Document/Exhibit Description Pages Size
1: 40-F Annual Report by a Canadian Issuer 6 24K
2: EX-1 Underwriting Agreement 1 5K
3: EX-2 Plan of Acquisition, Reorganization, Arrangement, 11 42K
Liquidation or Succession
4: EX-3 Articles of Incorporation/Organization or By-Laws 120± 426K
5: EX-4 Instrument Defining the Rights of Security Holders 102± 461K
6: EX-5 Opinion re: Legality 1 8K
7: EX-6 Opinion re: Discount on Capital Shares 18± 72K
9: EX-8 Opinion re: Tax Matters 1 8K
8: EX-7 Opinion re: Liquidation Preference 1 8K
EX-4 — Instrument Defining the Rights of Security Holders
Exhibit Table of Contents
EXHIBIT 4 - Consolidated Financial Statements
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Consolidated Financial Results
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CONTENTS
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72 Financial Reporting Responsibility of Management
73 Auditors' Reports to Shareholders
74 Consolidated Balance Sheets
75 Consolidated Statements of Income
76 Consolidated Statements of Changes in Shareholders' Equity
77 Consolidated Statements of Cash Flows
78 Notes to the Consolidated Financial Statements
119 Principal Subsidiaries
120 Supplementary Annual Financial Information
127 Quarterly Review
128 Ten-Year Statistical Review
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CONSOLIDATED FINANCIAL RESULTS
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Financial Reporting Responsibility of Management
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The management of Canadian Imperial Bank of Commerce (CIBC) is responsible for
the preparation of the Annual Report, which includes the consolidated financial
statements. The consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles, including the
accounting requirements of the Superintendent of Financial Institutions, Canada
(OSFI) and, of necessity, contain items that reflect the best estimates and
judgments of management. All financial information appearing throughout the
Annual Report is consistent with that in the consolidated financial statements.
In meeting its responsibility for the reliability and integrity of the
consolidated financial statements, management has developed, and maintains, a
comprehensive system of internal controls designed to ensure that transactions
are properly authorized, assets are safeguarded and financial records are
reliable. The system focuses on the need for the employment and training of
qualified and professional staff, effective communication between management and
staff, and management guidelines and policies. The system also includes policies
on corporate conduct and a management organization philosophy that reflects
accountability within delineated areas of responsibility. The system of internal
controls is reviewed by the Audit Committee of the Board of Directors of CIBC.
The Chief Auditor and his staff review and report on CIBC's internal
controls, including computerized information system controls and security, the
overall control environment, and accounting and financial controls. Systems and
procedures to ensure employee compliance with conflict of interest rules and
with securities legislation are monitored by the Compliance Officer. The Chief
Auditor and the Compliance Officer have full and independent access to the Audit
Committee.
The Audit Committee is composed of directors who are not officers or
employees of CIBC. CIBC's interim and annual consolidated financial statements
and management discussion and analysis are discussed and reviewed by the Audit
Committee with management and the shareholders' auditors before such financial
information is approved by the Board of Directors.
In addition, the Audit Committee has the duty to review investments and
transactions that could adversely affect the well-being of CIBC; to review
financial reports requiring board approval prior to submission to securities
commissions or other regulatory authorities; to review key management estimates
and judgments underlying financial statements; and to approve the shareholders'
auditors' fees.
Deloitte & Touche LLP and PricewaterhouseCoopers LLP, the shareholders'
auditors, obtain an understanding of CIBC's internal controls and procedures for
financial reporting to plan and conduct such tests and other audit procedures as
they consider necessary in the circumstances to express an opinion in their
report that follows. The shareholders' auditors have full and independent access
to the Audit Committee to discuss their audit and related matters. Arthur
Andersen LLP, one of the shareholders' auditors for 2001 and 2000, is no longer
able to provide assurance on the financial statements for those years.
PricewaterhouseCoopers LLP has reissued its opinion on the 2001 and 2000
consolidated financial statements.
J.S. HUNKIN T.D. WOODS
Chairman and Chief Financial Officer
Chief Executive Officer November 27, 2002
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72
CIBC ANNUAL REPORT 2002
CONSOLIDATED FINANCIAL RESULTS
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Auditors' Reports to Shareholders
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We have audited the consolidated balance sheet of Canadian Imperial Bank of
Commerce (CIBC) as at October 31, 2002 and the consolidated statements of
income, changes in shareholders' equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of CIBC's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of CIBC as at October 31, 2002 and
the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles, including the
accounting requirements of the Superintendent of Financial Institutions, Canada.
The consolidated financial statements of CIBC as at October 31, 2001 and
for the two-year period then ended were audited by PricewaterhouseCoopers LLP,
who expressed an opinion without reservation on those statements in their report
dated November 27, 2002.
DELOITTE & TOUCHE LLP
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Canada
November 27, 2002
We have audited the consolidated balance sheet of Canadian Imperial Bank of
Commerce (CIBC) as at October 31, 2001 and the consolidated statements of
income, changes in shareholders' equity and cash flows for each of the years in
the two-year period then ended. These consolidated financial statements are the
responsibility of CIBC's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of CIBC as at October 31, 2001 and
the results of its operations and its cash flows for each of the years in the
two-year period then ended in accordance with Canadian generally accepted
accounting principles, including the accounting requirements of the
Superintendent of Financial Institutions, Canada.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Toronto, Canada
November 27, 2002
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73
CIBC ANNUAL REPORT 2002
CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Financial Statements
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[Enlarge/Download Table]
CONSOLIDATED BALANCE SHEETS
$ millions, as at October 31 2002 2001(1)
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ASSETS
Cash resources
Cash and non-interest-bearing deposits with banks $ 1,300 $ 1,528
Interest-bearing deposits with banks 8,212 9,822
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9,512 11,350
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Securities (Note 3)
Securities held for investment 20,583 22,849
Securities held for trading 44,628 51,798
Loan substitute securities 81 147
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65,292 74,794
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Loans (Note 4)
Residential mortgages 66,612 58,751
Personal and credit card loans 30,784 28,411
Business and government loans 41,961 46,693
Securities borrowed or purchased under resale agreements 16,020 24,079
Allowance for credit losses (2,288) (2,294)
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153,089 155,640
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Other
Derivative instruments market valuation (Note 22) 24,717 25,723
Customers' liability under acceptances 6,848 8,100
Land, buildings and equipment (Note 6) 2,247 1,769
Goodwill (Note 7) 1,078 400
Other intangible assets (Note 7) 297 228
Other assets (Note 8) 10,213 9,470
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45,400 45,690
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$ 273,293 $ 287,474
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 9)
Individuals $ 67,975 $ 66,826
Businesses and governments 117,986 114,270
Banks 10,669 13,256
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196,630 194,352
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Other
Derivative instruments market valuation (Note 22) 24,794 26,395
Acceptances 6,878 8,100
Obligations related to securities sold short 8,436 11,213
Obligations related to securities lent or sold under repurchase agreements 9,615 21,403
Other liabilities (Note 10) 10,980 10,112
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60,703 77,223
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Subordinated indebtedness (Note 11) 3,627 3,999
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Shareholders' equity
Preferred shares (Note 13) 3,088 2,299
Common shares (Note 13) 2,842 2,827
Contributed surplus 26 --
Retained earnings 6,377 6,774
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12,333 11,900
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$ 273,293 $ 287,474
===================================================================================================
(1) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
The accompanying notes are an integral part of the consolidated financial
statements.
J.S. HUNKIN I.E.H. DUVAR
Chairman and Chief Executive Officer Director
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74
CIBC ANNUAL REPORT 2002
CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
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CONSOLIDATED STATEMENTS OF INCOME
$ millions, for the years ended October 31 2002 2001 2000
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Interest income
Loans $ 8,552 $ 10,818 $ 11,467
Securities 2,750 3,530 3,297
Deposits with banks 222 426 563
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11,524 14,774 15,327
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Interest expense
Deposits and other liabilities 5,794 9,925 10,728
Subordinated indebtedness 220 300 317
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6,014 10,225 11,045
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Net interest income (Note 3) 5,510 4,549 4,282
Provision for credit losses (Note 4) 1,500 1,100 1,220
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4,010 3,449 3,062
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Non-interest income
Fees for services Underwriting 698 614 886
Deposit 605 521 503
Credit 410 493 508
Card 331 363 368
Investment management and custodial 486 322 379
Mutual funds 561 351 358
Insurance 148 100 124
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3,239 2,764 3,126
Commissions on securities transactions 1,203 1,089 1,480
Trading activities (Note 3) 273 1,343 1,140
Investment securities (losses) gains, net (168) 575 970
Income from securitized assets 177 223 237
Other 807 619 844
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5,531 6,613 7,797
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9,541 10,062 10,859
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Non-interest expenses
Employee compensation and benefits 4,882 4,732 4,937
Occupancy costs 715 631 634
Computer and office equipment 985 834 758
Communications 441 412 371
Advertising and business development 295 286 273
Professional fees 297 327 240
Business and capital taxes 114 109 108
Restructuring charge (Note 16) 514 207 (31)
Events of September 11, 2001 (Note 17) 32 7 --
Other 854 681 806
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9,129 8,226 8,096
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Income before income taxes and non-controlling interests 412 1,836 2,763
Income taxes (Note 18) (279) 92 641
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691 1,744 2,122
Non-controlling interests in net income of subsidiaries 38 58 62
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Net income $ 653 $ 1,686 $ 2,060
==========================================================================================
Earnings per share(1) (in dollars) (Note 19) - Basic $ 1.37 $ 4.19 $ 4.95
- Diluted $ 1.35 $ 4.13 $ 4.90
Dividends per common share (in dollars) (Note 13) $ 1.60 $ 1.44 $ 1.29
==========================================================================================
(1) On November 1, 2001, CIBC retroactively adopted the requirements of the
Canadian Institute of Chartered Accountants handbook section 3500,
"Earnings Per Share." Comparative figures have been restated.
The accompanying notes are an integral part of the consolidated financial
statements.
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75
CIBC ANNUAL REPORT 2002
CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
$ millions, as at or for the years ended October 31 2002 2001 2000
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Preferred shares (Note 13)
Balance at beginning of year $ 2,299 $ 1,876 $ 1,933
Issue of preferred shares 800 400 345
Redemption of preferred shares -- -- (425)
Translation adjustment on foreign currency preferred shares (11) 23 23
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Balance at end of year $ 3,088 $ 2,299 $ 1,876
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Common shares (Note 13)
Balance at beginning of year $ 2,827 $ 2,868 $ 3,035
Issue of common shares 59 90 34
Purchase of common shares for cancellation (44) (131) (201)
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Balance at end of year $ 2,842 $ 2,827 $ 2,868
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Contributed surplus
Balance at beginning of year $ -- $ -- $ --
Stock option expense (Note 14) 26 -- --
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Balance at end of year $ 26 $ -- $ --
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Retained earnings
Balance at beginning of year, as previously reported $ 6,774 $ 6,625 $ 6,090
Adjustment for change in accounting policies (Notes 14 & 15) (42) (140) --
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Balance at beginning of year, as restated 6,732 6,485 6,090
Net income 653 1,686 2,060
Dividends (Note 13) (738) (657) (629)
Premium on redemption of preferred shares -- -- (17)
Premium on purchase of common shares (269) (736) (873)
Foreign currency translation adjustment, net of income taxes(1) 2 38 8
Other (3) (42) (14)
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Balance at end of year $ 6,377 $ 6,774 $ 6,625
===============================================================================================
(1) The cumulative balance in the foreign currency translation account is $42
million (2001: $40 million; 2000: $2 million).
The accompanying notes are an integral part of the consolidated financial
statements.
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76
CIBC ANNUAL REPORT 2002
CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
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CONSOLIDATED STATEMENTS OF CASH FLOWS
$ millions, as at or for the years ended October 31 2002 2001(1) 2000
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Cash flows provided by (used in) operating activities
Net income $ 653 $ 1,686 $ 2,060
Adjustments to determine net cash flows:
Provision for credit losses 1,500 1,100 1,220
Amortization of buildings, furniture, equipment and leasehold
improvements 333 310 313
Amortization of goodwill -- 24 23
Amortization of intangible assets 32 25 24
Restructuring charge, net of cash payments 375 121 (31)
Future income taxes (1,141) (540) (267)
Investment securities losses (gains), net 168 (575) (970)
Accrued interest receivable 82 63 (332)
Accrued interest payable (627) (539) 250
Net change in securities held for trading 7,170 1,419 (7,163)
Gains on disposal of subsidiaries (190) (22) (125)
Gains on disposal of land, buildings and equipment (8) (12) (199)
Current income taxes 758 (723) 102
Insurance proceeds received 90 9 --
Other, net (294) (1,044) (1,163)
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8,901 1,302 (6,258)
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Cash flows provided by (used in) financing activities
Deposits, net of withdrawals 2,278 14,475 19,591
Obligations related to securities sold short (2,777) (2,779) (1,571)
Net obligations related to securities lent or sold under repurchase
agreements (11,788) 7,204 559
Redemption of subordinated indebtedness (342) (232) (175)
Issue of preferred shares 800 400 345
Redemption of preferred shares -- -- (442)
Issue of common shares 59 90 34
Purchase of common shares for cancellation (313) (867) (1,074)
Dividends (738) (657) (629)
Other, net (800) (131) 81
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(13,621) 17,503 16,719
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Cash flows provided by (used in) investing activities
Interest-bearing deposits with banks 1,610 (526) 1,329
Loans, net of repayments (8,930) (9,062) (10,381)
Proceeds from securitizations 1,952 1,306 1,162
Purchase of securities held for investment (33,284) (23,687) (15,141)
Proceeds on sale of securities held for investment 35,651 17,527 12,714
Net securities borrowed or purchased under resale agreements 8,059 (3,618) (1,303)
Net cash paid for acquisitions (626) (308) --
Proceeds from disposal of subsidiaries -- 54 486
Purchase of land, buildings and equipment (235) (588) (378)
Proceeds from disposal of land, buildings and equipment 7 29 862
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4,204 (18,873) (10,650)
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Effect of exchange rate changes on cash and cash equivalents (13) 31 13
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Net decrease in cash and cash equivalents during year (529) (37) (176)
Cash and cash equivalents at beginning of year 1,487 1,524 1,700
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Cash and cash equivalents at end of year $ 958 $ 1,487 $ 1,524
=========================================================================================================
Represented by:
Cash and non-interest-bearing deposits with banks $ 1,300 $ 1,528 $ 1,383
Cheques and other items in transit, net (Note 10) (342) (41) 141
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Cash and cash equivalents at end of year $ 958 $ 1,487 $ 1,524
=========================================================================================================
Cash interest paid $ 6,641 $ 10,764 $ 10,795
Cash income taxes paid $ 249 $ 1,007 $ 554
=========================================================================================================
(1) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
The accompanying notes are an integral part of the consolidated financial
statements.
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77
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Notes to the Consolidated Financial Statements
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Canadian Imperial Bank of Commerce
(CIBC) and its subsidiaries have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP), including the accounting
requirements of the Superintendent of Financial Institutions, Canada (OSFI).
A reconciliation of the impact on assets, liabilities, shareholders'
equity and net income arising from differences between Canadian and U.S. GAAP is
provided in Note 28. Disclosures reflected in these consolidated financial
statements substantially comply with those required under U.S. GAAP.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
balance sheet date and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
The following paragraphs describe CIBC's significant accounting policies:
Basis of consolidation
The consolidated financial statements include the accounts of all subsidiaries
on a consolidated basis. Inter-company balances and transactions have been
eliminated.
Investments in companies over which CIBC has significant influence are
accounted for by the equity method, other than those held in the merchant
banking portfolio, and are included in securities held for investment on the
consolidated balance sheets. CIBC's share of earnings from these investments is
included in interest income.
Investments in which CIBC exercises joint control are accounted for using
the proportionate consolidation method whereby CIBC's share of the assets,
liabilities, revenue and expenses of these joint ventures are included in the
consolidated financial statements.
Goodwill and other intangible assets
Effective November 1, 2001, CIBC adopted the requirements of the Canadian
Institute of Chartered Accountants (CICA) handbook section 3062, "Goodwill and
Other Intangible Assets." Under this section, goodwill, representing the excess
of the purchase price over the fair value of the net assets acquired in business
combinations, and other intangible assets with an indefinite life are no longer
amortized after October 31, 2001, but are reviewed at least annually for
impairment and written down for any impairment losses. Intangible assets with a
finite life are amortized over their estimated useful lives, generally not
exceeding 20 years, on a straight-line basis.
In 2001, CIBC adopted the requirements of the CICA handbook section 1581,
"Business Combinations." Under this section, if certain criteria are met upon
the initial adoption of section 3062, reclassifications between goodwill and
other intangible assets are required for any business combinations completed
before July 1, 2001. The implementation of section 3062 did not have a
significant impact on CIBC and no reclassifications were required.
Foreign currency translation
Assets and liabilities arising from foreign currency transactions are translated
into Canadian dollars at month-end exchange rates at the dates of the
consolidated financial statements, while the associated revenue and expenses are
translated using average monthly exchange rates. Realized and unrealized gains
and losses arising on the translation are included in the current year
consolidated statements of income.
Assets and liabilities of CIBC's foreign operations are translated into
Canadian dollars using month-end exchange rates at balance sheet dates, while
the associated revenue and expenses are translated at the average monthly
exchange rates in effect. Exchange gains and losses arising from the translation
of net investment positions and from the results of hedging these positions net
of applicable taxes are reported in retained earnings.
Securities
Securities held for investment comprise debt and equity securities, including
investments held in the merchant banking portfolio, originally purchased with
the intention of holding to maturity or a pre-determined period of time, which
may be sold in response to changes in investment objectives arising from
changing market conditions. Equity securities are stated at cost and debt
securities at amortized cost, determined on the average cost basis. Realized
gains and losses on disposal and write-downs to reflect other than temporary
impairments in value are included in investment securities gains in the
consolidated statements of income. Realized and unrealized gains on securities
used in hedging activities are included in earnings in the same period as the
earnings from the items hedged.
Securities held for trading are purchased for resale within a short period
of time and are stated at fair value. Fair value is determined based on market
value, or where market prices are not readily available by using quoted market
prices for similar securities or other third-party evidence as available. Gains
and losses realized on disposal and unrealized gains and losses from market
fluctuations are included in trading activities in the consolidated statements
of income.
Loan substitute securities are accounted for in the same manner as loans.
They represent after-tax financing arrangements, which provide issuers with
tax-effective borrowings.
Obligations related to securities sold short are recorded as liabilities
and are carried at fair value. Realized and unrealized gains and losses on
securities sold short that are used in hedging activities are included in
earnings in the same period as the earnings from the items hedged. Realized and
unrealized gains and losses on securities sold short that are used in trading
are included in trading activities in the consolidated statements of income.
Dividend and interest income on all securities, including the amortization
of premiums and discounts on debt securities held for investment, are included
in interest income in the consolidated statements of income.
Loans
Loans are stated net of unearned income and allowance for credit losses.
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78
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Impaired loans
A loan is classified as impaired when, in the opinion of management, there no
longer is reasonable assurance of the timely collection of the full amount of
principal and interest. Generally, loans on which repayment of principal or
payment of interest is contractually 90 days in arrears are automatically
considered impaired unless they are fully secured and in the process of
collection. Notwithstanding management's assessment of collectibility, such
loans are considered impaired if payments are 180 days in arrears. Exceptions
are as follows:
Credit card loans are not classified as impaired but are instead fully
written off when payments are contractually 180 days in arrears.
Loans guaranteed or insured by the Canadian government, the provinces or a
Canadian government agency are classified as impaired only when payments are
contractually 365 days in arrears.
When a loan is classified as impaired, accrual of interest ceases. All
uncollected interest is recorded as part of the loan's carrying value for the
purpose of determining the loan's estimated realizable value and establishing
allowances for credit losses. No portion of cash received on any impaired loan
is recorded as income until such time as any prior write-off has been recovered
or any specific allowance has been reversed and it is determined that the loan
principal is fully collectible in accordance with the original contractual terms
of the loan.
Loan fees and origination costs
Fees relating to loan origination, including commitment, restructuring and
renegotiation fees, are considered an integral part of the yield earned on the
loan and are deferred as unearned income and amortized to interest income over
the term of the loan. Incremental direct costs for originating or acquiring a
loan are netted against origination fees and deferred as unearned income. Fees
received for commitments which are not expected to result in a loan are included
in non-interest income over the commitment period. Loan syndication fees are
included in non-interest income on completion of the syndication arrangement,
provided that the yield on the portion of the loan retained by CIBC is at least
equal to the average yield earned by the other lenders involved in the
financing; otherwise, an appropriate portion of the fee is deferred as unearned
income and amortized to interest income to produce an equal average yield over
the term of the loan.
Securitizations
CIBC periodically sells groups of loans or receivables to special purpose
entities (SPEs) that issue securities to investors - a process referred to as
securitization. In 2001, CIBC adopted the CICA Accounting Guideline (AcG) 12,
"Transfers of Receivables," for securitizations occurring on or after April 1,
2001. This guideline redefined the criteria that must be met in order for a
securitization to be recognized as a sale. The impact of this change in
accounting policy was not significant to CIBC.
Under AcG 12, securitizations are accounted for as sales when CIBC
surrenders control of the transferred assets and receives consideration other
than beneficial interests in the transferred assets. When such sales occur, CIBC
may retain interest-only strips, one or more subordinated tranches, and in some
cases, a cash reserve account, all of which are considered retained interests in
the securitized assets. Securitizations taking place, or committed to, before
April 1, 2001, were accounted for as sales if, among other criteria, the
transactions transferred the significant risks and rewards of ownership from
CIBC to the SPEs.
Gains or losses on transfers accounted for as sales under AcG 12 depend,
in part, upon the allocation of previous carrying amounts to assets sold and
retained interests. These carrying amounts are allocated in proportion to the
relative fair value of the assets sold and retained interests. Quoted market
prices, if available, are used to obtain fair values. However, as market prices
are generally not available for retained interests, CIBC estimates fair value
based on the present value of expected future cash flows. This may require
management to estimate credit losses, the rate of prepayments, forward yield
curves, discount rates and other factors that influence the value of retained
interests.
The gains or losses on securitizations are calculated as the excess or
shortfall of consideration over the pro-rata share of the original carrying
amounts attributed to the assets sold. Gains and losses on these transactions
are included in other non-interest income in the consolidated statements of
income. Retained interests in securitized assets are classified as securities
held for investment on the consolidated balance sheets and stated at their
pro-rata share of the original carrying amounts. Retained interests are reviewed
each reporting period for impairment.
Securitization affects the components of income reported in the
consolidated statements of income. Non-interest income from securitized assets
comprises income from retained interests, losses under recourse arrangements and
servicing income.
Allowance for credit losses
Management establishes and maintains an allowance for credit losses that it
considers the best estimate of probable credit-related losses existing in CIBC's
portfolio of on- and off-balance sheet financial instruments, giving due regard
to current conditions and credit derivatives. Impaired loans are carried at
their estimated realizable values determined by discounting the expected future
cash flows at the interest rate inherent in the loan. When the amount and timing
of future cash flows cannot be estimated reliably, the loan is carried at either
the fair value of the security underlying the loan or the market price of the
loan. Any changes in the estimated realizable amounts over time are reported as
a charge or credit to the allowance for credit losses. The allowance for credit
losses consists of specific and general components.
Management conducts ongoing credit assessments of the business and
government loan portfolio on an account-by-account basis and establishes
specific allowances when impaired loans are identified. Residential mortgage and
personal and credit card loan portfolios consist of large numbers of homogeneous
balances of relatively small amounts, for which specific allowances are
established by reference to historical ratios of write-offs to balances
outstanding.
The general allowance is provided for losses which management estimates
are in the portfolio at the balance sheet date, and which relate to loans not
yet specifically identified as impaired and not yet captured in the
determination of specific allowances.
The credit portfolios to which the general allowance applies include
business loans and acceptances, off-balance sheet credit instruments, such as
credit commitments and letters of credit, and consumer loans. The general
allowance does not apply to loans or credit facilities that are impaired, as
appropriate specific provisions are taken to provide for these.
The general allowance is established based on expected loss rates
associated with different credit portfolios at different risk levels, and the
estimated time period for losses that are present but yet to be specifically
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79
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
identified, adjusting for management's view of the current and ongoing economic
and portfolio trends.
Expected loss rates for business loan portfolios are based on the risk
rating of each credit facility and on probability of default factors associated
with each risk rating, as well as estimates of loss given default. The
probability of default factors reflects CIBC's historical experience over an
economic cycle, and is supplemented by data derived from defaults in the public
debt markets. Loss given default estimates are based on CIBC's experience over
past years. For consumer loan portfolios, expected losses are based on CIBC's
historical flow and loss rates.
The level of the general allowance is determined by a number of factors,
including the portfolios' size, the relative risk profiles of the portfolios,
the economic trends, and evidence of credit quality improvements or
deterioration. The general allowance requirement is assessed using these
criteria. On a regular basis, the parameters that drive the general allowance
calculation are updated, based on CIBC's market experience.
Securities borrowed or purchased under resale agreements and obligations related
to securities lent or sold under repurchase agreements
Securities purchased under resale agreements are stated at cost plus accrued
interest and are secured loans insofar as they represent a purchase of
securities by CIBC effected with a simultaneous agreement to sell them back at a
future date, which is generally near term. Interest income is included in loan
interest income in the consolidated statements of income. Obligations related to
securities sold under repurchase agreements are stated at cost plus accrued
interest and represent the borrowing equivalent of securities purchased under
resale agreements. Interest is reflected in deposits and other liabilities
interest expense in the consolidated statements of income.
Securities borrowed and securities lent are recorded at the amount of cash
advanced or received. Securities borrowed consist primarily of government and
equity securities. CIBC monitors the market value of the securities borrowed and
lent on a daily basis and calls for additional collateral when appropriate. Fees
earned or incurred are recorded as interest income or interest expense in the
consolidated statements of income.
Derivative instruments
Derivative instruments are contracts that require or provide the opportunity to
exchange cash flows or payments determined by applying certain rates, indices or
changes therein to notional contract amounts.
CIBC utilizes derivatives in two broadly defined activities: trading and
asset-liability management.
Derivatives held for trading purposes
CIBC's derivative trading activities are primarily driven by client trading
activities. Clients transact with CIBC as part of their own risk management,
investing and trading activities. To facilitate these activities, CIBC acts as a
derivatives dealer or market maker, and is prepared to transact with clients by
quoting bid and offer prices, with the objective of providing a spread to CIBC.
CIBC also takes limited proprietary trading positions in the interest rate,
foreign exchange, debt, equity and commodity markets, with the objective of
earning income.
All financial and commodity derivative instruments entered into for
trading purposes, including derivatives used to hedge risks created by assets
and liabilities which are marked to market, are stated at fair values. Quoted
market prices, when available, are used to determine the fair values of
derivatives held for trading. Otherwise, fair values are estimated using pricing
models that are based on current market quotations wherever possible. Where
appropriate, the estimates include a valuation adjustment to cover market, model
and credit risks, as well as administrative costs. Realized and unrealized
trading gains and losses are included in trading activities in the consolidated
statements of income. Derivatives with a positive fair value are reported as
assets, while derivatives with a negative fair value are reported as liabilities
on the consolidated balance sheets, in both cases as derivative instruments
market valuation. Assets and liabilities with the same counterparty are netted
only where CIBC has the legal right, as well as the intent, to settle the
derivative assets and liabilities on a net basis.
Derivatives held for asset-liability management purposes
CIBC uses derivative financial instruments, primarily interest rate swaps and,
to a lesser degree, futures, forward rate agreements and options contracts, to
manage financial risks, such as movements in interest rates and foreign exchange
rates. These instruments are used for hedging activities or to modify interest
rate characteristics of specific non-trading on-balance sheet assets and
liabilities, or groups of non-trading on-balance sheet assets and liabilities,
and as hedges of firm commitments or anticipated transactions.
When derivative instruments, primarily interest rate swaps, modify the
interest rate characteristics of specific financial assets or liabilities or
groups of financial assets and liabilities, these derivative instruments are
accounted for using the accrual method. Under this method, interest income or
expense on these derivative instruments is accrued for and included in interest
income or expense in the consolidated statements of income and reported in other
assets or other liabilities on the consolidated balance sheets. This accounting
treatment results in interest income or expense on non-trading on-balance sheet
assets and liabilities being reflected in the consolidated statements of income
at their modified rates rather than their original contractual interest rates.
Derivative instruments may also be designated as specific hedges of
financial risk exposures of on-balance sheet assets or liabilities, firm
commitments and anticipated transactions, or of foreign currency exposures
arising from net investments in foreign operations. Designation as a hedge is
only allowed if, both at the inception of the hedge and throughout the hedge
period, the changes in the fair value or cash flows of the derivative instrument
are expected to substantially offset the changes in the fair values or cash
flows of the hedged items.
Gains and losses on derivative instruments used to hedge interest rate
risk exposures of on-balance sheet assets and liabilities, except for hedges of
foreign currency denominated assets and liabilities, are recognized as interest
income or expense at the same time as interest income or expense related to the
hedged on-balance sheet assets and liabilities.
Certain liabilities, whose values are determined based on an underlying
index or asset, are accounted for on a modified accrual basis. Under this
method, the carrying value of the liabilities is adjusted to reflect changes in
the value of the underlying index or asset, subject to a minimum guaranteed
redemption value, if any. These adjustments are recorded as interest expense in
the consolidated statements of income. Derivatives that are used to hedge these
liabilities are accounted for on an
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
offsetting basis, with adjustments recorded as interest expense in the
consolidated statements of income.
Foreign currency derivative instruments that hedge foreign currency risk
exposures from foreign currency denominated assets and liabilities are revalued
each month, using the spot foreign exchange rate, and are included in other
assets or other liabilities on the consolidated balance sheets. Resulting gains
and losses are recognized as non-interest income in the consolidated statements
of income. The hedged items are also revalued using the spot foreign exchange
rate, with the resulting gains or losses recognized as non-interest income. Any
premium or discount resulting from differences between the contracted forward
and spot foreign exchange rates due to interest rate differentials at the date
of inception on the foreign currency derivative hedge is accrued in interest
income or expense in the consolidated statements of income.
Derivative instruments, primarily credit default swaps, are also used to
mitigate credit exposure in the non-trading portfolios. The existence of these
derivative instruments is considered in determining the provision for credit
losses. Amounts recoverable from credit default swaps are recorded as an
increase in the allowance for credit losses. Premiums paid are deferred and
amortized to interest income over the term of the instruments.
Realized and unrealized gains and losses on derivative instruments used to
hedge firm commitments or anticipated transactions are deferred and amortized
over the period that the committed or anticipated transactions occur and are
recognized in income. Anticipated transactions can be hedged only when
significant characteristics and expected terms of the anticipated transactions
are identified, and it is probable that the anticipated transactions will occur.
There is no recognition in the consolidated statements of income of unrealized
gains or losses on derivatives hedging anticipated transactions until the
anticipated transactions occur.
Premiums paid for options used for hedging purposes are amortized over the
life of the contract.
A hedging relationship is terminated if the hedge ceases to be effective;
if the underlying asset, liability or future transaction being hedged is
liquidated or terminated and the derivative instrument is still outstanding; or
if the derivative instrument is no longer designated as a hedging instrument.
If the relationship of hedging or modification of interest rate
characteristics is terminated, the difference between the fair value of the
derivative and its accrued value upon termination is deferred in other assets or
other liabilities and amortized into income or expense over the remaining term
to maturity of the derivative hedge or the remaining term of the hedged asset or
liability, as appropriate.
Offsetting of financial assets and financial liabilities
Financial assets and financial liabilities are presented on a net basis on the
balance sheet when this reflects CIBC's expected future cash flows from settling
two or more separate financial instruments. A financial asset and a financial
liability are offset when CIBC has a legally enforceable right to set off the
recognized amounts and intends to settle on a net basis, or to realize the asset
and settle the liability simultaneously.
Acceptances and customers' liability under acceptances
Acceptances constitute a liability of CIBC on negotiable instruments issued
third parties by customers of CIBC. CIBC earns a fee for guaranteeing and then
making the payment to the third parties. The amounts owed to CIBC its customers
in respect of these guaranteed amounts are reflected in assets as customers'
liability under acceptances on the consolidated balance sheets.
Land, buildings and equipment
Land is reported at cost. Buildings, furniture, equipment and leasehold
improvements are reported at cost less accumulated amortization. Amortization is
recorded on a straight-line basis as follows:
Buildings 40 years
Computer equipment 2 to 7 years
Office furniture and other equipment 4 to 15 years
Leasehold improvements Over estimated useful life
Gains and losses on disposal are reported in non-interest income in the
consolidated statements of income.
Future income taxes
CIBC uses the asset and liability method to provide for income taxes on all
transactions recorded in the consolidated financial statements. The asset and
liability method requires that income taxes reflect the expected future tax
consequences of temporary differences between the carrying amounts of assets or
liabilities and their tax bases. Future income tax assets and liabilities are
determined for each temporary difference and unused losses, as applicable, at
rates expected to be in effect when the asset is realized or the liability is
settled. A valuation allowance is established to reduce future income tax assets
to the amount that is more likely than not to be realized.
Post-employment and post-retirement plans
In 2001, CIBC adopted the requirements of the CICA handbook section 3461,
"Employee Future Benefits." Under section 3461, employee future benefits are
defined as pension and other benefits provided after retirement; post-employment
benefits provided to former active employees; compensated absences, such as
parental leave and sabbaticals; and termination benefits. This section outlines
new measurement and disclosure requirements for employee future benefits.
CIBC is the sponsor of pension plans under which all eligible employees
are entitled to benefits based on length of service and salary levels. CIBC also
provides certain health care, life insurance and other benefits to eligible
pensioners and inactive employees. CIBC has a long-term disability plan to
provide benefits to disabled employees.
Based on management's best estimate assumptions, actuarial valuations of
the obligations for pensions, post-retirement and post-employment benefits are
made periodically for accounting purposes by an independent actuary.
The annual expense includes the estimated present value of the cost of
future benefits payable in respect of services rendered in the current period;
interest on projected obligations net of earnings on plan assets; and the
amortization of experience gains and losses. Amortization is charged on a
straight-line basis over the expected average remaining service life of the
employee groups covered by the plan.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Stock-based compensation
CIBC provides compensation to directors and certain employees in the form of
stock options and deferred share-based awards.
In 2002, CIBC early adopted, effective November 1, 2001, the requirements
of the CICA handbook section 3870, "Stock-Based Compensation and Other
Stock-Based Payments." As encouraged by section 3870, CIBC adopted the fair
value-based method to account for stock-based transactions with employees and
non-officer members of CIBC's Board of Directors. The value is recognized over
the applicable vesting period as an increase to compensation expense and
contributed surplus. When the options are exercised, the proceeds received by
CIBC, together with the amount in contributed surplus, will be credited to
common share capital. For options granted prior to November 1, 2001, CIBC
continues to follow the accounting policy under which no expense is recognized
for these stock options. When these options are exercised, the proceeds received
by CIBC are recorded as common share capital.
Up to 50% of options relating to the Employee Stock Option Plan granted
prior to 2000 can be exercised as stock appreciation rights (SARs). Under
section 3870, CIBC's obligations, which arise from changes in the market price
of CIBC's common shares, are recorded over the applicable vesting period in
compensation expense with a corresponding accrual in other liabilities. If SARs
are exercised as purchases of shares, the exercise price together with the
relevant amount in other liabilities, representing the value of shares at the
market price, is credited to common share capital. The impact of this change in
accounting policy is detailed in Note 14.
Compensation expense in respect of awards under the Restricted Share
Program is recognized in an amount equal to the sum to be transferred to the
trust in respect of the current year allocations. Amounts paid under the
directors' plans are charged to compensation expense. Obligations relating to
deferred share units under the directors' plans change with CIBC's common share
price and the change is recognized as a compensation (expense) credit in the
period in which the change occurs.
CIBC's contribution under its Employee Share Purchase Plan is expensed as
incurred.
Earnings per share
In 2002, CIBC retroactively adopted, effective November 1, 2001, the
requirements of the CICA handbook section 3500, "Earnings Per Share." Under this
section, basic earnings per share (EPS) is determined as net income minus
dividends and premiums on preferred shares, divided by the weighted-average
number of common shares outstanding for the period.
Diluted EPS is determined as net income minus dividends and premiums on
preferred shares, divided by the weighted-average number of diluted common
shares outstanding for the period. Diluted common shares reflect the potential
dilutive effect of exercising the stock options outstanding and other dilutive
conversions based on the treasury stock method, whereby incremental shares are
calculated as if stock options were exercised at the beginning of the period and
funds received were used to purchase CIBC`s own stock.
Assets under administration
Assets under administration comprise assets under management, assets securitized
and still administered by CIBC, and assets administered by CIBC in the capacity
of custodian. Mutual fund assets managed by CIBC on behalf of its clients are
considered assets under management. Assets under administration are not the
property of CIBC and are not included on the consolidated balance sheets.
Investment management and custodial, and mutual fund fees are included in
non-interest income as fees for services. Investment management and custodial
fees are primarily investment, estate and trust management fees and are recorded
on an accrual basis. Accordingly, prepaid fees are deferred and amortized over
the contract term. Mutual fund fees are recorded on an accrual basis.
Cash and cash equivalents
Cash and cash equivalents in the consolidated statements of cash flows comprise
cash, deposits with the Bank of Canada, current operating accounts, overnight
deposits with banks and, on a net basis, uncleared cheques and other items in
transit.
2001 and 2000 financial information
Certain 2001 and 2000 financial information has been reclassified, where
necessary, to conform with the presentation adopted in 2002.
Future accounting policy changes
A description of future Canadian accounting policy changes is provided in Note
29. A description of future U.S. accounting policy changes is provided in Note
28.
--------------------------------------------------------------------------------
2. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
Acquisitions
In March 2002, CIBC acquired control of Juniper Financial Corp. (Juniper), a
U.S. credit card company. In July 2002, CIBC invested an additional $79 million
in Juniper to acquire Class D Preferred Shares. As at October 31, 2002, CIBC
owned 90% of the voting equity in Juniper.
In December 2001 and January 2002, CIBC acquired Merrill Lynch Canada
Inc.'s Private Client & Securities Services businesses and Merrill Lynch
Investment Managers Canada Inc. (MLIM), Merrill Lynch's asset management
business in Canada, respectively, for cash. MLIM was subsequently renamed CM
Investment Management Inc. CIBC is in the process of integrating the acquired
businesses' operations with its existing operations. As part of the integration
plan, CIBC is carrying out staff reductions, branch closures and exiting of
certain activities of the acquired businesses. These costs were accrued as
liabilities in the purchase equation. CIBC expects the integration to be
substantially completed by the end of the first quarter of 2003.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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In October 2001, CIBC acquired control of TAL Global Asset Management Inc.
(TAL) through the acquisition of the remaining 34% of its outstanding common
shares. TAL is a Canadian investment management firm in which CIBC previously
held a 66% equity interest that was accounted for by the equity method. During
2002, CIBC completed the review and determination of the fair value of the
assets acquired and liabilities assumed from the acquisition of the remaining
shares in TAL. As a result, the allocation of the purchase price has been
adjusted and goodwill increased by $14 million. CIBC also completed assessing
useful lives of the identified intangible assets acquired, of which $41 million
were determined to have an indefinite life. The remaining identified intangible
assets are amortized over periods ranging from five to 10 years.
The results of operations of these businesses have been included in CIBC's
consolidated financial statements since the effective date of control. Details
of these transactions are as follows:
[Enlarge/Download Table]
2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Merrill Lynch
Canada Inc.'s Merrill Lynch
Private Client & Investment TAL
Juniper Financial Securities Services Managers Global Asset
$ millions Corp. Businesses Canada Inc. Management Inc.
-------------------------------------------------------------------------------------------------------------------------------
Effective date of control March 29, 2002 December 28, 2001 January 31, 2002 October 10, 2001
Percentage of voting
shares acquired 90% Asset purchase 100% 34%
Goodwill $108 $558 $5 $279
Business line assigned to CIBC World Markets CIBC Wealth Management CIBC Wealth Management CIBC Wealth Management
Deductible for tax
purposes -- $376 -- --
Other intangible assets -- -- $75 $65
Assigned to -- -- Contract-based Contract-based
intangibles intangibles
Subject to amortization -- -- -- $24
Not subject to
amortization
(indefinite life) -- -- $75 $41
===============================================================================================================================
Details of the aggregate consideration given and the fair value of net assets
acquired are as follows:
[Enlarge/Download Table]
2002 2001
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Merrill Lynch
Canada Inc.'s Merrill Lynch
Private Client & Investment TAL
Juniper Financial Securities Services Managers Global Asset
$ millions Corp. Businesses Canada Inc. Management Inc.(1)
-----------------------------------------------------------------------------------------------------------------------------------
Aggregate consideration
Acquisition cost (paid in cash) $310 $555 $71 $318
Direct acquisition expenses -- 4 -- 3
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$310 $559 $71 $321
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Fair value of net assets acquired
Cash resources $117 $-- $28 $13
Loans 356 -- -- --
Land, buildings and equipment 27 25 2 2
Goodwill 108 558 5 279
Other intangible assets -- -- 75 65
Future tax asset -- 26 -- --
Other assets 50 5 24 35
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Total assets acquired 658 614 134 394
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Deposits 334 -- -- --
Future tax liability -- -- 31 22
Integration liabilities -- 45(2) 3(3) --
Other liabilities 14 10 29 51
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Total liabilities assumed 348 55 63 73
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Net assets acquired $310 $559 $71 $321
===================================================================================================================================
(1) The allocation of the purchase price has been adjusted to reflect the fair
value of the assets acquired and liabilities assumed.
(2) Includes severance of $19 million, exit costs of $19 million and other
costs of $7 million. As at October 31, 2002, $18 million has been paid.
(3) Includes severance of $2 million and exit costs of $1 million. As at
October 31, 2002, $2 million has been paid.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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The following table reflects on an unaudited pro-forma basis, the combined
results of CIBC as if these acquisitions had occurred at the beginning of the
respective years presented.
[Download Table]
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UNAUDITED PRO-FORMA COMBINED RESULTS OF OPERATIONS
$ millions, for the years ended October 31 2002 2001
--------------------------------------------------------------------------------
Net interest income $ 5,516 $ 4,527
Non-interest income 5,599 7,019
Provision for credit losses 1,508 1,113
Non-interest expenses 9,249 8,720
--------------------------------------------------------------------------------
Income before income taxes
and non-controlling interests 358 1,713
Income taxes and non-controlling interests (239) 164
--------------------------------------------------------------------------------
Net income $ 597 $ 1,549
================================================================================
Diluted EPS $ 1.20 $ 3.76
================================================================================
Dispositions
In October 2002, CIBC and Barclays Bank PLC completed the combination of their
Caribbean retail, corporate and international banking operations, which was
named FirstCaribbean International Bank Limited(TM) (FCIB). FCIB commenced
operations on October 14, 2002. This transaction resulted in CIBC divesting of
its 77% ownership in its Caribbean subsidiaries and taking back an equity
interest of approximately 44% in FCIB, which is accounted for by the equity
method. CIBC recognized a pre-tax dilution gain of $190 million ($190 million
after-tax), which was included in other non-interest income in the consolidated
statements of income. An additional dilution could result depending on the
outcome of certain future events, including the rights issue available to the
public shareholders of FCIB, which is scheduled to close in the first quarter of
2003.
On September 17, 2002, CIBC signed an agreement with Hewlett-Packard
(Canada) Co. (HP) to sell CIBC's 51% interest in INTRIA-HP Corporation, a
technology outsourcing company, and other related assets. The transaction closed
on November 1, 2002, and any impact from the transaction will be recorded in the
2003 consolidated financial statements and is not expected to be significant. In
addition, CIBC entered into a seven-year outsourcing agreement with HP to
provide CIBC with comprehensive information technology services valued at
approximately $2 billion, beginning on November 1, 2002.
In July 2001, CIBC sold two of its offshore banking subsidiaries located
in the Channel Islands. As a result, CIBC recognized a pre-tax gain of $22
million ($22 million after-tax), which was included in other non-interest income
in the consolidated statements of income.
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3. SECURITIES
[Enlarge/Download Table]
Residual term to contractual maturity
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Within 1 year 1 to 5 years 5 to 10 years Over 10 years
---------------------------------------------------------------------------------------------------------------------------
Carrying Carrying Carrying Carrying
$ millions, as at October 31 value Yield(1) value Yield(1) value Yield(1) value Yield(1)
---------------------------------------------------------------------------------------------------------------------------
Securities held for
investment
Canadian federal government $ 3,013 3.0% $ 4,323 4.3% $ 648 5.6% $ 332 7.6%
Other Canadian governments 85 5.1 243 5.6 -- -- 298 6.5
U.S. Treasury 2 5.2 -- -- -- -- -- --
Other U.S. agencies 370 6.2 290 5.0 870 5.5 3,400 5.8
Other foreign governments 124 5.8 19 4.7 159 6.7 -- --
Corporate debt 1,205 6.7 1,193 6.4 464 7.5 692 6.8
Corporate equity 59 3.1 276 5.9 -- -- -- --
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Total debt securities
Carrying value $ 4,799 $ 6,068 $ 2,141 $ 4,722
Fair value $ 4,598 $ 6,193 $ 2,332 $ 5,007
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Total equity securities
Carrying value $ 59 $ 276 $ -- $ --
Fair value(2) $ 47 $ 272 $ -- $ --
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Total investment securities
Carrying value $ 4,858 $ 6,344 $ 2,141 $ 4,722
Fair value(2) $ 4,645 $ 6,465 $ 2,332 $ 5,007
===========================================================================================================================
Securities held for trading(3)
Canadian federal government $ 1,775 $ 8,829 $ 161 $ 190
Other Canadian governments 220 864 383 409
U.S. Treasury and agencies 6,480 151 50 133
Other foreign governments 654 231 33 14
Corporate debt 6,104 1,434 641 867
Corporate equity 96 315 3 --
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Total trading securities $ 15,329 $ 11,824 $ 1,271 $ 1,613
---------------------------------------------------------------------------------------------------------------------------
Loan substitute securities
Carrying value $ 30 2.9% $ 51 4.4% $ -- -- $ -- --
Fair value $ 30 $ 51 $ -- $ --
===========================================================================================================================
Total securities
Carrying value $ 20,217 $ 18,219 $ 3,412 $ 6,335
Fair value(2) $ 20,004 $ 18,340 $ 3,603 $ 6,620
===========================================================================================================================
Residual term to contractual maturity
--------------------------------------------------------------------------------------
No specific maturity 2002 Total 2001 Total 2000 Total
--------------------------------------------------------------------------------------------------------------------
Carrying Carrying Carrying Carrying
$ millions, as at October 31 value Yield(1) value Yield(1) value Yield(1) value Yield(1)
--------------------------------------------------------------------------------------------------------------------
Securities held for investment
Canadian federal government $ -- -- $ 8,316 4.1% $ 9,851 5.4% $ 4,629 5.9%
Other Canadian governments -- -- 626 6.0 801 6.3 1,311 6.1
U.S. Treasury -- -- 2 5.2 583 5.5 158 6.7
Other U.S. agencies -- -- 4,930 5.7 4,513 6.1 2,949 6.5
Other foreign governments -- -- 302 6.2 854 6.6 1,238 6.2
Corporate debt -- -- 3,554 6.7 3,162 6.5 2,368 7.1
Corporate equity 2,518 -- 2,853 -- 3,085 -- 3,211 --
--------------------------------------------------------------------------------------------------------------------
Total debt securities
Carrying value $ -- $ 17,730 $ 19,764 $ 12,653
Fair value $ -- $ 18,130 $ 20,363 $ 12,802
--------------------------------------------------------------------------------------------------------------------
Total equity securities
Carrying value $ 2,518 $ 2,853 $ 3,085 $ 3,211
Fair value(2) $ 2,805 $ 3,124 $ 3,199 $ 5,689
--------------------------------------------------------------------------------------------------------------------
Total investment securities
Carrying value $ 2,518 $ 20,583 $ 22,849 $ 15,864
Fair value(2) $ 2,805 $ 21,254 $ 23,562 $ 18,491
====================================================================================================================
Securities held for trading(3)
Canadian federal government $ -- $ 10,955 $ 12,293 $ 13,383
Other Canadian governments -- 1,876 1,711 1,926
U.S. Treasury and agencies -- 6,814 6,928 4,523
Other foreign governments -- 932 587 1,359
Corporate debt -- 9,046 8,232 9,334
Corporate equity 14,591 15,005 22,047 22,692
--------------------------------------------------------------------------------------------------------------------
Total trading securities $ 14,591 $ 44,628 $ 51,798 $ 53,217
--------------------------------------------------------------------------------------------------------------------
Loan substitute securities
Carrying value $ -- -- $ 81 3.8% $ 147 4.4% $ 161 4.3%
Fair value $ -- $ 81 $ 147 $ 161
====================================================================================================================
Total securities
Carrying value $ 17,109 $ 65,292 $ 74,794 $ 69,242
Fair value(2) $ 17,396 $ 65,963 $ 75,507 $ 71,869
====================================================================================================================
(1) Represents the weighted-average yield, which is determined by applying the
weighted average of the book yields of individual fixed income securities
and the stated dividend rates of corporate equity securities.
(2) The fair value of publicly traded equity securities held for investment
does not take into account any adjustments for resale restrictions that
expire within one year, adjustments for liquidity or future expenses.
(3) As securities held for trading are recorded at fair value, carrying value
equals fair value.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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FAIR VALUE OF SECURITIES HELD FOR INVESTMENT
[Enlarge/Download Table]
2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair
$ millions, as at October 31 value gains losses value value gains losses value
--------------------------------------------------------------------------------------------------------------------------------
Securities issued or
guaranteed by:
Canadian federal government $ 8,316 $ 166 $ -- $ 8,482 $ 9,851 $ 318 $ -- $ 10,169
Other Canadian governments 626 56 -- 682 801 43 -- 844
U.S. Treasury 2 -- -- 2 583 51 -- 634
Other U.S. agencies 4,930 287 (19) 5,198 4,513 100 (10) 4,603
Other foreign governments 302 52 -- 354 854 54 (2) 906
Corporate securities
Debt 3,554 103 (245) 3,412 3,162 87 (42) 3,207
Equity(1) 2,853 405 (134) 3,124 3,085 496 (382) 3,199
--------------------------------------------------------------------------------------------------------------------------------
$ 20,583 $ 1,069 $ (398) $ 21,254 $ 22,849 $ 1,149 $ (436) $ 23,562
================================================================================================================================
(1) In 2001, equity securities held for investment included one security
partially hedged by forward sales contracts which were unwound in 2002.
The unrealized gain related to securities held for investment as at
October 31, 2001 would have increased by $815 million as a result of these
hedges.
Trading activities
Trading revenue is earned through the trading of securities and foreign exchange
and derivative products. Net interest income on trading assets is integral to
trading activities and is therefore included in total trading revenue.
Trading activities include dealing and other securities and derivatives
trading activities measured at fair value, with gains and losses recognized in
income. Trading activities exclude underwriting fees and commissions on
securities transactions, which are shown separately in the consolidated
statements of income.
--------------------------------------------------------------------------------
TRADING REVENUE
$ millions, for the years ended October 31 2002 2001 2000
--------------------------------------------------------------------------------
Net interest income consists of:
Non-trading related $ 5,220 $ 4,862 $ 4,632
Trading related 290 (313) (350)
--------------------------------------------------------------------------------
Net interest income $ 5,510 $ 4,549 $ 4,282
================================================================================
Trading revenue consists of:
Trading related net interest income $ 290 $ (313) $ (350)
Non-interest income - trading activities 273 1,343 1,140
--------------------------------------------------------------------------------
Trading revenue $ 563 $ 1,030 $ 790
================================================================================
Trading revenue by product line:
Interest rates $ 290 $ 505 $ 231
Foreign exchange(1) 152 179 199
Equities 44 279 304
Other(2) 77 67 56
--------------------------------------------------------------------------------
Trading revenue $ 563 $ 1,030 $ 790
================================================================================
(1) Revenue earned on foreign exchange for other than trading activities is
included in other non-interest income.
(2) Includes commodities, credit derivatives and secondary loan trading and
sales.
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4. LOANS
[Enlarge/Download Table]
2002 2001
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Gross Total Gross Total
$ millions, as at October 31 amount allowance Net total amount allowance Net total
-----------------------------------------------------------------------------------------------------------------------------------
Residential mortgages $ 66,612 $ 40 $ 66,572 $ 58,751 $ 23 $ 58,728
Personal and credit card loans(1) 30,784 701 30,083 28,411 502 27,909
Business and government loans 41,961 1,547 40,414 46,693 519 46,174
Securities borrowed or purchased under resale agreements 16,020 -- 16,020 24,079 -- 24,079
General allowance(2) -- -- -- -- 1,250 (1,250)
-----------------------------------------------------------------------------------------------------------------------------------
$155,377 $2,288 $153,089 $157,934 $2,294 $155,640
===================================================================================================================================
(1) Includes $303 million (2001: $233 million), non-recourse portion of
approximately $141 million (2001: $106 million), relating to loans to
certain employees of CIBC and its subsidiaries to finance a portion of
their participation in funds which make private equity investments on a
side by side basis with CIBC and its affiliates. These loans are secured
by the borrowers' interest in the fund. Of the total loans outstanding,
$61 million (2001: $22 million) relates to individuals who are no longer
employed by CIBC and its subsidiaries.
(2) Pursuant to an OSFI guideline issued in October 2001, the general
allowance has been allocated to related asset categories in 2002. Prior to
2002, the general allowance was not allocated.
--------------------------------------------------------------------------------
85
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
LOAN MATURITIES
[Enlarge/Download Table]
Residual term to contractual maturity
----------------------------------------------------------------
Within 1 to 5 5 to 10 Over 2002
$ millions, as at October 31 1 year years years 10 years Total
---------------------------------------------------------------------------------------------------------------------------
Residential mortgages $ 13,842 $ 48,864 $ 3,562 $ 344 $ 66,612
Personal and credit card loans 23,836 6,925 20 3 30,784
Business and government loans 26,305 12,823 2,442 391 41,961
Securities borrowed or purchased under resale agreements 16,020 -- -- -- 16,020
---------------------------------------------------------------------------------------------------------------------------
$ 80,003 $ 68,612 $ 6,024 $ 738 $155,377
===========================================================================================================================
--------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES
[Enlarge/Download Table]
Specific allowance General allowance(1) Total allowance
--------------------------------------------------------------------------------------------
$ millions, as at or for the years
ended October 31 2002 2001 2000 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 1,045 $ 988 $ 752 $ 1,250 $ 1,250 $ 1,000 $ 2,295 $ 2,238 $ 1,752
Provision for credit losses
charged to the consolidated
statements of income 1,500 1,100 970 -- -- 250 1,500 1,100 1,220
Write-offs (1,705) (1,249) (849) -- -- -- (1,705) (1,249) (849)
Recoveries(2) 217 185 121 -- -- -- 217 185 121
Foreign exchange and other
adjustments (18) 21 (6) -- -- -- (18) 21 (6)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,039 1,045 988 1,250 1,250 1,250 2,289 2,295 2,238
Less: allowance on
letters of credit(3) (1) (1) (2) -- -- -- (1) (1) (2)
-----------------------------------------------------------------------------------------------------------------------------------
Allowance for credit losses $ 1,038 $ 1,044 $ 986 $ 1,250 $ 1,250 $ 1,250 $ 2,288 $ 2,294 $ 2,236
===================================================================================================================================
(1) Pursuant to an OSFI guideline issued in October 2001, the general
allowance has been allocated to related asset categories in 2002. Prior to
2002, the general allowance was not allocated.
(2) Includes credit protection purchased from third parties.
(3) Allowance on letters of credit is included in other liabilities.
--------------------------------------------------------------------------------
IMPAIRED LOANS
[Enlarge/Download Table]
2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Gross Specific Gross Specific
$ millions, as at October 31 amount allowance Net total amount allowance Net total
-------------------------------------------------------------------------------------------------------------------------------
Residential mortgages $ 172 $ 21 $ 151 $ 182 $ 23 $ 159
Personal and credit card loans(1) 239 422 (183) 323 502 (179)
Business and government loans 1,834 595 1,239 1,197 519 678
-------------------------------------------------------------------------------------------------------------------------------
Total impaired loans 2,245 1,038 1,207 1,702 1,044 658
Loan substitute securities 30 -- 30 -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Total impaired loans and loan substitute securities $ 2,275 $ 1,038 $ 1,237 $ 1,702 $ 1,044 $ 658
===============================================================================================================================
(1) Specific allowances for large numbers of homogeneous balances of
relatively small amounts are established by reference to historical ratios
of write-offs to balances outstanding. This may result in negative net
impaired loans as individual loans are generally classified as impaired
when repayment of principal or payment of interest is contractually 90
days in arrears.
As at October 31, 2002, other past due loans totalled $38 million (2001: $68
million) of which $38 million (2001: $67 million) were in Canada and nil (2001:
$1 million) were outside Canada. Other past due loans, excluding credit card
loans and government guaranteed loans, are loans where repayment of principal or
payment of interest is contractually in arrears between 90 and 180 days. These
loans have not been classified as impaired loans because they are both fully
secured and in the process of collection. If the number of days in arrears
reaches 180, the loans become impaired notwithstanding the security held.
As at October 31, 2002, the interest entitlements on loans classified as
impaired totalled $114 million (2001: $95 million; 2000: $146 million) of which
$60 million (2001: $72 million; 2000: $101 million) were in Canada and $54
million (2001: $23 million; 2000: $45 million) were outside Canada. During the
year, interest recognized on loans before being classified as impaired totalled
$84 million (2001: $62 million; 2000: $77 million) of which $33 million (2001:
$36 million; 2000: $51 million) were in Canada and $51 million (2001: $26
million; 2000: $26 million) were outside Canada.
--------------------------------------------------------------------------------
86
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. SECURITIZATIONS
During the year, CIBC securitized $1,971 million (2001: $810 million) of
government-guaranteed residential mortgage loans through the creation of
mortgage-backed securities, and subsequently sold $1,969 million (2001: $809
million) of those securities. CIBC received net cash proceeds of $1,952 million
(2001: $809 million) and retained the rights to future excess interest on
residential mortgages valued at $82 million (2001: $37 million). A pre-tax gain
on the sale, net of transaction costs, of $21 million (2001: $17 million) was
recognized as other non-interest income in the consolidated statements of
income. CIBC retained responsibility for servicing the mortgages and recognizes
revenue for servicing as these services are provided. The key assumptions used
to value the sold and retained interests include a prepayment rate of 12% and
discount rates of 4.5% to 5.5%. There are no expected credit losses as the
mortgages are government guaranteed.
During 2001, CIBC also securitized $848 million of non-investment grade
loans. In addition, CIBC sold $195 million of undrawn credit commitments. In
consideration for the sale, CIBC received cash proceeds of $497 million and $141
million in an investment grade note issued by the securitization vehicle. CIBC
recognized a pre-tax loss of $162 million, which was included in other
non-interest income in the consolidated statements of income, and a specific
provision for credit losses of $48 million. CIBC did not retain responsibility
for servicing these loans. The key assumptions used to value the retained
interest include expected credit losses of 11.0%.
A servicing asset or liability is not generally recognized in these
securitizations because CIBC receives adequate compensation for the servicing
that it provides with respect to the transferred assets.
The following table summarizes certain cash flows received from or paid to
SPEs:
[Enlarge/Download Table]
$ millions, for the years ended October 31 2002 2001
-------------------------------------------------------------------------------------------------
Proceeds from new securitizations $ 1,952 $ 1,306
Proceeds from collections reinvested in previous credit card securitizations $ 9,236 $ 8,246
Servicing fees received $ 12 $ 10
Purchase of impaired loans $ (63) $ (69)
Other cash flows received on retained interests $ 242 $ 282
=================================================================================================
Key economic assumptions used in measuring the fair value of retained interests
in securitizations and the sensitivity of the current fair value of residual
cash flows to changes in those assumptions are as follows:
[Enlarge/Download Table]
Non-
Commercial Residential Credit Investment investment
$ millions, as at October 31 mortgages mortgages card loans grade loans(1) grade loans
---------------------------------------------------------------------------------------------------------------------------------
2002 Carrying amount of retained interests $ 21 $ 106 $ 43 -- $ 139
Fair value of retained interests $ 21 $ 109 $ 42 -- $ 139
Weighted-average remaining life (in years) 2 5 revolving -- 3
Prepayment rate NA(2) 12.0 - 21.5% 15.0 - 45.4%(3) -- NA(4)
Impact on fair value of a 10% adverse change -- $ (3) $ (3) -- --
Impact on fair value of a 20% adverse change -- $ (5) $ (5) -- --
Expected credit losses 0.3% NA(5) 2.7 - 5.0% -- 11.0%
Impact on fair value of a 10% adverse change -- -- $ (1) -- --
Impact on fair value of a 20% adverse change -- -- $ (2) -- --
Residual cash flows discount rate (annual rate) 6.5% 4.7% 17.1 - 18.0% -- NA(4)
Impact on fair value of a 10% adverse change -- $ (1) -- -- --
Impact on fair value of a 20% adverse change -- $ (2) -- -- --
=================================================================================================================================
2001 Carrying amount of retained interests $ 42 $ 45 $ 29 $ 1,789 $ 141
Fair value of retained interests $ 42 $ 48 $ 27 $ 1,789 $ 141
Weighted-average remaining life (in years) 3 5 revolving 1 3
Prepayment rate NA(2) 12.0% 38.7%(3) 5.0% NA(4)
Impact on fair value of a 10% adverse change -- $ (1) $ (2) -- --
Impact on fair value of a 20% adverse change -- $ (2) $ (4) -- --
Expected credit losses 0.3% NA(5) 4.0% 2.0% 11.0%
Impact on fair value of a 10% adverse change -- -- $ (1) $ (2) --
Impact on fair value of a 20% adverse change -- -- $ (3) $ (4) --
Residual cash flows discount rate (annual rate) 6.5% 4.6 - 5.6% 16.9% 3.0% NA(4)
Impact on fair value of a 10% adverse change -- -- -- $ (3) --
Impact on fair value of a 20% adverse change -- $ (1) -- $ (5) --
=================================================================================================================================
(1) During 2002, the SPE for investment grade loans was wound up.
(2) Not applicable as these retained interests are not subject to prepayment
risk.
(3) Monthly prepayment rate.
(4) Not applicable as the retained interest is rated as investment grade and
does not represent future excess interest on the loans.
(5) Not applicable as these mortgages are government guaranteed.
--------------------------------------------------------------------------------
87
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The sensitivities are hypothetical and should be used with caution. As the
amounts indicate, changes in fair value based on variations in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption. Changes in one factor may
result in changes in another, which might magnify or counteract the
sensitivities.
The following table analyses CIBC's expected static pool credit losses:
[Enlarge/Download Table]
Non-
Credit Investment investment
Commercial Residential card grade grade
% of outstanding loans, as at October 31 mortgages mortgages loans loans loans
---------------------------------------------------------------------------------------------------------------------------
2002 Actual and projected credit losses 0.3% NA(1) 2.7 - 5.0% -- 11.0%
===========================================================================================================================
2001 Actual and projected credit losses 0.3% NA(1) 4.0% 2.0% 11.0%
===========================================================================================================================
(1) Static pool losses are not applicable to residential mortgages as the
mortgages are government guaranteed.
Information about impaired and other past due loans and net credit losses for
components of reported and securitized financial assets is presented in the
following table:
[Enlarge/Download Table]
$ millions, as at or for the years ended October 31
---------------------------------------------------------------------------------------------------------------------------
Total Impaired
principal and other Net
amount of past due credit
Type of loan loans(1) loans losses
---------------------------------------------------------------------------------------------------------------------------
2002 Residential mortgages $ 69,812 $ 411 $ 3
Personal and credit card loans 33,184 264 490
Business and government loans(2) 42,461 1,843 1,098
Securities borrowed or purchased under resale agreements 16,020 -- --
---------------------------------------------------------------------------------------------------------------------------
Total loans reported and securitized(3) 161,477 2,518 1,591
Less: loans securitized (6,100) (235) (91)
---------------------------------------------------------------------------------------------------------------------------
Loans reported before allowance for credit losses $155,377 $2,283 $1,500
===========================================================================================================================
2001 Residential mortgages $ 60,431 $ 231 $ 3
Personal and credit card loans 30,111 337 431
Business and government loans(2) 49,013 1,240 832
Securities borrowed or purchased under resale agreements 24,079 -- --
---------------------------------------------------------------------------------------------------------------------------
Total loans reported and securitized(3) 163,634 1,808 1,266
Less: loans securitized (5,700) (38) (166)
---------------------------------------------------------------------------------------------------------------------------
Loans reported before allowance for credit losses $157,934 $1,770 $1,100
===========================================================================================================================
(1) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
(2) Includes commercial mortgages and investment grade loans.
(3) Includes loans outstanding and loans that have been securitized, which
CIBC continues to service.
--------------------------------------------------------------------------------
6. LAND, BUILDINGS AND EQUIPMENT
[Enlarge/Download Table]
2002 2001
----------------------------------------------------------------------------------------
Accumulated Net book Net book
$ millions, as at October 31 Cost amortization(1) value value
----------------------------------------------------------------------------------------
Land $ 81 $ -- $ 81 $ 106
Buildings(2) 1,122 217 905 351
Computer equipment 2,080 1,547 533 464
Office furniture and other equipment 1,080 540 540 585
Leasehold improvements 664 476 188 263
----------------------------------------------------------------------------------------
$5,027 $2,780 $2,247 $1,769
========================================================================================
(1) Amortization of buildings, furniture, equipment and leasehold improvements
for the year amounted to $333 million (2001: $310 million; 2000: $313
million).
(2) Includes $576 million not being amortized as it relates to a building
under construction.
--------------------------------------------------------------------------------
88
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. GOODWILL AND OTHER INTANGIBLE ASSETS
As explained in Note 1, CIBC adopted the requirements of the CICA handbook
section 3062, "Goodwill and Other Intangible Assets," in 2002 and the CICA
handbook section 1581, "Business Combinations," in 2001.
CIBC completed its annual impairment testing on goodwill and other
intangible assets with an indefinite life. There were no impairment write-downs.
During the year, CIBC decided to exit its U.S. electronic banking
operations. As a result, CIBC recognized a write-down of $34 million on
finite-lived other intangible assets related to these operations, and this
amount is recorded in the restructuring charge.
The components of other intangible assets are as follows:
[Enlarge/Download Table]
2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
$ millions, as at October 31 amount amortization(1) amount amount amortization(1) amount
------------------------------------------------------------------------------------------------------------------------------------
Finite-lived other intangible assets
Customer relationships(2) $157 $ 26 $131 $101 $ 16 $ 85
Contract based(3) 57 16 41 80 6 74
Technology based 43 35 8 43 26 17
Other(3) 5 4 1 12 1 11
------------------------------------------------------------------------------------------------------------------------------------
262 81 181 236 49 187
Indefinite-lived other intangible assets
Contract based(4) 116 -- 116 41 -- 41
------------------------------------------------------------------------------------------------------------------------------------
Total other intangible assets $378 $ 81 $297 $277 $ 49 $228
====================================================================================================================================
(1) Amortization of other intangible assets for the year amounted to $32
million (2001: $25 million; 2000: $24 million).
(2) Changes in gross carrying amount include acquisitions of third-party
custody business and credit card relationships.
(3) Changes in gross carrying amount include the write-down relating to the
exit of U.S. electronic banking operations.
(4) Changes in gross carrying amount include $75 million of other intangible
assets acquired in the acquisition of MLIM.
The changes in the carrying amount of goodwill are as follows:
[Enlarge/Download Table]
CIBC CIBC CIBC
Retail Wealth World Corporate CIBC
$ millions, as at or for the years ended October 31 Markets Management Markets Amicus and Other Total
----------------------------------------------------------------------------------------------------------------------------------
2002 Balance at beginning of year $ 7 $ 305 $ 67 $ 13 $ 8 $ 400
Goodwill acquired during the year 4 563 108 -- -- 675
Adjustments(1) -- 14 (4) (1) (6) 3
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 11 $ 882 $ 171 $ 12 $ 2 $ 1,078
==================================================================================================================================
2001 Balance at beginning of year $ 14 $ -- $ 82 $ 6 $ 8 $ 110
Goodwill acquired during the year -- 279 4 12 -- 295
Amortization (7) -- (15) (2) -- (24)
Adjustments(1) -- 26(2) (4) (3) -- 19
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 7 $ 305 $ 67 $ 13 $ 8 $ 400
==================================================================================================================================
(1) Includes foreign currency translation and other purchase price equation
adjustments.
(2) Represents goodwill previously included in the equity interest in TAL
accounted for by the equity method.
In accordance with the CICA handbook section 3062, the effect of this accounting
change is reflected prospectively. Supplemental comparative disclosure, as if
the change had been retroactively applied to fiscal years 2001 and 2000, is as
follows:
[Enlarge/Download Table]
$ millions, except per share amounts, for the years ended October 31 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------
Reported net income $ 653 $ 1,686 $ 2,060
Add back:
Goodwill amortization(1) -- 24 23
Goodwill amortization - equity accounted investments(2) -- 22 17
----------------------------------------------------------------------------------------------------------------------
-- 46 40
----------------------------------------------------------------------------------------------------------------------
Net income adjusted for goodwill amortization $ 653 $ 1,732 $ 2,100
======================================================================================================================
Basic EPS - Reported $ 1.37 $ 4.19 $ 4.95
- Adjusted for goodwill $ 1.37 $ 4.31 $ 5.06
Diluted EPS - Reported $ 1.35 $ 4.13 $ 4.90
- Adjusted for goodwill $ 1.35 $ 4.25 $ 5.01
======================================================================================================================
(1) Recorded in non-interest expenses in the consolidated statements of
income.
(2) Recorded in interest income in the consolidated statements of income.
--------------------------------------------------------------------------------
89
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. OTHER ASSETS
[Download Table]
$ millions, as at October 31 2002 2001(1)
-----------------------------------------------------------------------------
Accrued interest receivable $ 1,423 $ 1,505
Brokers' client accounts 994 836
Prepaid pension costs (Note 15) 467 413
Future income taxes (Note 18) 1,782 581
Other prepayments and deferred items 1,037 1,656
Other, including accounts receivable 4,510 4,479
-----------------------------------------------------------------------------
$10,213 $ 9,470
=============================================================================
(1) Goodwill and other intangible assets have been reclassified from other
assets in 2002.
--------------------------------------------------------------------------------
9. DEPOSITS
[Enlarge/Download Table]
Payable on a fixed date(3)
Payable Payable -----------------------------------------------
on after Within 1 to 5 to Over 2002 2001
$ millions, as at October 31 demand(1) notice(2) 1 year 5 years 10 years 10 years Total Total
----------------------------------------------------------------------------------------------------------------------------------
Individuals $ 6,620 $ 25,338 $ 23,335 $ 12,652 $ 30 $ -- $ 67,975 $ 66,826
Businesses and governments 17,059 6,072 85,182 5,408 2,617 1,648 117,986 114,270
Banks 568 101 8,525 1,427 9 39 10,669 13,256
----------------------------------------------------------------------------------------------------------------------------------
$ 24,247 $ 31,511 $117,042 $ 19,487 $ 2,656 $ 1,687 $196,630 $194,352
==================================================================================================================================
Total deposits include:
Non-interest-bearing
deposits
In domestic offices $ 8,690 $ 7,599
In foreign offices 445 846
Interest-bearing
deposits
In domestic offices 110,382 110,131
In foreign offices 75,431 74,437
U.S. federal funds
purchased 1,682 1,339
----------------------------------------------------------------------------------------------------------------------------------
$196,630 $194,352
==================================================================================================================================
(1) Deposits payable on demand include all deposits for which CIBC does not
have the right to require notice of withdrawal. These deposits are, in
general, chequing accounts.
(2) Deposits payable after notice include all deposits for which CIBC can
legally require notice of withdrawal. These deposits are, in general,
savings accounts.
(3) Deposits payable on a fixed date include all deposits which mature on a
specified date. These deposits are generally term deposits, guaranteed
investment certificates and similar instruments.
--------------------------------------------------------------------------------
10. OTHER LIABILITIES
[Download Table]
$ millions, as at October 31 2002 2001
--------------------------------------------------------------------------------
Accrued interest payable $ 1,437 $ 2,064
Gold and silver certificates 161 263
Brokers' client accounts 2,139 1,777
Cheques and other items in transit, net 342 41
Deferred gain on sale of real estate properties(1) 110 126
Other deferred items 344 251
Restructuring provision (Note 16) 452 212
Employee benefit plans (Note 15) 525 467
Accrued expenses 874 1,010
Non-controlling interests in subsidiaries 111 249
Other, including accounts payable 4,485 3,652
--------------------------------------------------------------------------------
$10,980 $10,112
================================================================================
(1) Deferred gain is being recognized in income each year over the approximate
10-year average term of the leases relating to properties sold and leased
back by CIBC in 2000, which CIBC continues to occupy.
--------------------------------------------------------------------------------
90
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. SUBORDINATED INDEBTEDNESS
The following indebtedness is unsecured and subordinated to deposits and other
liabilities. Foreign-denominated indebtedness either funds foreign-denominated
assets (including net investments in foreign operations) or is combined with
cross-currency swaps to provide Canadian dollar equivalent funding.
--------------------------------------------------------------------------------
TERMS OF SUBORDINATED INDEBTEDNESS
[Enlarge/Download Table]
$ millions, as at October 31
-----------------------------------------------------------------------------------------------------------------------------------
Earliest date redeemable by CIBC
-------------------------------------
At greater of
Canada Yield Denominated in
Interest rate % Maturity date Price(1) and par At par foreign currency 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
5.5 June 21, 2003(3) Yen 5 billion $ 64 $ 65
11.125 February 10, 2004(3) 1 1
7.1 March 10, 2004 March 10, 1999 67 67
8.55 May 12, 2005(13) May 12, 2000 1 1
8.65 August 22, 2005(14) August 22, 2000 24 24
Floating(4) March 7, 2007(10) March 7, 2002 -- 100
Floating(5) October 30, 2007(16) October 30, 2002 -- 210
Floating(5) March 4, 2008 March 4, 2003 50 50
Floating(6)(7) May 19, 2008 May 18, 2003 US$ 250 million 389 397
6.5(2) October 21, 2009 October 21, 1999 October 21, 2004 400 400
7.4(2) January 31, 2011 January 31, 2006 250 250
8.15(2) April 25, 2011 April 25, 2001 April 25, 2006 250 250
7.0(2) October 23, 2011 October 23, 2001 October 23, 2006 250 250
Floating(6)(8) August 14, 2012 August 14, 2007 US$ 300 million 467 477
5.89(2) February 26, 2013 February 26, 1998 February 26, 2008 120 120
9.65 October 31, 2014 November 1, 1999 250 250
8.7 May 25, 2029(3) 25 25
11.6 January 7, 2031 January 7, 1996 200 200
10.8 May 15, 2031 May 15, 2021 150 150
8.7 May 25, 2032(3) 25 25
8.7 May 25, 2033(3) 25 25
8.7 May 25, 2035(3) 25 25
Floating(9) July 31, 2084 July 27, 1990 US$ 255 million(12) 397 405
Floating(11) August 31, 2085 August 20, 1991 US$ 126 million(15) 197 232
-----------------------------------------------------------------------------------------------------------------------------------
$3,627 $3,999
===================================================================================================================================
(1) Canada Yield Price: a price calculated to provide a yield to maturity
equal to the yield of a Government of Canada bond of appropriate maturity
plus a predetermined spread.
(2) Interest rate is fixed at the indicated rate until the earliest date
redeemable at par by CIBC and thereafter, at the three-month bankers'
acceptance rate plus 1.00%.
(3) Not redeemable prior to maturity date.
(4) Interest rate is based on the three-month bankers' acceptance rate plus
0.20% until the earliest date redeemable by CIBC and thereafter, on the
three-month bankers' acceptance rate plus 1.00%.
(5) Interest rate is based on the three-month bankers' acceptance rate plus
0.21% until the earliest date redeemable by CIBC and thereafter, on the
three-month bankers' acceptance rate plus 1.00%.
(6) Issued by CIBC World Markets plc and guaranteed by CIBC on a subordinated
basis.
(7) Interest rate is based on the three-month London inter-bank offered rate
(LIBOR) plus 0.25% until the earliest date redeemable by CIBC World
Markets plc and thereafter, on the three-month LIBOR plus 0.75%.
(8) Interest rate is based on the three-month LIBOR plus 0.35% until the
earliest date redeemable by CIBC World Markets plc and thereafter, on the
three-month LIBOR plus 1.35%.
(9) Interest rate is based on the six-month LIBOR plus 0.25%.
(10) Redeemed for cash on March 7, 2002.
(11) Interest rate is based on the six-month LIBOR plus 0.125%.
(12) US$2 million of the indebtedness was repurchased for cash on February 16,
2001.
(13) On May 12, 2001, $69 million of the indebtedness was converted to 8.55%
Deposit Notes maturing May 12, 2005.
(14) On August 22, 2001, $176 million of the indebtedness was converted to
8.65% Deposit Notes maturing August 22, 2005.
(15) US$20 million of the indebtedness was repurchased for cash on April 26,
2002.
(16) Redeemed for cash on October 30, 2002.
The aggregate contractual maturities of CIBC's subordinated indebtedness are
outlined in the following table:
--------------------------------------------------------------------------------
REPAYMENT SCHEDULE
[Download Table]
$ millions
--------------------------------------------------------------------------------
Within 1 year $ 64
1 to 2 years 68
2 to 3 years 25
3 to 4 years --
4 to 5 years --
Over 5 years 3,470
--------------------------------------------------------------------------------
$3,627
================================================================================
--------------------------------------------------------------------------------
91
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
12. INTEREST RATE SENSITIVITY
CIBC is exposed to interest rate risk as a consequence of the mismatch, or gap,
between the assets, liabilities and off-balance sheet instruments scheduled to
mature or reprice on particular dates. The gaps which existed at October 31 are
detailed below.
[Enlarge/Download Table]
Based on earlier of maturity or repricing date of interest sensitive instruments
--------------------------------------------------------------------------------
Floating Within 3 to 12 1 to 5 Over 5 Not interest
$ millions, as at October 31 rate 3 months months years years rate sensitive Total
-----------------------------------------------------------------------------------------------------------------------------------
2002 Assets
-----------------------------------------------------------------------------------------------------------------------------------
Cash resources $ 14 $ 6,960 $ 1,238 $ -- $ -- $ 1,300 $ 9,512
Effective yield(1) 2.51% 1.91%
Securities held for
investment
and loan substitute
securities 2,582 673 4,174 6,597 4,120 2,518 20,664
Effective yield(1) 4.27% 4.32% 4.81% 6.60%
Securities held for trading -- 12,472 2,942 11,398 3,225 14,591 44,628
Effective yield(1) 1.93% 2.89% 3.90% 6.15%
Loans 68,968 35,660 11,838 28,563 5,797 2,263 153,089
Effective yield(1) 3.61% 5.72% 6.47% 6.73%
Other -- 24,717 -- -- -- 20,683 45,400
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 71,564 $ 80,482 $ 20,192 $ 46,558 $ 13,142 $ 41,355 $ 273,293
===================================================================================================================================
Liabilities and
shareholders' equity
-----------------------------------------------------------------------------------------------------------------------------------
Deposits $ 51,903 $ 80,533 $ 26,472 $ 17,359 $ 2,176 $ 18,187 $ 196,630
Effective yield(1) 2.28% 2.63% 3.81% 4.10%
Obligations related to
securities sold short -- 491 1,380 1,606 1,611 3,348 8,436
Effective yield(1) 1.83% 3.25% 3.52% 4.73%
Obligations related to
securities lent or sold
under repurchase agreements -- 9,404 -- -- -- 211 9,615
Effective yield(1) 3.21%
Subordinated indebtedness -- 1,500 64 1,243 820 -- 3,627
Effective yield(1) 2.10% 5.50% 7.19% 9.67%
Other -- 24,794 -- -- -- 30,191 54,985
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 51,903 $ 116,722 $ 27,916 $ 20,208 $ 4,607 $ 51,937 $ 273,293
===================================================================================================================================
On-balance sheet gap $ 19,661 $ (36,240) $ (7,724) $ 26,350 $ 8,535 $ (10,582) $ --
Off-balance sheet gap -- 27,844 (17,456) (8,567) (1,821) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total gap $ 19,661 $ (8,396) $ (25,180) $ 17,783 $ 6,714 $ (10,582) $ --
Total cumulative gap $ 19,661 $ 11,265 $ (13,915) $ 3,868 $ 10,582 $ -- $ --
===================================================================================================================================
Gap by currency
-----------------------------------------------------------------------------------------------------------------------------------
On-balance sheet gap
Canadian currency $ 38,063 $ (50,138) $ (4,494) $ 25,682 $ 4,878 $ (13,991) $ --
Foreign currencies (18,402) 13,898 (3,230) 668 3,657 3,409 --
-----------------------------------------------------------------------------------------------------------------------------------
Total on-balance sheet gap 19,661 (36,240) (7,724) 26,350 8,535 (10,582) --
-----------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet gap
Canadian currency -- 6,036 (3,608) (1,236) (1,192) -- --
Foreign currencies -- 21,808 (13,848) (7,331) (629) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total off-balance sheet gap -- 27,844 (17,456) (8,567) (1,821) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total gap $ 19,661 $ (8,396) $ (25,180) $ 17,783 $ 6,714 $ (10,582) $ --
===================================================================================================================================
2001 Gap by currency
-----------------------------------------------------------------------------------------------------------------------------------
On-balance sheet gap
Canadian currency $ 23,521 $ (42,902) $ (1,891) $ 30,828 $ 4,701 $ (14,257) $ --
Foreign currencies (14,624) 20,444 (14,549) (2,761) 918 10,572 --
-----------------------------------------------------------------------------------------------------------------------------------
Total on-balance sheet gap 8,897 (22,458) (16,440) 28,067 5,619 (3,685) --
-----------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet gap
Canadian currency -- (1,293) 3,743 (446) (2,004) -- --
Foreign currencies -- 10,132 (13,772) (1,084) 4,724 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total off-balance sheet gap -- 8,839 (10,029) (1,530) 2,720 -- --
===================================================================================================================================
Total gap $ 8,897 $ (13,619) $ (26,469) $ 26,537 $ 8,339 $ (3,685) $ --
Total cumulative gap $ 8,897 $ (4,722) $ (31,191) $ (4,654) $ 3,685 $ -- $ --
===================================================================================================================================
(1) Represents the weighted-average effective yield based on the earlier of
contractual repricing or maturity date.
--------------------------------------------------------------------------------
92
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. SHARE CAPITAL
Authorized
Preferred shares
An unlimited number of Class A Preferred Shares and Class B Preferred Shares
without nominal or par value issuable in series provided that for each class of
preferred shares, the maximum aggregate consideration for all outstanding shares
at any time does not exceed $10 billion.
Common shares
An unlimited number of common shares without nominal or par value provided that
the maximum aggregate consideration for all outstanding common shares at any
time does not exceed $15 billion.
Share rights and privileges
Class A Preferred Shares
Each series of Class A Preferred Shares bears quarterly non-cumulative dividends
and is redeemable for cash by CIBC on or after the specified redemption dates at
the cash redemption prices indicated below. Each series, except as noted below,
provides CIBC and the shareholders with the right to convert the shares to CIBC
common shares on or after a specified conversion date. Each share is convertible
into a number of common shares determined by dividing the then applicable cash
redemption price by 95% of the average common share price (as defined in the
short form prospectus or prospectus supplement), subject to a minimum price of
$2.00 per share. Where shareholders exercise their conversion right, CIBC has
the right, subject to OSFI's consent, to elect to redeem for cash any shares
tendered for conversion or to arrange for their cash sale to another purchaser.
--------------------------------------------------------------------------------
TERMS OF PREFERRED SHARES
[Enlarge/Download Table]
Conversion for common
-------------------------------------
Quarterly Specified Cash redemption CIBC Shareholders'
dividends per share(1) redemption date price per share conversion date conversion date
-----------------------------------------------------------------------------------------------------------------------------------
Series 14 $0.371875 July 31, 2003 $26.00 July 31, 2003 July 31, 2006
July 31, 2004 $25.50
July 31, 2005 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 15 $0.353125 July 31, 2004 $26.00 July 31, 2004 July 31, 2007
July 31, 2005 $25.50
July 31, 2006 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 16 US $0.353125 October 29, 2004 US $25.50 October 29, 2004 October 29, 2007
October 29, 2005 US $25.25
October 29, 2006 US $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 17 $0.340625 October 29, 2004 $25.50 October 29, 2004 October 29, 2007
October 29, 2005 $25.25
October 29, 2006 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 18 $0.343750 October 29, 2012 $25.00 not convertible not convertible
-----------------------------------------------------------------------------------------------------------------------------------
Series 19 $0.309375 April 30, 2008 $25.75 April 30, 2008 April 30, 2013
April 30, 2009 $25.60
April 30, 2010 $25.45
April 30, 2011 $25.30
April 30, 2012 $25.15
April 30, 2013 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 20 US $0.321875 October 31, 2005 US $25.50 October 31, 2005 April 30, 2008
October 31, 2006 US $25.25
October 31, 2007 US $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 21 $0.375000 July 31, 2005 $26.00 July 31, 2005 July 31, 2010
July 31, 2006 $25.75
July 31, 2007 $25.50
July 31, 2008 $25.25
July 31, 2009 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 22 US $0.390625 July 31, 2005 US $26.00 July 31, 2005 July 31, 2010
July 31, 2006 US $25.75
July 31, 2007 US $25.50
July 31, 2008 US $25.25
July 31, 2009 US $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 23 $0.331250 October 31, 2007 $25.75 October 31, 2007 July 31, 2011
October 31, 2008 $25.50
October 31, 2009 $25.25
October 31, 2010 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 24 $0.375000 January 31, 2007 $26.00 January 31, 2007 not convertible
January 31, 2008 $25.75
January 31, 2009 $25.50
January 31, 2010 $25.25
January 31, 2011 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Series 25 $0.375000 July 31, 2007 $26.00 July 31, 2007 not convertible
July 31, 2008 $25.75
July 31, 2009 $25.50
July 31, 2010 $25.25
July 31, 2011 $25.00
===================================================================================================================================
(1) The quarterly dividends are adjusted for the number of days during the
quarter that the share is outstanding at the time of issuance and
redemption.
--------------------------------------------------------------------------------
93
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
OUTSTANDING SHARES AND DIVIDENDS PAID
[Enlarge/Download Table]
2002
--------------------------------------------------------------------------------------------------------------------------------
As at or for the years Shares outstanding Dividends paid Shares outstanding
ended October 31 No. of shares $ millions $ millions $ per share No. of shares $ millions
--------------------------------------------------------------------------------------------------------------------------------
Class A Preferred Shares
Fixed-rate shares
entitled to
non-cumulative dividends
Series 12 -- $ -- $ -- $ -- -- $ --
Series 13 -- -- -- $ -- -- --
Series 14 8,000,000 200 12 $1.49 8,000,000 200
Series 15 12,000,000 300 17 $1.41 12,000,000 300
Series 16 5,500,000 214 12 US$1.41 5,500,000 219
Series 17 6,500,000 162 9 $1.36 6,500,000 162
Series 18 12,000,000 300 16 $1.38 12,000,000 300
Series 19 8,000,000 200 10 $1.24 8,000,000 200
Series 20 4,000,000 156 8 US$1.29 4,000,000 159
Series 21 8,000,000 200 12 $1.50 8,000,000 200
Series 22 4,000,000 156 10 US$1.56 4,000,000 159
Series 23 16,000,000 400 21 $1.33 16,000,000 400
Series 24 16,000,000 400 21 $1.30 -- --
Series 25 16,000,000 400 13 $0.80 -- --
--------------------------------------------------------------------------------------------------------------------------------
Total preferred share
capital and dividends $3,088 $161 $2,299
--------------------------------------------------------------------------------------------------------------------------------
Common shares
Total common share capital
at beginning of year 363,187,931 $2,827 377,140,195 $2,868
Issued pursuant to
stock option plans 1,562,438 59 2,983,736 90
Purchase of common shares
for cancellation (5,686,000) (44) (16,936,000) (131)
--------------------------------------------------------------------------------------------------------------------------------
Total common share capital
and dividends 359,064,369 $2,842 $577 $1.60 363,187,931 $2,827
================================================================================================================================
Total dividends paid $738
================================================================================================================================
2001 2000
---------------------------------------------------------------------------------------
Dividends paid Dividends paid
$ millions $ per share $ millions $ per share
---------------------------------------------------------------------------------------
Class A Preferred Shares
Fixed-rate shares
entitled to
non-cumulative dividends
Series 12 $ -- $ -- $14 US $1.63
Series 13 -- $ -- 14 $1.75
Series 14 12 $1.49 12 $1.49
Series 15 17 $1.41 17 $1.41
Series 16 11 US$1.41 11 US$1.41
Series 17 9 $1.36 9 $1.36
Series 18 17 $1.38 17 $1.38
Series 19 10 $1.24 10 $1.24
Series 20 8 US$1.29 8 US$1.29
Series 21 12 $1.50 9 $1.14
Series 22 9 US$1.56 7 US$1.18
Series 23 16 $0.99 -- --
Series 24 -- -- -- --
Series 25 -- -- -- --
---------------------------------------------------------------------------------------
Total preferred share
capital and dividends $121 $128
---------------------------------------------------------------------------------------
Common shares
Total common share capital
at beginning of year
Issued pursuant to
stock option plans
Purchase of common shares
for cancellation
---------------------------------------------------------------------------------------
Total common share capital
and dividends $536 $1.44 $501 $1.29
=======================================================================================
Total dividends paid $657 $629
=======================================================================================
Restrictions on the payment of dividends
CIBC is prohibited by the Bank Act (Canada) from declaring or paying any
dividends on its preferred shares or common shares if there are reasonable
grounds for believing that CIBC is, or the payment would cause CIBC to be, in
contravention of any capital adequacy or liquidity regulation or any direction
to CIBC made by OSFI regarding CIBC's capital or liquidity.
In addition, Section 79(5) of the Bank Act, which was proclaimed into
force on October 24, 2001, prohibits CIBC from paying a dividend in any
financial year without the approval of OSFI if, on the day the dividend is
declared, the total of all dividends declared by CIBC in that year would exceed
the aggregate of CIBC's net income up to that day in that year and of its
retained net income for the preceding two financial years.
CIBC's ability to pay common share dividends is also restricted by the
terms of the outstanding preferred shares which provide that CIBC may not pay
dividends on its common shares at any time without the approval of holders of
the outstanding preferred shares unless all dividends which are then payable
have been declared and paid or set apart for payment.
Shareholder Investment Plan
Under the Shareholder Investment Plan, eligible shareholders have the right to
participate in one or more of the Dividend Reinvestment Option, the Share
Purchase Option and the Stock Dividend Option.
Shares reserved for issue
As at October 31, 2002, 30,735,308 common shares were reserved for future issue
pursuant to stock option plans.
Normal course issuer bid
CIBC commenced a normal course issuer bid, effective for one year, on January 9,
2002. Under this bid, CIBC may purchase up to 18 million common shares, just
under 5% of its outstanding common shares as at December 31, 2001. As at October
31, 2002, 5.7 million shares were repurchased under the program for an aggregate
consideration of $313 million.
On December 20, 2000, CIBC commenced a normal course issuer bid, effective
for one year, to purchase up to 18.8 million common shares, just under 5% of
CIBC's outstanding common shares as at November 30, 2000. As at October 31,
2001, 16.9 million shares were purchased under the program for an aggregate
consideration of $867 million. There were no purchases under this bid during
fiscal 2002.
--------------------------------------------------------------------------------
94
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
14. STOCK-BASED COMPENSATION
CIBC has the following significant stock-based compensation plans:
Stock option plans
CIBC has two stock option plans: Employee Stock Option Plan and Non-Officer
Director Stock Option Plan.
Under CIBC's Employee Stock Option Plan, stock options are periodically
granted to selected employees. Options provide the employee with the right to
purchase CIBC common shares from CIBC at a fixed price not less than the closing
price of the shares on the trading day immediately preceding the grant date. In
general, the options vest evenly over a four-year period and expire 10 years
from the grant date. Certain options expiring in February 2010 vest based upon
the attainment of specified share prices, and certain options vest based upon
the earlier of the attainment of these prices and seven years.
Up to 50% of options relating to the Employee Stock Option Plan granted
prior to 2000 can be exercised as SARs. SARs can be exchanged for a cash amount
equal to the excess of the weighted-average price of the common shares on the
Toronto Stock Exchange on the trading day immediately preceding the day the SARs
are exercised over the option strike price.
Under CIBC's Non-Officer Director Stock Option Plan, each director who is
not an officer or employee of CIBC or any of its subsidiaries is provided with
the right to purchase CIBC common shares from CIBC at a fixed price equal to the
five-day average of the closing price per share on the Toronto Stock Exchange
for the five trading days preceding the date of the grant. The options, which
are not eligible for SARs, vest immediately and expire 10 years from the grant
date.
A maximum of 42,834,500 common shares may be issued under CIBC's stock
option plans.
Adoption of CICA handbook section 3870
In 2002, CIBC early adopted, effective November 1, 2001, the requirements of the
CICA handbook section 3870, "Stock-Based Compensation and Other Stock-Based
Payments." The impact of this change in accounting policy is detailed below:
Stock option plans
As a result of adopting the fair value-based method encouraged by section 3870,
compensation expense increased by $26 million for the year. None of the options
granted since November 1, 2001 have been exercised.
The weighted-average grant-date fair value of options granted during 2002
has been estimated at $16.24 using the Black-Scholes option-pricing model. The
pricing model assumes weighted-average risk-free interest rates of 5.42%,
weighted-average expected dividend yields of 3.00% annually, weighted-average
expected common stock price volatility of 25.86% and a weighted-average expected
life of 10 years.
Because the fair value-based method of accounting has not been applied to
options granted prior to November 1, 2001, the compensation expense of $26
million may not be representative of that expected in future years.
SARs
Section 3870 requires that the cumulative amount relating to all vested SARs
outstanding at the beginning of the fiscal year of adoption be charged to
opening retained earnings for that fiscal year. This resulted in a $42 million
after-tax charge to opening retained earnings at November 1, 2001, a $72 million
pre-tax increase in liabilities and an increase in future income tax asset of
$30 million. Compensation expense decreased by $41 million pre-tax for the year.
The accounting for other stock-based compensation plans as outlined below
is not affected by this change in accounting policy.
Employee Share Purchase Plan
Under CIBC's Employee Share Purchase Plan, qualifying employees can choose each
year to have up to 10% of their annual base earnings withheld to purchase CIBC
common shares. CIBC matches 50% of the employee contribution amount up to a
maximum of 3%. All contributions are used by the plan trustee to purchase common
shares during each pay period in the open market. CIBC contributions vest after
two years of continuous participation in the plan, and all subsequent
contributions vest immediately. CIBC's contribution is expensed as incurred and
totalled $29 million for 2002 (2001: $30 million; 2000: $24 million).
Restricted Share Program
Under CIBC's Restricted Share Program (RSP), share equivalents are awarded under
the following compensation plans:
Restricted Share Awards
Under the CIBC Restricted Share Awards (RSA) Plan, which began in 2000, certain
key employees are granted awards to receive CIBC common shares as part of their
total compensation. Additionally, RSAs may be awarded as special grants. The
funding for awards under this plan is paid into a trust which purchases CIBC
common shares in the open market. RSAs vest one-third annually and the common
shares held in the trust are distributed generally within a three-year period,
beginning one year after the fiscal year of the grant. Compensation expense in
respect of RSAs totalled $38 million for 2002 (2001: $51 million; 2000: $22
million).
Stock Participation Plan
Under the CIBC Stock Participation Plan (SPP), which began in 2000, certain key
employees are granted awards to receive CIBC common shares as a portion of their
total compensation. The funding for awards under this program is paid into a
trust which purchases CIBC common shares in the open market. SPP awards vest
one-third annually and the common shares held in the trust are distributed
generally within a three-year period, beginning one year after the fiscal year
of the grant. Additionally, SPP awards may be issued as special grants, which
generally vest and the common shares held in the trust are distributed within
three years from the grant date. Compensation expense in respect of SPP awards
totalled $173 million for 2002 (2001: $98 million; 2000: $128 million).
--------------------------------------------------------------------------------
95
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Long Term Incentive Plan and Special Incentive Program
Under CIBC's Long Term Incentive Plan (LTIP), certain key CIBC employees are
granted awards to receive CIBC common shares as a portion of their total
compensation. The funding for awards under this plan is paid into a trust which
purchases CIBC common shares in the open market. Generally, LTIP awards vest and
the common shares held in the trust are distributed within a three-year period,
beginning one year after the fiscal year of the grant.
Under CIBC's Special Incentive Program (SIP), certain key employees
receive common share-based awards. The funding for awards under the SIP is
comparable with those of the LTIP. The awards under the SIP vest and are
distributed when the plan expires on October 31, 2003.
Compensation expense for these two plans totalled $113 million for 2002
(2001: $150 million; 2000: $171 million).
Directors' plans
Members of CIBC's Board of Directors who are not officers or employees of CIBC
or any of its subsidiaries may elect to receive the annual amount payable by
CIBC under the Deferred Share Unit/Common Share Election Plan as deferred share
units (DSUs) or CIBC common shares.
The members may also elect, under the Director Share Plan, to receive all
or a portion of their compensation (annual retainer, committee member fee,
committee chair fee and meeting fees) in the form of cash, CIBC common shares or
DSUs.
Compensation expense in respect of these plans totalled $2 million for
2002 (2001: $2 million; 2000: $2 million). The value of DSUs credited to a
director is payable when he or she is no longer a director or employee of CIBC.
In addition, under the Deferred Share Unit/Common Share Election Plan the value
of DSUs is payable when the director is no longer related to or affiliated with
CIBC as "related" and "affiliated" are defined in the Income Tax Act (Canada).
--------------------------------------------------------------------------------
STOCK OPTION PLANS
[Enlarge/Download Table]
2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number of average Number of average Number of average
stock exercise stock exercise stock exercise
As at or for the years ended October 31 options price options price options price
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 19,070,952 $36.55 20,247,187 $33.28 16,933,275 $31.36
Granted 3,042,992 $54.48 3,021,990(1) $48.60 5,196,956 $36.27
Exercised (1,562,438) $30.78 (2,983,736) $30.19 (1,405,416) $23.89
Forfeited/Cancelled (302,277) $42.78 (652,749) $27.43 (95,000) $41.64
Exercised as SARs (306,275) $30.12 (561,740) $38.72 (382,628) $21.47
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 19,942,954 $39.74 19,070,952 $36.55 20,247,187 $33.28
===================================================================================================================================
Exercisable at end of year 10,683,434 $34.48 13,202,090 $34.15 9,141,886 $28.33
===================================================================================================================================
(1) Includes 48,000 options granted to non-officer members of CIBC's Board of
Directors in 2000, that were approved by CIBC's shareholders at the annual
meeting on March 1, 2001.
--------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING AND VESTED
[Enlarge/Download Table]
Stock options outstanding Stock options vested
---------------------------------------- --------------------------------------------
Weighted-
average Weighted- Weighted-
contractual average average
Number life exercise Number exercise Exercisable
Range of exercise prices outstanding remaining price outstanding price as SARs
----------------------------------------------------------------------------------------------------------------------------
$15.375 - $21.125 2,180,869 2.33 $18.64 2,179,369 $18.64 1,132,940
$31.700 - $39.850 9,307,861 6.40 $36.86 5,282,322 $36.13 2,546,776
$40.350 - $49.940 4,200,684 6.46 $42.66 2,908,243 $41.39 1,245,292
$50.330 - $57.190 4,253,540 8.88 $53.99 313,500 $52.55 --
----------------------------------------------------------------------------------------------------------------------------
Total 19,942,954 6.50 $39.74 10,683,434 $34.48 4,925,008
============================================================================================================================
--------------------------------------------------------------------------------
96
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. POST-EMPLOYMENT AND POST-RETIREMENT PLANS
As explained in Note 1, CIBC adopted the requirements of the CICA handbook
section 3461, "Employee Future Benefits," in 2001. This section was adopted
retroactively without restatement, resulting in a $140 million after-tax charge
to opening retained earnings on November 1, 2000, and a $237 million pre-tax
increase in the accrued benefit liability, offset by a reduction in future
income taxes of $97 million.
Under CIBC's defined benefit pension plans, pension benefits are provided
to qualified employees. These benefits are, in general, based on years of
service and compensation near retirement. CIBC also provides post-retirement
benefits to retired employees, including life insurance, health and dental care
benefits. In addition, post-employment benefits are also provided to inactive
employees.
The funded status of the employee benefit plans and the amounts recognized
on CIBC's consolidated balance sheets are as follows:
[Enlarge/Download Table]
Pension Other
benefit plans benefit plans
---------------------------------------------------
$ millions, as at or for the years ended October 31 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation(1)
Balance at beginning of year $ 2,226 $ 2,013 $ 609 $ 130
Adjustment for change in accounting policy -- 163 -- 403
Adjustment for inclusion of subsidiary plans 216(2) -- 19 --
Current service cost 80 66 53 37
Employees' contributions 10 11 -- --
Interest cost 167 148 39 36
Benefits paid (142) (134) (38) (36)
Foreign exchange rate changes 7 -- -- --
Actuarial (gains) losses (73) (48) 14 39
Plan amendments 45 12 -- --
Corporate restructuring giving rise to curtailments 1 (5) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,537 $ 2,226 $ 696 $ 609
===================================================================================================================================
Plan assets(1)
Fair value at beginning of year $ 2,121 $ 2,545 $ 103 $ 111
Adjustment for change in accounting policy -- 48 -- --
Adjustment for inclusion of subsidiary plans 211(2) -- -- --
Actual return on plan assets (106) (364) (4) (3)
Employer contributions 88 15 45 31
Employees' contributions 10 11 -- --
Benefits paid (142) (134) (38) (36)
Foreign exchange rate changes 6 -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Fair value at end of year $ 2,188 $ 2,121 $ 106 $ 103
===================================================================================================================================
Funded status - plan deficit $ (349) $ (105) $ (590) $ (506)
Employer contribution received after measurement date 15 -- -- --
Unamortized net actuarial losses 786 506 59 39
Unamortized past service costs 54 12 -- --
Unamortized transitional obligation (23) -- 6 --
-----------------------------------------------------------------------------------------------------------------------------------
Accrued benefit asset (liability) 483 413 (525) (467)
Valuation allowance(3) (16) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Accrued benefit asset (liability), net of valuation allowance $ 467 $ 413 $ (525) $ (467)
===================================================================================================================================
(1) Measurement date is as at September 30, 2002
(2) Net of valuation allowance of $24 million.
(3) Represents excess of accrued benefit asset over the amount expected to be
realized in the future.
Included in the accrued benefit obligation and fair value of the plan assets at
year-end are the following amounts in respect of plans that are not fully
funded:
[Download Table]
Pension Other
benefit plans benefit plans
---------------------------------------------
$ millions, as at October 31 2002 2001 2002 2001
-------------------------------------------------------------------------------
Accrued benefit obligation $ 2,499 $ 120 $ 696 $ 609
Fair value of plan assets 2,128 -- 106 103
-------------------------------------------------------------------------------
Funded status - plan deficit $ (371) $ (120) $ (590) $ (506)
===============================================================================
Plan assets include securities of CIBC having a fair value of $15 million at
October 31, 2002 (2001: $15 million). The significant actuarial assumptions
adopted in measuring CIBC's accrued benefit obligation are as follows:
[Enlarge/Download Table]
Pension Other
benefit plans benefit plans
------------------------------------------------------------
For the years
ended October 31 2002(1) 2001 2000 2002(1) 2001
------------------------------------------------------------------------------------------------
Discount rate 6.7% 6.75% 7.5% 6.4% 6.75%
Expected long-term
rate of return on
plan assets 7.5% 7.5% 7.5% 7.0% 7.5%
Rate of compensation
increase 3.7% 4.0% 4.5% 3.4% 4.0%
================================================================================================
(1) Weighted-average assumptions of CIBC and subsidiary plans.
--------------------------------------------------------------------------------
97
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A 9.2% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2002 (2001: 9%). The rate was assumed to decrease
gradually to 4.5% for 2009 and remain at that level thereafter. The effect of a
1% increase each year in the assumed health care cost trend rate would be to
increase the post-retirement benefit expense by $10 million (2001: $7 million;
2000: $7 million) and the accumulated post-retirement benefit obligation by $80
million (2001: $60 million; 2000: $46 million).
CIBC's net benefit plan expense is reported as employee compensation and
benefits in the consolidated statements of income as follows:
[Enlarge/Download Table]
Pension Other
benefit plans benefit plans
-----------------------------------------------------------
$ millions, as at or for the years ended October 31 2002 2001 2000 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Current service cost $ 80 $ 66 $ 54 $ 53 $ 37
Interest cost 167 148 145 39 36
Expected return on plan assets (199) (191) (168) (8) (8)
Amortization of past service costs 2 1 9 -- --
Amortization of net actuarial (gains) losses 2 -- (12) 5 --
Amortization of transitional asset (2) -- -- -- --
Curtailment (gains) losses 2 (5) 2 -- --
Change in valuation allowance (8) -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Net benefit plan expense $ 44 $ 19 $ 30 $ 89 $ 65
=======================================================================================================================
The expense for CIBC's defined contribution pension plans totalled $25 million
(2001: $26 million; 2000: $23 million). Additionally, the expense for government
pension plans (CPP/QPP/FICA) totalled $87 million (2001: $78 million; 2000: $66
million).
--------------------------------------------------------------------------------
16. RESTRUCTURING
During the year, CIBC recorded a restructuring charge of $508 million relating
to the closing of its U.S. electronic banking business and restructuring
initiatives in other businesses. These initiatives are expected to result in the
elimination of approximately 2,700 positions.
The pre-tax charge of $366 million relating to the closing of electronic
banking business in the U.S. consists of contract termination costs, termination
benefits and other related charges, including the write-down of assets. The
initiative, subject to regulatory approval, is expected to be substantially
complete by the end of the first quarter of 2003. Activities include transfer of
customer accounts to other financial institutions and discontinuation of product
offerings.
In addition, CIBC recorded other restructuring charges of $142 million
substantially relating to the elimination of approximately 1,400 positions.
CIBC World Markets has reduced staff levels, primarily in the U.S., as a
result of the continued low level of business activity in capital markets and
investment banking. In addition, selective reductions will be made in Asian,
European and commercial banking businesses.
CIBC Retail Markets will reduce staff levels, reconfigure its branch
network and close bizSmart.
Operations and systems development support for CIBC World Markets, CIBC
Wealth Management and CIBC Retail Markets businesses will be rationalized to
align their cost structures with current market conditions.
In 2001, a pre-tax restructuring charge of $207 million was taken as CIBC
initiated an organization-wide cost-reduction program in response to changing
economic conditions.
Significant actions taken under this restructuring program included
consolidation of branches, rationalization of business support functions,
realignment of the work force, reorganization of certain operations, and
termination of certain leases and were substantially completed in 2002.
Approximately 1,600 positions were eliminated in 2002.
Higher-than-expected termination costs were partially offset by unanticipated
levels of attrition and redeployment. As a result, CIBC revised its estimate for
restructuring with a net $6 million increase in the original provision.
The components of the charges and movements in the associated provision
are as follows:
--------------------------------------------------------------------------------
RESTRUCTURING PROVISION
[Enlarge/Download Table]
2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
Contract
Termination termination Termination
$ millions, as at or for the years ended October 31 benefits costs Other Total benefits Other Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 186 $ -- $ 26 $ 212 $ 86 $ 9 $ 95
Restructuring charge 140 185 183 508 181 26 207
Change in estimate 6 -- -- 6 -- -- --
Cash payments (138) -- (1) (139) (81) (5) (86)
Non-cash items -- -- (135) (135) -- (4) (4)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 194 $ 185 $ 73 $ 452 $ 186 $ 26 $ 212
===================================================================================================================================
--------------------------------------------------------------------------------
98
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
17. EVENTS OF SEPTEMBER 11, 2001
CIBC's New York operations located at One World Financial Center (WFC), in close
proximity to the World Trade Center, were directly affected by the events of
September 11, 2001. These events caused the temporary relocation of employees
from WFC to CIBC's other major premises in midtown Manhattan, as well as to
temporary locations in the vicinity.
For the year ended October 31, 2002, CIBC recorded expenses related to the
events of September 11, 2001 of $32 million (2001: $7 million), net of insurance
recoveries. CIBC has received payments on account of insurance claims of $90
million in 2002 (2001: $9 million). Although CIBC is still in discussions with
its insurance carrier as to the ultimate settlement amount, CIBC has recorded
insurance recoveries for amounts for which it considers recovery is probable. In
addition, no insurance recovery amounts are recorded under the business
interruption insurance claim as negotiations are still continuing. Management is
still in the process of evaluating various scenarios concerning the premises in
New York. The full financial impact of these decisions, including related
insurance recoveries, was not determinable at the time of preparation of these
consolidated financial statements.
Expenses related to the events of September 11, 2001 include costs related
to the write-off of damaged assets; lease termination costs; and other direct
and incremental costs including employee relocation, which required
reconfiguring alternative office facilities, technology and telecommunications,
and providing transportation.
Details of the net loss relating to events of September 11, 2001 are as
follows:
[Download Table]
$ millions, for the years ended October 31 2002 2001
-------------------------------------------------------------------------------
Non-interest income
Insurance proceeds on fixed assets $ 59 $ --
-------------------------------------------------------------------------------
Non-interest expenses
Assets written off 44 --
Lease termination costs at WFC 11 --
Other direct and incremental expenses 92 18
Less: insurance recoveries on expenditures (56) (11)
-------------------------------------------------------------------------------
91 7
-------------------------------------------------------------------------------
Net loss relating to events of September 11, 2001 $(32) $ (7)
===============================================================================
--------------------------------------------------------------------------------
18. INCOME TAXES
The components of income tax expense reported in the consolidated statements of
income consist of the following:
--------------------------------------------------------------------------------
COMPONENTS OF INCOME TAX EXPENSE
[Download Table]
$ millions, for the years ended October 31 2002 2001 2000
--------------------------------------------------------------------------------
Current income taxes
Federal $ 631 $ 587 $ 510
Provincial 237 237 194
Foreign (6) (192) 204
-------------------------------------------------------------------------------
862 632 908
-------------------------------------------------------------------------------
Future income taxes
Federal (66) (86) (162)
Provincial (31) (26) (59)
Foreign(1) (1,044) (428) (46)
-------------------------------------------------------------------------------
(1,141) (540) (267)
-------------------------------------------------------------------------------
$ (279) $ 92 $ 641
===============================================================================
(1) 2002 includes the recognition of a previously unrecorded future tax asset
of $52 million in respect of certain U.K. tax losses.
Income taxes are reported in the consolidated financial statements as follows:
--------------------------------------------------------------------------------
TOTAL INCOME TAXES
[Download Table]
$ millions, for the years ended October 31 2002 2001 2000
-------------------------------------------------------------------------------
Consolidated statements of income
Income taxes $(279) $ 92 $ 641
Consolidated statements of changes
in shareholders' equity
Foreign currency translation
adjustment 107 (323) (179)
Accounting policy changes(1) (30) (97) --
Other (4) -- --
-------------------------------------------------------------------------------
$(206) $(328) $ 462
===============================================================================
(1) Represents the effect of implementing the CICA handbook section 3870,
"Stock-Based Compensation and Other Stock-Based Payments" in 2002, and
section 3461, "Employee Future Benefits" in 2001.
Future income tax balances are included in other assets (Note 8) and result from
temporary differences between the tax basis of assets and liabilities and their
carrying amounts on the balance sheet.
--------------------------------------------------------------------------------
99
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The combined Canadian federal and provincial income tax rate varies each
year according to changes in the statutory rates imposed by each of these
jurisdictions and according to changes in the proportion of CIBC's business
carried on in each province. CIBC is also subject to Canadian taxation on income
of foreign branches. Earnings of foreign subsidiaries would generally only be
subject to Canadian tax when distributed to Canada. Additional Canadian taxes
that would be payable if all foreign subsidiaries' retained earnings were
distributed to the Canadian parent are estimated at $92 million as at October
31, 2002 (2001: $84 million; 2000: $90 million).
The effective rates of income tax in the consolidated statements of income
are different from the combined Canadian federal and provincial income tax rate
of 38.7% (2001: 41.6%; 2000: 42.9%) as set out below:
--------------------------------------------------------------------------------
RECONCILIATION OF INCOME TAXES
[Download Table]
$ millions, for the years ended October 31 2002 2001 2000
--------------------------------------------------------------------------------
Combined Canadian federal and
provincial income tax rate applied
to income before income taxes $ 160 $ 764 $ 1,184
Income taxes adjusted for the effect of:
Earnings of foreign subsidiaries (396) (654) (504)
Tax-exempt income and gains (68) (81) (122)
Federal large corporations tax 10 14 14
Temporary tax on capital -- -- 8
Earnings of domestic subsidiaries (1) 20 39
Future tax rate reductions 30 90 --
Other (14) (61) 22
--------------------------------------------------------------------------------
Income taxes in the consolidated
statements of income $ (279) $ 92 $ 641
===============================================================================
During 2001, various proposed federal and provincial income tax rate decreases
were passed into law, resulting in phased-in income tax reductions over a three-
to four-year period. In 2002, CIBC recognized a $30 million charge (2001: $90
million) to income tax expense, thereby reducing its future income tax asset in
recognition of the fact that temporary differences will reverse when the rates
are lower.
--------------------------------------------------------------------------------
SOURCES OF FUTURE INCOME TAX BALANCES
[Download Table]
$ millions, as at October 31 2002 2001(1) 2000(1)
--------------------------------------------------------------------------------
Future income tax liability
Lease receivables $ 939 $ 789 $ 816
Buildings and equipment -- -- 43
Pension and employee benefits -- -- 88
Undistributed earnings of
foreign subsidiaries 91 73 320
Unrealized foreign currency
translation gains 122 166 115
Goodwill 33 32 5
Other 16 102 98
-----------------------------------------------------------------------------
1,201 1,162 1,485
-----------------------------------------------------------------------------
Future income tax asset
Allowance for credit losses 1,006 901 757
Buildings and equipment 56 20 --
Pension and employee benefits 35 12 --
Unearned income 144 113 104
Investment revaluations 532 260 262
Tax loss carryforwards 547 20 5
Provisions 499 261 228
Deferred charges 107 137 123
Other 57 19 4
-----------------------------------------------------------------------------
2,983 1,743 1,483
-----------------------------------------------------------------------------
Future income tax (asset) liability $(1,782) $ (581) $ 2
=============================================================================
(1) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
CIBC has not provided for a valuation allowance related to future income tax
assets. Included in the above tax loss carryforwards amount is $447 million
relating to losses in the U.S. operations in 2002 which expire in 20 years. In
addition, as other future income tax assets naturally reverse into tax losses in
the U.S., CIBC will have 20 years from the date such temporary differences
become tax losses, to utilize them before they would begin to expire under
current tax law. CIBC believes that, based on all available evidence, it is more
likely than not that all of the future tax assets will be realized prior to
their expiration. In this regard, CIBC has initiated various expense management
initiatives, refocused its business activities and committed to provide
additional capital which will generate additional income.
--------------------------------------------------------------------------------
100
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
19. EARNINGS PER SHARE
As explained in Note 1, CIBC adopted the requirements of the CICA handbook
section 3500, "Earnings Per Share," in 2002.
The requirements of section 3500 were adopted retroactively and basic and
diluted EPS for prior years were changed. As a result, CIBC's basic EPS was
decreased by $0.01 and $0.02 for the years ended October 31, 2001 and 2000,
respectively, and CIBC's diluted EPS was increased by $0.06 for the years ended
October 31, 2001 and 2000.
The following is a reconciliation of net income and share data used in the
basic and diluted EPS computations for the years ended October 31:
[Enlarge/Download Table]
$ millions, except per share amounts, for the years ended October 31 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Basic EPS
Net income $ 653 $ 1,686 $ 2,060
Preferred share dividends and premiums (165) (127) (133)
-----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common shares $ 488 $ 1,559 $ 1,927
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (thousands) 360,553 372,305 388,951
-----------------------------------------------------------------------------------------------------------------------------------
Per share $ 1.37 $ 4.19 $ 4.95
===================================================================================================================================
Diluted EPS(1)
Net income applicable to common shares $ 488 $ 1,559 $ 1,927
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding (thousands) 360,553 372,305 388,951
-----------------------------------------------------------------------------------------------------------------------------------
Add: number of incremental shares(2) 2,674 5,502 3,970
-----------------------------------------------------------------------------------------------------------------------------------
Weighted-average diluted common shares outstanding (thousands) 363,227 377,807 392,921
===================================================================================================================================
Per share $ 1.35 $ 4.13 $ 4.90
===================================================================================================================================
(1) The computation of diluted EPS excludes average options outstanding of
3,676,586 with a weighted-average exercise price of $53.32; average
options outstanding of 1,016,875 with a weighted- average exercise price
of $52.57; and average options outstanding of 3,952,396 with a
weighted-average exercise price of $39.66 for the years ended October 31,
2002, 2001 and 2000, respectively, as the options' exercise prices were
greater than the average market price of CIBC's common shares. Also
excluded from the computation are average options outstanding of 590,704
with a weighted-aver- age exercise price of $37.60; average options
outstanding of 764,167 with a weighted-average exercise price of $37.60;
and average options outstanding of 1,141,958 with a weighted-average
exercise price of $35.87 for the years ended October 31, 2002, 2001 and
2000, respectively, as these options are performance based and the vesting
criteria for these options had not been achieved.
(2) The number of incremental shares is determined by computing a weighted
average of the number of incremental shares included in each interim
period.
--------------------------------------------------------------------------------
20. CAPITAL REQUIREMENTS
CIBC's regulatory capital requirements are determined in accordance with
guidelines issued by OSFI. The OSFI guidelines evolve from the framework of
risk-based capital standards developed by the Bank for International Settlements
(BIS).
Total regulatory capital is the sum of Tier 1 and Tier 2 capital less
certain deductions. Tier 1 capital consists of common shares, contributed
surplus, retained earnings, non-cumulative preferred shares and non-controlling
interests in subsidiaries, less goodwill and identified other intangible assets
in excess of 5% of gross Tier 1 capital. Tier 2 capital consists of unamortized
subordinated indebtedness, general allowance for credit losses to a maximum of
0.875% of risk-weighted assets, and non-cumulative preferred shares in excess of
the regulatory maximum permitted for inclusion in Tier 1 capital. The concept of
Tier 3 capital was created under the BIS standards in conjunction with the
introduction of market risk capital requirements in January 1998. Specific
qualifying guidelines with respect to Tier 3 capital have not been issued by
OSFI. No Tier 3 capital has been issued by CIBC.
Risk-weighted assets arising from credit risk are calculated by applying
the weighting factors specified in OSFI guidelines to all balance sheet assets
and off-balance sheet exposures. Risk-weighted assets reflecting market risk in
the trading portfolio are calculated based on CIBC's value-at-risk simulation
models approved by OSFI. Regulatory capital ratios are then determined by
dividing Tier 1 and total regulatory capital by the calculated amount of
risk-weighted assets.
BIS standards require that banks maintain minimum Tier 1 and total capital
ratios of 4% and 8%, respectively. OSFI has established that Canadian
deposit-taking financial institutions should attain Tier 1 and total capital
ratios of at least 7% and 10%, respectively, and that banks not exceed a maximum
leverage ratio (or asset to capital multiple) of 20 times capital, unless
otherwise approved. OSFI has approved a maximum leverage ratio for CIBC of 23
times capital.
CIBC's capital ratios and leverage ratio are as follows:
--------------------------------------------------------------------------------
CAPITAL AND LEVERAGE RATIOS
[Download Table]
$ millions, as at October 31 2002 2001
--------------------------------------------------------------------------------
Tier 1 capital $ 11,037 $ 11,749
Total regulatory capital $ 14,296 $ 15,600
Tier 1 capital ratio 8.7% 9.0%
Total capital ratio 11.3% 12.0%
Leverage ratio 18.3x 17.7x
===============================================================================
--------------------------------------------------------------------------------
21. RELATED-PARTY TRANSACTIONS
In the ordinary course of business, CIBC provides normal banking services to
affiliated companies on terms similar to those offered to non-related parties.
Loans, at varied rates and terms, are made to directors, officers and
employees.
--------------------------------------------------------------------------------
AMOUNTS OUTSTANDING FROM DIRECTORS, OFFICERS AND EMPLOYEES
[Download Table]
$ millions, as at October 31 2002 2001
--------------------------------------------------------------------------------
Mortgage loans $1,144 $ 604
Personal loans 1,044 672
--------------------------------------------------------------------------------
$2,188 $1,276
================================================================================
--------------------------------------------------------------------------------
101
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The tables below present the fair value of both on- and off-balance sheet
financial instruments of CIBC, based on the valuation approach set out below.
Fair value represents management's estimate of the amount of cash value at
which a financial instrument could be exchanged in an arm's length transaction
between willing parties under no compulsion to act, carried out in the normal
course of business. Fair value is best evidenced by a quoted market price, if
one exists.
Quoted market prices are not available for a significant portion of CIBC's
balance sheet because of the lack of traded markets for certain instruments and
also, where such markets do exist, they are not currently considered
sufficiently liquid to be used as a basis for valuation. Where quoted markets
exist and are considered sufficiently liquid to be used as a basis for fair
value, these quoted prices are used to calculate fair value. Fair values for
CIBC's trading portfolios are adjusted for bid-offer considerations, including
consideration of concentration exposure where appropriate.
In those instances where traded markets do not exist or are not
sufficiently liquid, CIBC's measure of fair value is estimated, using a variety
of valuation techniques and models. The results of these valuation techniques
and models may vary from the ultimate net realizable value, even if market
conditions were to remain unchanged. CIBC has an ongoing process of enhancing
its valuation techniques and models. CIBC's techniques and models take into
account the effect of changes in market rates, including market interest rates
and credit quality, where CIBC is exposed to the credit risk of an issuer,
borrower or counterparty.
Both book and fair values of loans and loan commitments are affected by
credit quality. In this regard, CIBC relies on its allowance for credit
processes to simultaneously write down (but never up) both the book value and
fair value of loans and to account for reductions in credit quality in loan
commitments and other credit-related arrangements on which CIBC has credit
exposure. This applies to impaired assets and assets not yet specifically
identified as impaired through specific and general allowances, respectively.
The specific allowance for credit losses is designed to write down the book
value of impaired loans to the recoverable amounts and to account for any
impairment on loan commitments and other credit-related arrangements.
Recoverable amounts take into account the credit protection available to CIBC
under guarantees, including protection purchased through credit derivatives. The
general allowance for credit losses is similarly designed to write down the book
value of loans to reflect losses inherent in the portfolio of loans (and
commitments and other credit-related arrangements) that are not yet specifically
identified as impaired. The recoverable amounts thus calculated and used for
book value purposes already include the effect of credit quality in CIBC's
measure of fair value and therefore no further adjustments are made. Both the
book and fair values disclosed are net of all general and specific allowances
for credit losses. The policy followed in setting allowances for credit losses
is explained in Note 1.
For changes in fair value due to interest rate risk on financial
instruments where traded markets do not exist, the calculation of fair value for
interest rate products is based on the difference between the original and
current market interest rates for the same type of product using present value
techniques. The actual cash flows based on the original interest rate are
discounted using current market interest rates for the remaining term to the
repricing or maturity date, whichever is earlier. The remaining term used is
generally contractual. For this purpose, there is no adjustment to fair values
for variable rate instruments. CIBC does not make additional adjustments to fair
value for bid-offer considerations for its non-trading portfolios fair values.
Due to the judgment used in applying a wide variety of acceptable
valuation techniques and models, as well as the use of estimates that are
inherent in this process, estimates of fair values of the same or similar assets
may differ among financial institutions. The calculation of fair values is based
on market conditions at October 31, 2002 and may not be reflective of future
fair values.
The fair values disclosed below exclude the values of assets that are not
financial instruments. Excluded from this table are assets, such as land,
buildings and equipment, as well as goodwill and other intangible assets,
including customer relationships, which in management's opinion add significant
value to CIBC.
--------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
[Enlarge/Download Table]
2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
Fair value Fair value
over (under) over (under)
$ millions, as at October 31 Book value Fair value book value Book value Fair value book value
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash resources $ 9,512 $ 9,512 $ -- $ 11,350 $ 11,350 $ --
Securities 65,292 65,963 671 74,794 75,507 713
Loans 153,089 154,252 1,163 155,640 156,963 1,323
Customers' liability under acceptances 6,848 6,848 -- 8,100 8,100 --
Other assets 5,819 5,819 -- 4,954 4,954 --
===================================================================================================================================
Liabilities
Deposits $ 196,630 $ 197,449 $ 819 $ 194,352 $ 196,051 $ 1,699
Acceptances 6,878 6,878 -- 8,100 8,100 --
Obligations related to securities sold short 8,436 8,436 -- 11,213 11,213 --
Obligations related to securities lent or sold
under repurchase agreements 9,615 9,615 -- 21,403 21,403 --
Other liabilities 7,483 7,483 -- 6,898 6,898 --
Subordinated indebtedness 3,627 3,904 277 3,999 4,354 355
===================================================================================================================================
Derivative financial instruments
Net assets
(liabilities) - held for trading $ (77) $ (77) $ -- $ (672) $ (672) $ --
- held for asset-liability
management $ (87) $ (540) $ (453) $ 478 $ 942 $ 464
===================================================================================================================================
--------------------------------------------------------------------------------
102
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS(1)
[Enlarge/Download Table]
2002 Fair value 2001 Fair value
-----------------------------------------------------------------------------------------------------------------------------------
$ millions, as at October 31 Positive Negative Net Positive Negative Net
-----------------------------------------------------------------------------------------------------------------------------------
Held for trading purposes
Interest rate products
Forward rate agreements $ 38 $ 13 $ 25 $ 50 $ 43 $ 7
Swap contracts 16,662 15,186 1,476 15,794 14,206 1,588
Purchased options 1,028 -- 1,028 1,160 -- 1,160
Written options -- 1,289 (1,289) -- 1,357 (1,357)
----------------------------------------------------------------------------------------------------------------------------------
Total interest rate products 17,728 16,488 1,240 17,004 15,606 1,398
----------------------------------------------------------------------------------------------------------------------------------
Foreign exchange products
Forward contracts 1,080 878 202 1,674 1,474 200
Swap contracts 2,948 2,928 20 3,298 3,435 (137)
Purchased options 168 -- 168 369 -- 369
Written options -- 181 (181) -- 287 (287)
----------------------------------------------------------------------------------------------------------------------------------
Total foreign exchange products 4,196 3,987 209 5,341 5,196 145
----------------------------------------------------------------------------------------------------------------------------------
Credit derivatives(2)
Swap contracts 49 5 44 35 50 (15)
Purchased options 28 -- 28 79 -- 79
Written options -- 66 (66) -- 47 (47)
----------------------------------------------------------------------------------------------------------------------------------
Total credit derivatives 77 71 6 114 97 17
----------------------------------------------------------------------------------------------------------------------------------
Equities(2)(3) 1,737 3,268 (1,531) 1,625 3,328 (1,703)
----------------------------------------------------------------------------------------------------------------------------------
Other(2)(4) 979 980 (1) 1,639 2,168 (529)
----------------------------------------------------------------------------------------------------------------------------------
Total held for trading 24,717 24,794 (77) 25,723 26,395 (672)
----------------------------------------------------------------------------------------------------------------------------------
Held for asset-liability management purposes
Interest rate products
Swap contracts 1,869 2,363 (494) 2,122 2,105 17
Purchased options 9 -- 9 2 -- 2
Written options -- 1 (1) -- 65 (65)
----------------------------------------------------------------------------------------------------------------------------------
Total interest rate products 1,878 2,364 (486) 2,124 2,170 (46)
----------------------------------------------------------------------------------------------------------------------------------
Foreign exchange products
Forward contracts 152 228 (76) 49 236 (187)
Swap contracts 109 298 (189) 418 105 313
Purchased options 1 -- 1 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Total foreign exchange products 262 526 (264) 467 341 126
----------------------------------------------------------------------------------------------------------------------------------
Credit derivatives(2)
Swap contracts -- 1 (1) -- -- --
Purchased options 200 -- 200 -- -- --
Written options(5) -- 42 (42) -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Total credit derivatives 200 43 157 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Equities(2)(3) 67 14 53 863 1 862
----------------------------------------------------------------------------------------------------------------------------------
Total held for asset-liability management
purposes 2,407 2,947 (540) 3,454 2,512 942
----------------------------------------------------------------------------------------------------------------------------------
Total fair value 27,124 27,741 (617) 29,177 28,907 270
Less: impact of master netting agreements (18,932) (18,932) -- (20,014) (20,014) --
----------------------------------------------------------------------------------------------------------------------------------
$ 8,192 $ 8,809 $ (617) $ 9,163 $ 8,893 $ 270
==================================================================================================================================
Average fair value of derivatives held for
trading purposes(6)
Interest rate products $ 14,173 $ 13,217 $ 956 $ 10,307 $ 9,469 $ 838
Foreign exchange products 4,876 4,506 370 6,980 7,269 (289)
Credit derivatives(2) 97 78 19 184 106 78
Equities(2) 1,994 3,076 (1,082) 2,190 2,686 (496)
Other(2) 953 1,518 (565) 2,136 2,572 (436)
----------------------------------------------------------------------------------------------------------------------------------
$ 22,093 $ 22,395 $ (302) $ 21,797 $ 22,102 $ (305)
==================================================================================================================================
(1) As at October 31, 2002, deferred losses associated with derivative
instruments used to hedge anticipated asset-liability management
transactions (including firm commitments) were $7 million (2001: $23
million).
(2) Reclassified from other in 2002.
(3) Includes swaps and options.
(4) Includes commodity forwards, swaps and options.
(5) Reported as financial guarantees in Note 24.
(6) Average fair values represent monthly averages.
Methods and assumptions: on-balance sheet financial instruments
Financial instruments with fair value equal to book value
Due to their short-term maturity, and where CIBC considers any difference
between fair value and book value to be insignificant, the fair values of
certain on-balance sheet financial instruments are assumed to equal their book
values. These categories include cash resources, customers' liability under
acceptances, other assets, acceptances, obligations related to securities sold
short, obligations related to securities sold under repurchase agreements and
other liabilities.
--------------------------------------------------------------------------------
103
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS(1)
2002 Fair value 2001 Fair value
-------------------------------------------------------------------------------------------------------------------
$ millions, as at October 31 Positive Negative Net Positive Negative Net
-------------------------------------------------------------------------------------------------------------------
Held for trading purposes
Interest rate products
Forward rate agreements $ 38 $ 13 $ 25 $ 50 $ 43 $ 7
Swap contracts 16,662 15,186 1,476 15,794 14,206 1,588
Purchased options 1,028 -- 1,028 1,160 -- 1,160
Written options -- 1,289 (1,289) -- 1,357 (1,357)
-------------------------------------------------------------------------------------------------------------------
Total interest rate products 17,728 16,488 1,240 17,004 15,606 1,398
-------------------------------------------------------------------------------------------------------------------
Foreign exchange products
Forward contracts 1,080 878 202 1,674 1,474 200
Swap contracts 2,948 2,928 20 3,298 3,435 (137)
Purchased options 168 -- 168 369 -- 369
Written options -- 181 (181) -- 287 (287)
-------------------------------------------------------------------------------------------------------------------
Total foreign exchange products 4,196 3,987 209 5,341 5,196 145
-------------------------------------------------------------------------------------------------------------------
Credit derivatives(2)
Swap contracts 49 5 44 35 50 (15)
Purchased options 28 -- 28 79 -- 79
Written options -- 66 (66) -- 47 (47)
-------------------------------------------------------------------------------------------------------------------
Total credit derivatives 77 71 6 114 97 17
-------------------------------------------------------------------------------------------------------------------
Equities(2)(3) 1,737 3,268 (1,531) 1,625 3,328 (1,703)
-------------------------------------------------------------------------------------------------------------------
Other(2)(4) 979 980 (1) 1,639 2,168 (529)
-------------------------------------------------------------------------------------------------------------------
Total held for trading 24,717 24,794 (77) 25,723 26,395 (672)
-------------------------------------------------------------------------------------------------------------------
Held for asset-liability management purposes
Interest rate products
Swap contracts 1,869 2,363 (494) 2,122 2,105 17
Purchased options 9 -- 9 2 -- 2
Written options -- 1 (1) -- 65 (65)
-------------------------------------------------------------------------------------------------------------------
Total interest rate products 1,878 2,364 (486) 2,124 2,170 (46)
-------------------------------------------------------------------------------------------------------------------
Foreign exchange products
Forward contracts 152 228 (76) 49 236 (187)
Swap contracts 109 298 (189) 418 105 313
Purchased options 1 -- 1 -- -- --
-------------------------------------------------------------------------------------------------------------------
Total foreign exchange products 262 526 (264) 467 341 126
-------------------------------------------------------------------------------------------------------------------
Credit derivatives(2)
Swap contracts -- 1 (1) -- -- --
Purchased options 200 -- 200 -- -- --
Written options(5) -- 42 (42) -- -- --
-------------------------------------------------------------------------------------------------------------------
Total credit derivatives 200 43 157 -- -- --
-------------------------------------------------------------------------------------------------------------------
Equities(2)(3) 67 14 53 863 1 862
-------------------------------------------------------------------------------------------------------------------
Total held for asset-liability management 2,407 2,947 (540) 3,454 2,512 942
Total fair value 27,124 27,741 (617) 29,177 28,907 270
-------------------------------------------------------------------------------------------------------------------
Less: impact of master netting agreements (18,932) (18,932) -- (20,014) (20,014) --
-------------------------------------------------------------------------------------------------------------------
$ 8,192 $ 8,809 $ (617) $ 9,163 $ 8,893 $ 270
===================================================================================================================
Average fair value of derivatives held for
trading purposes(6)
Interest rate products $ 14,173 $ 13,217 $ 956 $ 10,307 $ 9,469 $ 838
Foreign exchange products 4,876 4,506 370 6,980 7,269 (289)
Credit derivatives(2) 97 78 19 184 106 78
Equities(2) 1,994 3,076 (1,082) 2,190 2,686 (496)
Other(2) 953 1,518 (565) 2,136 2,572 (436)
-------------------------------------------------------------------------------------------------------------------
$ 22,093 $ 22,395 $ (302) $ 21,797 $ 22,102 $ (305)
===================================================================================================================
(1) As at October 31, 2002, deferred losses associated with derivative
instruments used to hedge anticipated asset-liability management
transactions (including firm commitments) were $7 million (2001: $23
million).
(2) Reclassified from other in 2002.
(3) Includes swaps and options.
(4) Includes commodity forwards, swaps and options.
(5) Reported as financial guarantees in Note 24.
(6) Average fair values represent monthly averages.
Methods and assumptions: on-balance sheet financial instruments
Financial instruments with fair value equal to book value
Due to their short-term maturity, and where CIBC considers any difference
between fair value and book value to be insignificant, the fair values of
certain on-balance sheet financial instruments are assumed to equal their book
values. These categories include cash resources, customers' liability under
acceptances, other assets, acceptances, obligations related to securities sold
short, obligations related to securities sold under repurchase agreements and
other liabilities.
--------------------------------------------------------------------------------
103
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Securities
The fair values of securities are detailed in Note 3 and are based on quoted
market prices where available; otherwise, fair values are estimated using quoted
market prices for similar securities or other third-party evidence as available.
The quoted market price used to value publicly traded equity securities,
held for investment purposes, generally does not take into account any
adjustments for resale restrictions that expire within one year, adjustments for
liquidity or future expenses.
For privately issued securities that have no reasonably liquid market,
CIBC considers the fair value to be equal to book value. The book value of
privately issued securities is adjusted to reflect other-than-temporary declines
in value, including private market transactions that provide evidence of
other-than-temporary impairment. Where private market transactions provide a new
valuation level not incorporated in book values, this new level is used to
determine fair value.
Loans
The fair values for variable-rate loans and those that reprice frequently are
assumed to be equal to their book value. The fair value for fixed-rate loans is
estimated, using a discounted cash flow calculation that uses market interest
rates currently charged for loans with similar terms and credit risks. As noted
above, the book value of loans is adjusted to take account of impaired assets
and assets not yet specifically identified as impaired through the specific and
general allowance categories, respectively. The fair value of loans is reduced
by the fair value of credit derivatives held as credit protection against these
loans. The fair value of these credit derivatives is disclosed separately.
Mortgages
The fair values of variable-rate mortgages are assumed to equal their book
value. The fair values of fixed-rate mortgages are estimated, using a discounted
cash flow calculation that uses market interest rates currently charged for
mortgages with similar remaining terms. The valuation model used for mortgages
takes into account prepayment optionality, as well as consumer behaviour, as
appropriate.
Deposit liabilities
The fair values of floating-rate deposits and demand deposits are assumed to be
equal to their book values. The fair values of fixed-rate deposits are
determined by discounting the contractual cash flows, using market interest
rates currently offered for deposits of similar terms. The fair values for
deposit liabilities with embedded optionality (cashable option) include the
value of those options.
Subordinated debt
The fair values are determined by reference to current market prices for the
same or similar debt instruments.
Methods and assumptions: off-balance sheet financial instruments
Derivative instruments
The fair values of derivatives are based on quoted market prices or dealer
quotes, where available. Otherwise, fair values are estimated on the basis of
pricing models that incorporate current market measures for interest rates,
currency exchange rates, equity prices and indices, credit spreads,
corresponding market volatility levels and other market-based pricing factors.
For trading derivatives, fair value reflects a valuation adjustment for
market, model and credit risks, as well as administrative costs, as appropriate.
Specifically, credit risk adjustments are based on current and potential credit
exposure and take into account both collateral and netting arrangements.
Administrative cost adjustments reflect the expected future costs of processing
by type of deal and term.
Mortgage commitments
The fair value of mortgage commitments is for fixed-rate mortgage commitments
and is based on increases, if any, in market interest rates between the
commitment and funding dates. The valuation model takes into account the
expected probability that the outstanding commitments will be exercised. The
fair value of these commitments is insignificant.
Credit commitments
Other commitments to extend credit are primarily variable rate and consequently,
do not expose CIBC to interest rate risk, although they do expose CIBC to credit
risk. These commitments generally contain provisions, whereby drawn credit
commitments are priced based on the credit quality of the obligor at the date
funds are drawn. As noted above, the credit exposure on loan commitments is
included in CIBC's assessment of its specific and general allowances and hence,
no further adjustments are made.
23. DERIVATIVE FINANCIAL INSTRUMENTS
As explained in Note 1, in the normal course of business, CIBC utilizes various
derivative instruments, which will limit or give rise to varying degrees and
types of risk.
Derivative products used by CIBC
The majority of CIBC's derivative contracts are over-the-counter transactions
that are privately negotiated between CIBC and a counterparty to the contract.
The remainder, are transacted through organized and regulated exchanges and
consist primarily of options and futures.
Interest rate derivatives
Forward rate agreements are over-the-counter contracts that effectively fix a
future interest rate for a period of time. The agreement provides that at a
predetermined future date, a cash settlement will be made between the
counterparties based upon the difference between the contracted rate and a
future market rate calculated on a specified notional principal amount. No
exchange of principal amount takes place.
Interest rate futures are standardized contracts transacted on an
exchange. They are based upon an agreement to buy or sell a specified quantity
of a financial instrument on a specified future date, at a contracted price.
These contracts differ from forward contracts in that they are in standard
amounts with standard settlement dates and are transacted on an exchange.
Interest rate swaps are over-the-counter contracts in which two
counter-parties agree to exchange interest cash flows over a period of time
based on rates applied to a specified notional principal amount. A typical
interest rate
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
swap would require one counterparty to pay a fixed market interest rate in
exchange for a variable market interest rate determined from time to time with
both sets of cash flows calculated on the same notional principal. No exchange
of principal amount takes place.
Interest rate options are contracts in which one party (the purchaser of
an option) acquires from another party (the writer of an option) in exchange for
a premium, the right, but not the obligation, either to buy or sell, on a
specified future date or within a specified time, a specified financial
instrument at a contracted price. The underlying financial instrument will have
a market price that is sensitive to changes in interest rates. In managing its
interest rate exposure, CIBC acts both as a writer and purchaser of these
options. Options are transacted both over-the-counter and through exchanges.
Foreign exchange derivatives
Foreign exchange forwards are contracts in which one counterparty contracts with
another to exchange a specified amount of one currency for a specified amount of
a second currency, at a future date or range of dates.
Foreign exchange futures contracts are similar in mechanics to forward
contracts but differ in that they are in standard amounts with standard
settlement dates and are transacted on an exchange.
Swap contracts comprise foreign exchange swaps and cross currency interest
rate swaps. Foreign exchange swaps are transactions in which a foreign currency
is simultaneously purchased in the spot market and sold in the forward market,
or vice-versa. Cross currency interest rate swaps are transactions in which
counterparties exchange principal and interest flows in different currencies
over a period of time. These contracts are used to manage both currency and
interest rate exposures.
Credit derivatives
Credit derivatives are over-the-counter contracts designed to transfer the
credit risk in an underlying financial instrument (usually termed a reference
asset) from one counterparty to another. The most common credit derivatives are
credit default swaps (referred to as option contracts) and total return swaps
(referred to as swap contracts). In option contracts, an option purchaser
acquires credit protection on a reference asset or group of assets from an
option writer in exchange for a premium. The credit protection compensates the
option purchaser for any deterioration in value of the reference asset upon the
occurrence of certain credit events such as bankruptcy or failure to pay.
Settlement may be cash based or physical in requiring the delivery of the
reference asset to the option writer. In swap contracts, one counterparty agrees
to pay or receive from the other cash amounts based on changes in the value of a
reference asset or group of assets.
Equity derivatives
Equity index futures are standardized contracts transacted on an exchange. They
are based on an agreement to pay or receive a cash amount based on the
difference between the contracted price level of an underlying stock index and
its corresponding market price level at a specified future date. There is no
actual delivery of stocks that comprise the underlying index. These contracts
are in standard amounts with standard settlement dates.
Equity swaps are over-the-counter contracts in which one counterparty
agrees to pay or receive from the other cash amounts based on changes in the
value of a stock index, a basket of stocks or a single stock.
Equity options give the purchaser of the option, for a premium, the right
but not the obligation to buy from or sell to the writer of an option, an
underlying equity index, basket of stocks or single stock at a contracted price.
Other derivative products
CIBC also transacts in other derivative products including commodity derivatives
such as precious metal and energy-related products in both over-the-counter and
exchange markets.
Notional amounts
The table below presents the notional amounts of derivative instruments.
The notional amounts are not recorded as assets or liabilities on the
consolidated balance sheets as they represent the face amount of the contract to
which a rate or price is applied to determine the amount of cash flows to be
exchanged. Notional amounts represent the volume of outstanding transactions and
do not represent the potential gain or loss associated with market risk or
credit risk of such instruments. As at October 31, 2002, the notional amounts of
derivatives held for trading purposes were $1,141 billion (2001: $1,115
billion), or 87% of total notional amounts (2001: 88%). The notional amounts of
derivatives held for asset-liability management were $173 billion (2001: $154
billion), or 13% of total notional amounts (2001: 12%).
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
NOTIONAL AMOUNTS
Residual term to contractual maturity Analysed by use
-------------------------------------- ---------------------------------------------
2002 Total
Under 3 to 12 1 to Over notional 2002 2001
$ millions, as at October 31 3 months months 5 years 5 years amounts Trading ALM(1) Trading ALM(1)
----------------------------------------------------------------------------------------------------------------------------------
Interest rate products
Over-the-counter
Forward rate agreements $ 25,735 $ 12,137 $ 2,548 $ -- $ 40,420 $ 40,420 $ -- $ 36,528 $ --
Swap contracts 87,827 136,272 308,814 161,367 694,280 574,514 119,766 530,856 116,120
Purchased options 6,779 8,568 20,545 6,552 42,444 40,868 1,576 42,889 4,854
Written options 4,796 11,198 23,292 7,060 46,346 46,315 31 53,772 --
---------------------------------------------------------------------------------------------------------------------------------
125,137 168,175 355,199 174,979 823,490 702,117 121,373 664,045 120,974
---------------------------------------------------------------------------------------------------------------------------------
Exchange traded
Futures contracts 26,179 64,693 17,515 130 108,517 101,540 6,977 117,326 6,565
Purchased options 2,504 3,675 2,961 -- 9,140 9,140 -- 7,719 --
Written options 3,291 6,452 4,828 -- 14,571 14,571 -- 8,686 --
---------------------------------------------------------------------------------------------------------------------------------
31,974 74,820 25,304 130 132,228 125,251 6,977 133,731 6,565
---------------------------------------------------------------------------------------------------------------------------------
Total interest rate products 157,111 242,995 380,503 175,109 955,718 827,368 128,350 797,776 127,539
---------------------------------------------------------------------------------------------------------------------------------
Foreign exchange products
Over-the-counter
Forward contracts 92,084 34,946 6,789 45 133,864 105,184 28,680 111,050 9,693
Swap contracts 3,318 10,373 27,864 25,634 67,189 58,121 9,068 57,697 12,704
Purchased options 2,349 2,740 2,277 197 7,563 7,095 468 9,879 554
Written options 2,034 2,704 1,638 319 6,695 6,695 -- 10,115 --
---------------------------------------------------------------------------------------------------------------------------------
99,785 50,763 38,568 26,195 215,311 177,095 38,216 188,741 22,951
---------------------------------------------------------------------------------------------------------------------------------
Exchange traded
Futures contracts 76 -- -- -- 76 76 -- 251 --
---------------------------------------------------------------------------------------------------------------------------------
Total foreign exchange products 99,861 50,763 38,568 26,195 215,387 177,171 38,216 188,992 22,951
---------------------------------------------------------------------------------------------------------------------------------
Credit derivatives(2)
Over-the-counter
Swap contracts 94 131 1,439 127 1,791 1,791 -- 1,269 --
Purchased options 5,992 1,849 11,599 2,283 21,723 18,370 3,353 24,783 127
Written options(3) 15,191 1,577 16,751 639 34,158 33,961 197 25,485 32
---------------------------------------------------------------------------------------------------------------------------------
Total credit derivatives 21,277 3,557 29,789 3,049 57,672 54,122 3,550 51,537 159
---------------------------------------------------------------------------------------------------------------------------------
Equities(2)(4)
Over-the-counter 9,610 13,275 20,631 3,971 47,487 46,384 1,103 34,417 3,727
Exchange traded 13,599 3,952 1,488 -- 19,039 17,730 1,309 21,467 --
---------------------------------------------------------------------------------------------------------------------------------
Total equities 23,209 17,227 22,119 3,971 66,526 64,114 2,412 55,884 3,727
---------------------------------------------------------------------------------------------------------------------------------
Other(2)(5)
Over-the-counter 2,719 3,962 7,957 3,026 17,664 17,664 -- 19,956 --
Exchange traded 421 404 218 11 1,054 1,054 -- 728 --
---------------------------------------------------------------------------------------------------------------------------------
Total other 3,140 4,366 8,175 3,037 18,718 18,718 -- 20,684 --
---------------------------------------------------------------------------------------------------------------------------------
$304,598 $318,908 $479,154 $211,361 $1,314,021 $1,141,493 $172,528 $1,114,873 $154,376
=================================================================================================================================
(1) ALM: asset-liability management.
(2) Reclassified from other in 2002.
(3) ALM written options are reported as financial guarantees in Note 24.
(4) Includes futures, swaps and options.
(5) Includes commodity forwards, futures, swaps and options.
Risk
Market risk
Derivative instruments, in the absence of any compensating upfront cash
payments, generally have no market value at inception. They obtain value,
positive or negative, as relevant interest rates, exchange rates, equity,
commodity or credit prices or indices change, such that the previously
contracted derivative transactions have become more or less favourable than what
can be negotiated under current market conditions for contracts with the same
remaining period to expiry. The potential for derivatives to increase or
decrease in value as a result of the foregoing factors is generally referred to
as market risk.
The market risks arising through trading activities are managed in order
to mitigate risk, where appropriate, and with a view to maximize trading
revenue. To further manage risks, CIBC may enter into contracts with other
market makers or may undertake cash market hedges. There is no correlation
between the high notional values of contracts to which CIBC is a party and the
net market and credit risks to which CIBC is exposed.
Credit risk
Credit risk arises from the potential for a counterparty to default on its
contractual obligations and the risk that prevailing market conditions are such
that CIBC would incur a loss in replacing the defaulted transaction. CIBC limits
the credit risk of derivatives traded over-the-counter by dealing with
counterparties that are creditworthy and by actively pursuing risk mitigation
opportunities through the use of multi-product master netting agreements,
collateral and other credit mitigation techniques. Credit risk on exchange
traded futures and options is limited as these transactions are standardized
contracts executed on established exchanges that assume the obligations of
counterparties, and are subject to initial margins and daily settlement of
variation margins.
Written options generally have no credit risk if the counterparty has
already performed in accordance with the terms of the contract through an
upfront payment of the premium. Written options will however have some credit
risk to the extent of any unpaid premiums.
The table below summarizes the credit exposure of CIBC arising from
derivative instruments. The current replacement cost is the estimated
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
cost of replacement of all contracts which have a positive market value,
representing an unrealized gain to CIBC. The replacement cost of an instrument
is dependent upon its terms relative to prevailing market prices, and will
fluctuate as market prices change and as the derivative approaches its scheduled
maturity.
The credit equivalent amount is the sum of the current replacement cost
and the potential credit exposure. The potential credit exposure is an estimate
of the amount that the current replacement cost could increase over the
remaining term of each transaction, based on a formula prescribed by OSFI. OSFI
prescribes a standard measure of counterparty credit risk to be applied to the
credit equivalent amount to arrive at the risk-weighted amount. This is
presently used in determining the regulatory capital requirements for
derivatives.
CIBC negotiates master netting agreements with counterparties with which
it has significant credit risk through derivatives activities. Such agreements
provide for the simultaneous close out and netting of all transactions with a
counterparty in an event of default. An increasing number of these agreements
also provide for the exchange of collateral between parties in the event that
the mark-to-market value of outstanding transactions between the parties exceeds
an agreed threshold. Such agreements are used both to accommodate business with
less creditworthy counterparties, as well as to help contain the build-up of
credit exposure resulting from multiple deals with more active counterparties.
[Enlarge/Download Table]
-------------------------------------------------------------------------------------
CREDIT RISK
2002
-------------------------------------------------------------------------------------
Current replacement cost Credit Risk-
----------------------------- equivalent weighted
$ millions, as at October 31 Trading ALM Total amount amount
-------------------------------------------------------------------------------------
Interest rate products
Forward rate agreements $ 38 $ -- $ 38 $ 51 $ 13
Swap contracts 16,662 1,869 18,531 22,400 6,011
Purchased options 1,028 9 1,037 1,238 345
-------------------------------------------------------------------------------------
17,728 1,878 19,606 23,689 6,369
-------------------------------------------------------------------------------------
Foreign exchange products
Forward contracts 1,080 152 1,232 2,550 804
Swap contracts 2,948 109 3,057 6,510 1,691
Purchased options 168 1 169 348 124
-------------------------------------------------------------------------------------
4,196 262 4,458 9,408 2,619
-------------------------------------------------------------------------------------
Credit derivatives(1) (2)
Swap contracts 49 -- 49 191 92
Purchased options 28 -- 28 1,360 541
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77 -- 77 1,551 633
-------------------------------------------------------------------------------------
Equities(1)(3) 1,737 67 1,804 4,033 1,342
-------------------------------------------------------------------------------------
Other(1)(4) 979 -- 979 2,737 1,246
-------------------------------------------------------------------------------------
24,717 2,207 26,924 41,418 12,209
Less: impact of master netting
agreements (18,932) -- (18,932) (24,402) (6,733)
-------------------------------------------------------------------------------------
$ 5,785 $2,207 $ 7,992 $ 17,016 $ 5,476
=====================================================================================
2001
-------------------------------------------------------------------------------------
Current replacement cost Credit Risk-
---------------------------- equivalent weighted
$ millions, as at October 31 Trading ALM Total amount amount
-------------------------------------------------------------------------------------
Interest rate products
Forward rate agreements $ 50 $ -- $ 50 $ 71 $ 22
Swap contracts 15,794 2,122 17,916 21,562 5,844
Purchased options 1,160 2 1,162 1,383 397
-------------------------------------------------------------------------------------
17,004 2,124 19,128 23,016 6,263
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Foreign exchange products
Forward contracts 1,674 49 1,723 3,086 961
Swap contracts 3,298 418 3,716 7,012 1,867
Purchased options 369 -- 369 598 201
-------------------------------------------------------------------------------------
5,341 467 5,808 10,696 3,029
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Credit derivatives(1) (2)
Swap contracts 35 -- 35 155 77
Purchased options 79 -- 79 1,907 705
-------------------------------------------------------------------------------------
114 -- 114 2,062 782
-------------------------------------------------------------------------------------
Equities(1)(3) 1,625 863 2,488 4,217 1,351
-------------------------------------------------------------------------------------
Other(1)(4) 1,639 -- 1,639 3,571 1,657
-------------------------------------------------------------------------------------
25,723 3,454 29,177 43,562 13,082
Less: impact of master netting
agreements (20,014) -- (20,014) (24,516) (7,010)
-------------------------------------------------------------------------------------
$ 5,709 $3,454 $ 9,163 $ 19,046 $ 6,072
=====================================================================================
(1) Reclassified from other in 2002.
(2) ALM credit derivative purchased options, with a replacement cost of $200
million, are given guarantee treatment for credit risk capital purposes,
and are excluded from the table above.
(3) Includes swaps and options.
(4) Includes commodity forwards, swaps and options.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24. CREDIT-RELATED ARRANGEMENTS
Credit-related arrangements are off-balance sheet instruments and are typically
entered into to meet the financing needs of customers or to facilitate
international trade. CIBC's policy of requiring collateral or other security to
support credit-related arrangements and the types of security held is generally
the same as for loans. The contract amounts shown below for credit-related
arrangements represent the maximum amount of additional credit that CIBC could
be obligated to extend. The contract amounts also represent the credit risk
amounts should the contracts be fully drawn down, the counterparties default and
any collateral held proves to be of no value. As many of these arrangements will
expire or terminate without being drawn upon, the contract amounts are not
necessarily indicative of future cash requirements or credit risk.
[Download Table]
Contract amounts
------------------------
$ millions, as at October 31 2002 2001
--------------------------------------------------------------------------------
Lines of credit(1) $ 97,992 $103,569
Direct credit substitutes:
Financial guarantees(2) 7,345 7,570
Securities lent 17,510 16,283
Transaction-related contingencies 1,696 1,464
Documentary letters of credit 185 217
Other(3) 367 310
--------------------------------------------------------------------------------
$125,095 $129,413
================================================================================
(1) Includes irrevocable lines of credit totalling $76,972 million (2001:
$83,896 million) of which $63,805 million (2001: $64,383 million) will
expire in one year or less, and excludes lines of credit for credit cards
as the lines are short term in nature and are revocable at CIBC's
discretion.
(2) Includes credit derivatives - written options of $197 million (2001: $32
million), which have also been reported as derivatives in Note 23.
(3) Includes forward asset purchases.
Lines of credit are undrawn lending facilities that have been approved by CIBC
to meet the business requirements of customers. The majority of such commitments
are of a general nature with annual review provisions and/or various conditions
for drawdown. The credit risk associated with undrawn lending facilities arises
from the possibility that a commitment may be drawn down as a loan. Therefore, a
lending commitment is subject to the same credit review process as a loan. The
amount of collateral obtained, if deemed necessary by CIBC, is based on
management's credit evaluation of the borrower and may include a charge over
present and future assets of the borrower.
Direct credit substitutes include guarantees or equivalent instruments,
such as standby letters of credit which back financial obligations of the
customer. Also included as direct credit substitutes are securities lent against
collateral. The credit risk associated with direct credit substitutes is
essentially the same as that involved in extending loan commitments to
customers. The amount of collateral obtained, if deemed necessary by CIBC, is
based on management's credit evaluation of the borrower and may include a charge
over present and future assets of the borrower.
Transaction-related contingencies are guarantees, which back particular
performance obligations rather than customers' financial obligations. Examples
of transaction-related contingencies are performance bonds, warranties and
indemnities.
Documentary letters of credit are short-term instruments issued on behalf
of a customer, authorizing a third party, such as an exporter, to draw drafts on
CIBC up to a specified amount, subject to specific terms and conditions. CIBC is
at risk for any drafts drawn that are not ultimately settled by the customer,
however the amounts drawn are collateralized by the related goods.
25. CONCENTRATION OF CREDIT RISK
Concentrations of credit exposure may arise with a group of counterparties which
have similar economic characteristics or that are located in the same geographic
region. The ability of such counterparties to meet contractual obligations would
be similarly affected by changing economic, political or other conditions.
The amounts of foreign and domestic credit exposure associated with CIBC's
on-balance sheet financial instruments are summarized in the table "Geographic
Distribution of Major Assets" in Note 26.
The amounts of credit exposure associated with CIBC's off-balance sheet
financial instruments are summarized in the table below.
[Enlarge/Download Table]
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CREDIT EXPOSURE
2002 2001
----------------------------------------------------------------------------------------------------------------------------------
United Other United Other
$ millions, as at October 31 Canada States countries Total Canada States countries Total
----------------------------------------------------------------------------------------------------------------------------------
Credit-related arrangements(1)
Lines of credit $51,950 $36,998 $ 9,044 $ 97,992 $40,994 $55,563 $ 7,012 $103,569
Other credit-related arrangements 19,937 4,214 2,952 27,103 16,853 6,036 2,955 25,844
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$71,887 $41,212 $11,996 $125,095 $57,847 $61,599 $ 9,967 $129,413
==================================================================================================================================
Derivative instruments(2)(3)
By counterparty type
Financial institutions $ 2,834 $ 9,435 $10,647 $ 22,916 $ 3,738 $ 9,830 $10,771 $ 24,339
Governments 962 10 3 975 1,060 8 5 1,073
Other 1,250 1,160 623 3,033 1,757 1,400 608 3,765
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5,046 10,605 11,273 26,924 6,555 11,238 11,384 29,177
Less: impact of master netting agreements (3,453) (8,090) (7,389) (18,932) (4,157) (8,567) (7,290) (20,014)
----------------------------------------------------------------------------------------------------------------------------------
Total derivative instruments $ 1,593 $ 2,515 $ 3,884 $ 7,992 $ 2,398 $ 2,671 $ 4,094 $ 9,163
==================================================================================================================================
(1) Credit-related arrangements are allocated based on the location in which
they are recorded.
(2) Derivative instruments are allocated based on the location of ultimate
risk.
(3) ALM credit derivative purchased options, with a replacement cost of $200
million, are given guarantee treatment for credit risk capital purposes,
and are excluded from the table above.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. SEGMENTED INFORMATION
During the year, CIBC merged most of the businesses within Electronic Commerce
and Retail and Small Business Banking into a new business line, CIBC Retail
Markets. Amicus (previously part of Electronic Commerce) became a separate
business line, and Technology and Operations became a part of Corporate and
Other. In addition, asset management moved from private client investment to
wealth products, both within CIBC Wealth Management.
As a result, CIBC is organized into four business lines that are segmented
on the basis of products and services provided or delivery channels used. The
four business lines are: CIBC Retail Markets, CIBC Wealth Management, CIBC World
Markets, and Amicus. These business lines are supported by four functional
groups which form Corporate and Other: Treasury, Balance Sheet and Risk
Management (TBRM); Administration; Technology and Operations; and Corporate
Development.
Comparative figures have been reclassified to reflect the new management
reporting structure.
CIBC Retail Markets provides financial services and products to personal
and small business customers in Canada. These services are offered through
CIBC's Canadian branch network and through electronic channels, such as
telephone banking, internet banking and ABMs. The business line's suite of
products comprises personal and small business loans, card products, mortgages
and insurance. The business line also manages the payments business (chequing,
savings and current accounts) for which revenue and expenses are allocated to
all the customer segments. It also has an approximate 44% equity investment in
FCIB. FCIB was formed on October 11, 2002 as a result of the combination of the
Caribbean retail, corporate and international banking operations of CIBC and
Barclays Bank PLC.
CIBC Wealth Management is focused on providing relationship-based advisory
sales, service and product solutions to the full spectrum of wealth building
clients. The business delivers a wide selection of investment products and
services - full-service brokerage in Canada and the U.S., discount brokerage,
asset management, global private banking and trust, and a broad selection of
investment and credit services through its branch-based sales force.
CIBC World Markets is a full-service investment bank, active throughout
North America, with niche capabilities in the U.K. and Asia.
Amicus comprises the co-branded retail electronic banking businesses,
including President's Choice Financial (Loblaw Companies Limited), Marketplace
Bank (Winn-Dixie Stores, Inc.), Safeway SELECT Bank (Safeway Inc.) and the
non-branch ABM business. As previously announced, CIBC decided to close its U.S.
electronic banking operations and focus on further developing its electronic
banking operations in Canada.
Corporate and Other comprises the four functional groups - TBRM;
Administration; Technology and Operations; and Corporate Development -as well as
CIBC Mellon's custody business and other revenue and expense items not directly
attributable to the business lines. TBRM revenue, expenses and balance sheet
(including capital) items are allocated to the business lines through a
combination of funds transfer pricing and revenue, expense and balance sheet
(including capital) allocation models. TBRM is responsible for CIBC's overall
balance sheet (including capital) and risk measurement, monitoring and control.
As well, TBRM's integrated Treasury Division provides CIBC-wide asset-liability,
funding, liquidity and cash collateral management. Activities of the functional
groups on behalf of CIBC as a whole are included in Corporate and Other.
Expenses of these groups are generally allocated to the business lines.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
[Enlarge/Download Table]
RESULTS BY BUSINESS LINE
CIBC CIBC CIBC
Retail Wealth World Corporate CIBC
$ millions, for the years ended October 31 Markets Management Markets Amicus and Other Total
-----------------------------------------------------------------------------------------------------------------------------------
2002 Net interest income (TEB)(1) $ 3,855 $ 609 $ 850 $ 110 $ 197 $ 5,621
Non-interest income 1,600 1,816 1,951 120 44 5,531
Intersegment revenue(2) (576) 368 212 -- (4) --
Total revenue (TEB)(1) 4,879 2,793 3,013 230 237 11,152
-----------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 418 -- 1,062 20 -- 1,500
Non-interest expenses 2,773 2,557 2,459 585 241 8,615
Restructuring charge 58 (6) 59 366 37 514
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and non-controlling interests 1,630 242 (567) (741) (41) 523
Income taxes 436 66 (415) (273) 18 (168)
Non-controlling interests 23 -- (8) -- 23 38
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,171 $ 176 $ (144) $ (468) $ (82) $ 653
===================================================================================================================================
Average assets(3) $144,585 $ 27,315 $115,410 $ 5,200 $ -- $292,510
===================================================================================================================================
2001 Net interest income (TEB)(1) $ 3,510 $ 561 $ 323 $ 62 $ 237 $ 4,693
Non-interest income 1,441 1,404 3,525 93 150 6,613
Intersegment revenue(2) (562) 351 218 (7) -- --
Total revenue (TEB)(1) 4,389 2,316 4,066 148 387 11,306
-----------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 396 -- 694 10 -- 1,100
Non-interest expenses 2,653 1,887 2,667 538 274 8,019
Restructuring charge 32 33 63 40 39 207
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and non-controlling interests 1,308 396 642 (440) 74 1,980
Income taxes 362 85 (177) (166) 132 236
Non-controlling interests 29 -- 11 -- 18 58
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 917 $ 311 $ 808 $ (274) $ (76) $ 1,686
-----------------------------------------------------------------------------------------------------------------------------------
Average assets(3) $131,406 $ 22,918 $121,969 $ 2,505 $ -- $278,798
===================================================================================================================================
2000 Net interest income (TEB)(1) $ 3,259 $ 576 $ 407 $ 25 $ 146 $ 4,413
Non-interest income 1,443 1,837 4,138 55 324 7,797
Intersegment revenue(2) (559) 328 236 (5) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue (TEB)(1) 4,143 2,741 4,781 75 470 12,210
Provision for credit losses 679 1 286 4 250(4) 1,220
Non-interest expenses 2,539 2,104 2,938 290 256 8,127
-----------------------------------------------------------------------------------------------------------------------------------
Restructuring charge 1 (11) -- -- (21) (31)
Income (loss) before taxes and non-controlling interests 924 647 1,557 (219) (15) 2,894
Income taxes 211 213 410 (90) 28 772
Non-controlling interests 26 -- 24 -- 12 62
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 687 $ 434 $ 1,123 $ (129) $ (55) $ 2,060
===================================================================================================================================
Average assets(3) $124,969 $ 19,307 $117,900 $ 642 $ 301 $263,119
===================================================================================================================================
(1) Taxable equivalent basis (TEB). Net interest income includes tax-exempt
income on certain securities. Since this income is not taxable to CIBC,
the rate of interest or dividend received by CIBC is significantly lower
than would apply to a loan of the same amount. As the impact of tax-exempt
income varies from year to year, such income has been adjusted to a
taxable equivalent basis to permit uniform measurement and comparison of
net interest income. An equal and offsetting adjustment is made to
increase the provision for income taxes. This is the measure reviewed by
CIBC's management.
(2) Intersegment revenue represents internal sales commissions and revenue
allocations under the Manufacturer/Customer Segment/Distributor Management
Model.
(3) Assets are disclosed on an average basis as this measure is most relevant
to a financial institution and is the measure reviewed by CIBC's
management.
(4) Represents an increase in the general allowance for credit losses.
Results for CIBC's operating segments are based on CIBC's internal financial
reporting systems that are maintained on a taxable equivalent basis and adjusted
to be consistent with systems utilized in the preparation of CIBC's consolidated
financial statements. The assets and liabilities of the segments are transfer
priced, using a funding methodology that best reflects their nature and term, at
wholesale market rates. Non-interest expenses are matched against the revenue to
which they relate. Indirect expenses are allocated to the segments based on
appropriate criteria.
To measure and report the results of operations of the four business
lines, CIBC utilizes the Manufacturer/Customer Segment/Distributor Management
Model that was developed in 2000. Under this model, internal payments for sales
commissions and distribution service fees are made among the business lines. As
well, revenue and expenses relating to certain activities are fully allocated to
the other business lines. In addition, the revenue, expenses and balance sheet
items (including capital) of the four functional groups are generally allocated
to the four business lines. This model allows management to better understand
the economics of CIBC's customer segments, products and delivery channels.
The model utilizes certain estimates and allocation methodologies in the
preparation of segmented financial information. These estimates and
methodologies may be refined from time to time and restatement of various
periods may occur.
In 2001, CIBC refined certain estimates and allocation methodologies
underlying the model. Key changes included refinements to customer
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110
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
segmentation and cost recovery methodologies. These changes primarily affected
Imperial Service in the CIBC Wealth Management business line and both personal
banking and small business banking in the CIBC Retail Markets business line.
Prior year segmented financial information has been reclassified.
Each year, the sales and service fees paid to segments for certain
products are renegotiated among the business lines. Prior year financial
information has not been reclassified to reflect these fee changes.
Revenue
Revenue for each of the business lines is summarized as follows:
--------------------------------------------------------------------------------
REVENUE BY BUSINESS LINE(1) (TEB)
[Download Table]
$ millions, for the years ended October 31 2002 2001 2000
--------------------------------------------------------------------------------
CIBC Retail Markets
Personal banking $ 1,126 $ 993 $ 952
Small business banking 720 661 681
West Indies 448 281 268
Cards 1,241 1,128 936
Lending products 582 634 624
Mortgages 623 479 332
Insurance 72 50 245
Other 67 163 105
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4,879 4,389 4,143
--------------------------------------------------------------------------------
CIBC Wealth Management
Imperial Service 667 627 558
Private client investment 1,320 977 1,280
Global private banking and trust 127 145 191
Wealth products 643 486 663
Other 36 81 49
--------------------------------------------------------------------------------
2,793 2,316 2,741
--------------------------------------------------------------------------------
CIBC World Markets
Capital markets 1,288 1,534 1,516
Investment banking and
credit products 1,115 1,474 1,723
Merchant banking 198 569 1,021
Commercial banking 446 481 491
Other (34) 8 30
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3,013 4,066 4,781
--------------------------------------------------------------------------------
Amicus 230 148 75
--------------------------------------------------------------------------------
Corporate and Other 237 387 470
--------------------------------------------------------------------------------
Total(2) $11,152 $11,306 $12,210
================================================================================
(1) Revenue includes the impact of internal sales commissions and revenue
allocations under the Manufacturer/Customer Segment/Distributor Management
Model.
(2) A TEB adjustment of $111 million (2001: $144 million; 2000: $131 million)
must be deducted from this table to reconcile combined segment revenue to
reported revenue of $11,041 million (2001: $11,162 million; 2000: $12,079
million) in the consolidated statements of income.
CIBC Retail Markets
Personal banking is the individual customer segment (customers other than those
in Imperial Service and global private banking and trust). Revenue is earned
from commission and service fees paid by CIBC's product groups, primarily the
investments, deposits, mortgages and lending products businesses.
Small business banking is the customer segment supporting small
owner-operated businesses, including owners' personal holdings. Revenue is
earned from commission and service fees paid by CIBC's product groups, primarily
the investments, deposits, mortgages and lending products businesses.
West Indies prior to October 11, 2002, when FCIB was formed, was a
full-service banking operation in eight countries, servicing all customer
segments through a 42-branch network and electronic delivery channels. Revenue
was earned on net interest spreads, and sales and service fees. FCIB was formed
as a result of the combination of the Caribbean retail, corporate and
international banking operations of CIBC and Barclays Bank PLC. After the
formation of FCIB, revenue represents CIBC's earnings from its approximate 44%
equity investment in FCIB.
Cards comprises a portfolio of credit cards. Revenue is earned through
spreads and fees.
Lending products comprises personal (including student loans), small
business and agricultural lending portfolios. Revenue is earned through net
interest spreads and service fees, less internal commissions paid to the
customer segments.
Mortgages includes both residential and commercial mortgages. Revenue is
earned through spreads, fees, mortgage sales and hedging activities, less
internal commissions paid to the customer segments.
Insurance provides creditor insurance products. Revenue comprises earned
premiums less claims plus investment income.
Other includes electronic and self-service banking, and the allocation of
a portion of treasury revenue.
CIBC Wealth Management
Imperial Service is the customer segment offering financial advice to CIBC's
affluent clients. Specially trained financial advisers support the financial
planning and product fulfillment needs of these clients. Revenue is earned
primarily from sales and service fees paid by CIBC's product groups.
Private client investment generates fees and commissions from full-service
retail brokerage, providing equity and debt investments, mutual fund products,
asset management services and advisory and financial planning services to
individuals in Canada and the U.S.
Global private banking and trust provides a comprehensive range of global
solutions, including investment management, trusts, private banking and global
custody, to meet the financial management needs of individuals, families and
corporations with significant financial resources. Revenue is earned from net
interest spreads, fees and commissions.
Wealth products includes mutual funds, investment management services,
GICs and discount brokerage services. These investment products are developed
and distributed to retail, institutional, small business and Imperial Service
customers. Revenue is earned from net interest spreads, fees and commissions.
Other consists primarily of the allocation of a portion of treasury
revenue.
CIBC World Markets
Capital markets operates trading, sales and research businesses serving
institutional, corporate and government clients across North America and around
the world. Revenue is generated from fees, commissions, spread-based income and
from taking proprietary positions within prescribed risk parameters.
Investment banking and credit products provides advisory services and
underwriting of debt, credit and equity for corporate and government clients
across North America and around the world. Revenue is earned from fees relating
to merger and acquisition services, underwriting activities, advisory services,
and loan syndications. In addition, net interest is earned on spreads on
corporate loans.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Merchant banking makes investments to create, grow and recapital-ize
companies across a variety of industries. Revenue is generated from fees,
interest and dividends earned on investments and from gains or losses associated
with these investments.
Commercial banking originates financial solutions centred around credit
products for medium-sized businesses in Canada. Revenue is generated from
interest, fees and service charges.
Other includes the allocation of a portion of treasury revenue, net of
unallocated funding charges; CEF Capital, an affiliated Asian merchant bank
holding company; and other revenue not directly attributed to the main
businesses listed above.
Geographic distribution
CIBC earns revenue and incurs expenses from domestic and foreign activities, and
has domestic and foreign assets from which income is earned. Assets are
allocated based on the location of ultimate risk, while net income (loss) and
related income taxes are allocated based on the geographic location in which
income is recorded. The geographic distribution of net income (loss) and major
assets are set out in the following tables.
Included in the geographic distribution of major assets are loans and
acceptances, net of allowance for credit losses, totalling $160 billion, and no
industry or foreign jurisdiction accounts for more than 10% of this amount,
except for the U.S. which accounts for 13% of the total amount outstanding.
[Enlarge/Download Table]
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GEOGRAPHIC DISTRIBUTION OF NET INCOME (LOSS)
United West Other
$ millions, for the years ended October 31 Canada States Indies countries Total
-------------------------------------------------------------------------------------------------------------------
2002 Net interest income $ 4,421 $ 347 $ 522 $ 220 $ 5,510
Non-interest income 3,388 655 1,210 278 5,531
-------------------------------------------------------------------------------------------------------------------
Total revenue 7,809 1,002 1,732 498 11,041
Provision for credit losses 540 827 -- 133 1,500
Non-interest expenses 5,732 2,787 210 400 9,129
-------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and non-controlling interests 1,537 (2,612) 1,522 (35) 412
Income taxes 590 (1,109) 269 (29) (279)
Non-controlling interests 23 (8) 23 -- 38
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 924 $(1,495) $ 1,230 $ (6) $ 653
===================================================================================================================
2001 Net interest income $ 3,468 $ (5) $ 770 $ 316 $ 4,549
Non-interest income 3,247 2,183 866 317 6,613
-------------------------------------------------------------------------------------------------------------------
Total revenue 6,715 2,178 1,636 633 11,162
Provision for credit losses 476 620 9 (5) 1,100
Non-interest expenses 5,093 2,591 191 351 8,226
-------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and non-controlling interests 1,146 (1,033) 1,436 287 1,836
Income taxes 536 (686) 195 47 92
Non-controlling interests 12 11 35 -- 58
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 598 $ (358) $ 1,206 $ 240 $ 1,686
===================================================================================================================
2000 Net interest income $ 2,957 $ 119 $ 772 $ 434 $ 4,282
Non-interest income 4,032 2,827 867 71 7,797
-------------------------------------------------------------------------------------------------------------------
Total revenue 6,989 2,946 1,639 505 12,079
Provision for credit losses 1,034 166 21 (1) 1,220
Non-interest expenses 4,918 2,632 185 361 8,096
-------------------------------------------------------------------------------------------------------------------
Income before taxes and non-controlling interests 1,037 148 1,433 145 2,763
Income taxes 428 22 220 (29) 641
Non-controlling interests 12 24 26 -- 62
-------------------------------------------------------------------------------------------------------------------
Net income $ 597 $ 102 $ 1,187 $ 174 $ 2,060
===================================================================================================================
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112
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GEOGRAPHIC DISTRIBUTION OF MAJOR ASSETS(1)
[Enlarge/Download Table]
$ millions, as at September 30 and October 31 2002 2001 2000
--------------------------------------------------------------------------------------------
Canada $ 171,083 $ 174,031 $ 157,493
United States 57,450 66,329 66,079
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Europe United Kingdom 5,811 6,432 6,862
France 3,049 3,637 3,731
Germany 6,367 6,626 6,469
Other European countries 9,684 10,413 9,173
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24,911 27,108 26,235
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Latin America 334 535 510
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West Indies 1,823 5,088 4,776
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Asia and Pacific Japan 1,878 1,889 2,072
Hong Kong 870 985 1,172
Australia 230 346 439
Other Asian and Pacific countries 636 770 1,348
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3,614 3,990 5,031
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Middle East and Africa 171 568 1,041
--------------------------------------------------------------------------------------------
General allowance for credit losses(2) -- (1,250) (1,250)
--------------------------------------------------------------------------------------------
Major assets(1) 259,386 276,399 259,915
Other assets 13,835 11,097 8,975
--------------------------------------------------------------------------------------------
Total assets as at September 30(3) 273,221 287,496 268,890
Net change in October(3) 72 (22) (1,188)
--------------------------------------------------------------------------------------------
Total assets as at October 31 $ 273,293 $ 287,474 $ 267,702
============================================================================================
Canadian currency(4) $ 172,979 $ 178,895 $ 161,393
Foreign currencies $ 100,314 $ 108,579 $ 106,309
============================================================================================
(1) Major assets consist of cash, loans, securities, deposits with banks,
customers' liability under acceptances, and derivative instruments market
valuation, after deduction of allowance for credit losses.
(2) Pursuant to an OSFI guideline issued in October 2001, the general
allowance has been allocated to geographic regions in 2002. Prior to 2002,
the general allowance was not allocated.
(3) The information presented here is compiled for regulatory purposes and
reported on a calendar quarter basis. Significant movement in October has
been assigned to the appropriate geographic regions.
(4) For purposes of presentation, the general allowance for credit losses has
been entirely applied to Canadian dollar-based-lending.
27. COMMITMENTS AND CONTINGENT LIABILITIES
Long-term commitments for leases
CIBC has obligations under non-cancellable leases for buildings and equipment.
Future minimum lease payments for all lease commitments for each of the
five succeeding years and thereafter are as follows:
--------------------------------------------------------------------------------
LEASE COMMITMENTS(1)(2)(3)
[Download Table]
$ millions
--------------------------------------------------------------------------------
2003 $ 423
2004 396
2005 335
2006 286
2007 223
2008 and thereafter 1,038
================================================================================
(1) Total rental expense in respect of buildings and equipment charged to the
consolidated statements of income was $487 million (2001: $412 million;
2000: $428 million).
(2) Includes future minimum lease commitments under sale-leaseback amounting
to $54 million in 2003, $51 million in 2004, $51 million in 2005, $50
million in 2006, $49 million in 2007 and $171 million in 2008 and
thereafter.
(3) Includes $168 million relating to one of CIBC's premises in New York.
These premises were sublet, with the commencement date effective November
2002.
Other commitments and contingent liabilities
In the ordinary course of business, securities and other assets are pledged
against liabilities or used to facilitate certain activities. The table presents
the details of notional amounts pledged.
--------------------------------------------------------------------------------
PLEDGED ASSETS
[Download Table]
$ millions, as at October 31 2002 2001
--------------------------------------------------------------------------------
Foreign governments and central banks(1) $ 2,757 $ 3,937
Clearing systems, payment systems and depositories(1) 728 680
Margins for exchange traded futures
and options, and collateralized
derivative transactions 1,977 3,033
Collateral related to securities borrowed,
securities sold short and securities lent
or sold under repurchase agreements 21,316 36,607
--------------------------------------------------------------------------------
$26,778 $44,257
================================================================================
(1) Includes assets pledged in order to participate in clearing and payment
systems and depositories or to have access to the facilities of central
banks in foreign jurisdictions.
CIBC and in some cases certain of its affiliates have been named as defendants
in five Enron related actions along with, among others, commercial and/or
investment banks, certain current and former Enron officers and directors,
lawyers and accountants. Three of those cases are putative class actions brought
on behalf of individuals who purchased Enron or NewPower securities. The
remaining two actions were brought by purchasers of Marlin
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113
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Water Trust notes issued by an Enron special purpose entity. CIBC believes that
each of these lawsuits filed against CIBC and its affiliates is without merit
and intends to defend each of these actions vigorously.
Additionally, CIBC and certain of its affiliates have received inquiries
and requests for information from various regulatory and governmental agencies
and a U.S. Senate committee regarding certain transactions and business
relationships with Enron and its affiliates. CIBC will continue to cooperate
fully with these authorities and with such other agencies and authorities as may
request information.
In addition to the matters described above, CIBC and its subsidiaries are
party to legal proceedings in the ordinary course of their businesses.
Management does not expect the outcome of any of these proceedings, individually
or in the aggregate, to have a material adverse effect on the consolidated
financial position or results of the bank's operations.
--------------------------------------------------------------------------------
28. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
CIBC's consolidated financial statements are prepared in accordance with
Canadian GAAP, including the accounting requirements of OSFI. Set out below are
more significant differences which would result if U.S. GAAP were applied in the
preparation of the consolidated financial statements.
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
2002 2001(1)
----------------------------------------------------------------------------------------------------------------------------------
Canadian U.S. Canadian U.S.
$ millions, as at October 31 GAAP Adjustments GAAP GAAP(2) Adjustments GAAP(2)
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash resources $ 9,512 $ 308 $ 9,820 $ 11,350 $ -- $ 11,350
Securities
Securities held for investment 20,583 (20,583) -- 22,849 (22,849) --
Securities available for sale -- 19,666 19,666 -- 23,650 23,650
Securities held for trading 44,628 52 44,680 51,798 50 51,848
Loan substitute securities 81 (81) -- 147 (147) --
Loans 153,089 1,661 154,750 155,640 -- 155,640
Other
Derivative instruments market valuation 24,717 1,385 26,102 25,723 2,066 27,789
Customers' liability under acceptances 6,848 -- 6,848 8,100 -- 8,100
Land, buildings and equipment 2,247 -- 2,247 1,769 -- 1,769
Goodwill 1,078 (73) 1,005 400 -- 400
Other intangible assets 297 -- 297 228 -- 228
Other assets 10,213 2,631 12,844 9,470 165 9,635
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$ 273,293 $ 4,966 $ 278,259 $ 287,474 $ 2,935 $ 290,409
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 196,630 $ 2,052 $ 198,682 $ 194,352 $ 273 $ 194,625
Other
Derivative instruments market valuation 24,794 1,818 26,612 26,395 588 26,983
Acceptances 6,878 -- 6,878 8,100 -- 8,100
Obligations related to securities sold short 8,436 779 9,215 11,213 -- 11,213
Obligations related to securities lent or
sold under repurchase agreements 9,615 -- 9,615 21,403 -- 21,403
Other liabilities 10,980 329 11,309 10,112 877 10,989
Subordinated indebtedness 3,627 (7) 3,620 3,999 150 4,149
Shareholders' equity
Preferred shares 3,088 -- 3,088 2,299 -- 2,299
Common shares 2,842 (11) 2,831 2,827 -- 2,827
Contributed surplus 26 -- 26 -- -- --
Retained earnings 6,377 (427) 5,950 6,774 4 6,778
Accumulated other comprehensive income -- 433 433 -- 1,043 1,043
----------------------------------------------------------------------------------------------------------------------------------
$ 273,293 $ 4,966 $ 278,259 $ 287,474 $ 2,935 $ 290,409
==================================================================================================================================
(1) Restated.
(2) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
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114
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
[Enlarge/Download Table]
$ millions, except per share amounts,
for the years ended October 31 2002 2001(1)(2) 2000(2)
-------------------------------------------------------------------------------------
Net income as reported $ 653 $ 1,686 $ 2,060
-------------------------------------------------------------------------------------
Provision for credit losses (123) -- --
Non-interest income
Trading activities 2 (8) 35
Equity accounting adjustments (60) (56) (31)
Impairment measurements -- (18) --
Other 123 -- --
Derivative instruments and
hedging activities
Transitional provision -- 183 --
Current year adjustments (635) 87 --
Non-interest expenses
Employee future benefits (17) (98) (67)
Restructuring charge -- -- (216)
Stock-based compensation (39) (9) (28)
Lease termination costs -- (50) 50
Income taxes and net change in
income taxes due to the above items 275 (16) 110
-------------------------------------------------------------------------------------
(474) 15 (147)
-------------------------------------------------------------------------------------
Net income based on U.S. GAAP 179 1,701 1,913
Preferred share dividends and premiums (165) (121) (128)
-------------------------------------------------------------------------------------
Net income applicable to common
shares based on U.S. GAAP $ 14 $ 1,580 $ 1,785
=====================================================================================
Weighted-average common shares
outstanding (thousands) 360,553 372,305 388,951
Add: number of incremental shares(3) 3,654 3,477 1,279
-------------------------------------------------------------------------------------
Weighted-average diluted common
shares outstanding (thousands) 364,207 375,782 390,230
=====================================================================================
Basic EPS $ 0.05 $ 4.24 $ 4.59
Diluted EPS $ 0.05 $ 4.20 $ 4.57
=====================================================================================
(1) Restated.
(2) Adjusted for the retroactive application of equity accounting due to
additional interests acquired in the investments during 2002.
(3) It is assumed that 80% of average options outstanding will be exercised
for shares while the remaining 20% will be exercised as SARs.
Comprehensive income
Statement of Financial Accounting Standard (SFAS) 130, "Reporting Comprehensive
Income," requires that a statement of comprehensive income be displayed with the
same prominence as other financial statements. Comprehensive income, which
incorporates net income, includes all changes in equity during a period, except
those resulting from investments by, and distributions to, owners. There is no
requirement to disclose comprehensive income under Canadian GAAP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
[Download Table]
$ millions, for the years ended October 31 2002 2001(1) 2000
--------------------------------------------------------------------------------
Net income based on U.S. GAAP $ 179 $ 1,701 $ 1,913
--------------------------------------------------------------------------------
Other comprehensive income, net of tax
Change in foreign currency
translation adjustments(2) 2 38 8
Change in net unrealized losses
on securities available for sale(3)(4) (115) (1,119) (637)
Change in net unrealized (losses)
gains on hedges of securities
available for sale -- (51) 51
Derivative instruments and
hedging activities
Transitional provision(5) -- (17) --
Change in unrealized
(losses) gains(5) (485) 499 --
Change in additional
pension obligation(6) (12) -- --
--------------------------------------------------------------------------------
Total other comprehensive income (610) (650) (578)
================================================================================
Comprehensive income $(431) $ 1,051 $ 1,335
================================================================================
(1) Restated.
(2) Net of income tax (expense) benefit of $(107) million (2001: $323 million;
2000: $179 million).
(3) Net of income tax benefit of $1 million (2001: $690 million; 2000: $414
million).
(4) Net of reclassification adjustments for net realized gains included in net
income of $70 million (2001: $819 million; 2000: $1,063 million).
(5) Net of income tax benefit (expense) of $306 million (2001: $(303) million;
2000: nil).
(6) Net of income tax benefit of $6 million (2001: nil; 2000: nil).
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ACCUMULATED OTHER COMPREHENSIVE INCOME
[Download Table]
$ millions, as at or for the years ended October 31 2002 2001(1) 2000
--------------------------------------------------------------------------------
Accumulated other comprehensive
income net of tax
Unrealized foreign currency
translation gains $ 42 $ 40 $ 2
Unrealized gains on securities
available for sale 406 521 1,640
Unrealized gains on hedges
of available-for-sale securities -- -- 51
Unrealized (losses) gains on
derivatives designated as hedges (3) 482 --
Additional pension obligation (12) -- --
--------------------------------------------------------------------------------
Balance at end of year $433 $1,043 $1,693
================================================================================
(1) Restated.
A. 2001 Restatement
In 2002, CIBC concluded that in 2001 it did not meet all of the hedge accounting
criteria in SFAS 133 for certain of our derivative instruments, notwithstanding
that all of these instruments were designated as hedges and highly effective in
achieving their intended purpose from an economic point of view. Consequently,
CIBC has revised the 2001 U.S. GAAP results. Net income has increased by $90
million (income before tax increased by $154 million); both basic and diluted
EPS increased by $0.24; other comprehensive income has decreased by $148
million; deposits has increased by $100 million; other liabilities has decreased
by $42 million; and shareholders' equity has decreased by $58 million.
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CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B. Securities available for sale
Under Canadian GAAP, securities held for investment are carried at cost or at
amortized cost. U.S. GAAP requires these securities to be classified as either
securities held to maturity or as securities available for sale. The accounting
for securities held to maturity is consistent with the accounting for securities
held for investment, while securities available for sale are reported at
estimated fair value with unrealized gains and losses recognized in other
comprehensive income.
U.S. GAAP also requires the following additional disclosures:
--------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
[Download Table]
$ millions, for the years ended October 31 2002 2001 2000
--------------------------------------------------------------------------------
Proceeds from sales $35,651 $17,527 $12,587
Gross realized gains $ 1,083 $ 1,058 $ 1,137
Gross realized losses $ 167 $ 36 $ 26
================================================================================
C. Provision and allowance for credit losses
Under Canadian GAAP, the existence of credit protection on loan balances from
the purchases of credit derivatives is considered when determining the provision
for credit losses. Amounts recoverable from credit default swaps are included in
allowance for credit losses. Under U.S. GAAP, credit derivatives are recognized
at fair value.
In addition, under Canadian GAAP, loss on sale of performing loans is
included in other non-interest income. Loss on sale of impaired loans is
included in allowance for credit losses. Under U.S. GAAP, loss on sale of loans
is included in allowance for credit losses, unless the decline is due to a
change in general market level of interest or foreign exchange rates.
As a result of these classification differences, provision for credit
losses increased by $123 million and other non-interest income increased by $123
million in 2002.
D. Trading activities
Under Canadian GAAP, CIBC records certain valuation adjustments to trading
securities to reflect resale restrictions that expire within one year or
adjustments for liquidity. Under U.S. GAAP, these valuation adjustments are not
permitted.
E. Equity accounting adjustments
Under Canadian GAAP, CIBC accounts for merchant banking investments on a cost
basis. U.S. GAAP requires the use of equity method to account for such
investments when the equity interest is between 20% and 50%. In addition, under
Canadian GAAP, investments accounted for by the cost method are not restated
retroactively to the equity method when the investor acquires an additional
interest in the business. U.S. GAAP requires retroactive application of the
equity method. As a result of the retroactive application, 2001 and 2000 net
income decreased by $21 million and $18 million, respectively (income before tax
decreased by $28 million and $31 million, respectively), and securities
decreased by $59 million and $31 million, respectively.
Under Canadian GAAP, certain of CIBC's investments in limited partnerships
are accounted for on a cost basis. CIBC records an impairment loss on these
investments when there is evidence of an other-than-temporary decline in their
value. U.S. GAAP requires the use of the equity method to account for such
investments when the equity interest is more than minor.
F. Impairment measurements
Under Canadian GAAP, CIBC records securities held for investment at cost, less
amounts for impairment of carrying values deemed to be other-than-temporary in
nature. When an other-than-temporary impairment has occurred on a publicly
traded available-for-sale security, CIBC records the security at expected
realizable value. Under U.S. GAAP, when an other-than-temporary impairment has
occurred on a publicly traded available-for-sale security, it requires the
establishment of a new cost basis for the security, equal to its quoted market
price at the time impairment is determined to be other-than-temporary.
G. Derivative instruments and hedging activities
Effective November 1, 2000, CIBC adopted the new U.S. standard on accounting for
derivative instruments and hedging activities. This standard requires that all
derivative instruments, including derivative instruments embedded in financial
instruments that are not clearly and closely related to the economic
characteristics of the underlying host financial instruments, be recognized at
fair value in the consolidated financial statements. Under Canadian GAAP,
derivatives used for trading purposes are already carried at fair value on the
consolidated balance sheets with changes in fair value reflected in current
earnings. However, as explained more fully in Note 1, under Canadian GAAP, gains
and losses on both securities and derivative instruments used for hedging
purposes, are recognized in the income statement on the same basis and in the
same period as the underlying hedged items. Thus, while there is no difference
in accounting between Canadian and U.S. GAAP in respect of derivatives held for
trading purposes, there are significant differences in accounting in respect of
derivatives held for hedging purposes.
The accounting under U.S. GAAP for changes in the fair value of
derivatives held for hedging purposes depends on their intended use. For fair
value hedges, the effective portion of changes in fair value of derivative
instruments is offset in income against the change in fair value, attributed to
the risk being hedged, of the underlying hedged asset, liability or firm
commitment. For cash flow hedges, the effective portion of changes in fair value
of derivative instruments is offset through other comprehensive income, until
the variability in cash flows being hedged is recognized in earnings in future
accounting periods. For both fair value and cash flow hedges, if a derivative
instrument is designated as a hedge and meets the criteria for hedge
effectiveness, earnings offset is available, but only to the extent that the
hedge is effective. The ineffective portion of the change in fair value of a
qualifying derivative instrument hedge is always recognized in current earnings
for both fair value and cash flow hedges. In addition, cash (on-balance sheet)
financial instruments do not, in most cases, qualify as hedging instruments
under U.S. GAAP.
In order to qualify for hedge accounting offsets, the U.S. accounting
standard requires that extensive documentation be maintained and that hedge
effectiveness tests prescribed by that standard be met at both the inception of
a hedge relationship and on a periodic, ongoing basis. In this regard, CIBC has
elected, for operational and cost considerations, not to designate certain
derivatives as hedges for U.S. GAAP accounting purposes, even though these
hedges are highly effective for economic purposes. In addition, the U.S.
accounting standard disallows the use of cash instrument hedges and certain
credit derivative hedges of loans and loan commitments are difficult to qualify
for hedge accounting, even though such hedges are also highly effective for
economic purposes. In consequence,
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116
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
in respect of accounting for hedging activities, the U.S. GAAP reported earnings
may exhibit significant volatility in any given period.
Upon adoption of this standard on November 1, 2000, CIBC recorded a
pre-tax income of $183 million as a transitional adjustment.
H. Employee future benefits
Under Canadian GAAP, prior to November 1, 2000, CIBC recognized the pension
costs when services were rendered by employees, with the corresponding
obligation valued using management's best estimate of the long-term rate of
return on assets, while the costs of other post-retirement benefits were
expensed when paid. Under U.S. GAAP, it requires both pension and other
post-retirement benefits be recognized in the period services are rendered by
employees and the related obligations be valued using current market rates.
As explained in Note 15, effective November 1, 2000, CIBC retroactively
adopted the requirements of the CICA handbook section 3461, "Employee Future
Benefits," which substantially harmonized Canadian and U.S. GAAP. CIBC continues
to recognize certain unamortized actuarial losses and transitional obligations
that resulted from the application of U.S. GAAP on a prospective basis. As a
result, there will continue to be an adjustment to income until amounts,
previously deferred under U.S. GAAP, have been fully amortized into income.
Under Canadian GAAP, an entity's accrued benefit asset is limited to the
amount it can realize in the future by applying any surplus to reduce an
entity's contributions. The valuation allowance is not included under U.S. GAAP
resulting in an adjustment to income which is all recognized in 2002. In
addition, for defined benefit plans, U.S. GAAP requires that the unfunded
accumulated benefit obligation be recorded as additional minimum liability and
the excess of the unfunded accumulated benefit obligation over the unrecognized
prior service cost be recorded in other comprehensive income.
I. Restructuring charge
Prior to November 1, 2000, when CIBC adopted "Employee Future Benefits," under
Canadian GAAP, a liability for special termination benefits pursuant to a
restructuring required that management approve a plan of termination. U.S. GAAP
differed from Canadian GAAP for years prior to November 1, 2000, as it also
required that, prior to the date of the financial statements, the termination
benefit arrangements be communicated to employees. This U.S. GAAP condition was
not met for $216 million of CIBC's 1999 restructuring charge until 2000,
resulting in a timing difference for the recognition of the restructuring charge
under Canadian and U.S. GAAP. The principles of Canadian and U.S. GAAP have
since been harmonized.
J. Stock-based compensation
CIBC adopted the expense recognition provisions of SFAS 123, "Accounting for
Stock-Based Compensation," effective November 1, 2001. The impact of this change
in accounting policy is the same as under Canadian GAAP (as detailed in Note 14)
except as it relates to SARs outstanding as of the date of adoption.
Under Canadian GAAP, the cost of SARs is measured assuming that all
options eligible for SARs are exercised as SARs. Under U.S. GAAP, for SARs
granted prior to the date of adoption of SFAS 123, the Financial Accounting
Standards Board (FASB) Interpretation No. 28, "Accounting for SARs and Other
Variable Stock Option or Award Plans," continues to apply under which the
accrual is determined as an estimate (based on past experience) of the
proportion of stock options expected to be exercised for cash.
Upon its acquisition by CIBC in 2001, TAL settled all its outstanding
employee stock options in cash. Under Canadian GAAP, the cash settlement of
these variable stock options was charged to retained earnings. Under U.S. GAAP,
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," requires this settlement payment to be charged to income.
K. Lease termination costs
Prior to October 31, 2000, CIBC made the decision to consolidate its leased
premises in New York and move out of existing premises within three years. Under
Canadian GAAP, all future net costs related to pre-existing leases are
recognized as an expense in the period when the decision is made to stop using
the pre-existing leased property. Under U.S. GAAP, future net costs related to
pre-existing leased property that will no longer be used cannot be recognized as
an expense until a confirming event occurs, in this case, the signing of a
sub-lease, which occurred in 2001.
L. Income taxes
Under Canadian GAAP, tax rate changes are reflected in the measurement of the
future income tax balances when they are substantively enacted. Under U.S. GAAP,
only the enacted tax rates under current legislation are required to be used.
M. Pro-forma disclosures
SFAS 123 requires pro-forma disclosure of net income and EPS as if the fair
value-based method had been applied for awards granted subsequent to 1995. The
fair value-based method requires that the cost of SARs is measured assuming that
all options eligible for SARs are exercised as SARs.
Had the fair value-based method been used for awards granted subsequent to
1995 until October 31, 2001, U.S. GAAP net income in 2002 would have been
decreased by $21 million (2001: $37 million; 2000: $52 million) and basic and
diluted EPS reduced by $0.06 (2001: $0.10; 2000: $0.13).
N. Special purpose entities
Under Canadian GAAP, CIBC is required to consolidate certain SPEs when CIBC has
control and has the right and ability to obtain future economic benefits from
the SPE and is exposed to the related risks. U.S. GAAP requires consolidation of
SPEs when CIBC is the sponsor and there is insufficient third-party equity. As a
result, certain SPEs are consolidated under U.S. GAAP.
O. Non-cash collateral
Under Canadian GAAP, non-cash collateral received from securities lending is not
recognized in the financial statements. Under U.S. GAAP, certain non-cash
collateral received in securities lending transactions is recognized as an
asset, and a liability is recorded for obligations to return the collateral.
P. Netting of financial instruments
Under Canadian GAAP, two or more separate financial instruments can be presented
on a net basis if certain criteria are met. In addition to the same criteria,
under U.S. GAAP, only financial instruments with the same party can be presented
on a net basis.
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117
CIBC ANNUAL REPORT 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Q. Future U.S. accounting policy changes
CIBC will be required to adopt the following accounting standards for U.S. GAAP
purposes in future years.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supercedes FASB No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Under SFAS 144, long-lived assets classified as held for sale should be
measured at the lower of their carrying amount or fair value less cost to sell.
SFAS 144 requires operating losses from discontinued operations to be reported
in future periods, as incurred. In addition, a component of an entity may
qualify to be reported as a discontinued operation. CIBC adopted the provisions
of SFAS 144 as of November 1, 2002. Adoption of SFAS 144 will primarily affect
CIBC if and when qualifying future business dispositions occur.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires a liability to be
recognized for costs associated with exit or disposal activities when they are
incurred rather than the date upon which a company commits to an exit plan. This
standard is effective for exit or disposal activities that are initiated after
December 31, 2002.
In June 2002, the FASB issued an exposure draft "Consolidation of Certain
Special-Purpose Entities." The exposure draft addresses the application of
consolidation policies and disclosure requirements of SPEs. CIBC is monitoring
the status of this exposure draft and the potential impact on its consolidated
financial statements is not yet determinable.
In June 2002, the FASB issued an exposure draft "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The exposure draft requires a guarantor to recognize a
liability for the fair value of the obligations it has undertaken in issuing the
guarantee, and elaborates on the disclosures to be made by a guarantor. CIBC is
monitoring the status, and its potential impact on the consolidated financial
statements is not yet determinable.
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29. FUTURE CANADIAN ACCOUNTING POLICY CHANGES
CIBC will be required to adopt the following accounting standards for Canadian
GAAP purposes in future years:
In November 2001, the CICA issued AcG 13, "Hedging Relationships," which
will be effective for CIBC beginning fiscal 2004.
AcG 13 addresses the identification, designation, documentation and
effectiveness of hedging relationships for the purposes of applying hedge
accounting. In addition, it establishes conditions for applying hedge accounting
and deals with the discontinuance of hedge accounting.
Under the new guideline, CIBC is required to document its hedging
relationships and explicitly demonstrate that the hedges are sufficiently
effective in order to continue accrual accounting for derivatives hedging
certain positions. Otherwise, the derivative instrument will need to be
marked-to-market through the current year's consolidated statements of income.
The impact of implementing this guideline in CIBC's consolidated financial
statements is not yet determinable.
In August 2002, the CICA issued a draft guideline "Consolidation of
Special-Purpose Entities." The guideline establishes principles for determining
when an entity includes the assets, liabilities and results of activities of an
SPE in its consolidated financial statements. CIBC uses SPEs to securitize its
own assets, provide clients access to liquidity in the commercial paper market
through CIBC administered conduits and as an intermediary, and to structure SPE
transactions for clients. CIBC is monitoring the status of this draft guideline,
and its potential impact on the consolidated financial statements is not yet
determinable.
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118
CIBC ANNUAL REPORT 2002
Dates Referenced Herein and Documents Incorporated by Reference
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