Pacific & Western Credit Corp. announces results for its first quarter ended January 31, 2013

LONDON, ON, March 6, 2013 /CNW/ -

FIRST QUARTER SUMMARY
(three months ended January 31, 2013, compared to three months ended January 31, 2012, unless otherwise noted)

Pacific & Western Credit Corp.

  • Net income (loss) of Pacific & Western Credit Corp. for the three months ended January 31, 2013 was ($1.1 million) or ($0.04) per share (($0.04) diluted) compared to ($2.7 million) or ($0.10) per share (($0.10) diluted) for the previous quarter and ($853,000) or ($0.03) per share (($0.03) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income of the Corporation for the current quarter was $129,000 compared to ($1.5 million) for the previous quarter and $307,000 a year ago.

Pacific & Western Bank of Canada

  • Net income for Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, for the three months ended January 31, 2013 was $1.1 million compared to ($907,000) for the previous quarter and $1.8 million for the same period a year ago. Included in net income for the same period a year ago was pre-tax gains of $3.2 million realized on the sale of securities. While there were no gains realized on the sale of securities in the current quarter, pre-tax gains of $1.0 million were realized on the sale of lending assets totalling $37 million. Net income for the previous quarter included a negative income tax adjustment of $1.9 million.
  • Net interest income and spread for the three months ended January 31, 2013 increased to $5.9 million and 1.59% respectively from $5.5 million and 1.42% for the previous quarter and $4.8 million and 1.24% respectively for the same period a year ago.
  • Lending assets at January 31, 2013 totalled $1.17 billion compared to $1.21 billion at the end of the previous quarter and $1.24 billion a year ago. Prior to the loans sold during the quarter, total loans at January 31, 2013 of $1.21 billion were comparable to a year ago.
  • Credit quality continues to remain strong with gross impaired loans at January 31, 2013 totalling $1.7 million or 0.14% of total loans compared to $1.7 million or 0.13% of total loans a year ago. Net impaired loans totalled $104,000 at January 31, 2013 compared to $60,000 a year ago.

PRESIDENT'S COMMENTS

Our Bank's net interest income continued to increase with net interest income of $5.9 million for the first quarter compared to $5.5 million earned in the previous quarter and $4.8 million earned in the same quarter a year ago.  This increase can be mainly attributed to a significant increase in spread which improved by 28% over the same period last year to 1.59%.  I expect that spread will continue to increase as lower yielding loans booked in the past continue to be replaced with higher yielding loans.  Credit quality as always remained strong with no loans being in arrears at the end of the quarter. 

Our three initiatives are now well into the execution stage.  Bulk financing assets increased by 11% during the quarter to $121 million and credit card receivables increased to $25 million.  Our trustee deposits initiative continues to gain momentum and to date we have agreements with six insolvency offices across Canada. We continue to market this product and are pleased with the interest we have received.  Overall, we are pleased with the progress that we are making on these three important initiatives and look forward to them contributing significantly to our bottom line as each of the programs gain momentum.

On January 28, 2013 we announced our plans to reorganize our group's capital structure.  Key elements of this plan are to list our Bank on the Toronto Stock Exchange and for our Series C Note holders to accept the Bank's common shares in lieu of cash interest payments beginning June 30, 2014.  Tomorrow, our Series C Note holders will vote on this proposal and should they vote in favour, the company will convert $30 million of subordinated debt holdings of the Bank into common shares of the Bank.  This will save the Bank approximately $3 million in interest expense and considerably increase its capital position.  Reducing our Bank's interest expense and improving its capital position will no doubt enhance its value, which of course benefits our shareholders.  Over the years, the Bank has been our primary investment and I am very pleased with the progress we have made in the last few years in increasing its intrinsic value.  We are also considering investing in other areas apart from the Bank in order to accelerate PWC's return to profitability and utilize approximately $32 million in tax losses that it has.  These are exciting times for PWC's shareholders and I look forward to writing to you tomorrow about the results of the Series C Note holders' vote and its implication for our shareholders.

                         
FINANCIAL HIGHLIGHTS                        
(unaudited)           as at
                January 31       October 31       January 31
($CDN thousands except per share amounts )       2013       2012       2012
Pacific & Western Bank of Canada                        
Balance Sheet Summary                          
  Cash and securities       $ 231,809     $ 296,693     $ 309,763
  Total loans           1,173,287       1,210,311       1,235,513
  Average loans           1,191,799       1,232,953       1,192,339
  Total assets           1,433,585       1,534,168       1,577,271
  Deposits           1,233,453       1,317,298       1,359,923
  Subordinated notes payable       49,856       49,815       49,692
  Shareholder's equity         94,234       93,104       96,469
Capital ratios (2012 based on Basel II)                        
  Total regulatory capital       $ 131,081     $ 143,714     $ 158,566
  Assets-to-capital ratio         10.37       10.86       10.12
  Common Equity Tier 1 ratio       7.81%        n/a         n/a 
  Tier 1 risk-based capital ratio       7.81%       8.54%       8.56%
  Total risk-based capital ratio        12.00%       12.81%       13.28%
                for the three months ended
Results of operations                          
  Net interest income       $ 5,929     $ 5,503     $ 4,772
  Spread            1.59%       1.42%       1.24%
  Other income          1,280       2,370       3,405
  Provision for (recovery of) credit losses       (21)       28       184
  Total revenue           7,230       7,845       7,993
  Net income before income taxes       1,550       1,026       2,698
  Net income (loss)         1,115       (907)       1,838
  Return on average total assets       0.30%       -0.23%       0.48%
  Gross impaired loans to total loans       0.14%       0.13%       0.13%
  Provision for credit losses as a % of average loans       0.00%       0.00%       0.02%
Segmented operations summary                        
  Commercial Lending income before income taxes     $ 2,019     $ 1,594     $ 3,184
  Loan spread           2.23%       2.11%       2.07%
  Results from Credit Card Operations     $ (469)     $ (568)     $ (486)
  Credit card receivables       $ 24,908     $ 23,397     $ 2,286
Pacific & Western Credit Corp., (consolidated)                        
Results of operations                           
  Net income (loss) of the Bank     $ 1,115     $ (907)     $ 1,838
  Deduct interest expense on notes of the parent       (732)       (725)       (614)
  Net non-interest expenses of the parent       133       393       (463)
  Provision for income taxes       (387)       (232)       (454)
  Net income (loss) before the following:       129       (1,471)       307
  Interest expense relating to Class B
Preferred Share dividends
      (1,227)       (1,223)       (1,160)
  Net loss of the Corporation available to
common shareholders
    $ (1,098)     $ (2,694)     $ (853)
  Loss per common share:                        
    Basic         $ (0.04)     $ (0.10)     $ (0.03)
    Diluted         $ (0.04)     $ (0.10)     $ (0.03)

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

This management's discussion and analysis (MD&A) of operations and financial condition for the first quarter of fiscal 2013 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended January 31, 2013, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Corporation's MD&A and the audited consolidated financial statements for the year ended October 31, 2012, all of which are available on SEDAR at www.sedar.com. Except as discussed below, all other factors discussed and referred to in the MD&A for the year ended October 31, 2012, remain substantially unchanged.

Overview

Pacific & Western Credit Corp. is a holding company whose shares trade on the Toronto Stock Exchange. Its wholly-owned and principal subsidiary is Pacific & Western Bank of Canada which provides lending services to selected niche markets and operates as a Schedule I bank under the Bank Act (Canada).

Pacific & Western Credit Corp.

Net income (loss) of the Corporation for the three months ending January 31, 2013 was ($1.1 million) or ($0.04) per share (($0.04) diluted) compared to ($2.7 million) or ($0.10) per share (($0.10) diluted) for the previous quarter and ($853,000) or ($0.03) per share (($0.03) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income for the three months ending January 31, 2013 was $129,000 compared to ($1.5 million) for the previous quarter and $307,000 for the same period a year ago. These dividends are recorded as interest expense in the consolidated financial statements as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet.

Pacific & Western Bank of Canada

Net income of the Bank for the three months ending January 31, 2013 was $1.1 million compared to ($907,000) for the previous quarter and $1.8 million for the same period a year ago with the decrease due primarily to pre-tax gains of $3.2 million from the sale of preferred shares realized a year ago compared to $nil. This decrease was largely offset by an increase of $1.2 million in net interest income compared to a year ago and pre-tax gains totalling $1.0 million from the sale of loans in the current quarter compared to $nil a year ago. The results for the previous quarter were negatively impacted by an income tax adjustment of $1.9 million.

At January 31, 2013, total assets of the Bank were $1.43 billion compared to $1.53 billion at the end of the previous quarter and $1.58 billion a year ago with the decrease due primarily to a lower level of cash and securities held at the end of the current quarter and a lower level of lending assets caused primarily by loan sales of $37 million in the current quarter. Sales of loans took place during the current quarter to assist the Bank in managing its capital levels to prepare it for new regulatory guidelines which took effect in January 2013. Cash and securities decreased due to the Corporation changing its investment strategy and holding a higher level of liquid securities as a proportion of its treasury assets.  This change in strategy results in lower levels of cash and securities being required to meet its liquidity requirements.

Credit quality remains strong, with gross impaired loans totalling $1.7 million at January 31, 2013 compared to $1.7 million a year ago and net impaired loans of $104,000 compared to $60,000 a year ago. At January 31, 2013, the ratio of gross impaired loans as a percentage of total loans was 0.14% compared to 0.13% last year.

The Basel Committee on Banking Supervision published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). The Office of the Superintendent of Financial Institutions (OSFI) required all Canadian banks to comply with the new Basel III standards on an "all in" basis effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio at January 1, 2013, and at January 1, 2014 an 8.5% Tier 1 capital ratio and 10.5% total capital, all of which include a 2.50% capital conservation buffer. At January 31, 2013, the Bank exceeded the new capital requirements with a CET1 ratio of 7.81%. In addition, its Tier 1 capital ratio was 7.81%, its total capital ratio was 12.0% and its assets-to-capital ratio at January 31, 2013 was 10.37.

On January 28, 2013, the Corporation announced its plans for the Bank to complete an initial public offering (IPO) of its common shares in the second quarter of 2013. Upon completion of the IPO the Bank's common shares will be listed on the Toronto Stock Exchange (TSX). Following completion of the IPO of the Bank, it is expected that the Corporation will continue to hold at least 90% of the issued and outstanding common shares of the Bank and will continue to be its single largest shareholder.

The Corporation also announced that it would be seeking approval from its Series C Note holders to modify its Series C Notes at a Note holder meeting to be held on March 7, 2013. The Corporation is requesting that the Series C Note indenture be modified so that the Corporation has the option, as at June 30, 2014, provided the Bank has completed its IPO and the Bank's common shares have been listed on the TSX, to satisfy all future interest obligations of the Corporation's outstanding Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It will also request that the Series C Note indenture be modified to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation.

Total Revenue

Total revenue consists of net interest income, other income and provisions for credit losses. For the three months ended January 31, 2013 total revenue of the Bank was $7.2 million compared to $7.8 million for the previous quarter and $8.0 million for the same period last year. Total revenue decreased from a year ago due primarily to pre-tax gains totalling $3.2 million from the sale of preferred shares a year ago compared to $nil. This decrease was largely offset by an increase of $1.2 million in net interest income compared to the same quarter last year and pre-tax gains totalling $1.0 million from the sale of loans compared to $nil a year ago. Total revenue decreased from the previous quarter primarily as a result of a higher amount of gains on the sale of lending assets in the previous quarter.

The provision for (recovery of) credit losses, which is also included in total revenue, was a recovery of ($21,000) in the current quarter compared to a provision of $28,000 for the previous quarter and $184,000 a year ago. Included in the provision for (recovery of) credit losses in the current quarter were provisions totalling $165,000 relating to credit card receivables.

Net Interest Income and Net Interest Margin

Net interest income of the Bank for the three months ended January 31, 2013 increased to $5.9 million from $5.5 million for the previous quarter and from $4.8 million for the same period a year ago with the increase due primarily to loans that matured during the period being replaced with loans with increased spreads and a decrease in interest rates on new deposits compared to a year ago. Net interest margin or spread for the three months ended January 31, 2013 increased to 1.59% from 1.42% for the previous quarter and 1.24% last year with the increase due to the factors noted above.

Other Income  

Other income for the three months ended January 31, 2013 was $1.3 million compared to $2.4 million for the previous quarter and $3.4 million for the same period a year ago. Other income in the current quarter includes gains totalling $1.0 million on the sale of loans and non-interest revenue of $257,000 from credit cards. Other income for the previous quarter included gains of $1.9 million on the sale of loans and non-interest revenue of $218,000 from credit cards. Other income for the same period last year included gains of $3.2 million from the sale of preferred shares held in the treasury portfolio. In the previous year, the Corporation sold all of its remaining preferred shares of other financial institutions in order to minimize the impact on regulatory capital of mark-to-market adjustments on the preferred shares as regulatory capital includes unrealized gains and losses on available-for-sale securities.

Non-Interest Expenses

Non-interest expenses of the Corporation, including those relating to credit card operations, totalled $5.5 million for the current quarter compared to $6.4 million for the previous quarter and $5.8 million for the same period a year ago. The decrease in non-interest expenses from the previous quarter was due to year end accruals and higher levels of consulting fees in the previous quarter.

Income Taxes

The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 27% compared to 29% for the previous periods. The effective rate is impacted by the tax benefit on operating losses in the parent company not being recorded for accounting purposes and certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:

             
(thousands of Canadian dollars)     for the three months ended
        January 31   January 31
        2013   2012
             
Income tax on earnings of the Bank   $ 435  $ -
Tax on gain on sale of securities     -   860
Income tax on dividends paid by the Corporation     387   454
             
    $ 822  $ 1,314

 

For the current quarter, the provision for income taxes was $822,000 compared to $1.3 million a year ago and includes an income tax provision of $387,000 in the parent company relating to income tax on dividends paid by the Corporation on its Class B Preferred Shares. The income tax provision for the same quarter last year included a provision of $860,000 relating to gains on the sale of securities and a provision of $454,000 in the parent company relating to the income tax on dividends paid by the Corporation on its Class B Preferred Shares.

At January 31, 2013, the deferred income tax asset in the Bank was $8.7 million compared to $10.5 million a year ago with the decrease due to the tax effect of operating results over the past year and the recording of an income tax adjustment totalling $1.9 million in the previous year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $46 million from previous periods, the benefit of which was recorded at the time. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

In addition, the Corporation has income tax loss carry-forwards of the parent company which total approximately $34 million, the benefit of which has not been recorded. These loss carry-forwards are scheduled to begin expiring in 2014 if unutilized.

The ultimate realization of the deferred income tax asset in the Bank cannot be determined with certainty however management is of the opinion that it is probable the Bank will be able to realize the deferred income tax asset in future years. The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income in future years sufficient to offset the income tax losses. The ability to generate sufficient taxable income may be dependent upon the Bank increasing its capital to facilitate growth in its lending assets thereby increasing income from operations.

Comprehensive Income (Loss)

Total comprehensive income (loss) is comprised of the net income (loss) for the period and other comprehensive income (loss) which consists primarily of unrealized gains and losses on available-for-sale securities. Total comprehensive income (loss) for the three months ended January 31, 2013 was ($1.1 million) compared to ($2.8 million) a year ago. The change from a year ago is due to amounts of unrealized gains on available-for-sale securities recorded in comprehensive income (loss) in previous years being reversed when realized during the three months ended January 31, 2012.

Segment Analysis 

Commercial Lending  

The commercial lending segment consists of the operations of the Bank related to issuing mortgages, loans and leases. The commercial lending segment is supported by deposit taking, treasury and administrative activities of the Bank. For the three months ended January 31, 2013, net income of the commercial lending segment totalled $1.6 million compared to $2.3 million a year ago with the difference due primarily to the increase in net interest income offset by a lower level of other income compared to a year ago.

Net interest income from commercial lending for the three months ended January 31, 2013, totalled $5.7 million compared to $4.8 million last year with the increase due primarily to a lower cost of deposits and increased yields on new loans.

For the three months ended January 31, 2013, non-interest expenses for the commercial lending segment totalled $4.9 million compared to $4.9 million a year ago.

Credit Card Operations 

This segment consists of income and expenses related to the Bank's private label credit card program which was launched on January 2, 2012.  As at January 31, 2013, credit card receivables totalled $24.9 million compared to $2.3 million a year ago. For the three months ended January 31, 2013, costs to operate the credit card program exceeded revenues by $469,000 compared to $486,000 a year ago.

Net interest income (loss) from credit card operations for the three months ending January 31, 2013, totalled $241,000 compared to ($4,000) a year ago. Net interest income from credit card operations continues to be impacted by incentive programs with low or no interest rates to generate the issue of new cards.  Non-interest revenue from credit card operations in the form of credit card fees totalled $257,000 in the quarter compared to $14,000 a year ago.

For the three months ending January 31, 2013, the Bank recorded a provision for credit losses of $165,000 relating to credit card receivables compared to $62,000 a year ago. At January 31, 2013, the collective allowance relating to credit card receivables totalled $425,000 compared to $62,000 a year ago.

Non-interest expenses relating to credit card operations totalled $802,000 in the current quarter compared to $434,000 last year. These expenses consisted of salaries and benefits relating to the credit card operations, expenses for activities carried out by external parties to administer processing of the credit cards, marketing and promotional costs and general and administrative expenses.

Corporate Head Office Operations

This segment consists of income and expenses related to the operations of the parent company and typically consists of general and administrative activities as well as interest expense on notes payable and preferred share liabilities.

Consolidated Balance Sheet

Total assets of the Corporation at January 31, 2013, were $1.43 billion compared to $1.54 billion at the end of the previous quarter and $1.58 billion a year ago with the change due primarily to decreases in cash and securities and in lending assets. Cash and securities declined as a result of a strategy to increase the amount of liquid securities enabling it to reduce the overall level of cash and securities. Lending assets decreased primarily as a result of loan sales over the past year.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Corporation's treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers' acceptances and corporate debt. Cash and securities, which are held primarily for liquidity management purposes, totalled $234.9 million or 16% of total assets compared to $300 million or 20% of total assets at the end of the previous quarter and $311.9 million or 20% of total assets a year ago. Cash and cash equivalents comprised $99 million of the total amount at January 31, 2013, compared to $133 million at the end of the previous quarter and $240 million of the total a year ago. The decrease in cash and securities as a percentage of total assets was a result of the Corporation shifting its strategy to hold higher amounts of liquid securities as a proportion of its treasury portfolio instead of holding securities that were not as liquid to earn additional investment income.  The Corporation changed its strategy in order to adapt to changes in global regulatory liquidity requirements.

During the past year, the Corporation sold all of its remaining holdings of preferred shares of other financial institutions. Although the preferred shares held by the Corporation yielded an attractive after-tax rate of return, the Corporation undertook the strategy of reducing its holdings of preferred shares in order to minimize the impact on regulatory capital of mark-to-market adjustments on the preferred shares as regulatory capital includes unrealized gains and losses on available-for-sale securities. As well, changes in global banking regulations makes holding other financial institutions' preferred shares unattractive due to negative impacts in calculating regulatory capital.

At January 31, 2013, the net unrealized gains in the Corporation's available-for-sale securities portfolio was $119,000 compared to net unrealized gains of $7.4 million a year ago with the change due to gains being realized over the past year and a securities portfolio that is now comprised of highly liquid and shorter term securities. In addition there was an unrealized loss of $806,000 at January 31, 2013 in the security the Corporation classifies as held-to-maturity. This unrealized loss was due to changes in interest rates rather than due to changes in credit risk and no impairment write down is required at this time.

Mortgages and Loans

Mortgages and loans totalled $1.17 billion at January 31, 2013, compared to $1.21 billion at the end of the previous quarter and $1.24 billion a year ago with the decrease due primarily to loans sold over the past year as the Corporation undertook this strategy to assist in managing its capital levels in preparation for new regulatory guidelines which took effect in January 2013.

New lending in the current quarter totalled $136 million compared to $139 million a year ago and loan repayments for the current quarter totalled $175 million compared to $55 million last year. Loan repayments for the current quarter include loan sales totalling $37 million. The Corporation expects that it will continue to sell lending assets as market conditions allow and realize on existing gains in the portfolio.

At January 31, 2013, the Corporation's bulk financing portfolio, which consists of loans and leases acquired through its bulk financing initiative totalled $121.1 million compared to $109 million at the end of the previous quarter and $73.9 million a year ago. The Corporation continues to enter into agreements with vendors for the bulk lease financing program and expects to see accelerated growth in this market in the coming months.

Credit Quality

Gross impaired loans at January 31, 2013 totalled $1.7 million or 0.14% of total loans compared to $1.6 million or 0.13% of total loans at the end of the previous quarter and $1.7 million or 0.13% of total loans a year ago. The Corporation has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Provisions for (recovery of) credit losses in the current quarter totalled ($21,000) compared to $28,000 in the previous quarter and $184,000 a year ago. The change in the provision for credit losses from a year ago was due to the decrease in lending assets brought about by the sale of loans and proceeds received on impaired loans offset by additional provisions related to credit card receivables.

At January 31, 2013 the Corporation's collective allowance totalled $3.2 million compared to $3.0 million a year ago and the Corporation's individual allowance for credit losses totalled $1.6 million compared to $1.6 million a year ago. Included in the Corporation's collective allowance at January 31, 2013 was $425,000 relating to credit card receivables compared to $62,000 a year ago.

Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Corporation is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.

Other Assets 

Other assets totalled $25.4 million at January 31, 2013 compared to $25 million at the end of the previous quarter and $30.2 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.7 million compared to $10.5 million last year and capital assets and prepaid expenses totalling $14.0 million at January 31, 2013 compared to $16.0 million last year.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at January 31, 2013 totalled $1.23 billion compared to $1.32 billion at the end of the previous quarter and $1.36 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $39.7 million or approximately 3.2% of total deposits at the end of the year were in the form of demand deposits compared to $33.9 million or approximately 2.8% of total deposits a year ago, with the remaining deposits having fixed terms. Total deposits decreased from last year as a result of the reduction in cash and securities and the decrease in lending assets.

In order to diversify its sources of deposits and reduce its cost of new deposits, the Corporation has identified a new source, that being deposits of trustees in the bankruptcy industry. The Corporation has developed new banking software to serve this deposit market and launched this product on a pilot basis in April 2012. These services are now being offered to trustees in the bankruptcy industry across Canada.

A further source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. From time to time, the Corporation uses these sources of short-term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At January 31, 2013, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.

Other liabilities consist primarily of accounts payable and accruals and the fair value of derivatives. At January 31, 2013, other liabilities totalled $14.1 million compared to $32.7 million at the end of the previous quarter and $30.6 million a year ago with the change due to a reduction in the fair value of derivatives as interest rate swap contracts were unwound during the quarter. See Interest Rate Risk Management in this Management's Discussion and Analysis for more information.

Securitization Liabilities 

The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At January 31, 2013, the amount of securitization liabilities totalled $43.5 million compared to $43.4 million a year ago. The Corporation has not entered into any securitization transactions in the current quarter.

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $41.5 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $82.3 million at January 31, 2013 compared to $77.7 million a year ago with the increase due primarily to additional notes issued during the past year by the Corporation. Excluding issue costs, notes payable consist of Series C Notes totalling $61.7 million maturing in 2018, a five year note in the amount of $4.0 million bearing interest at 6% and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum.

In addition, the Corporation has outstanding subordinated notes totalling $21.5 million issued by the Bank to external parties. These subordinated notes bear interest at rates ranging from 8.00% to 11.00%, are callable by the Bank, and mature between 2019 and 2021.

As noted previously, on January 28, 2013, the Corporation announced that it would be seeking approval from its Series C Note holders to modify its Series C Notes at a Note holder meeting to be held on March 7, 2013. The Corporation is requesting that the Series C Note indenture be modified so that the Corporation has the option, as at June 30, 2014, provided the Bank has completed its IPO and the Bank's common shares have been listed on the TSX, to satisfy all future interest obligations of the Corporation's outstanding Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It will also request that the Series C Note indenture be modified to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation.

Preferred Share Liabilities

At January 31, 2013, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million before deducting issue costs of $2.3 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.0 million, net of issue and conversion costs, representing the fair value of the Corporation's obligation to make future payments of principal and interest, has been classified on the Corporation's Consolidated Balance Sheet as Preferred Share Liabilities.  In addition, an amount of $3.2 million, net of income taxes and issue costs, representing the equity portion of the Class B Preferred Shares, has been included in Shareholders' Equity on the Corporation's Consolidated Balance Sheet. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $42.0 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The increase is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 11.8%.

Liquidity

At January 31, 2013, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations due to the end of fiscal 2014. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on Class B Preferred Shares. The funding for the obligations beyond 2014 is expected to come primarily from cash and interest income earned by the Corporation.

Shareholders' Equity

At January 31, 2013, shareholders' equity was $18.3 million compared to $17.9 million at the end of previous quarter and $24.6 million a year ago with the decrease from a year ago due primarily to operating losses over the past year. Common shares outstanding at January 31, 2013 totalled 29,655,507 compared to 26,824,737 a year ago with the change due to 1,657,163 common shares issued since last year as part of the dividends on the Class B Preferred Shares and 1,173,607 common shares issued under a private placement. Common share options outstanding totalled 489,083 at the end of the quarter compared to 1,163,033 a year ago with the change due to common share options expiring during the past year.

At January 31, 2013, there were 314,572 Class A Preferred Shares outstanding, unchanged from a year ago and 1,909,458 Class B Preferred Shares outstanding, also unchanged from a year ago. In November, 2012, 6,202,370 warrants to acquire common shares and common share warrants expired.

The Corporation's book value per common share at January 31, 2013 was $0.47 compared to $0.48 at the end of the previous quarter and $0.61 a year ago. Assuming the outstanding Class B Preferred Shares are converted into common shares on the basis of $5.00 per share, the Corporation's book value per common share at January 31, 2013 would be $1.52 per share.

Reduction of Stated Capital

On May 30, 2012, at a special meeting of the shareholders of the Corporation, approval was given authorizing the reduction of the stated capital of the common shares of the Corporation by $50,472,000 and correspondingly reducing retained earnings (deficit) by the same amount. There was no impact on total shareholders' equity.

Updated Share Information

As at March 5, 2013, there were no changes since January 31, 2013 in the number of outstanding common shares, Class A or Class B Preferred Shares. As at March 5, 2013, there were 539,083 common share options outstanding with the change since January 31, 2013 due to a grant of 50,000 options.

Capital Management

The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). Significant changes under Basel III that are most relevant to the Bank include:

  • Increased focus on tangible common equity.
  • All forms of non-common equity such as the Bank's conventional subordinated notes must be NVCC compliant. NVCC compliant means the subordinated notes must include a clause that would require conversion to common equity in the event that OSFI deems the institution to be insolvent or a government is ready to inject a "bail out" payment.
  • Changes in the risk-weighting of certain assets.
  • Additional capital buffers.
  • New requirements for levels of liquidity and new liquidity measurements.

OSFI required that all Canadian banks must comply with the Basel III standards on an "all-in" basis effective January 1, 2013 for purposes of determining its risk-based capital ratios. Effective January 31, 2013, required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.50% capital conservation buffer. The Basel III rules provide for "transitional" adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.

Under the Basel III standards, regulatory capital of the Bank totalled $131.1 million at January 31, 2013 and the Bank exceeded the new capital requirements with a CET1 ratio of 7.81%. In addition, its Tier 1 capital ratio was 7.81%, its total capital ratio was 12.0% and its assets-to-capital ratio at January 31, 2013 was 10.37.

See note 13 to the interim consolidated financial statements for more information regarding capital management.

Interest Rate Risk Management

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholder's equity. The following table provides the duration difference between the Bank's assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's shareholder's equity over a 60 month period if no remedial actions are taken.

The change in exposure to a decrease of 100 basis points in interest rates in a 60 month period from a year ago was due primarily to the change in the composition of the Bank's treasury portfolio through the sale of longer term securities over the past with the proceeds being invested in cash or short term liquid securities as well as the Corporation unwinding interest rate swaps during the quarter.

The decision to unwind the swap contracts during the quarter was made as the Bank decided to use on-balance sheet strategies to manage its interest rate risk rather than interest rate swaps. These strategies include the raising of longer term deposits and reducing the duration of its assets primarily by maintaining higher levels of shorter duration and highly liquid treasury assets. Another factor in unwinding its interest rate swap contracts was the decision to eliminate the basis risk that resulted from the decrease in the correlation between the yield on banker's acceptances and the GIC's the Bank issues that occurred during the global liquidity crisis.

                     
      January 31, 2013     January 31, 2012
      Increase 100
bps
  Decrease 100
bps
    Increase 100
bps
  Decrease 100
bps
                     
Sensitivity of projected net interest
income during a 12 month period
   $ 4,436  $ (4,503)    $ 4,228  $ (4,202)
Sensitivity of projected net interest
income during a 60 month period
    1,824  $ (2,175)     (8,708)  $ 14,830
                     
Duration difference between assets and
liabilities (months)
    1         1    

 

Summary of Quarterly Results

(thousands of dollars except per share amounts)     2013     2012     2011
      Q1     Q4   Q3   Q2   Q1     Q4   Q3   Q2
                                       
Results of operations:                                      
Total interest income    $ 15,705   $ 15,264 $ 15,356 $ 14,928 $ 15,021   $ 14,798 $ 14,644 $ 13,594
Interest expense     11,735     12,069   12,244   12,581   12,022     12,374   12,969   11,995
Net interest income     3,970     3,555   3,112   2,347   2,999     2,424   1,675   1,599
Provision for (recovery of) credit losses     (21)     28   249   -   184     118   37   78
Other income     1,280     2,370   3,573   3,939   3,405     8,649   255   919
Total revenue     5,271     5,897   6,436   6,286   6,220     10,955   1,893   2,440
Non-interest expenses     5,547     6,426   6,162   5,724   5,759     6,680   5,582   4,293
Income (loss) before income taxes     (276)     (529)   274   562   461     4,275   (3,689)   (1,853)
Income tax provision (recovery)     822     2,165   888   1,473   1,314     5,558   (154)   293
Net income (loss)   $ (1,098)   $ (2,694) $ (614) $ (911) $ (853)   $ (1,283) $ (3,535) $ (2,146)
Earnings (loss) per share                                      
  - basic   $ (0.04)   $ (0.10) $ (0.02) $ (0.03) $ (0.03)   $ (0.05) $ (0.17) $ (0.14)
  - diluted   $ (0.04)   $ (0.10) $ (0.02) $ (0.03) $ (0.03)   $ (0.05) $ (0.17) $ (0.14)

 

The financial results of the Corporation for each of the last eight quarters are summarized above. The Corporation's results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect the increase in lending assets, adjusted for loan sales in the first quarter of 2013, with some seasonality occurring during the spring and summer months due to residential construction lending. Additional factors in the increase in net interest income were higher yields on loans booked and a decrease in the cost of deposits over the past year.

Other income during the quarters shows variability due to the level of gains realized in each quarter on the sale of preferred shares held in the Corporation's treasury portfolio and in the fourth quarter of 2012 and first quarter of 2013 from the sale of loans. The provision for credit losses recorded in the third quarter of 2012 was due to loan growth in the quarter and an adjustment in the collective allowance relating to credit card receivables.

Non-interest expenses decreased in the first quarter of 2013 as a result of a strategy to reduce overhead expenses, a decrease in professional and consulting fees in the quarter and timing of expenses. Non-interest expenses increased in the fourth quarter of 2012 as a result of expenses being incurred totalling approximately $1.3 million relating to professional and consulting fees and increased costs relating to credit card operations.

The provision for income taxes in the first quarter of 2013 reflects the effective statutory income tax rate of the Bank and includes the income tax on dividends paid by the Corporation on its Class B Preferred Shares. The provision for income taxes in the fourth quarter of 2012 included an income tax adjustment of $1.9 million relating to a change in the estimate of previously recognized deferred income tax assets. The income tax provision in the third quarter of 2012 decreased from previous quarters as a result of a recovery for income taxes relating to a change in corporate income tax rates substantively enacted during the quarter.

Significant Accounting Policies and Use of Estimates and Judgments

Significant accounting policies are detailed in Note 3 of the Corporation's 2012 Audited Consolidated Financial Statements. There have been no change in accounting policies nor any significant new policies adopted during the current period.

In preparing these Interim Consolidated Financial Statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Areas where significant judgment was applied or estimates were developed include the calculation of the allowance for credit losses, assessments of fair value and impairments of financial instruments, and the measurement of deferred income taxes.

It is reasonably possible, on the basis of existing knowledge, that actual results may vary from that expected in the generation of these estimates. This could result in material adjustments to the carrying amounts of assets and/or liabilities affected in the future.

Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are applied prospectively once they are recognized.

Future Change in Accounting Policies

IFRS 9: Financial instruments (IFRS 9)

In November 2009, the IASB issued IFRS 9 as the first phase of an ongoing project to replace IAS 39. This first issuance of IFRS 9 introduced new requirements for classifying and measuring financial assets. IFRS 9 was then re-issued in October 2010, incorporating new requirements for the accounting of financial liabilities, and carrying over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. The mandatory effective date for the adoption of IFRS 9 was set for annual periods beginning on or after January 1, 2013, with earlier application permitted. In December 2011, the IASB amended the mandatory effective date for the adoption of IFRS 9 for annual periods beginning on or after January 1, 2015, with earlier application permitted. The IASB continues to deliberate on the content of IFRS 9 and intends to expand the existing standard by adding new requirements for the impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various projects, IFRS 9 will represent a complete replacement of IAS 39.

The most significant changes expected under IFRS 9 relate to decreases in the classification categories available for financial instruments, a requirement that debt instruments meet a business model and cash flow characteristic test before being eligible for measurement at amortized cost, and a requirement that changes in the fair value of equity instruments be reported in profit or loss (unless an irrevocable election is made at initial recognition to recognize such changes in other comprehensive income). Management has performed preliminary evaluations of the impact of IFRS 9, however the impact on the Corporation's Consolidated Financial Statements is not determinable at this time as it is dependent upon the nature of financial instruments held by the Corporation when IFRS 9 becomes effective. The Corporation is choosing not to early adopt IFRS 9.

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2012, and are found on pages 47 to 52 of the Corporation's 2012 Annual Report.

Controls and Procedures

During the most recent interim period, there have been no changes in the Corporation's policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Dated: March 5, 2013

Forward-Looking Statements

The statements in this management's discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see page 52 of our 2012 Annual Report.

The foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. The forward-looking information contained in the management's discussion and analysis is presented to assist our shareholders in understanding our financial position and may not be appropriate for any other purposes. Except as required by securities law, we do not undertake to update any forward-looking statement that is contained in this management's discussion and analysis or made from time to time by the Corporation or on its behalf.

PACIFIC & WESTERN CREDIT CORP.
Consolidated Balance Sheet
(Unaudited)

(thousands of Canadian dollars)              
      January 31   October 31   January 31
As at           2013   2012   2012
                 
Assets              
                 
Cash and cash equivalents   $ 98,956 $ 132,766 $ 240,204
Securities (note 4)     135,963   167,227   71,706
Loans, net of allowance for credit losses (note 5)     1,173,287   1,210,311   1,235,513
Other assets          25,384   24,953   30,208
                   
    $ 1,433,590 $ 1,535,257 $ 1,577,631
               
Liabilities and Shareholders' Equity              
               
Deposits    $ 1,233,453 $ 1,317,298 $ 1,359,923
Notes payable (note 6)       82,331   82,172   77,728
Securitization liabilities (note 7)       43,484   43,356   43,431
Other liabilities          14,078   32,711   30,583
Preferred share liabilities (note 8)     41,975   41,823   41,341
      1,415,321   1,517,360   1,553,006
                   
Shareholders' equity:              
  Share capital (note 9)     23,409   21,888   69,517
  Retained earnings (deficit)     (5,227)   (4,063)   (50,316)
  Accumulated other comprehensive income      87   72   5,424
      18,269   17,897   24,625
                   
    $ 1,433,590 $ 1,535,257 $ 1,577,631

The accompanying notes are an integral part of these interim Consolidated Financial Statements.

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Income (Loss)
(Unaudited)

(thousands of Canadian dollars, except per share amounts)          
      for the three months ended
      January 31   January 31
            2013   2012
                 
Interest income:            
  Loans   $ 13,613  $ 12,727
  Securities         824   1,252
  Loan fees         1,268   1,042
            15,705   15,021
               
Interest expense:            
  Deposits and other       8,376   8,844
  Notes payable       2,132   2,018
  Preferred share liabilities     1,227   1,160
            11,735   12,022
               
Net interest income       3,970   2,999
               
Other income (note 10)       1,280   3,405
Net interest and other income      5,250   6,404
               
Provision for (recovery of) credit losses (note 5b)     (21)   184
Net interest and other income after provision for credit losses     5,271   6,220
                 
Non-interest expenses:            
  Salaries and benefits       2,563   2,790
  General and administrative     2,566   2,533
  Premises and equipment     418   436
            5,547   5,759
               
Income (loss) before income taxes     (276)   461
               
Income tax provision       822   1,314
               
Net loss   $ (1,098) $ (853)
             
Net loss available to:            
  Preferred shareholders   $ 17 $ 17
  Common shareholders     (1,115)   (870)
Net loss   $ (1,098) $ (853)
                 
Basic earnings (loss) per share    $ (0.04) $ (0.03)
               
Diluted earnings (loss) per share    $ (0.04) $ (0.03)
               
Weighted average number of common shares outstanding     28,855,000   26,435,000
             

The accompanying notes are an integral part of these interim Consolidated Financial Statements.

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

(thousands of Canadian dollars)          
      for the three months ended
      January 31   January 31
      2013   2012
           
Net loss   $ (1,098)  $ (853)
               
Other comprehensive income (loss), net of tax          
  Net unrealized gains (losses) on assets held as
available-for-sale (1)
    15   554
  Amount transferred to income or loss on disposal
of available-for-sale assets (2)
    -   (2,498)
        15   (1,944)
                 
Comprehensive loss   $ (1,083)  $ (2,797)

 

(1)      Net of income tax benefit (expense) of ($6) (2012 - ($205))
(2)      Net of income tax benefit (expense) $nil (2012 - $924)

The accompanying notes are an integral part of these interim Consolidated Financial Statements.

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)

(thousands of Canadian dollars)          
      for the three months ended
      January 31   January 31
      2013   2012
               
Common shares (note 9):            
                 
Balance, beginning of the period   $ 14,913 $ 61,886
Issued on payment of Class B preferred share dividends     674   674
Issued during the period     843   -
           
Balance, end of the period   $ 16,430 $ 62,560
           
Common share warrants:          
           
Balance, beginning of the period   $ 2,003 $ 2,003
Amount transferred to contributed surplus on expiry     (2,003)   -
             
Balance, end of the period   $ - $ 2,003
               
Preferred shares (note 9):            
               
Class A preferred shares            
Balance, beginning and end of the period   $ 1,061 $ 1,061
             
Class B preferred shares            
Balance, beginning and end of the period   $ 3,187  $ 3,187
               
Contributed surplus (note 9):            
           
Balance, beginning of the period   $ 724 $ 688
Fair value of stock options granted     4   18
Amount transferred from common share warrants     2,003   -
                 
Balance, end of the period   $ 2,731 $ 706
                 
Retained earnings (deficit):            
               
Balance, beginning of the period   $ (4,063) $ (49,397)
Net loss     (1,098)   (853)
Dividends paid         (66)   (66)
                 
Balance, end of the period   $ (5,227) $ (50,316)
             
Accumulated other comprehensive income, net of taxes:          
           
Balance, beginning of the period   $ 72 $ 7,368
Other comprehensive income (loss)     15   (1,944)
                 
Balance, end of the period   $ 87 $ 5,424
               
Total shareholders' equity   $ 18,269 $ 24,625

The accompanying notes are an integral part of these interim Consolidated Financial Statements.

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Cash Flows
(Unaudited) 

(thousands of Canadian dollars)            
            January 31     January 31
For the three months ended     2013     2012
             
Cash provided (used in):            
               
Operations:            
  Net loss   $ (1,098)   $ (853)
  Items not involving cash:            
      Provision for (recovery of) credit losses     (21)     184
      Change in derivative financial instruments     -     (204)
      Provision for income taxes     822     860
      Stock-based compensation     4     18
      Gain on disposal of securities     -     (3,199)
      Interest income     (15,705)     (15,021)
      Interest expense      11,735     12,022
      Gain on sale of lending assets     (1,011)     -
  Mortgages and loans     38,824     (85,727)
  Interest received        14,445     15,052
  Deposits       (83,845)     90,193
  Interest paid        (11,697)     (10,652)
  Income taxes paid      -     (454)
  Change in other assets and liabilities     (18,325)     (3,333)
            (65,872)     (1,114)
Investing:            
  Purchase of securities     (21,585)     (155)
  Proceeds from sale and maturity of securities     52,870     46,640
      31,285     46,485
Financing:                
  Proceeds on issuance of notes payable     2,000     -
  Repayment of notes payable     (2,000)     -
  Proceeds from shares issued     843     -
  Dividends paid       (66)     (66)
            777     (66)
                   
Increase (decrease) in cash and cash equivalents     (33,810)     45,305
                 
Cash and cash equivalents, beginning of the period     132,766     194,899
                   
Cash and cash equivalents, end of the period   $ 98,956   $ 240,204
                   
Cash and cash equivalents is represented by:            
  Cash   $ 59,681   $ 224,310
  Cash equivalents       39,275     15,894
                   
Cash and cash equivalents, end of the period   $ 98,956   $ 240,204

The accompanying notes are an integral part of these interim Consolidated Financial Statements

 

 

PACIFIC & WESTERN CREDIT CORP.
Notes to Interim Consolidated Financial Statements
(Unaudited)

Three month periods ended January 31, 2013 and 2012


1. Reporting entity:

Pacific & Western Credit Corp. (the "Corporation"), is a holding company whose shares trade on the Toronto Stock Exchange. It is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2.

The Corporation's wholly-owned and principal subsidiary is Pacific & Western Bank of Canada ("PWB" or the "Bank") which operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI).  Pacific & Western Bank of Canada is involved in the business of providing financial solutions to clients in selected niche markets.

2. Basis of preparation:

a) Statement of compliance

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Corporation's audited Consolidated Financial Statements for the year ended October 31, 2012.

The interim Consolidated Financial Statements for the three months ended January 31, 2013 and 2012 were approved by the Board of Directors on March 5, 2013.

b) Basis of measurement:

These interim Consolidated Financial Statements have been prepared on the historical cost basis except for securities designated as available-for-sale, loans in a hedging relationship, derivative liabilities and stock based compensation that are measured at fair value in the Consolidated Balance Sheets.

c) Functional and presentation currency

These interim Consolidated Financial Statements are presented in Canadian dollars which is the Corporation's functional currency. Except as indicated, the financial information presented has been rounded to the nearest thousand.

d) Use of estimates and judgements

In preparing these interim Consolidated Financial Statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Areas where significant judgment was applied or estimates were developed include the calculation of the allowance for credit losses, assessments of fair value and impairments of financial instruments, measurement of stock-based compensation, measurement of warrants, and the measurement of deferred income taxes.

It is reasonably possible, on the basis of existing knowledge, that actual results may vary from that expected in the generation of these estimates. This could result in material adjustments to the carrying amounts of assets and/or liabilities affected in the future.

Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are applied prospectively once they are recognized.

3. Significant accounting policies:

The accounting policies applied by the Corporation in these interim Consolidated Financial Statements are the same as those applied by the Corporation as at and for the year ended October 31, 2012 and are detailed in Note 3 of the Corporation's 2012 Audited Consolidated Financial Statements. There have been no changes in accounting policies nor any significant new policies adopted during the current period.

4. Securities:

Portfolio analysis:

                 
      January 31   October 31   January 31
        2013   2012   2012
               
Available-for-sale securities              
Securities issued or guaranteed by:              
  Canadian federal government   $ 61,740  $ 76,841  $ 16,275
  Canadian provincial governments     32,899   48,526   -
  Canadian municipal governments     948   1,581   3,975
Corporate debt     25,126   25,012   15,140
Corporate equity     -   -   21,000
Total available-for-sale securities   $ 120,713  $ 151,960  $ 56,390
                 
Held-to-maturity security              
Corporate debt   $ 15,250  $ 15,267  $ 15,316
Total securities   $ 135,963  $ 167,227  $ 71,706

 

5. Loans:

a) Portfolio analysis:

               
      January 31   October 31   January 31
      2013   2012   2012
               
Residential mortgages              
  Insured   $ 27,458  $ 35,966  $ 37,692
  Uninsured     248,903   230,129   201,057
Securitized mortgages     41,685   41,894   42,532
Government financing     155,351   172,326   221,791
Corporate loans     603,165   630,738   633,952
Corporate leases     67,325   71,131   91,402
Other loans     4,958   5,080   4,667
Credit card receivables     24,908   23,397   2,286
      1,173,753   1,210,661   1,235,379
               
Allowance for credit losses:              
  Collective     (3,166)   (3,283)   (3,006)
  Individual     (1,583)   (1,579)   (1,597)
      (4,749)   (4,862)   (4,603)
               
      1,169,004   1,205,799   1,230,776
               
Accrued interest     4,283   4,512   4,737
               
Total loans, net of allowance for credit losses   $ 1,173,287  $ 1,210,311  $ 1,235,513

 

The collective allowance for credit losses relates to the following loan portfolios:

               
      January 31   October 31   January 31
      2013   2012   2012
               
Residential mortgages    $ 598  $ 600  $ 445
Corporate and government loans     2,116   2,307   2,455
Other loans     27   24   44
Credit card receivables     425   352   62
     $ 3,166  $ 3,283  $ 3,006

The Corporation holds collateral against loans in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the nature of the underlying collateral. For mortgages secured by real estate, the value of collateral is determined at the time of borrowing by an appraisal. For loans secured by equipment, the value of collateral is assigned by the nature of the underlying equipment held. The fair value of collateral securing loans that are not impaired at January 31, 2013 totalled $1,642,217,000.

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                       
              January 31   October 31   January 31
              2013   2012   2012
For the three months ended     Collective   Individual   Total
Allowance
  Total
Allowance
  Total
Allowance
                       
Balance, beginning of the period    $ 3,283  $ 1,579  $ 4,862  $ 4,387  $ 4,387
Provision for (recovery of) credit losses     (59)   38   (21)   461   184
Recoveries (write-offs)     (58)   (34)   (92)   14   32
                       
Balance, end of the period    $ 3,166  $ 1,583  $ 4,749  $ 4,862  $ 4,603

c)  Impaired loans:

                 
        January 31, 2013
        Gross
impaired
  Individual
allowance
  Net
impaired
                 
Residential mortgages     $ 1,670  $ 1,583  $ 87
Other loans       17       17
      $ 1,687  $ 1,583  $ 104
                 
                 
        January 31, 2012
        Gross
impaired
  Individual
allowance
  Net
impaired
                 
Residential mortgages     $ 1,617  $ 1,597  $ 20
Other loans       40   -   40
      $ 1,657  $ 1,597  $ 60

 

Impaired loans at January 31, 2013 include foreclosed real estate held for sale with a gross carrying value of $111,000 (January 31, 2012 - $158,000) and a related allowance of $111,000 (January 31, 2012 - $110,000). Real estate held for sale is measured at the lower of cost and fair value less costs to sell.

Interest income recognized on impaired loans for the three months ended January 31, 2013 was $38,000 (January 31, 2012 - $36,000). An individual allowance has been recognized on the impaired loans to reflect the estimated recoverable amounts for impaired loans.

At January 31, 2013, loans, other than credit card receivables, past due but not impaired totalled $nil (January 31, 2012 - $15,000). At January 31, 2013, credit card receivables overdue by one day or more but not impaired totalled $1,362,000 (January 31, 2012 - $nil).

6. Notes payable:

                   
          January 31   October 31   January 31
          2013   2012   2012
                   
Ten year term Series C Notes unsecured, maturing
2018, net of issue costs of $1,144 (October 31, 2012 -
$1,183, January 31, 2012 - $1,292) , effective interest of
10.56% 
      $ 57,902 $ 57,774 $ 57,423
                   
Ten year term, unsecured, callable, subordinated notes
payable by the Bank to third parties, maturing between
2019 and 2021, net of issue costs of $1,271 (October
31, 2012 - $1,302, January 31, 2012 - $1,395), effective
interest of 10.92% 
        20,229   22,198   20,105
                   
Notes payable, unsecured, effective interest of 6.05%          4,200   2,200   200
                   
        $ 82,331  $ 82,172  $ 77,728

 

7. Securitization liabilities:

Securitization liabilities include amounts payable to counterparties for cash received upon initiation of securitization transactions, accrued interest on amounts payable to counterparties, and the unamortized balance of deferred costs and discounts which arose upon initiation of the securitization transactions.

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020.  Securitized insured mortgages with a carrying value of $41,447,000 (January 31, 2012 - $42,532,000) are pledged as collateral for these liabilities.

8. Preferred share liabilities:

At January 31, 2013, the Corporation has outstanding 1,909,458 (January 31, 2012 - 1,909,458) Class B Preferred Shares with a total value of $47.7 million (October 31, 2012 - $47.7 million, January 31, 2012 - $47.7 million) less issue costs of $2.3 million (October 31, 2012 - $2.3 million, January 31, 2012 - $2.5 million).  As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.0 million (October 31, 2012 - $41.8 million, January 31, 2012 - $41.3 million), net of issue costs, representing the fair value of the Corporation's obligation to make future payments of principal and interest has been classified on the Corporation's Consolidated Balance Sheets as a preferred share liability.  In addition, an amount of $3.2 million (October 31, 2012 - $3.2 million, January 31, 2012 - $3.2 million) representing the equity element of the Class B Preferred Shares, net of issue costs, has been classified in share capital on the Consolidated Balance Sheet.

As the preferred shares must be redeemed by the Corporation for approximately $47.7 million (October 31, 2012 - $47.7 million, January 31, 2012 - $47.7 million), the preferred share liability amount of $42.0 million (October 31, 2012 - $41.8 million, January 31, 2012 - $41.3 million) is being adjusted over the remaining term to redemption, until the amount is equal to the estimated redemption amount.  The increase is included in interest expense in the Consolidated Statement of Income (Loss) calculated using the effective interest rate of 11.8%.

9. Share capital:

                 
            Stock Options
          Common
shares
outstanding
Number   Weighted-
average
exercise
price
                 
Outstanding, October 31, 2012      28,522,491 1,163,033  $ 4.77
Granted         - -   -
Issued for cash proceeds     480,429 -   -
Issued pursuant to Class B Preferred Share dividend     652,587 -   -
Expired         - (673,950)   2.81
Outstanding, January 31, 2013      29,655,507 489,083  $ 7.47

 

At January 31, 2013, there were 314,572 (January 31, 2012 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (January 31, 2012 - 1,909,458) Class B Preferred Shares outstanding.  In November 2012, 6,202,370 warrants to acquire common shares and common share warrants expired.

The Corporation recognized compensation expense relating to the estimated fair value of stock options granted for the three month period ended January 31, 2013 of $4,000 (January 31, 2012 - $18,000). During the three months ended January 31, 2012, 50,000 options were granted to an officer who is a member of the Corporation's key management personnel. These options are exercisable into common shares at $1.90 per share and expire in January, 2022. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.31%, (ii) expected option life of 60 months and (iii) expected volatility of 57.71%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.95 per option. No stock options were granted during the three months ended January 31, 2013.

During the three months ended January 31, 2013, the Corporation issued 127,240 DSU's (January 31, 2012 - 128,574) to its directors. The amount recorded in the Consolidated Statement of Income (Loss) relating to DSU's for the three months ended January 31, 2013 was a $13,000 recovery (January 31, 2012 - $324,000 expense).  At January 31, 2013 there were 426,696 (January 31, 2012 - 299,456) DSU's outstanding.

On May 30, 2012, at a special meeting of the shareholders of the Corporation, approval was given authorizing the reduction of the stated capital of the common shares of the Corporation by $50,472,000 and correspondingly reducing retained earnings (deficit) by the same amount. There was no impact on total shareholders' equity.

10. Other income:

           
      for the three months ended
      January 31   January 31
      2013   2012
           
Gain on sale of securities    $ -  $ 3,199
Gain on sale of loans     1,011   -
Credit card non-interest revenue     257   -
Other income     12   2
Mark-to-market adjustment for derivatives     -   204
           
     $ 1,280  $ 3,405

11. Commitments and contingencies:

The amount of credit related commitments represents the maximum amount of additional credit that the Corporation could be obligated to extend.  Under certain circumstances, the Corporation may cancel loan commitments at its option.  The amount with respect to the letters of credit are not necessarily indicative of credit risk as many of these arrangements are contracted for a limited period of usually less than one year and will expire or terminate without being drawn upon.

             
        January 31   January 31
        2013   2012
             
Loan commitments      $ 170,421  $ 233,209
Undrawn credit card lines       121,453   42,313
Letters of credit       24,098   30,741
             
       $ 315,972  $ 306,263

 

In the ordinary course of business, cash and securities are pledged against liabilities and off-balance sheet items. Details of assets pledged are as follows:

             
        January 31   January 31
        2013   2012
             
Collateral related to derivative transactions      $ -  $ 18,431
Collateral related to letters of credit       9,248   9,171
             
       $ 9,248  $ 27,602

12. Related party transactions:

The Corporation's Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or outstanding balances during the period.

The Corporation issues both mortgages and personal loans to employees and Senior Executive Officers. At January 31, 2013 amounts due from Senior Executive Officers totalled $919,000 (January 31, 2012 - $970,000) and are unsecured.

The interest rates charged on these loans are similar to those charged in an arms-length transaction. Interest income earned on the above loans for the three months January 31, 2013 was $10,000 (January 31, 2012 - $11,000). There was no provision for credit losses related to loans issued to key management personnel for the three months ended January 31, 2013 and 2012.

13. Capital management:

a) Overview:

The Corporation's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.  The impact of the level of capital on shareholders' return is also important and the Corporation recognizes the need to maintain a balance between the higher returns that might be possible with greater leverage and the advantages and security afforded by a sound capital position.

The Corporation's primary subsidiary is Pacific & Western Bank of Canada, (the "Bank") and as a result, the following discussion on capital management is with respect to the capital of the Bank.  The Bank operates as a bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI).  OSFI sets and monitors capital requirements for the Bank.

Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and conditions in financial markets.

The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders.  The Bank's regulatory capital is comprised of share capital, retained earnings and unrealized gains and losses on available-for-sale securities (Common Equity Tier 1 capital) and the face value of subordinated notes (Tier 2 capital).

The Bank monitors its capital adequacy and related capital ratios on a daily basis and has policies setting internal maximum and minimum amounts for its capital ratios.  These capital ratios consist of the assets-to-capital multiple and the risk-based capital ratios.

During the period ended January 31, 2013 there were no material changes in the Bank's management of capital.

b) Risk-Based Capital Ratio:

The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III).

OSFI required that all Canadian banks must comply with the Basel III standards on an "all-in" basis effective January 1, 2013 for purposes of determining its risk-based capital ratios. Effective January 31, 2013, required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.50% capital conservation buffer. The Basel III rules provide for "transitional" adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.

OSFI also requires banks to measure capital adequacy in accordance with guidelines for determining risk adjusted capital and risk-weighted assets including off-balance sheet credit instruments as specified in the Basel III regulations.  Based on the deemed credit risk for each type of asset, assets held by the Bank are assigned a weighting of 0% to 150% to determine the risk-based capital ratio.

The Bank's risk-based capital ratios are calculated as follows:

             
          January 31, 2013
          "All-in"   "Transitional"
               
Common Equity Tier 1 (CET1) capital          
  Directly issued qualifying common share capital   $ 103,965 $ 103,965
  Retained earnings (deficit)     (9,818)   (9,818)
  Accumulated other comprehensive income     87   87
CET1 before regulatory adjustments     94,234   94,234
  Regulatory adjustments applied to CET1      (8,899)   -
Total Common Equity Tier 1 capital   $ 85,335 $ 94,234
             
Additional Tier 1 capital           
  Directly issued qualifying Additional Tier 1 instruments     -   -
Total Tier 1 capital       $ 85,335 $ 94,234
             
Tier 2 capital            
  Directly issued capital instruments subject to phase out from Tier 2   $ 51,500 $ 51,500
Tier 2 capital before regulatory adjustments     51,500   51,500
  Regulatory adjustments applied to Tier 2     (5,753)   (5,150)
Total Tier 2 capital   $ 45,747 $ 46,350
Total capital    $ 131,082 $ 140,584
Total risk-weighted assets   $ 1,092,731 $ 1,102,233
Capital ratios            
  CET1 Ratio     7.81%   8.55%
  Tier 1 Capital Ratio     7.81%   8.55%
  Total Capital Ratio     12.00%   12.75%

 

c) Assets-to-Capital Multiple:

The Bank's growth in total assets is limited by a permitted assets-to-capital multiple which is prescribed by OSFI and is defined as the ratio of the total assets of the Bank to its regulatory capital. The Bank's assets-to-capital multiple is calculated as follows:

           
          January 31
          2013
           
Total assets (on and off-balance sheet)     $ 1,457,683
Capital          
  Common shares     $ 103,965
  Retained earnings (deficit)       (9,818)
Accumulated other comprehensive income       87
  Subordinated notes (leverageable amount)       46,350
Total regulatory capital     $ 140,584
           
Assets-to-capital ratio       10.37

 

The Bank was in compliance with the assets-to-capital multiple prescribed by OSFI throughout the current period.

14. Interest rate position:

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholder's equity. The following table provides the duration difference between the Bank's assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's shareholder's equity over a 60 month period if no remedial actions are taken.

The change in exposure to a decrease of 100 basis points in interest rates in a 60 month period from a year ago was due primarily to the change in the composition of the Bank's treasury portfolio through the sale of longer term securities over the past with the proceeds being invested in cash or short term liquid securities as well as the Corporation unwinding interest rate swaps during the quarter.

                     
      January 31, 2013       January 31, 2012
      Increase 100
bps
  Decrease 100
bps
    Increase 100
bps
  Decrease 100
bps
                     
Sensitivity of projected net interest
income during a 12 month period
  $ 4,436  $ (4,503)    $ 4,228  $ (4,202)
Sensitivity of projected net interest
income during a 60 month period
    1,824  $ (2,175)     (8,708)  $ 14,830
                     
Duration difference between assets and
liabilities (months)
    1         1    

 

15. Segmented information:

The Corporation determines its operating segments based on the different business activities of its component operations. The Corporation has identified three distinct operating segments: commercial lending, credit card lending and corporate head office operations.

The commercial lending segment consists of the operations of the Bank related to issuing mortgages and loans and participating in securitization arrangements. The commercial lending segment is supported by deposit taking, and treasury and administrative activities. The credit card lending segment consists of the operations of the Bank related to its private label credit card program.  The corporate head office operations segment consists of operations of the parent company, which are not directly related to the operations of the Bank.

Operating segment financial results are based on internal financial reporting documents which are provided to the Corporation's chief decision makers. The financial results for all segments are presented on a consolidated basis. Transactions between segments have been eliminated.

The following table details financial results for the Corporation by operating segment:

                           
For the three months ended     January 31, 2013
      Commercial
lending
  Credit card
lending (1)
  Corporate
head office
  Intersegment
eliminations
  Total
                       
Net interest income   $ 5,688  $ 241  $ (2,766)  $ 807 $ 3,970
Other income         1,023   257   -   -   1,280
Net interest income and other income     6,711   498   (2,766)   807   5,250
Provision for credit losses       (186)   165   -   -   (21)
Net interest and other income (loss) after provision for credit losses     6,897   333   (2,766)   807   5,271
Non-interest expense         4,878   802   167   (300)   5,547
Income (loss) before income taxes     2,019   (469)   (2,933)   1,107   (276)
Income tax expense (recovery)       435   -   387   -   822
Net income (loss)   $ 1,584  $ (469)  $ (3,320)  $ 1,107 $ (1,098)
                           
Total assets   $ 1,408,677  $ 24,908  $ 1,101  $ (1,096) $ 1,433,590
Total liabilities   $ 1,311,351  $ -  $ 134,287  $ (30,317) $ 1,415,321
                           
                           
                       
For the three months ended       January 31, 2012
      Commercial
lending
  Credit card
lending (1)
  Corporate
head office
  Intersegment
eliminations
  Total
                             
Net interest income   $ 4,776  $ (4)  $ (2,604)  $ 831 $ 2,999
Other income         3,391   14   -   -   3,405
Net interest income and other income (charges)     8,167   10   (2,604)   831   6,404
Provision for credit losses       122   62   -   -   184
Net interest and other income (loss) after provision for credit losses     8,045   (52)   (2,604)   831   6,220
Non-interest expense         4,861   434   749   (285)   5,759
Income (loss) before income taxes     3,184   (486)   (3,353)   1,116   461
Income tax expense         860   -   454   -   1,314
Net income (loss)   $ 2,324  $ (486)  $ (3,807)  $ 1,116 $ (853)
                           
Total assets   $ 1,574,985  $ 2,286  $ 1,476  $ (1,116) $ 1,577,631
Total liabilities   $ 1,480,802  $ -  $ 102,484  $ (30,280) $ 1,553,006
                     
Note 1:  Credit card lending segment launched operations on January 2, 2012.        

 

16. Comparative numbers:

Upon completion of its transition to IFRS, the Corporation revised the classification of certain of its financial instruments and changed an election under IFRS1.  This resulted in a decrease in securities of $13,648,000, an increase in loans of $17,662,000, a decrease in other assets of $1,084,000, and an increase in Accumulated Other Comprehensive Income of $2,930,000.00 compared to what was previously recorded in its interim consolidated financial statements for the period ended January 31, 2012.

17. Subsidiary company information:

The following table presents summary financial information for the Bank on a consolidated basis:

Consolidated balance sheets                
        January 31   October 31   January 31
        2013   2012   2012
                 
Cash and cash equivalents     $ 95,846  $ 129,466  $ 238,057
Securities       135,963   167,227   71,706
Loans, net of allowance for credit losses       1,173,287   1,210,311   1,235,513
Other assets       28,489   27,164   31,995
      $ 1,433,585  $ 1,534,168  $ 1,577,271
                 
Deposits     $ 1,233,453  $ 1,317,298  $ 1,359,923
Subordinated notes payable       49,856   49,815   49,692
Securitization liabilities       43,484   43,356   43,431
Other liabilities       12,558   30,595   27,756
        1,339,351   1,441,064   1,480,802
                 
Shareholder's equity       94,234   93,104   96,469
                 
       $ 1,433,585  $ 1,534,168  $ 1,577,271

 



Consolidated statements of income          
      for the three months ended
      January 31   January 31
      2013   2012
           
Interest income    $ 15,695  $ 15,008
Interest expense     9,766   10,236
Net interest income     5,929   4,772
Other income      1,280   3,405
Net interest income and other income     7,209   8,177
Provision for (recovery of) credit losses     (21)   184
Net interest and other income after 
provision for credit losses
    7,230   7,993
Non-interest expenses     5,680   5,295
Income before income taxes     1,550   2,698
Income taxes     435   860
Net income    $ 1,115  $ 1,838

 


Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.4 billion in assets.  PWBank specializes in providing innovative financing to large corporate and government entities including hospitals, school boards, universities and colleges, municipalities and provincial and federal government agencies.

Pacific & Western Bank of Canada is wholly owned by Pacific & Western Credit Corp., whose shares trade on the TSX under the symbol PWC.

On behalf of the Board of Directors:  David R. Taylor, President & C.E.O.

To receive company news releases, please contact:
Wade MacBain at wadem@pwbank.com (519) 675-4201


FOR FURTHER INFORMATION PLEASE CONTACT:
Investor Relations: (800) 244-1509, wadem@pwbank.com
Public Relations & Media: Tel Matrundola, Vice-President, (416) 203-0882, telm@pwbank.com
Visit our website at:  http://www.pwbank.com

 

 

 

SOURCE Pacific & Western Credit Corp.




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