independent assurance that risk
management controls and governance
processes are adequate and functioning
as intended
The following CWB oversight functions provide key support within
the group-wide risk management framework:
Group Risk Management – Establishes the group-wide risk
management framework and provides independent oversight
of enterprise risk management. The Chief Risk Officer (CRO)
will report 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.
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.
CREDIT RISK
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. CWB’s
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.
Refer to the Loans and Credit Quality sections of this MD&A for
additional information.
49
CWB Group 2014 Annual Report 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 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
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;
• pricing of credits commensurate with risk to ensure an
• oversight provided by the Loans Committee of the Board;
appropriate financial return;
• delegated lending authorities that are clearly communicated
• management of growth while maintaining the quality of loans;
to lenders and other personnel engaged in the credit granting
process;
• credit policies, guidelines and directives which are
communicated within all branches, 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 credit 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;
• early recognition of problem accounts and immediate 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. A summary report of less than
satisfactory accounts is reviewed by the Loans Committee of
the Board on a quarterly basis.
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 and Atlantic Canada.
For additional information, see the Loans and Credit Quality sections
of this MD&A.
50
CWB Group 2014 Annual Report MARKET RISK
Risk Overview
Risk Governance
Market risk arises when making loans, taking deposits and making
investments. The most material market risks for CWB are those
related to changes in interest rates. CWB 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 cash and 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
movements in interest rates and volatility in financial markets. CWB
has limited direct exposure to foreign exchange risk.
INTEREST RATE 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 and manages market risk with strong support from senior
management.
This risk and the potential for variability in earnings arise primarily
when cash flows associated with 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.
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 strategy. The objective is to prudently
manage interest rate risk within established 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 after Treasury hedging activity. The interest rate gap
is measured at least monthly. Note 29 to the consolidated financial
statements shows the gap position at October 31, 2014 for select
time intervals.
The analysis in Note 29 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 negative 0.7%
of total assets at October 31, 2014, down from 1.2% one year ago,
while the one-month and under gap decreased to 2.7%, from 6.7%
a year earlier.
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:
• a constant structure in the interest sensitive asset liability portfolio;
• floor levels for various deposit liabilities;
•
interest rate changes affecting interest sensitive assets and liabilities
by proportionally the same amount and applied at the appropriate
repricing dates; and,
• no early redemptions.
51
CWB Group 2014 Annual Report Interest rate risk is the impact on earnings and economic value resulting from changes in interest rates.Interest rate risk is managed to ensure sustainable earnings over time, balancing the impact on current year earnings against changes in economic value at risk over the life of the asset and liability portfolios.Market risk is the impact on earnings resulting from changes in financial market variables such as interest rates and foreign exchange rates. Table 27 – Estimated Sensitivity of Net Interest Income
as a Result of One Percentage Point Change in Interest Rates
($ thousands)
Impact of 1% increase in interest rates
Period
90 days
1 year
1 year percentage change
Impact of 1% decrease in interest rates
Period
90 days
1 year
1 year percentage change
2014
2013
$
2,411
$
4,176
9,185
14,545
2.0%
3.3%
2014
2013
$
(4,889)
$
(6,796)
(18,221)
(23,853)
(3.9)%
(5.3)%
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 adjusted to zero or an assumed floor if
higher than zero.
It is estimated that a one-percentage point increase in all interest
rates at October 31, 2014 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 $36.6 million, net
of tax (October 31, 2013 – $14.4 million); it is estimated that a
one-percentage point decrease in all interest rates at October 31,
2014 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 $37.3 million, net of tax
(October 31, 2013 – $14.4 million).
It is management’s intention to continue to manage the asset liability
structure and interest rate sensitivity through pricing and product
policies to attract desired assets and liabilities, as well as through the
use of interest rate swaps or other appropriate hedging techniques
(see discussion under Derivative Financial Instruments 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.
FOREIGN EXCHANGE RISK
Foreign exchange risk is the risk of changes in earnings or economic value arising from changes in foreign exchange rates. This risk
arises when various assets and liabilities are denominated in different currencies.
In providing financial services to its clients, CWB has assets and
liabilities denominated in U.S. dollars. At October 31, 2014,
assets denominated in U.S. dollars were 1.0% (2013 – 1.2%) of
total assets and U.S. dollar liabilities were 1.1% (2013 – 1.3%) of
total liabilities. Currencies other than U.S. dollars are not bought
or sold other than to meet specific client needs. CWB has no
material 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.
52
CWB Group 2014 Annual Report
LIQUIDITY AND FUNDING RISK
Risk Overview
CWB maintains a sound, prudent and conservative approach to
managing exposure to liquidity risk, including targeting a contingency
planning horizon under stressed 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:
• 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.
• an appropriate balance between the level of risks CWB undertakes
and the corresponding cost of risk mitigation that considers the
potential impact of extreme but plausible events;
Refer to the Liquidity Management section 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
measures, monitors and manages liquidity risk with strong
support from senior management.
53
CWB Group 2014 Annual Report Liquidity risk is the risk that CWB cannot meet a demand for cash or fund its financial obligations in a cost efficient or timely manner as they become due. These financial obligations can arise from withdrawals of deposits, debt maturities, and commitments to provide credit. Risk 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 modelling – 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 – Treasury oversight of all significant liquidity
risks that support analysis, risk measurement, stress testing,
monitoring and reporting to both ALCO and the Board;
• Stress testing – CWB performs liquidity stress testing on a
regular basis to evaluate the potential effect of both systemic
and company-specific (idiosyncratic) 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. CWB stress tests liquidity as
per guidance from OSFI as described in the Liquidity Adequacy
Requirements Guideline. Stress test results are reviewed
by ALCO and 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 funding, risk
mitigation and contingency plans.
• Contingency planning – A liquidity contingency plan is
maintained that defines a liquidity event and 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 currently include securitization, capital market issuance
and whole loan sales; and,
• 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 the final Liquidity Adequacy Requirements in May 2014,
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 also introduced a monitoring tool
called the Net Cumulative Cash Flow. CWB expects to be compliant
with the Liquidity Adequacy Requirements Guidelines.
54
CWB Group 2014 Annual Report Contractual Obligations
CWB enters into contracts in the normal course of business that give
rise to commitments of future minimum payments that affect the
liquidity position. In addition to the obligations related to deposits
and subordinated debentures discussed in the Deposits and Liquidity
Table 28 – Contractual Obligations
($ thousands)
Management sections of this MD&A, as well as Notes 13, 17, 21 and
29 of the consolidated financial statements, the following contractual
obligations are outstanding at October 31, 2014:
Lease commitments
$
12,121
$
21,751
$
16,857
$
46,178
$
96,907
Within 1
Year
1 to 3
Years
4 to 5
Years
More than 5
Years
Total
Purchase obligations for operating
and capital expenditures
October 31, 2014
October 31, 2013
Credit Ratings
3,132
15,253
13,019
$
$
2,856
24,607
25,438
$
$
2,677
19,534
19,395
$
$
–
46,178
52,599
$
$
8,665
105,572
110,451
$
$
CWB’s ability to efficiently access capital markets 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, 2014.
Table 29 – Credit Ratings
The following CWB ratings issued by DBRS, along with the corresponding outlook, were last confirmed
on October 21, 2014.
Long-term
senior debt and
deposits
Short-term debt
Subordinated
debentures
Preferred shares
Outlook
DBRS
A (low)
R-1 (low)
BBB (high)
Pfd-3
Stable
55
CWB Group 2014 Annual Report
CAPITAL RISK
Risk Overview
CWB follows three main principles to facilitate the effective
management of capital risk:
• Capital management involves a dynamic and ongoing process to
determine, allocate and maintain appropriate amounts of capital.
• The optimal amount and composition of capital must consider
regulatory and economic capital requirements, as well as the
expectation of CWB shareholders and other stakeholders.
• The objective of capital management is to ensure:
- capital is, and will continue to be, adequate to maintain
confidence in the safety and stability of 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.
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 the capital management
policy and three-year capital projections, is completed at least
annually.
• Consolidated forecast models are used to analyze the likely capital
impact of projected operations, stress testing and/or significant
transactions.
• Regulatory capital ratios are reported to senior management and
the Board on a monthly basis.
Risk Governance
• The Board receives a quarterly capital risk update.
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
For additional information, please refer to the Capital Management
section of this MD&A.
OPERATIONAL RISK
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. 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 2014 or 2013.
The regulatory framework requires certain amounts of capital to be
allocated to support operational risk. 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
56
encompasses a common language of risk coupled with programs
and methodologies for identification, measurement, control, and
management of operational risk. This is supported by specific
operational risk training for all staff.
Risk Governance
Business and support areas are fully accountable for the management
and control of operational risks to which they are exposed. The
Group Operational Risk Committee has responsibility for operational
risk, with oversight by the Board, Executive Committee and senior
management. The Group Risk Management function is responsible
for the continual enhancement of the Group Operational Risk
Management Framework and supporting policies. The Board
has ultimate oversight and approves the Group’s Operational
Risk Management Framework with support from various Board
committees.
CWB Group 2014 Annual ReportCapital risk is the risk that CWB has insufficient capital resources, in either quantity or quality, to support strategic initiatives and current or planned operations. Operational risk is the risk of loss resulting from human error, inadequate or failed processes, systems or controls, or external events. There are three subsets of operational risk: regulatory risk, people risk and technology risk. Risk Management
Following is a summary of strategies and factors that assist with the
effective management of operational risk:
Additional key components include:
• Flat organizational structure with management close to their
respective operations, which helps to facilitate effective internal
communication and operational control;
• Organizational surveys on employee engagement and corporate
culture (including CWB’s ongoing participation in the 50 Best
Employers in Canada survey);
• Communication of, and specific training related to, the importance
of effective operational risk management to all levels;
• Management that is very engaged with promoting CWB’s
operational risk tolerance and appetite; and,
• 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 Group Operational Risk Management framework and
supporting policies.
• 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.
•
implementation of policies and procedural controls appropriate to
address identified risks (including segregation of duties and other
fundamental checks and balances);
• continual enhancements to fraud prevention processes, policies
and communication;
• established “whistleblower” processes and employee code of
conduct;
• maintenance of an outsourcing management program;
• at least annual assessment and benchmarking of business
insurance;
• human resource policies and processes to ensure staff are
adequately trained for the tasks for which they are responsible and
enable retention and recruitment;
• a Regulatory Compliance department focused on key regulatory
compliance areas such as privacy, anti-money laundering, anti-
terrorist financing and consumer regulations;
• use of technology that incorporates automated systems with
built-in controls and active management of configuration and
change management along with information security management
programs;
• enhanced focus on data quality as an important and strategic asset;
• 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).
57
CWB Group 2014 Annual Report REGULATORY RISK
The businesses operated by CWB 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 support compliance
with governing laws and regulations.
Over the past several years the intensity of supervisory oversight of
all federally regulated Canadian financial institutions has increased
significantly in terms of both regulation and new standards. This
includes amplified supervisory activities, an increase in the volume
of regulation, more frequent data and information requests from
regulators, and shorter implementation time frames for regulatory
requirements, including the Basel III capital and liquidity standards.
Certain regulations may also impact CWB’s ability to compete
against both non-OSFI and other OSFI regulated entities. Effective
management of regulatory risk and compliance in the current
environment requires, and is expected to continue to require,
considerable internal resources and the active involvement of
senior management 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 and non-compliance for all regulated entities.
TECHNOLOGY RISK
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 (implementation scheduled for early fiscal
2016), which further increase risk exposure related to information
systems and technology.
PEOPLE RISK
Competition for qualified employees in CWB’s key markets is intense,
reflecting the general level of economic activity and the needs of other
financial services participants within and outside CWB’s geographic
footprint.
CWB intends to continually attract and retain sufficient qualified
employees to successfully execute against its strategic direction.
Inability to maintain an appropriate staff complement would adversely
affect CWB’s ability to achieve the organization’s strategic objectives.
58
CWB Group 2014 Annual ReportRegulatory 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. Technology risk is related to the operational performance, confidentiality, integrity and availability of our information, systems and infrastructure. People risk is the risk that CWB is not able to retain and attract sufficient qualified employees to implement its strategies and/or achieve its objectives. REPUTATION RISK
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 the CWB Group’s personal
conduct policies and in a manner that minimizes reputational risk.
In addition to members of senior management, the Legal, Strategy
and Communications, and Regulatory Compliance departments are
particularly involved in the management of reputation risk.
INSURANCE RISK
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.
Level of Competition
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.
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; real estate prices; adverse global
economic events and/or elevated economic uncertainties; inflation;
exchange rates; levels of consumer, business and government
spending; levels of consumer, business and government debt; and
consumer confidence.
59
CWB Group 2014 Annual Report Reputation risk is the consequence of not managing risks effectively and cannot be considered in isolation from other risks. 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.
Accuracy and Completeness of Information
on Clients and Counterparties
CWB depends on the accuracy and completeness of information
about customers and counterparties. In deciding whether to extend
credit or enter into other transactions with clients and counterparties,
CWB may rely on information furnished by them, including financial
statements, appraisals, external credit ratings and other financial
information. CWB may also rely on the representations of clients
and counterparties as to the accuracy and completeness of that
information and, with respect to financial statements, on the
reports of auditors. CWB’s financial condition and earnings could be
negatively impacted to the extent it relies on financial statements that
do not comply with standard accounting practices, that are materially
misleading, or that do not fairly present, in all material respects,
the financial condition and results of operations of the customer or
counterparties.
Ability to Execute Growth Initiatives
As part of its long-term corporate strategy, CWB intends to continue
growing its business through a combination of organic growth and
strategic acquisitions. The ability to successfully grow its business
will be dependent on a number of factors, including identification of
accretive new business or acquisition opportunities, negotiation of
purchase agreements on satisfactory terms and prices, approval of
acquisitions by regulatory authorities, securing satisfactory regulatory
capital and financing arrangements, and effective integration of newly
acquired operations into the existing business. All of these activities
may be more difficult to implement or may take longer to execute
than management anticipates. Further, any significant expansion
of the business may increase the operating complexity and divert
management’s attention away from established or ongoing business
activities. Any failure to successfully manage acquisition strategies
could have a material adverse impact on CWB’s business, financial
condition and results of operations.
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 its operations, CWB is primarily subject to credit, market (mainly
interest rate), liquidity, operational, reputation, regulatory, insurance,
environmental, and other risks. There can be no assurance that the
framework to manage risks, including the framework’s underlying
assumptions and models, will be effective under all conditions and
circumstances. If the risk management framework proves ineffective,
CWB could be materially affected by unexpected financial losses and/
or other harm.
Changes in Accounting Standards and
Accounting Policies and Estimates
The International Accounting Standards Board continues to change
the financial accounting and reporting standards that govern the
preparation of CWB’s financial statements. These types of changes
can be significant and may materially impact how CWB records and
reports its financial condition and results of operations. Where CWB
is required to retroactively apply a new or revised standard, it may be
required to restate prior period financial statements.
Other Factors
CWB cautions that the above discussion of risk factors is not
exhaustive. Other factors beyond CWB’s control that may affect future
results include changes in tax laws, technological changes, unexpected
changes in consumer spending and saving habits, timely development
and introduction of new products, and the anticipation of and success
in managing the associated risks.
60
CWB Group 2014 Annual Report UPDATED SHARE INFORMATION
As at November 26, 2014, there were 80,370,001 common shares
outstanding. Also outstanding were employee stock options, which
are or will be exercisable for up to 4,736,835 common shares for
maximum proceeds of $145.7 million. On December 3, 2014, the
Board of Directors declared a quarterly cash dividend of $0.21 per
common share payable on January 8, 2015, to shareholders of record
on December 16, 2014. The Board of Directors also declared a cash
dividend of $0.275 per Series 5 preferred share payable on January 31,
2015 to shareholders of record on January 23, 2015.
CONTROLS AND PROCEDURES
As of October 31, 2014, 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, 2014, 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.
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.
The Bank’s certifying officers had previously limited the scope of the
design 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 has now been removed.
There were no changes in CWB’s internal controls over financial
reporting that occurred during the year ended October 31, 2014 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 3, 2014.
61
CWB Group 2014 Annual Report 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 comprised 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 3, 2014
Carolyn J. Graham, FCA
Executive Vice President and Chief Financial Officer
62
CWB Group 2014 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, 2014 and 2013, the consolidated statements
of income, comprehensive income, changes in equity and cash
flows for the years ended October 31, 2014 and 2013, 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 the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’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, 2014 and 2013, and its consolidated
financial performance and its consolidated cash flows for the years
ended October 31, 2014 and 2013 in accordance with International
Financial Reporting Standards.
Chartered Accountants
Edmonton, Canada
December 3, 2014
63
CWB Group 2014 Annual Report CONSOLIDATED BALANCE SHEETS
($ thousands)
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions
Interest bearing deposits with regulated financial institutions
Cheques and other items in transit
Securities
Issued or guaranteed by Canada
Issued or guaranteed by a province or municipality
Other securities
Securities Purchased under Resale Agreements
Loans
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
Other liabilities
Debt
Subordinated debentures
Debt securities
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
As at
October 31
2014
As at
October 31
2013(1)
(Note 3)
$
13,320
491,255
3,839
508,414
$
83,856
258,466
5,673
347,995
(Note 4)
(Note 5)
(Note 6)
(Note 7)
(Note 8)
(Note 9)
(Note 9)
(Note 10)
(Note 11)
(Note 12)
(Note 13)
(Note 15)
(Note 11)
(Note 16)
(Note 17)
(Note 18)
(Note 18)
(Note 20)
764,213
560,482
764,510
2,089,205
99,566
2,841,154
14,764,543
17,605,697
(95,598)
17,510,099
927,077
410,984
894,271
2,232,332
–
2,502,295
13,150,931
15,653,226
(85,786)
15,567,440
66,257
50,408
85,137
65,764
5,420
128,386
401,372
$ 20,608,656
66,647
49,424
70,197
64,365
4,509
110,431
365,573
$ 18,513,340
$ 9,832,669
7,540,345
17,373,014
$ 9,420,754
6,210,286
15,631,040
54,826
165,903
386
282,944
504,059
625,000
411,990
1,036,990
125,000
533,038
1,011,147
25,339
(997)
1,693,527
1,066
55,290
167,816
36
238,939
462,081
625,000
195,650
820,650
208,815
510,282
858,167
24,632
(3,389)
1,598,507
1,062
1,694,593
$ 20,608,656
1,599,569
$ 18,513,340
(1) During 2014, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements and applied a change in accounting policy for internal direct leasing costs, as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
Allan W. Jackson
Chair of the Board
64
Chris Fowler
President and Chief Executive Officer
CWB Group 2014 Annual Report
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
Non-Interest Income
Trust and wealth management services
Credit related
Insurance, net
Gains on securities, net
Retail services
Other
Net Interest and Non-Interest 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
Premium paid on purchase of preferred shares for cancellation
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
(1) During 2014, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements, as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
2014
2013(1)
$
799,909
$ 735,404
44,096
5,142
44,952
1,609
849,147
781,965
311,075
286,913
32,552
343,627
505,520
25,057
32,433
319,346
462,619
27,846
480,463
434,773
33,866
25,014
20,914
13,999
11,399
8,217
113,409
593,872
24,511
21,685
16,279
15,094
10,272
7,141
94,982
529,755
187,871
172,237
49,065
52,036
288,972
304,900
73,601
42,825
47,435
262,497
267,258
64,052
$
231,299
$ 203,206
1,240
824
$
230,059
$ 202,382
11,510
15,183
–
36
$
218,549
$ 187,163
(Note 7)
(Note 22)
(Note 25)
80,034
80,955
(Note 26)
$
2.73
$
2.70
79,147
79,544
2.36
2.35
65
CWB Group 2014 Annual Report
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(2)
Reclassification to net income(3)
Derivatives designated as cash flow hedges
Gains from change in fair value(4)
Reclassification to net income(5)
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) During 2014, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements, as described in Note 1.
(2) Net of income tax of $4,697 (2013 – $866).
(3) Net of income tax of $3,712 (2013 – $3,934).
(4) Net of income tax of $1,139 (2013 – $788).
(5) Net of income tax of $1,208 (2013 – $424).
2014
2013(1)
$
231,299
$ 203,206
12,882
(10,287)
2,595
3,372
(3,575)
(203)
2,392
(2,553)
(11,160)
(13,713)
2,332
(1,255)
1,077
(12,636)
$
233,691
$ 190,570
$
232,451
$ 189,746
1,240
824
$
233,691
$ 190,570
Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statements of Income
when specific conditions are met.
The accompanying notes are an integral part of the consolidated financial statements.
66
CWB Group 2014 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
Issuance costs on preferred 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
Shares issued
Shares redeemed
Purchased 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
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
Partial ownership increase
Business acquisition
Balance at end of year
Total Equity
(Note 18)
(Note 18)
(Note 18)
(Note 18)
(Note 19)
2014
2013(1)
$
858,167
$
726,378
230,059
202,382
(11,510)
(62,408)
(3,161)
–
(15,183)
(55,374)
–
(36)
1,011,147
858,167
(3,389)
2,595
(203)
(997)
208,815
125,000
(208,815)
–
9,247
(13,713)
1,077
(3,389)
209,750
–
–
(935)
125,000
208,815
510,282
490,218
16,467
5,223
1,066
14,404
3,986
1,674
533,038
510,282
24,632
5,930
(5,223)
25,339
22,468
6,150
(3,986)
24,632
1,693,527
1,598,507
1,062
1,240
(1,139)
(97)
–
244
824
(322)
–
316
1,066
1,062
$ 1,694,593
$ 1,599,569
(1) During 2014, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements and applied a change in accounting policy for internal direct leasing costs, as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
67
CWB Group 2014 Annual Report
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
Gain on securities, net
Deferred taxes, net
Gain on disposal of property and equipment
Change in operating assets and liabilities
Loans, net
Deposits, net
Securities purchased under resale agreements, net
Securities sold under repurchase agreements, net
Other items, net
Cash Flows from Financing Activities
Common shares issued, net of issuance costs
Preferred shares issued, net of issuance costs
Preferred shares redeemed
Debt securities issued
Debt securities repaid
Dividends
Distributions to non-controlling interests
Debentures issued
Debentures redeemed
Preferred shares purchased for cancellation
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net
Securities, purchased
Securities, sales proceeds
Securities, matured
Proceeds on disposal of property and equipment
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
(1) During 2014, CWB retrospectively adopted IFRS 10 Consolidated Financial Statements, as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
68
(Note 18)
(Note 18)
(Note 18)
2014
2013(1)
$
231,299
$
203,206
25,057
21,685
10,254
5,930
6,604
(13,999)
(5,014)
(4,698)
27,846
21,572
(7,444)
6,150
2,816
(15,094)
5,507
–
(1,967,717)
(1,651,053)
1,741,974
1,381,203
(99,566)
–
–
(70,089)
13,327
(34,864)
17,533
121,839
(208,815)
363,187
934
(94,446)
16,078
–
–
90,596
(146,848)
(104,219)
(73,918)
(1,139)
–
–
–
(70,557)
(322)
250,000
(50,000)
(971)
71,839
130,605
(232,766)
(81,284)
(6,779,305)
(6,004,062)
4,329,567
3,839,290
2,604,572
2,275,813
7,263
(38,212)
–
(108,881)
(71,906)
34,239
–
(27,504)
(10,098)
(7,845)
28,314
5,925
$
$
(37,667)
$
34,239
13,320
$
83,856
3,839
(54,826)
5,673
(55,290)
$
(37,667)
$
34,239
$
845,063
$
785,643
333,479
68,362
313,463
65,989
CWB Group 2014 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2014 and 2013
($ 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 3, 2014.
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.
b) Statement of Compliance
f) Business Combinations
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 on critical judgments in applying accounting policies that
has the most significant effect on the amounts recognized in the
consolidated financial statements is described in the following notes:
•
Impairment of loans (Note 6);
• Allowance for credit losses (Note 7); and,
• Provision for unpaid claims and adjustment expenses (Note 22).
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.
69
CWB Group 2014 Annual Report 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 purchased under resale agreements
Loans
Allowance for credit losses
Property and equipment
Goodwill and intangible assets
Insurance-related other assets
Derivative financial instruments
Other assets
Deposits
Interest in unconsolidated structured entity
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
Subsidiaries
Comparative figures
i) Changes in Accounting Policies
Consolidated Financial Statements
Effective November 1, 2013, CWB retrospectively adopted IFRS 10
Consolidated Financial Statements and IFRS 12 Disclosures of Interests
in Other Entities, 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. As a result of the application
of IFRS 10, CWB has changed its accounting policy for determining
whether it has control over its investees and, consequently, has
de-consolidated Canadian Western Bank Capital Trust (the Trust)
through which certain regulatory capital instruments are issued. In
accordance with the transitional provisions, CWB has applied IFRS
10 retrospectively and comparative figures have been restated to
reflect the de-consolidation of the Trust. The de-consolidation of the
Trust resulted in a $105,000 decrease in CWB Capital Trust Capital
Securities Series 1 (WesTS) previously classified as non-controlling
70
interest and an increase of $105,000 in deposit liabilities, and
reclassification of the associated distribution, which totalled $6,744
for the year ended October 31, 2013, from non-controlling interest
to interest expense. The annual disclosures required by IFRS 12 are
included in Notes 14, 20 and 33.
Accounting for internal direct leasing costs
IAS 17 Leases requires that the lessor capitalize initial direct leasing
costs in the initial measurement of the lease, and defines initial direct
costs as incremental costs directly attributable to negotiating and
arranging a lease. Prior to 2014, CWB capitalized costs of certain
employees and other internal costs directly attributable to arranging
new leases within initial direct leasing costs on initial measurement
of a lease. During 2014, the IFRS Interpretations Committee issued
clarification that certain internal costs do not qualify as incremental
costs. As a result, during the year CWB changed its accounting policy
to expense, rather than capitalize, non-incremental internal costs for
negotiating and arranging new leases as incurred. CWB has applied
this accounting policy retrospectively, resulting in a decrease of $9,453
in loans, an increase in other assets of $2,533 for deferred income
taxes and a decrease of $6,920 in retained earnings for all presented
comparative periods. This change did not result in a change to the
consolidated statements of income.
Fair value measurement
Effective November 1, 2013, CWB adopted IFRS 13 Fair Value
Measurement, which 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. In accordance with the transitional provisions
of IFRS 13, CWB has applied the new fair value measurement
guidance prospectively. This new standard had no impact on the
measurement of CWB’s assets and liabilities. Additional disclosures
required by IFRS 13 are included in Note 30.
j) 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 9 – Financial Instruments
During 2014, the IASB issued the complete version of IFRS 9. Under
the finalized guidance, IFRS 9 specifies that financial assets be
classified into one of three categories: financial assets measured
at amortized cost, financial assets measured at fair value through
profit or loss or financial assets measured at fair value through other
comprehensive income. IFRS 9 introduces changes to measuring an
entity’s own credit risk in the valuation of financial liabilities. The
final standard also introduces a new “expected credit loss” model
for calculating impairment, and new general hedge accounting
requirements that align more closely with an entity’s risk management
model. IFRS 9 will be mandatorily effective for CWB’s fiscal year
beginning on November 1, 2018, and early adoption is permitted.
OSFI is currently assessing whether it will require federally regulated
Canadian banks, including CWB, to early adopt IFRS 9 effective
November 1, 2017.
CWB Group 2014 Annual Report IFRS 15 – Revenue from Contracts with Customers
4. SECURITIES
Securities have been designated as available-for-sale, are accounted
for at settlement date and recorded on the consolidated balance
sheets at fair value with changes in fair value recorded in other
comprehensive income, net of income taxes, until the security is sold
or becomes impaired. Interest income from securities, which includes
amortization of premiums and discounts, is recognized using the
effective interest method in the consolidated statements of income.
Dividend income is recognized on the ex-dividend date.
Securities are purchased with the original intention to hold the
instrument to maturity or until market conditions render alternative
investments more attractive. Gains and losses realized on disposal
of securities and adjustments to record any impairment in value are
included in non-interest 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.
During 2014, the IASB established principles for reporting about
the nature, amount, timing and uncertainty of revenue and cash
flows arising from an entity’s contracts with customers. The standard
provides a single, principles based model for revenue recognition to
be applied to all contracts with customers. IFRS 15 will be effective for
CWB’s fiscal year beginning November 1, 2017, with earlier adoption
permitted.
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. macro-hedging, leases and
insurance) may have a significant impact on CWB’s future consolidated
financial statements.
2. FINANCIAL 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 assets include cash resources, securities, securities purchased
under resale agreements, loans, derivative financial instruments and
certain other assets. Financial liabilities include deposits, 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 2014 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 non-
interest 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 $491,255 (October 31, 2013 – $258,466),
which is $91 (October 31, 2013 – $569) higher than amortized cost.
71
CWB Group 2014 Annual Report The analysis of securities at carrying value, by type and maturity, is as follows:
Maturities
As at
As at
Within
1 Year
1 to
3 Years
3 to
5 Years
Over 5
Years
October 31
2014
October 31
2013
Securities issued or guaranteed by
Canada
$
140,017 $
274,565 $
349,631 $
– $
764,213 $
927,077
A province or municipality
16,906
72,370
370,897
100,309
560,482
410,984
Other debt securities
Equity securities
Preferred shares
Common shares(1)
Total
(1) Common shares have no maturity date.
102,487
154,097
19,978
13,800
290,362
367,961
80,168
106,882
119,916
14,251
321,217
379,141
–
–
–
152,931
152,931
147,169
$
339,578 $
607,914 $
860,422 $
281,291 $
2,089,205 $
2,232,332
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
As at October 31, 2014
As at October 31, 2013
Amortized
Unrealized
Unrealized
Fair
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Value
Cost
Gains
Losses
Fair
Value
Securities issued or guaranteed by
Canada
$ 763,866 $
426 $
79 $ 764,213 $ 926,445 $
652 $
20 $ 927,077
A province or municipality
Other debt securities
Equity securities
Preferred shares
Common shares
559,923
289,490
659
949
325,051
154,359
2,222
5,830
100
560,482
410,823
227
66
410,984
77
290,362
366,781
1,284
104
367,961
6,056
321,217
395,442
1,444
17,745
379,141
7,258
152,931
140,512
8,119
1,462
147,169
Total
$ 2,092,689 $
10,086 $
13,570 $ 2,089,205 $ 2,240,003 $
11,726 $
19,397 $ 2,232,332
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, 2014,
CWB assessed the securities with unrealized losses and, based on
available objective evidence, $1,200 (2013 – nil) of pre-tax impairment
charges were included in gains on securities, net.
5. SECURITIES PURCHASED
UNDER RESALE AGREEMENTS
Securities purchased under resale agreements represent a purchase
of Government of Canada securities by CWB effected with a
simultaneous agreement to sell them back at a specified price on a
future date, which is generally short term. The difference between the
cost of the purchase and the predetermined proceeds to be received
on a resale agreement is recorded as securities interest income.
Securities purchased under resale agreements have been designated
as available-for-sale and are reported on the consolidated balance
sheets at fair value with changes in fair value reported in other
comprehensive income, net of income taxes.
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CWB Group 2014 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 allowances for credit losses, by loan type, are as follows:
As at October 31, 2014
As at October 31, 2013
Gross
Amount
Impaired
Amount(2)
Gross
Specific
Allowance
Net
Impaired
Loans
Gross
Amount
Gross
Impaired
Amount(2)
Specific
Allowance
Net
Impaired
Loans
$ 2,841,154 $ 15,294 $
518 $
14,776 $ 2,502,295 $ 17,052 $
748 $
16,304
Personal
Business
Real estate(1)
Commercial
6,810,834
26,058
4,263,501
6,544
909
631
25,149
5,829,225
31,937
6,349
25,588
5,913
4,091,371
4,612
293
4,319
8,431
Equipment financing and energy
3,690,208
14,224
3,465
10,759
3,230,335
10,610
2,179
Total
$ 17,605,697 $ 62,120 $
5,523
56,597 $ 15,653,226 $ 64,211 $
9,569
54,642
Collective allowance(3)
Net impaired loans after
collective allowance
(90,075)
$
(33,478)
(76,217)
$
(21,575)
(1) Multi-family residential mortgages are included in real estate loans.
(2) Gross impaired loans include foreclosed assets with a carrying value of $2,393 (October 31, 2013 – $12,407). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(3) The collective allowance for credit loss is not allocated by loan type.
During the year, interest recognized as income on impaired loans totalled $1,264 (2013 – $2,582).
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CWB Group 2014 Annual Report
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, 2014
As at October 31, 2013
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
$
17,742
$
2,508
$
15,234
$
38,886
$
7,475
$
31,411
32,862
1,039
31,823
17,904
6,336
1,968
1,695
1,517
877
384
152
563
5,459
1,584
1,543
954
2,886
1,861
1,214
1,460
476
728
381
146
363
$
62,120
$
5,523
56,597
$
64,211
$
9,569
17,428
2,158
1,480
1,068
1,097
54,642
(76,217)
$
(21,575)
Collective allowance(1)
Net impaired loans after
collective allowance
(1) The collective allowance for credit loss is not allocated by province.
(90,075)
$
(33,478)
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, 2014
1 - 30 days
31 - 60 days
61 - 90 days
90 days
Total
More than
Personal
Business
As at October 31, 2013
$
11,661
$
13,672
$
2,363
$
2,259
$
29,955
24,190
22,236
2,049
40
48,515
$
$
35,851
24,710
$
$
35,908
48,102
$
$
4,412
2,075
$
$
2,299
2,400
$
$
78,470
77,287
The composition of CWB’s loan portfolio by geographic region and industry sector is as follows:
October 31, 2014
($ millions)
Personal
Business
Real estate
Commercial
Equipment financing
and energy(1)
Total Loans(2)
Composition
Percentage
October 31, 2014
October 31, 2013
Composition Percentage
Oct. 31
Oct. 31
BC
AB
ON
SK
MB
Other
Total
2014
2013
$
875
$ 1,121
$
565
$
178
$
83
$
19
$ 2,841
16%
16%
2,960
1,560
2,736
1,887
500
376
605
5,125
1,551
6,174
653
1,529
442
210
336
988
119
145
131
395
54
86
6,811
4,264
414
3,690
554
14,765
39
24
21
84
37
26
21
84
$ 6,000
$ 7,295
$ 2,094
$ 1,166
$
478
$
573
$ 17,606
100%
100%
34%
35%
41%
42%
12%
11%
7%
7%
3%
2%
3%
3%
100%
100%
(1) Includes securitized leases reported on-balance sheet of $465 (October 31, 2013 – $230).
(2) This table does not include an allocation of the allowance for credit losses.
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CWB Group 2014 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:
2014
Specific
Allowance
Collective
Allowance
2013
Specific
Collective
Total
Allowance
Allowance
Total
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
$
9,569 $
76,217 $
85,786 $
14,379 $
67,344 $
81,723
11,199
13,858
25,057
18,973
8,873
27,846
(17,069)
1,824
–
–
(17,069)
(26,652)
1,824
2,869
–
–
(26,652)
2,869
Balance at end of year
$
5,523 $
90,075 $
95,598 $
9,569 $
76,217 $
85,786
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CWB Group 2014 Annual Report
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 non-interest 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, 2013
$
62,025
$
23,748
$
27,731
$
34,712
$
148,216
Leasehold
Improvements
Land and
Buildings
Computer
Equipment
Office
Equipment
Total
Additions
Disposals
Balance at October 31, 2014
Accumulated depreciation and impairment
Balance at November 1, 2013
Depreciation for the year
Disposals
Balance at October 31, 2014
Net carrying amount at October 31, 2014
Cost
Balance at November 1, 2012
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
$
$
6,975
–
69,000
31,342
5,216
–
36,558
55
(5,264)
18,539
6,308
583
(3,061)
3,830
3,342
–
3,553
(569)
13,925
(5,833)
31,073
37,696
156,308
20,845
2,915
–
23,074
3,036
(207)
23,760
25,903
81,569
11,750
(3,268)
90,051
32,442
$
14,709
$
7,313
$
11,793
$
66,257
59,172
$
23,615
$
24,250
$
32,518
$
139,555
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)
8,799
(138)
34,712
148,216
20,367
2,740
(33)
23,074
70,617
11,090
(138)
81,569
Net carrying amount at October 31, 2013
$
30,683
$
17,440
$
6,886
$
11,638
$
66,647
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CWB Group 2014 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).
NL
CDI
VTC
AIM
M&P
Total
Balance at November 1, 2013
$
35,776 $
3,254 $
3,679 $
2,827 $
3,888 $
49,424
Business acquisition
Goodwill impairment
–
–
–
–
–
–
984
–
–
–
984
–
Balance at October 31, 2014
$
35,776 $
3,254 $
3,679 $
3,811 $
3,888 $
50,408
Balance at November 1, 2012
$
35,776 $
3,254 $
3,679 $
2,827 $
– $
45,536
Business acquisition
Goodwill impairment
–
–
–
–
–
–
–
–
3,888
3,888
–
–
Balance at October 31, 2013
$
35,776 $
3,254 $
3,679 $
2,827 $
3,888 $
49,424
Intangible assets
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 from the date at which it is available
for use as follows:
• Customer relationships: 10 to 15 years;
• Computer software: 3 to 15 years;
• Non-competition agreements: 4 to 5 years; and,
• Other: 3 to 5 years.
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CWB Group 2014 Annual Report
Business acquisition
Additions
Balance at October 31, 2014
Accumulated amortization
Balance at November 1, 2013
Amortization
Customer
Relationships
Computer
Software
Non-
competition
Agreements
Trademarks
Other
Total
Cost
Balance at November 1, 2013
$
42,710 $
65,403 $
9,719 $
2,709 $
3,730 $
124,271
486
–
43,196
–
23,337
88,740
–
–
102
–
–
950
588
24,287
9,719
2,811
4,680
149,146
Balance at October 31, 2014
16,235
39,003
13,192
3,043
33,873
5,130
5,231
1,417
6,648
–
–
–
1,778
345
2,123
54,074
9,935
64,009
Net carrying amount at October 31, 2014
$
26,961 $
49,737 $
3,071 $
2,811 $
2,557 $
85,137
Cost
Balance at November 1, 2012
$
37,515 $
48,528 $
5,593 $
2,191 $
1,900 $
95,727
Business acquisition
Additions
Balance at October 31, 2013
Accumulated amortization
Balance at November 1, 2012
Amortization
Balance at October 31, 2013
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
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 four-year future business plan. Cash flows
for a further 16-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; and,
• A pre-tax discount rate of 8.6% 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 2014 or 2013.
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CWB Group 2014 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
As at
October 31
2014
As at
October 31
2013
$
38,622 $
12,250
9,679
4,587
626
36,615
11,905
8,167
6,760
918
$
65,764 $
64,365
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.
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 and
deferred 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 statements.
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CWB Group 2014 Annual Report
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
statements.
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 non-interest 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.
As at October 31, 2014
As at October 31, 2013
Notional
Amount
Replace-
ment
Cost
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Notional
Amount
Replace-
ment
Cost
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Interest rate swaps
$ 1,725,000 $
1,612 $
7,421 $
9,033 $
1,807 $ 800,000 $
367 $
1,494 $
1,861 $
Equity swaps
22,959
3,785
50
3,835
767
17,470
4,131
45
4,176
372
835
Foreign exchange
contracts
1,964
23
20
43
14
1,235
11
12
23
10
Total
$ 1,749,923 $
5,420 $
7,491 $ 12,911 $
2,588 $ 818,705 $
4,509 $
1,551 $
6,060 $
1,217
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, 2014
As at October 31, 2013
Favourable Contracts Unfavourable Contracts
Favourable Contracts
Unfavourable Contracts
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Interest rate swaps
designated as hedges
$ 1,675,000 $
1,612 $
50,000 $
(27) $ 675,000 $
367 $ 125,000 $
(32)
Equity swaps designated
as hedges
Equity swaps not designated
as hedges
Foreign exchange contracts
9,255
3,785
9,950
(246)
17,470
4,131
–
1,204
–
23
3,754
760
(101)
(12)
–
784
–
11
–
–
451
Total
$ 1,685,459 $
5,420 $
64,464 $
(386) $ 693,254 $
4,509 $ 125,451 $
–
–
(4)
(36)
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CWB Group 2014 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)
2014
6261
130
$
$
2013
1,955
76
$
$
The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on contracts:
As at October 31, 2014
Maturity
As at October 31, 2013
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)
$ 375,000
1.31% $ 1,350,000
1.40% $ 525,000
1.24% $ 275,000
1.33%
Equity swaps designated
as hedges(2)
9,201
2.30%
10,004
2.27%
8,215
2.37%
9,255
2.45%
Equity swaps not designated
as hedges(3)
Foreign exchange contracts(4)
3,754
1,964
2.03%
–
–
–
–
1,235
–
–
–
–
Total
$ 389,919
$ 1,360,004
$ 534,450
$ 284,255
(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 outstanding at October 31, 2014 mature between December 2014 and July 2017.
(2) Equity swaps designated as hedges outstanding at October 31, 2014 mature between June 2015 and June 2017.
(3) Equity swaps not designated as hedges outstanding at October 31, 2014 mature June 2015.
(4) Foreign exchange contracts mature between November 2014 and July 2015. The contractual interest rate is not meaningful for foreign exchange contracts.
During the year, $3,372 net unrealized after-tax gains (2013 – $2,332)
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 (2013 – nil) were recorded in non-
interest 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,
$3,575 of net gains after tax (2013 – $1,255) were reclassified to net
income.
At October 31, 2014, hedged cash flows are expected to occur and
affect profit or loss within the next three years.
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CWB Group 2014 Annual Report
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 $2,261 (2013 – $2,108).
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
(Note 25)
As at
October 31
2014
As at
October 31
2013
$
48,242
$
44,698
36,856
26,349
8,468
1,336
5,874
1,261
28,358
21,857
7,410
2,011
6,019
78
$
128,386
$
110,431
As at October 31, 2014
Individuals
Business and
Government
Total
$
33,060
$
637,025
$
670,085
2,957,970
2,134,295
5,092,265
6,841,639
4,769,025
11,610,664
$
9,832,669
$
7,540,345
$ 17,373,014
As at October 31, 2013
Individuals
Business and
Government
Total
$
30,337
$
615,166
$
645,503
2,741,951
1,622,400
4,364,351
6,648,466
3,972,720
10,621,186
$
9,420,754
$
6,210,286
$ 15,631,040
14. INTEREST IN UNCONSOLIDATED STRUCTURED ENTITY
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
structured 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. The deposit
note of $105,000 (2013 – $105,000) is included in Deposits in the
consolidated balance sheets.
Based on the guidance provided in IFRS 10 Consolidated Financial
Statements, CWB has determined that it does not control, and
consequently does not consolidate, CWB Capital Trust. However, CWB
Capital Trust qualifies as an unconsolidated structured entity under
the guidance of IFRS 12 Disclosure of Interests in Other Entities and,
accordingly, additional disclosures regarding CWB Capital Trust are
provided herein.
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.
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CWB Group 2014 Annual Report
The following information presents the outstanding WesTS:
Issuance date
August 31, 2006
Distribution dates
June 30, December 31
Annual yield
6.199%
Earliest date redeemable
at the option of the issuer
December 31, 2011
Earliest date exchangeable
at the option of the holder
Any time
Trust capital securities outstanding
105,000
Principal amount
$105,000
The significant terms and conditions of the WesTS are:
1) Subject to the approval of OSFI, CWB Capital Trust may, in whole
(but not in part), on the redemption date specified above, and on
any distribution date thereafter, redeem the WesTS without the
consent of the holders.
2) Subject to the approval of OSFI, upon occurrence of a special event
as defined, prior to the redemption date specified above, CWB
Capital Trust may redeem all, but not part, of the WesTS without the
consent of the holders.
3) The WesTS may be redeemed for cash equivalent to (i) the early
redemption price if the redemption occurs prior to December 31,
2016 or (ii) the redemption price if the redemption occurs on or
after December 31, 2016. Redemption price refers to an amount
equal to one thousand dollars plus the unpaid distributions to the
redemption date. Early redemption price refers to an amount equal
to the greater of (i) the redemption price and (ii) the price calculated
to provide an annual yield, equal to the yield on a Government of
Canada bond issued on the redemption date with a maturity date of
December 31, 2016, plus 0.50%.
15. INSURANCE-RELATED OTHER LIABILITIES
Unpaid claims and adjustment expenses
Unearned premiums
Due to insurance companies and policyholders
Unearned commissions
Total
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.
6) For regulatory capital purposes, all of the outstanding WesTS
amounts are currently included in Tier 1 capital.
7) The non-cumulative cash distribution on the WesTS will be 6.199%
paid semi-annually until December 31, 2016 and, thereafter, at the
CDOR 180-day Bankers’ Acceptance rate plus 2.55%.
As at
October 31
2014
As at
October 31
2013
(Note 22)
$
85,526
$
89,742
77,408
2,378
591
75,481
2,033
560
$
165,903
$
167,816
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CWB Group 2014 Annual Report
As at
October 31
2014
As at
October 31
2013
$
137,084
$
112,500
115,014
9,838
11,242
3,507
3,370
2,679
210
104,866
10,360
1,663
3,431
3,840
1,679
600
$
282,944
$
238,939
(Note 25)
(Note 30)
16. OTHER LIABILITIES
Accounts payable
Accrued interest payable
Deferred tax liability
Income taxes payable
Deferred revenue
Leasehold inducements
Acquisition contingent consideration
Other
Total
17. DEBT
a) 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)
Total
Maturity
Date
Earliest Date
Redeemable
by CWB at Par
As at
October 31
2014
As at
October 31
2013
November 30, 2020
November 30, 2015
$
300,000 $
300,000
December 17, 2024
December 17, 2019
March 21, 2022
March 22, 2017
250,000
75,000
250,000
75,000
$
625,000 $
625,000
(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 3-month Canadian dollar CDOR 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 3-month Canadian dollar CDOR 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.
b) 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, 2014 was
$411,990 (October 31, 2013 – $195,650), and the associated carrying
amount of the lease assets recorded on the balance sheet was
$464,809 (October 31, 2013 – $230,353), which does not include an
allocation of the allowance for credit losses.
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CWB Group 2014 Annual Report
18. CAPITAL STOCK
Authorized:
• An unlimited number of common shares without nominal
or par value;
• 33,964,324 class A shares without nominal or par value; and
• An unlimited number of first preferred shares, without nominal or
par value, issuable in series, provided that the maximum aggregate
consideration for all outstanding first preferred shares at any time
does not exceed $1,000,000.
Issued and fully paid:
Preferred Shares - Series 5
Outstanding at beginning of year
Issued
Outstanding at end of year
Preferred Shares - Series 3
Outstanding at beginning of year
Redeemed
Purchased for cancellation
Outstanding at end of year
Common Shares
2014
Number of
Shares
Amount
2013
Number of
Shares
–
$
–
5,000,000
5,000,000
125,000
125,000
$
–
–
–
Amount
–
–
–
8,352,596
208,815
8,390,000
209,750
(8,352,596)
(208,815)
–
–
–
–
–
(37,404)
–
(935)
8,352,596
208,815
Outstanding at beginning of year
79,619,595
510,282
78,742,812
490,218
Issued under dividend reinvestment plan
Issued on exercise or exchange of options
Transferred from share-based payment reserve on
437,331
312,379
16,467
1,066
509,969
366,814
14,404
1,674
exercise or exchange of options
–
5,223
–
3,986
Outstanding at end of year
Share Capital
80,369,305
533,038
79,619,595
510,282
$
658,038
$
719,097
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 14), 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:
$0.78 per common share (2013 – $0.70)
$0.79 per preferred share – Series 5
$0.91 per preferred share – Series 3 (2013 – $1.81)
Total
2014
2013
$
62,408
$
55,374
3,940
7,570
–
15,183
$
73,918
$
70,557
Subsequent to October 31, 2014, the Board of Directors of CWB
declared a dividend of $0.21 per common share payable on January 8,
2015 to shareholders of record on December 16, 2014 and a dividend
of $0.275 per Series 5 preferred share payable on January 31, 2015 to
shareholders of record on January 23, 2015. With respect to these
dividend declarations, no liability was recorded in the balance sheet
at October 31, 2014.
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CWB Group 2014 Annual Report
b) Preferred Shares
Series 5 Preferred Shares
On February 10, 2014, CWB issued five million non-cumulative, five
year rate reset First Preferred Shares Series 5 (Series 5 Preferred Shares)
at $25.00 per share, for gross proceeds of $125 million. Holders of
Series 5 Preferred Shares are entitled to receive a non-cumulative fixed
dividend in the amount of $1.10 annually, payable quarterly, as and
when declared by the Board of Directors of CWB, for the initial period
ending April 30, 2019. The quarterly dividend represents an annual
yield of 4.40% based on the stated issue price per share. Thereafter,
the dividend rate will reset every five years at a level of 276 basis
points over the then five year Government of Canada bond yield.
CWB maintains the right to redeem, subject to the approval of OSFI,
up to all of the then outstanding Series 5 Preferred Shares on April 30,
2019, and on April 30 every five years thereafter at a price of $25.00
per share. Should CWB choose not to exercise its right to redeem
the Series 5 Preferred Shares, holders of these shares will have the
right to convert their shares into an equal number of non-cumulative,
floating rate First Preferred Shares Series 6 (Series 6 Preferred Shares),
subject to certain conditions, on April 30, 2019, and on April 30 every
five years thereafter. Holders of the Series 6 Preferred Shares will be
entitled to receive quarterly floating dividends, as and when declared
by the Board of Directors of CWB, equal to the 90-day Government of
Canada Treasury Bill rate plus 276 basis points.
Upon the occurrence of a trigger event (as defined by OSFI), each
Series 5 or 6 Preferred Share will be automatically converted, without
the consent of the holders, into CWB common shares. Conversion
to common shares will be determined by dividing the preferred share
conversion value ($25.00 per preferred share plus any declared but
unpaid dividends) by the common share value (the greater of (i) the
floor price of $5.00 and (ii) the current market price calculated as
the volume-weighted average trading price for the ten consecutive
trading days ending on the day immediately prior to the date of the
conversion).
Series 3 Preferred Shares
On April 30, 2014, CWB redeemed all outstanding Series 3 Preferred
Shares at $25.00 per share. Holders of the Series 3 preferred shares
were entitled, with OSFI approval, 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.
c) Dividend Reinvestment Plan
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 5 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, 437,331 (2013 – 509,969) common
shares were issued under the plan from CWB’s treasury at a 2%
(2013 – 2%) discount.
86
CWB Group 2014 Annual Report 19. 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.
4,217,908) are issued and outstanding. The options 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 2014 to June 2019.
CWB has authorized 6,830,580 common shares (2013 – 5,542,959)
for issuance under the share incentive plan. Of the amount
authorized, options exercisable into 4,743,277 shares (2013 –
The details of, and changes in, the issued and outstanding options follow:
Options
Balance at beginning of year
Granted
Exercised or exchanged
Expired
Forfeited
Balance at end of year
Exercisable at end of year
2014
2013
Number
of Options
4,217,908
$
1,422,357
(769,865)
–
(127,123)
4,743,277
469,910
$
$
Weighted
Average
Exercise
Price
26.96
38.58
24.44
–
30.59
30.76
28.76
Number
of Options
3,441,100
$
1,810,899
(824,068)
(162,075)
(47,948)
4,217,908
501,579
$
$
Weighted
Average
Exercise
Price
24.51
28.30
18.80
31.18
27.64
26.96
20.50
Further details relating to stock options outstanding and exercisable follow:
Range of Exercise Prices
$22.09 to $23.43
$25.46 to $29.42
$30.76 to $39.42
Total
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
0.5
$
2.9
4.0
3.2
$
Weighted
Average
Exercise
Price
23.10
27.43
37.55
30.76
Number of
Options
94,034
3,051,399
1,597,844
4,743,277
Number of
Options
94,034
$
164,750
211,126
469,910
$
Weighted
Average
Exercise
Price
23.10
29.42
30.76
28.76
Until March 1, 2014, the terms of the share incentive plan allowed
the holders of vested options two alternatives whereby the option
holder could either (a) elect to receive shares by delivering cash
to CWB in the amount of the option exercise price or (b) elect to
receive the number of shares equivalent to the excess of the market
value of the shares under option, determined at the exercise
date, over the exercise price (cashless settlement). Effective
March 1, 2014, all exercised options are settled via cashless
settlement. Of the 769,865 (2013 – 824,068) options exercised
or exchanged, option holders exchanged the rights to 723,373
(2013 – 737,653) options and received 265,887 (2013 – 280,399)
shares in return under the cashless settlement alternative.
Salary expense of $5,930 (2013 – $6,150) 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 1.5% (2013 – 1.4%), (ii) expected option life of 4.0
(2013 – 4.0) years, (iii) expected volatility of 18% (2013 – 22%), and
(iv) expected annual dividends of 2.1% (2013 – 2.5%). Expected
volatility is estimated by evaluating historical volatility of the share
price over multi-year periods. The weighted average fair value of
options granted was estimated at $4.61 (2013 – 3.93) per share.
During the year, $5,223 (2013 – $3,986) was transferred from
the share-based payment reserve to share capital, representing
the estimated fair value recognized for 769,865 (2013 – 824,068)
options exercised during the year.
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CWB Group 2014 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 $10,217 (2013 – $9,796) was
recognized related to RSUs. As at October 31, 2014, the liability for
the RSUs held under this plan was $13,709 (October 31, 2013 –
$12,111). At the end of each period, the liability and salary expense
are adjusted to reflect changes in the fair value of the RSUs.
2014
650,791
266,561
(142,555)
(26,777)
748,020
2013
594,455
354,491
(281,564)
(16,591)
650,791
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, other non-interest expenses included $629 (2013 –
$745) related to the DSUs. As at October 31, 2014, the liability for
DSUs held under this plan was $3,858 (October 31, 2013 – $2,782).
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
2014
83,350
24,236
(10,420)
97,166
2013
78,761
9,059
(4,470)
83,350
d) Performance Share Units
During 2014, CWB introduced a Performance Share Unit (PSU) plan,
which is offered to certain employees on an annual basis. At the
time of a grant, each PSU represents a unit with an underlying value
equivalent to the value of a CWB common share. Notional dividends
accrue to the holder of the PSU during the life of the PSU. Under
the PSU plan, each PSU vests at the end of a three year period and is
settled in cash.
For PSUs granted in fiscal 2014, at the end of each specified
performance period, a multiplier is applied to a portion of the PSUs
originally granted and any accrued notional dividends such that the
total value of the PSUs may vary from 0% to 200% of the value of an
equal number of CWB common shares. The multiplier is determined
by comparing the total shareholder return (TSR) of CWB’s common
shares against the TSR of comparator companies during various
performance periods.
Number of PSUs
Balance at beginning of year
Granted
Paid out
Balance at end of year
88
2014
–
25,305
–
25,305
2013
–
–
–
–
CWB Group 2014 Annual Report 20. NON-CONTROLLING INTERESTS
Non-controlling interests are comprised of the following:
McLean & Partners Wealth Management Ltd.
Adroit Investment Management Ltd.
Total
As at
October 31
2014
As at
October 31
2013
$
$
913
$
153
790
272
1,066
$
1,062
21. 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.
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
$2,526,808 (October 31, 2013 – $2,085,452) and authorized
but unfunded loan commitments of $2,084,503 (October 31,
2013 – $1,792,537). In the majority of instances, availability of
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
As at
October 31
2014
As at
October 31
2013
$
407,681
$
354,083
4,611,311
3,877,989
$
5,018,992
$
4,232,072
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.
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:
2015
2016
2017
2018
2019
2020 and thereafter
Total
$
12,121
11,796
9,955
8,799
8,058
46,178
$
96,907
89
CWB Group 2014 Annual Report
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.
22. 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).
Unpaid Claims and Adjustment Expenses
The provision for unpaid claims represents the amounts needed to
provide for the estimated ultimate expected cost of settling claims
related to insured events (both reported and unreported) that have
occurred but not been settled on or before each balance sheet date.
The provision for adjustment expenses represents the estimated
ultimate expected costs of investigating, resolving and processing
these claims. These provisions are included in other liabilities and
their computation takes into account the time value of money using
discount rates based on projected investment income from the assets
supporting the provisions.
90
CWB Group 2014 Annual Report 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.
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.
Net earned premiums
Commissions and processing fees
Net claims and adjustment expenses
Policy acquisition costs
Insurance revenues, net
Reinsurance Ceded
Earned premiums and claims expenses are recorded net of amounts
ceded to, and recoverable from, reinsurers. Estimates of amounts
recoverable from reinsurers on unpaid claims and adjustment expenses
are recorded in other assets separately from estimated amounts
payable to policyholders. Amounts recoverable from reinsurers are
estimated in a manner consistent with the liabilities associated with
the reinsured policies.
These assets consist of short-term balances due from reinsurers, as
well as longer term receivables that are dependent on the expected
claims and benefits arising under the related reinsured insurance
contracts. Amounts recoverable from or due to reinsurers are
measured consistently with the amounts associated with the reinsured
insurance contracts and in accordance with the terms of each
reinsurance contract. Reinsurance liabilities are primarily premiums
payable for reinsurance contracts and are recognized as an expense
when due.
Reinsurance assets are assessed for impairment on an annual basis. If
there is objective evidence that the reinsurance asset is impaired, the
carrying amount of the reinsurance asset is reduced to its recoverable
amount and the impairment loss is recognized in the income
statement. Objective evidence that a reinsurance asset is impaired is
gathered using observable data about the following criteria:
• Significant financial difficulty of the reinsurer;
• A breach of contract, such as default or delinquency in payments;
and,
• Observable data indicating that there is a measurable decrease in
the estimated future cash flow from the reinsurance asset since its
initial recognition.
a) Insurance Revenues, Net
Insurance revenues, net, reported in other income on the consolidated
statements of income are presented net of claims, adjustment
expenses and policy acquisition costs.
2014
2013
$
130,410
$
126,825
1,580
(85,997)
(25,079)
1,787
(87,008)
(25,325)
$
20,914
$
16,279
91
CWB Group 2014 Annual Report
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
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
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:
2014
2013
$
74,815
$
74,295
87,917
(1,920)
(89,552)
71,260
4,587
9,679
86,087
921
(86,488)
74,815
6,760
8,167
Unpaid claims and adjustment expenses, net, end of year
$
85,526
$
89,742
92
CWB Group 2014 Annual Report
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 2.47% (2013 – 2.50%).
However, that rate was reduced by a 0.50% (2013 – 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
$575 (2013 – $585) 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
$
66,943
$
18,583
$
68,532
$
21,210
Reinsurers’ share of unpaid claims and adjustment expenses
Unearned premiums
2,495
50,874
2,092
26,534
4,169
50,500
2,591
24,981
2014
2013
Automobile
Home
Automobile
Home
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 $320,000 (2013 – $300,000) is obtained to
protect against certain catastrophic losses. Retention on catastrophic
events is $5,000 (2013 – $5,000), on property per risk events is
$1,000 (2013 – $1,000) and on casualty events is $2,000 (2013 –
$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, 2014, $4,587 (October 31, 2013 – $6,760) 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
2014
$
11,132
$
3,425
2013
9,976
3,732
23. 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 totalled
$47,200 in 2014 (2013 – $46,400) and represented 53% (2013 –
52%) of direct automobile premiums written.
Province
Alberta
Rate Filing
File and approve
Regulatory Authority
Alberta Automobile Insurance Rate Board
While regulatory authorities generally approve rates and rate
adjustments prospectively, in some circumstances retroactive rate
adjustments in respect of historical results may be required, which
could result in a regulatory asset or liability for CWB. As at October
31, 2014 and October 31, 2013, CWB had no such regulatory asset
or liability.
24. 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 totalled $12,154 (2013 – $11,685).
93
CWB Group 2014 Annual Report
25. 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
Other comprehensive income
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.
2014
2013
$
78,615
$
58,545
(5,014)
73,601
5,507
64,052
985
(69)
916
(4,800)
364
(4,436)
$
74,517
$
59,616
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
$
77,255
25.3% $
67,884
25.4%
2014
2013
Increase (decrease) arising from:
Tax-exempt income
Stock-based compensation
Other
(6,285)
1,495
1,136
(2.1)
0.5
0.4
(6,072)
1,547
693
(2.2)
0.6
0.2
Provision for income taxes and effective tax rate
$
73,601
24.1%
$
64,052
24.0%
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 $8,234 (2013 – $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
2014
2013
$
19,978
$
16,618
10,832
(4,056)
(3,335)
2,930
9,357
(3,659)
536
(995)
$
26,349
$
21,857
$
$
7,995
$
9,197
1,843
1,163
9,838
$
10,360
CWB Group 2014 Annual Report
26. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated based on the weighted
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
2014
2013
Net income available to common shareholders
$
218,549
$
187,163
Denominator
Weighted average of common shares outstanding – basic
80,033,646
79,147,496
Dilutive instruments:
Stock options(1)
Weighted average number of common shares outstanding – diluted
Earnings per common share
Basic
Diluted
921,221
396,532
80,954,867
79,544,028
$
2.73
$
2.70
2.36
2.35
(1) At October 31, 2014 and 2013, there were no employee stock options with an average adjusted exercise price, adjusted for unrecognized stock-based compensation, that was greater than the average market price.
27. ASSETS UNDER ADMINISTRATION AND MANAGEMENT
Assets under administration of $10,101,698 (October 31, 2013 –
$8,423,972) and assets under management of $1,795,975 (October
31, 2013 – $1,901,146) 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.
28. 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 $114,508 (October 31, 2013 –
$106,085). 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 $264,936 (October
31, 2013 – $256,136).
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 totalled $589
as at October 31, 2014 (October 31, 2013 – $146). 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.
2014
$
5,775
$
3,219
$
8,994
$
2013
6,129
3,644
9,773
95
CWB Group 2014 Annual Report
29. 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
Asset Liability Gap Positions
($ millions)
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.
October 31, 2014
Assets
Floating Rate
and Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Total
Within
1 Year to
More than
Non –
Interest
1 Year
5 Years
5 Years
Sensitive
Total
Cash resources and securities
$
468
$
758
$
272
$ 1,498
$
1,022
$
173
$
4
$
2,697
8,284
897
2,263
11,444
6,025
113
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
1,748
8,159
593
593
$
$
$
$
$
$
–
–
–
75
–
313
–
388
8,752
1,730
2,848
13,330
–
1,360
8,407
6,395
1,315
3,838
11,548
5,841
4
12
–
8
24
–
–
34
106
–
–
46
142
–
1,748
31
895
–
–
1,347
$
3,978
$ 13,484
383
$ (1,130)
976
$
(154)
$
$
(154)
(154)
$
$
$
6,767
1,640
1,486
$
$
$
(72)
401
2
17,510
401
1,750
–
–
286
335
22,358
–
9
–
–
–
9
277
1,763
$
$
$
(16)
418
–
1,694
2
17,373
504
1,037
1,694
1,750
2,098
$ 22,358
$
$
(1,763)
–
–
–
–
–
–
–
Percentage of Total Assets
2.7%
4.4%
(0.7)%
(0.7)%
6.6%
7.9%
October 31, 2013
Cumulative Gap
Cumulative Gap as a
$
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%
–
(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.
96
CWB Group 2014 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, 2014
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
October 31, 2013
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
Floating Rate
and Within
1 Month
1 to 3
Months
3 Months
to 1 Year
3.7%
1.2
2.5%
3.8%
1.3
2.5%
2.6%
1.7
0.9%
2.3%
1.9
0.4%
4.3%
2.0
2.3%
4.0%
2.0
2.0%
Total
Within
1 Year
3.7%
1.5
2.2%
3.6%
1.6
2.0%
1 Year to
5 Years
More than
5 Years
Total
3.9%
2.4
1.5%
4.6%
2.4
2.2%
4.6%
–
4.6%
4.8%
3.3
1.5%
3.8%
1.8
2.0%
4.0%
1.9
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 2.0% or $9,185 (October 31,
2013 – 3.3% or $14,545) and decrease other comprehensive income
$36,578 (October 31, 2013 – $14,418) 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
3.9% or $18,221 (October 31, 2013 – 5.3% or $23,853) and increase
other comprehensive income $37,323 (October 31, 2013 – $14,418),
net of tax.
30. 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. The table also excludes assets and liabilities
which are considered financial instruments, but are not recorded at
fair value and for which the carrying amount approximates fair value.
97
CWB Group 2014 Annual Report
October 31, 2014
Financial Assets
Cash resources
Securities
Securities purchased under resale agreements
Loans(1)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(1)
Debt
Acquisition contingent consideration
Derivative related
Loans and
Receivables, and
Non-trading
Liabilities
Available-
for-sale
Total
Carrying
Amount
Fair Value
Fair Value
Over (Under)
Carrying
Amount
Derivatives
(Note 3) $
(Note 4)
– $
–
–
– $
508,414 $
508,414 $
508,414 $
–
–
2,089,205
2,089,205
2,089,205
99,566
99,566
99,566
–
–
–
–
17,582,480
5,420
–
–
–
17,582,480
17,571,250
(11,230)
5,420
5,420
–
$
5,420 $
17,582,480 $ 2,697,185 $ 20,285,085 $ 20,273,855 $
(11,230)
$
– $
17,388,737 $
– $ 17,388,737 $ 17,414,150 $
25,413
–
–
386
1,036,990
2,679
–
–
–
–
1,036,990
1,056,234
19,244
2,679
386
2,679
386
–
–
Total Financial Liabilities
$
386 $
18,428,406 $
– $ 18,428,792 $ 18,473,449 $
44,657
October 31, 2013
Financial Assets
Cash resources
Securities
Loans(1)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(1)
Debt
Acquisition contingent consideration
Derivative related
Loans and
Receivables, and
Non-trading
Derivatives
Liabilities
Available-
for-sale
Total
Carrying
Amount
Fair Value
Fair Value
Over (Under)
Carrying
Amount
(Note 3) $
(Note 4)
– $
–
– $
347,995 $
347,995 $
347,995 $
–
2,232,322
2,232,322
2,232,322
–
–
$
$
– 15,629,443
4,509
–
–
–
15,629,443
15,614,937
(14,506)
4,509
4,509
–
4,509 $ 15,629,443 $ 2,580,317 $ 18,214,269 $ 18,199,763 $
(14,506)
– $ 15,541,831 $
– $ 15,541,831 $ 15,553,762 $
11,931
–
–
36
820,650
1,679
–
–
–
–
820,650
835,639
14,989
1,679
1,679
36
36
–
–
Total Financial Liabilities
$
36 $ 16,364,160 $
– $ 16,364,196 $ 16,391,116 $
26,920
(1) Loans and deposits exclude deferred premiums and deferred revenue, which are not financial instruments.
(2) For further information on interest rates associated with financial assets and liabilities, including derivative instruments, refer to Note 29.
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.
Securities purchased under resale agreements are reported at the
fair value as disclosed on the consolidated balance sheets. 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;
• With the exception of derivative financial instruments and
acquisition contingent consideration, other assets and other
liabilities reported on the consolidated balance sheets are either not
considered financial instruments, or are assumed to approximate
their carrying value due to their short-term nature. Other assets
and other liabilities which are not considered financial instruments
include 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, deferred tax liability, deferred revenue, unearned insurance
premiums and other items that are not financial instruments;
• 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;
98
CWB Group 2014 Annual Report
• For the acquisition contingent consideration, included in other
liabilities, where an active market does not exist, fair value is
determined using valuation techniques that refer to non-market
observable inputs;
• Deposits with no stated maturity are assumed to be equal to their
carrying values. The estimated fair values of fixed rate deposits are
determined by discounting the contractual cash flows at current
market rates for deposits of similar terms; and,
• 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
according to a three-level hierarchy. Level 1 fair value measurements
reflect unadjusted quoted prices in active markets for identical assets
and liabilities that CWB can access at the measurement date. Level
2 fair value measurements were estimated using observable inputs,
including quoted market prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
inactive markets, and model inputs that are either observable or can
be corroborated by observable market data for substantially the full
term of the assets or liabilities. Level 3 fair value measurements were
determined using one or more inputs that are unobservable and
significant to the fair value of the asset or liability. Unobservable inputs
are used to measure fair value to the extent that observable inputs are
not available at the measurement date.
As at October 31, 2014
Financial Assets
Cash resources
Securities
Securities purchased under resale agreements
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Debt
Other liability
Derivative related
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
508,414
$
471,643
$
36,771
$
2,089,205
2,089,205
99,566
99,566
–
–
17,571,250
5,420
–
–
17,571,250
5,420
$ 20,273,855
$
2,660,414
$ 17,613,441
$
$ 17,414,150
$
1,056,234
2,679
386
$ 17,414,150
$
1,056,234
–
386
Total Financial Liabilities
$ 18,473,449
$
$ 18,470,770
$
2,679
Valuation Technique
As at October 31, 2013
Fair Value
Level 1
Level 2
Level 3
–
–
–
–
–
–
–
–
2,679
–
–
–
–
–
–
–
–
1,679
–
–
–
–
–
–
–
–
–
–
–
$
347,995
$
300,995
$
47,000
$
2,232,332
2,232,332
–
15,614,937
4,509
–
–
15,614,937
4,509
$ 18,199,773
$
2,533,327
$ 15,666,446
$
$ 15,553,762
$
835,639
1,679
36
$ 15,553,762
$
835,639
–
36
$ 16,389,437
$
1,679
99
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Debt
Other liability
Derivative related
Total Financial Liabilities
$ 16,391,116
$
CWB Group 2014 Annual Report b) Level 3 Financial Instrument
The Level 3 financial instrument was comprised of the contingent
consideration related to a subsidiary acquisition.
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 non-interest income
Balance at end of year
31. RISK MANAGEMENT
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
within boxes and the content forms an integral part of these audited
consolidated financial statements.
Information on specific measures of risk, including the allowance for
credit losses, derivative financial instruments, interest rate sensitivity,
fair value of financial instruments and liability for unpaid claims
are included elsewhere in these notes to the consolidated financial
statements.
32. 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 19 to the consolidated financial statements details the
number of shares under options outstanding, the weighted average
exercise price and the amounts exercisable at year end.
Regulatory capital and capital ratios are calculated in accordance
with the requirements of OSFI. 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.
2014
$
1,679
$
–
1,000
2013
–
1,679
–
$
2,679
$
1,679
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 Canadian
Direct Insurance (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 for a bank using the
Standardized approach for credit risk, including a 250 basis point
capital conservation buffer, are 7.0% common equity Tier 1 (CET1),
8.5% Tier 1 and 10.5% total capital.
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 2014 inclusion of
non-qualifying capital instruments in non-common Tier 1 (WesTS)
and total capital (subordinated debentures) under Basel III are
capped at 80% (October 31, 2013 – 90%) of the January 1, 2013
outstanding balances. At October 31, 2014, there was no exclusion
from regulatory capital related to the WesTS Tier 1 capital (disclosed in
deposits). At October 31, 2013, a combined $30,540 of outstanding
WesTS Tier 1 capital and Series 3 preferred shares were excluded from
regulatory capital. At October 31, 2014, $85,000 (October 31, 2013
– $17,500) of outstanding subordinated debentures were excluded
from regulatory capital.
Significant capital transactions during fiscal 2014 include the February
10, 2014 issue of five million Basel III-compliant, non-cumulative, five
year rate reset Series 5 Preferred Shares at $25.00 per share for gross
proceeds of $125 million, and the April 30, 2014 redemption, with
OSFI approval, of all outstanding Series 3 Preferred Shares (see Note 18).
100
CWB Group 2014 Annual Report
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
33. SUBSIDIARIES
Canadian Western Bank Subsidiaries (1)
(annexed in accordance with subsection 308 (3) of the Bank Act)
October 31, 2014
National Leasing Group Inc.
Canadian Direct Insurance Incorporated
Canadian Western Trust Company
McLean & Partners Wealth Management Ltd.
Adroit Investment Management Ltd.
Valiant Trust Company
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 SW
Calgary, Alberta
Suite 1250, 10303 Jasper Avenue
Edmonton, Alberta
Suite 310, 606 4th Street SW
Calgary, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
(1) CWB owns 100% of the voting shares of each entity, with the exception of Adroit Investment Management Ltd. (84.0% 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.
2014
2013
$ 1,443,841
$ 1,285,692
1,673,996
1,560,801
2,304,108
2,243,654
8.0%
8.0%
9.3
12.8
8.8x
9.7
13.9
8.1x
Carrying Value of
Voting Shares Owned
by the Bank(2)
$
134,458
25,766
19,136
11,777
8,449
8,080
1,000
1
1
101
CWB Group 2014 Annual Report
34. COMPARATIVE FIGURES
Certain comparative figures have been reclassified
to conform to the current period’s presentation.
102
CWB Group 2014 Annual Report Shareholder Information
CWB Group Corporate
Headquarters
Suite 3000, 10303 Jasper Avenue
Canadian Western Bank Place
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 5 Preferred Shares: CWB.PR.B
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, 10303 Jasper Avenue
Canadian Western Bank Place
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 in the
Investor Relations section at cwb.com.
This 2014 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.
Complaints or Concerns
regarding Accounting, Internal
Accounting Controls or
Auditing Matters
Please contact either:
Carolyn J. Graham
Executive Vice President and Chief
Financial Officer
Canadian Western Bank
Telephone: (780) 423-8854
Fax: (780) 969-8326
Email: carolyn.graham@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
Carolyn J. Graham, FCA
Executive Vice President and
Chief Financial Officer
Kelly S. Blackett
Executive Vice President, Human
Resources
Randy W. Garvey, FCMA
Executive Vice President, Corporate
Services
Gregory J. Sprung
Executive Vice President, Banking
Filings are available on the Canadian
Securities Administrators’ website at
sedar.com.
Brian J. Young
Executive Vice President
2015 Annual Meeting
The annual meeting of the common
shareholders of Canadian Western
Bank will be held in Edmonton, Alberta,
on March 5, 2015, at The Fairmont
Hotel Macdonald (Empire Ballroom)
at 3:00 p.m. MT (5:00 p.m. ET).
Senior Corporate Officers
Niall Boles
Senior Vice President and Treasurer
Richard R. Gilpin
Senior Vice President,
Credit Risk Management
Corporate Secretary
Gail L. Harding, Q.C.
Senior Vice President,
General Counsel and Corporate
Secretary
Canadian Western Bank
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta T5J 3X6
Telephone: (780) 969-1525
Fax: (780) 969-1503
Gail L. Harding, Q.C.
Senior Vice President, General Counsel
and Corporate Secretary
Darrell R. Jones, FCMA
Senior Vice President
and Chief Information Officer
Peter K. Morrison
Senior Vice President,
Business and Personal Banking
Allen D. Stephen, CA
Vice President and Chief Accountant
Commercial and
Retail Banking
Glen Eastwood
Senior Vice President and Regional
General Manager, Prairies
Michael N. Halliwell
Senior Vice President and Regional
General Manager, Northern Alberta
Mario Furlan
Senior Vice President and Regional
General Manager, British Columbia
National Leasing
Tom Pundyk
President and Chief Executive Officer
Canadian Western Trust
Matt Colpitts
Vice President and
General Manager
Valiant Trust
Jay Campbell
General Manager
Canadian Direct Insurance
Brian J. Young
President and Chief
Executive Officer
Adroit Investment
Management
Maria Holowinsky
President and Chief
Investment Officer
McLean & Partners
Wealth Management
Brent McLean
Chief Executive Officer
Kevin Dehod
President
Ombudsman
R. Graham Gilbert
103
CWB Group 2014 Annual Report 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
300, 5222 - 130 Avenue S.E.
Calgary
(403) 257-8235
Michael Docherty
Alberta
Edmonton
Edmonton Main
100, 12230 Jasper Avenue
(780) 424-4846
George Bawden
103 Street
10303 Jasper Avenue
(780) 423-8801
Bruce Young
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
104
Calgary Northeast
2810 - 32 Avenue N.E.
(403) 250-8838
June Lavigueur
Calgary South Trail
Crossing
300, 5222 - 130 Avenue S.E.
(403) 257-8235
Rick Vandergraaf
Broker Buying Centre
285, 2880 Glenmore Trail S.E.
(403) 720-8960
David Miller
Calgary Westjet
Banking Centre
22 Aerial Place 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
C, 6209 - 44 Street
(780) 874-9555
Ethan Walker
Medicine Hat
102, 1111 Kingsway
Avenue S.E.
(403) 527-7321
Daniel Kitching
Red Deer
4822 - 51 Avenue
(403) 341-4000
Don Odell
Sherwood Park
251 Palisades Way
(780) 449-6699
Arden Vos
St. Albert
300 - 700 St. Albert Trail
(780) 458-4001
Blair Zahara
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
Scott Weiss
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
Kevin Wilson
Prince George
300 Victoria Street
(250) 612-0123
Derek Dougherty
Richmond
4991 No. 3 Road
(604) 238-2800
Michael Yeung
Surrey
Panorama Ridge
103, 15230 Highway 10
(604) 575-3783
Greg Noga
Strawberry Hill
1, 7548 - 120 Street
(604) 591-1898
Bob Duffield
Victoria
1201 Douglas Street
(250) 383-1206
Bob Granger
Saskatchewan
Regina
1866 Hamilton Street
Hill Tower III
(306) 757-8888
Kelly Dennis
Saskatoon
Saskatoon City Centre
244 - 2 Avenue S
(306) 477-8888
Scott Grant
Saskatoon North Landing
101, 2803 Faithfull Avenue
(306) 244-8008
Byron Eberle
Yorkton
5, 259 Hamilton Road
(306) 782-1002
Kelly Price
Manitoba
Winnipeg
Winnipeg
230 Portage Avenue
(204) 956-4669
Mike McCauley
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 West
(416) 360-1301
Vancouver
600, 750 Cambie Street
(604) 685-2081
Optimum Mortgage
Edmonton
3000, 10303 Jasper Avenue
(780) 423-9748
(Representation across
all provinces in Canada,
excluding Quebec)
Canadian Direct
Insurance
Edmonton
500, 10115 - 100A Street
(780) 413-5933
Vancouver
600, 750 Cambie Street
(604) 699-3678
Valiant Trust
Calgary
310, 606 - 4 Street S.W.
(403) 233-2801
Edmonton
3000, 10303 Jasper Avenue
(780) 441-2267
Toronto
710, 130 King Street West
(416) 360-1481
Vancouver
600, 750 Cambie Street
(604) 699-4880
Adroit Investment
Management
Edmonton
1250, 10303 Jasper Avenue
(780) 429-3500
McLean & Partners
Wealth Management
Calgary
801 - 10 Avenue S.W.
(403) 234-0005
National Leasing Group
Winnipeg
1525 Buffalo Place
(204) 954-9000
(Representation across all
provinces and territories in
Canada)
Canadian Western
Financial
Edmonton
3000, 10303 Jasper Avenue
(780) 423-8888
CWB Group 2014 Annual Report C
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