2014

Pacific & Western Credit Corp. announces results for its third quarter ended July 31, 2013

LONDON, ON, Aug. 29, 2013 /CNW/ -

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

Pacific & Western Credit Corp.

  • Net income (loss) of Pacific & Western Credit Corp. for the three months ended July 31, 2013 was ($2.2 million) or ($0.07) per share (($0.07) diluted) compared to ($2.6 million) or ($0.09) per share (($0.09) diluted) for the previous quarter and ($614,000) or ($0.02) per share (($0.02) 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 (loss) of the Corporation for the current quarter was ($963,000) compared to ($1.3 million) for the previous quarter and $600,000 a year ago.
  • Net income (loss) of Pacific & Western Credit Corp. for the nine months ended July 31, 2013 was ($5.9 million) or ($0.20) per share (($0.20) diluted) compared to ($2.4 million) or ($0.09) per share (($0.09) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) of the Corporation for the nine months ended July 31, 2013 was ($2.2 million) compared to $1.3 million for the same period a year ago.

Pacific & Western Bank of Canada

  • Net interest income and spread for Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, for the three months ended July 31, 2013 increased to $6.7 million and 1.91% respectively from $6.1 million and 1.77% for the previous quarter and from $5.1 million and 1.25% respectively for the same period a year ago.
  • For the nine months ended July 31, 2013, net interest income and spread increased to $18.8 million and 1.71% respectively from $14.1 million and 1.24% a year ago.
  • Credit quality continues to remain strong with gross impaired loans at July 31, 2013 totalling $1.8 million or 0.15% of total loans compared to $1.7 million or 0.14% of total loans a year ago. Net impaired loans totalled $93,000 at July 31, 2013 compared to $51,000 a year ago.
  • At July 31, 2013, the Bank's Common Equity Tier 1 (CET1) ratio was 10.52% compared to 10.34% at the end of the previous quarter.
  • Net income (loss) for the Bank for the three months ended July 31, 2013 was $878,000 compared to ($39,000) for the previous quarter and $1.8 million for the same period a year ago. Net income for the same period a year ago included pre-tax gains from the sale of securities totalling $3.0 million.
  • Net income for the Bank for the nine months ended July 31, 2013 was $2.0 million compared to $4.7 million for the same period a year ago. Net income a year ago included pre-tax gains from the sales of securities which totalled $10.1 million and net income for the current period includes debt and other restructuring charges totalling $789,000.

PRESIDENT'S COMMENTS

I am pleased with the results of our third quarter. Our Bank's net interest income continued to grow with net interest income of $6.7 million for the third quarter compared to $6.1 million earned in the previous quarter and $5.1 million earned in the same quarter a year ago.  This increase can be mainly attributed to a significant increase in spread, which improved by 53% over the same period last year to 1.91% this quarter.  Credit quality continued to be outstanding with no loans in arrears at the end of the quarter.  Unlike last year, total revenue for the current quarter was not bolstered by gains from the sale of assets, but included restructuring charges relating to reductions in staff. Although it is possible that our Bank may still periodically realize gains from sales of assets, its primary source of revenue is now derived from sustainable net interest income from its growing loan and lease portfolio.  Overall, our Bank's spread figures have now returned to pre liquidity crisis levels and compare favourably to the large banks.

Our three new programs continue to grow.  Bulk financing assets increased by 25% during the quarter to $172 million and 81% over last year's balance. The loss incurred on our credit card program decreased from $579,000 in the previous quarter to $187,000 this quarter.  Our trustee deposits initiative continues to gain acceptance as new trustees throughout Canada are continuing to move their banking to us.  Overall, we are very pleased with the progress that we are making on the bulk financing and trustee deposits programs, and are working with our credit card partner to improve the profitability of that program.

On August 27th, we completed an Initial Public Offering and listed our Bank on the TSX.  This was a key step in the Bank's evolution, providing it with direct access to the public markets.  Our Bank raised net proceeds of $6 million, increasing its CET1 capital to $123 million and resulting in the Bank's capital ratios significantly exceeding the industry average while providing ample capacity for growth.

With the completion of the IPO, the Bank's visibility and perception of value should be significantly increased, which should be reflected in PWC's share value.  Additionally, PWC is now exploring other lending and investing opportunities to diversify and develop additional revenue sources.

These are exciting times for us shareholders. Our Bank has now been reconfigured so that it is able to earn ever increasing sustainable spread income, it has reduced its vulnerability to external factors and is well capitalized to provide for profitable growth. PWC is also now well positioned to pursue other lending and investing opportunities to further enhance shareholder value.

FINANCIAL HIGHLIGHTS          
(unaudited)   as at   as at
        July 31 July 31   July 31 July 31
($CDN thousands except per share amounts ) 2013 2012   2013 2012
Pacific & Western Bank of Canada          
Balance Sheet Summary            
  Cash and securities   $ 182,849 $ 251,527   $ 182,849 $ 251,527
  Total loans       1,193,561   1,255,595     1,193,561   1,255,595
  Average loans       1,194,443   1,233,487     1,201,936   1,202,380
  Total assets       1,407,342   1,538,769     1,407,342   1,538,769
  Average assets     1,398,679   1,610,014     1,470,755   1,512,252
  Deposits       1,201,593   1,323,494     1,201,593   1,323,494
  Subordinated notes payable   20,297   49,773     20,297   49,773
  Shareholder's equity     125,014   93,989     125,014   93,989
Capital ratios (2012 based on Basel II)                  
  Assets-to-capital ratio     9.75   10.50     9.75   10.50
  Common Equity Tier 1 capital   116,491   n/a      116,491    n/a 
  Risk-weighted assets     1,107,029   1,175,584     1,107,029   1,175,584
  Common Equity Tier 1 ratio   10.52%   n/a      10.52%   n/a 
  Tier 1 risk-based capital ratio   10.52%   8.46%     10.52%   8.46%
  Total risk-based capital ratio    12.14%   12.67%     12.14%   12.67%
          for the three months ended   for the nine months ended
Results of operations                  
  Net interest income   $ 6,733 $ 5,059   $ 18,759 $ 14,105
  Spread       1.91%   1.25%     1.71%   1.24%
  Other income       315   3,573     1,995   10,917
  Debt and other restructuring costs   (287)   -     (789)   -
  Provision for credit losses   154   249     399   433
  Total revenue        6,607   8,383     19,566   24,589
  Net income before income taxes   1,226   2,217     2,744   7,065
  Net income        878   1,783     1,954   4,731
  Return on average total assets   0.25%   0.44%     0.18%   0.42%
  Gross impaired loans to total loans   0.15%   0.14%     0.15%   0.14%
  Provision for credit losses as a % of average loans   0.01%   0.02%     0.03%   0.04%
  Commercial Lending income before income taxes $ 1,413 $ 3,015   $ 4,002 $ 9,284
  Loan spread       2.23%   2.04%     2.21%   2.03%
Pacific & Western Credit Corp., (consolidated)                
Results of operations                     
  Net income of the Bank   $ 878 $ 1,783   $ 1,954 $ 4,731
  Deduct interest expense on notes of the Corporation   (1,613)   (733)     (3,194)   (2,005)
  Net non-interest expenses of the Corporation   159   4     225   (121)
  Provision for income taxes   (387)   (454)     (1,160)   (1,341)
  Net income (loss) before the following:   (963)   600     (2,175)   1,264
  Interest expense relating to Class B Preferred Share dividends   (1,230)   (1,214)      (3,687)   (3,642)
  Net loss of the Corporation available to common shareholders $ (2,193) $ (614)   $  (5,862) $ (2,378)
  Loss per common share:                  
    Basic     $ (0.07) $ (0.02)   $ (0.20) $ (0.09)
    Diluted     $ (0.07) $ (0.02)   $ (0.20) $ (0.09)

 

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 third quarter of fiscal 2013, dated August 28, 2013, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 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.

Basis of Presentation

Non-GAAP and Additional GAAP Measures

Net Interest Income and Net Interest Margin or Spread

Most banks analyze profitability by net interest income (as presented in the Consolidated Statements of Income (Loss)) and net interest margin or spread.  Net interest margin or spread is defined as net interest income as a percentage of average total assets.  Net interest margin or spread does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.

Total Revenue

An additional measure of profitability is total revenue which consists of net interest income, other income, restructuring charges and provisions for credit losses (as presented in the Consolidated Statements of Income (Loss)).

Book Value Per Common Share

Book value per common share is defined as Shareholders' Equity less amounts relating to preferred shares recorded in equity, divided by the number of common shares outstanding.

Overview

Pacific & Western Credit Corp. (the `Corporation`) is a holding company whose shares trade on the Toronto Stock Exchange. Its wholly-owned and principal subsidiary is Pacific & Western Bank of Canada (the `Bank`) 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 July 31, 2013 was ($2.2 million) or ($0.07) per share (($0.07) diluted) compared to ($2.6 million) or ($0.09) per share (($0.09) diluted) for the previous quarter and ($614,000) or ($0.02) per share (($0.02) diluted) for the same period last year. Net income for the same period a year ago included pre-tax gains from the sale of securities totalling $3.0 million. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the three months ending July 31, 2013 was ($963,000) compared to ($1.3 million) for the previous quarter and $600,000 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.

Net income (loss) of Pacific & Western Credit Corp. for the nine months ended July 31, 2013 was ($5.9 million) or ($0.20) per share (($0.20) diluted) compared to ($2.4 million) or ($0.09) per share (($0.09) diluted) for the same period a year ago. Net income for the same period a year ago included pre-tax gains from the sale of securities totalling $10.1 million. Prior to the deduction of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income (loss) of the Corporation for the current quarter was ($2.2 million) compared to $1.3 million for the same period a year ago.

On January 28, 2013, the Corporation announced its plans for the Bank to complete an Initial Public Offering (IPO) of its common shares. The final prospectus was filed on August 20, 2013 and the Bank's common shares were conditionally approved for listing on the Toronto Stock Exchange (TSX). See Subsequent Event and Proposed Transactions for more information.

On January 28, 2013 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 held on March 7, 2013, this approval was received. This modification to the Series C Notes allows the Corporation, at its option, 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 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 also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation. See Subsequent Event and Proposed Transactions.

Pacific & Western Bank of Canada
Net income (loss) of the Bank for the three months ending July 31, 2013 was $878,000 compared to ($39,000) 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 were pre-tax gains of $3.0 million on the sale of securities. There were no gains realized on the sale of securities in the current quarter.

Net income of the Bank for the nine months ended July 31, 2013 was $2.0 million compared to $4.7 million for the same period a year ago. Included in net income for the same period a year ago were pre-tax gains of $10.1 million on the sale of securities. There were no gains realized on the sale of securities in the current period. Included in net income for the current period were debt and other restructuring costs totalling $789,000 relating to the retirement of subordinated notes payable to the parent company and severance costs incurred as a result of reductions in staff complement.

Net interest income and spread for the three months ended July 31, 2013 increased to $6.7 million and 1.91% respectively from $6.1 million and 1.77% for the previous quarter and from $5.1 million and 1.25% for the same period a year ago. For the nine months ended July 31, 2013, net interest income and spread increased to $18.8 million and 1.71% respectively from $14.1 million and 1.24% a year ago. Net interest income and spread increased from previous periods due to a combination of lower interest expense as a result of the repayment in March 2013 of subordinated notes payable to the parent company and the booking of new loans with larger spreads during the current periods.

At July 31, 2013, total assets of the Bank were $1.41 billion compared to $1.39 billion at the end of the previous quarter and $1.54 billion a year ago. The decrease in total assets from a year ago was 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 over the past year. Cash and securities decreased from the previous year due to a lower level of deposits maturing in the succeeding months thus requiring a lower level of liquid assets to fund their repayment.

Credit quality remains strong, with gross impaired loans totalling $1.8 million at July 31, 2013 compared to $1.7 million a year ago and net impaired loans of $93,000 compared to $51,000 a year ago. At July 31, 2013, the ratio of gross impaired loans as a percentage of total loans was 0.15% compared to 0.14% 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) requires all Canadian banks to comply with the new Basel III standards on an "all in" basis that became 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 July 31, 2013, the Bank significantly exceeded the new CET1 capital requirement of 7.0% with a ratio of 10.52%. In addition, its Tier 1 capital ratio was 10.52%; the total capital ratio was 12.14% and the assets-to-capital ratio at July 31, 2013 was 9.75.

Total Revenue

Total revenue consists of net interest income, other income, debt and restructuring charges and provisions for credit losses.  For the three months ended July 31, 2013 total revenue of the Bank was $6.6 million compared to $5.7 million in the previous quarter and $8.4 million for the same period last year. Total revenue decreased from a year ago due primarily to gains totalling $3.0 million from the sale of securities realized last year compared to $nil in the current period, with the impact reduced by an increase of $1.7 million in net interest income in the period. Compared to the previous quarter, total revenue of the Bank increased due primarily to the growth in net interest income.

For the nine months ending July 31, 2013, total revenue of the Bank was $19.6 million compared to $24.6 million a year ago with the decrease due primarily to gains totalling $10.1 million from the sale of securities in the same period a year ago compared to $nil in the current period. This decrease was partially offset by an increase in net interest income which grew to $18.8 million in the current period from $14.1 million a year ago. In addition, included in total revenue for the current period are restructuring charges totalling $789,000 of which $384,000 was a result of the retirement of subordinated notes payable to the parent company and $405,000 related to severance costs incurred as a result of reductions in staff complement.

The provision for credit losses, which is also included in total revenue, was a provision of $154,000 in the current quarter compared to $266,000 for the previous quarter and a provision of $249,000 for the same period a year ago. Included in the provision for credit losses in the current quarter was an amount totalling $369,000 relating to credit card receivables compared to $137,000 for the same period last year. For the nine months ended July 31, 2013, the provision for credit losses was $399,000 compared to $433,000 for the same period a year ago. Included in the provision for credit losses in the current period was an amount totalling $764,000 related to credit card receivables compared to $257,000 for the same period last year.

Net Interest Income and Net Interest Margin or Spread

Net interest income of the Bank for the three months ended July 31, 2013 increased to $6.7 million from $6.1 million for the previous quarter and from $5.1 million for the same period a year ago. These increases were due primarily to loans that matured during the period being replaced with loans with larger spreads and a decrease in interest expense as a result of the repayment in March 2013 of subordinated notes payable to the parent company. Net interest margin or spread for the three months ended July 31, 2013 increased to 1.91% from 1.77% for the previous quarter and from 1.25% last year due to the factors noted above. On a year-to-date basis, net interest income of the Bank increased to $18.8 million from $14.1 million a year ago and net interest margin or spread increased to 1.71% from 1.24% a year ago due to the factors noted previously.

Other Income  

Other income of the Corporation for the three months ended July 31, 2013 was $315,000 compared to $400,000 for the previous quarter and $3.6 million for the same period a year ago. Other income for the current quarter includes non-interest revenue of $306,000 from credit cards compared to $261,000 for the previous quarter and $259,000 for the same period a year ago. Other income for the same period last year included gains of $3.0 million from the sale of securities held in the treasury portfolio of the Bank.

On a year-to-date basis, other income of the Corporation totalled $2.0 million compared to $10.9 million a year ago with the difference due primarily to gains totalling $10.1 million on the sale of securities compared to $nil in the current period. In addition, gains from the sale of loans totalled $1.0 million and are included in other income for the current period compared to $nil a year ago and non-interest revenue from credit cards for the current period totalled $824,000 compared to $375,000 for the same period a year ago. Non-interest revenue from credit cards increased in the current period compared to the same period last year due to increases in credit card receivable balances and an additional two months of credit card activities as the credit card program was launched on January 2, 2012.

Non-Interest Expenses

Non-interest expenses of the Corporation, including those relating to credit card operations, totalled $5.2 million for the current quarter compared to $5.8 million for the previous quarter and $6.2 million for the same period a year ago. The decrease in non-interest expenses from the previous periods was due primarily to a reduction in staff complement, a reduction in costs to operate the credit card program and timing of expenses. On a year-to-date basis, non-interest expenses of the Corporation were $16.6 million for the current period compared to $17.7 million for the same period last year with the decrease due to the factors described above.

Income Taxes

The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 27%, similar to that of the previous period. 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:

               
          for the three months ended   for the nine months ended
          July 31   July 31   July 31 July 31
          2013   2012   2013 2012
                       
Income tax on earnings of the Bank $ 348 $ -   $ 790 $ -
Income tax on dividends paid by the Corporation   387   454     1,160   1,341
Tax on gain on sale of securities     -   810     -   2,710
Substantively enacted rate changes   -   (376)     -   (376)
                         
        $ 735 $ 888   $ 1,950 $ 3,675

 

For the current quarter, the provision for income taxes was $735,000 compared to $888,000 for the same period 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 $810,000 relating to gains on the sale of securities and a recovery of $376,000 resulting from a substantively enacted rate change that occurred during the quarter last year. On a year-to-date basis, the provision for income taxes was $2.0 million compared to $3.7 million for the same period last year. This decrease was due primarily to an income tax provision of $2.7 million on the sale of securities a year ago compared to $nil in the current period.

At July 31, 2013, the Bank has a deferred income tax asset of $8.3 million compared to $11.0 million a year ago with the decrease due to the tax effect of operating results over the past year, the recording of an income tax adjustment totalling $1.9 million in the previous year less tax rate adjustments recorded last year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $42 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 which total approximately $39 million, the benefit of which has not been recorded. These loss carry-forwards are scheduled to begin expiring in 2014 if unutilized.

Comprehensive Income (Loss)

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. Comprehensive loss for the three months ended July 31, 2013 was $2.2 million compared to $2.6 million for the previous quarter and $3.5 million a year ago. The change from a year ago is due to the net loss in the current period being greater than that of a year ago and amounts of unrealized gains on available-for-sale securities recorded in comprehensive income (loss) in previous years being reversed through other comprehensive income (loss) when realized last year. On a year-to-date basis, comprehensive loss was $5.9 million compared to $9.7 million for the same period a year ago with the change due to same factors described previously.

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 July 31, 2013, net income of the commercial lending segment totalled $1.1 million compared to $540,000 for the previous quarter and $2.6 million a year ago with the difference due primarily to gains from the sale of securities a year ago which totalled $3.0 million compared to $nil in the current quarter. On a year-to-date basis, net income of the commercial lending segment totalled $3.2 million compared to $7.0 million for the same period a year ago with the difference due primarily to gains from the sale of securities which totalled $10.1 million last year.

Net interest income from commercial lending for the three months ended July 31, 2013, totalled $6.4 million compared to $5.8 million for the previous quarter and $5.0 million last year with the growth due primarily to increased yields on new loans and a decrease in interest expense. For the nine months ended July 31, 2013, net interest income from commercial lending totalled $17.9 million compared to $14.0 million for the same period a year ago.

Credit quality relating to the commercial lending segment remains strong with provisions (recoveries) for credit losses for the three months ended July 31, 2013 totalling ($215,000) compared to a provision of $36,000 for the previous quarter and a provision of $112,000 for the same period last year. For the nine months ended July 31, 2013, the provision for credit losses was a recovery of ($365,000) compared to a provision of $176,000 for the same period a year ago. Provisions (recoveries) for credit losses were lower in the current periods as a result of decreases in lending assets and maturities in the existing loan portfolio over the past year.

For the three months ended July 31, 2013, non-interest expenses for the commercial lending segment totalled $4.9 million compared to $4.9 million for the previous quarter and $5.2 million a year ago. On a year-to-date basis, non-interest expenses totalled $14.7 million compared to $15.1 million for the same period 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 July 31, 2013, credit card receivables totalled $26.3 million compared to $23.8 million at the end of the previous quarter and $17.8 million a year ago. For the three months ended July 31, 2013, costs to operate the credit card program exceeded revenues by $187,000 compared to $579,000 for the previous quarter and $798,000 for the same period a year ago. For the nine months ended July 31, 2013, costs to operate the credit program exceeded revenues by $1.3 million compared to $2.2 million for the same period a year ago.

Net interest income from credit card operations for the three months ending July 31, 2013, totalled $370,000 compared to $269,000 for the previous quarter and $69,000 a year ago. For the nine months ended July 31, 2013, net interest income from credit card operations totalled $858,000 compared to $63,000 for the same period a year ago. Net interest income from credit card operations continues to be impacted by incentive programs with low or no interest rates used to generate the issue of new cards.

For the three months ended July 31, 2013, non-interest revenue from credit card operations in the form of credit card fees totalled $306,000 compared to $261,000 for the previous quarter and $259,000 a year ago. For the nine months ended July 31, 2013, non-interest revenue from credit card operations totalled $823,000 compared to $375,000 for the same period a year ago.

For the three months ending July 31, 2013, the Bank recorded a provision for credit losses of $369,000 relating to credit card receivables compared to $230,000 for the previous quarter and $137,000 a year ago. These provisions consist of adjustments to the collective allowance and write-offs of credit card balances. For the nine months ended July 31, 2013, the provision for credit card losses totalled $764,000 compared to $257,000 for the same period last year. At July 31, 2013, the collective allowance relating to credit card receivables totalled $744,000 compared to $250,000 a year ago.

Non-interest expenses relating to credit card operations totalled $494,000 for the current quarter compared to $879,000 for the previous quarter and $989,000 for the same period last year. On a year-to-date basis, non-interest expenses totalled $2.2 million compared to $2.4 million last year. Non-interest expenses relating to credit cards decreased in the current periods as a result of a decrease in staff complement and an effort to reduce non-variable costs. These expenses consist of salaries and benefits, expenses for activities carried out by external parties to administer processing of the credit cards and 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 July 31, 2013, were $1.40 billion compared to $1.39 billion at the end of the previous quarter and $1.54 billion a year ago with the change due primarily to decreases in cash and securities and a decrease in lending assets. Cash and securities decreased from a year ago due primarily to a lower level of deposits maturing in the coming months compared to a year ago requiring less cash to fund the maturities. Lending assets decreased from a year ago primarily as a result of loans sold 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 purposes, totalled $185.3 million or 13.2% of total assets compared to $169.5 million or 12.2% of total assets at the end of the previous quarter and $253.2 million or 16.5% of total assets a year ago. The decrease in cash and securities as a percentage of total assets from a year ago was a result of the Corporation no longer having to hold the same levels of cash as deposit maturities in the coming months are less than those maturing a year ago. In addition, since July 31, 2012, the Corporation shifted its strategy to hold larger amounts of cash and cash equivalents as a proportion of its treasury portfolio rather than holding securities that were not as liquid.

At July 31, 2013, net unrealized gains in the Corporation's available-for-sale securities portfolio were $38,000 compared to net unrealized gains of $70,000 a year ago. In addition there was an unrealized loss of $559,000 at July 31, 2013 compared to an unrealized loss of $545,000 at the end of the previous quarter relating to a 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 management is of the opinion that no impairment charge is required at this time.

Loans

Loans totalled $1.19 billion at July 31, 2013, compared to $1.20 billion at the end of the previous quarter and $1.26 billion a year ago with the decrease from a year ago due primarily to the sale of loans which occurred over the past year. The Corporation does not expect to see significant loan sales during the remainder of the year.

At July 31, 2013, the balances of individual loan categories remained relatively consistent with those from a year ago, taking into account loan sales. Government financings have declined from a year ago due to market conditions and the Corporation shifting its focus to corporate lending opportunities, primarily through its bulk financing initiative as described below.

The Corporation's bulk financing portfolio showed significant growth totalling $171.6 million at July 31, 2013 compared to $137.8 million at the end of the previous quarter, an increase of 25%, and $94.8 million a year ago, an increase of 81%. The bulk financing program continues to be a key initiative for the Corporation and is expected to be the primary area of growth in the Corporation's lending portfolio. The Corporation continues to enter into agreements with vendors for the program and expects to see continued growth in the coming months.

Overall, new lending for the quarter totalled $151.8 million compared to $117.9 million for the previous quarter and $166.0 million a year ago.  Loan repayments for the quarter totalled $153.6 million compared to $93.6 million for the previous quarter and $135.0 million a year ago. On a year-to-date basis, new lending totalled $405.8 million compared to loan repayments of $421.4 million. Loan repayments for the current nine month period include loan sales totalling $37 million.

Credit Quality

The Corporation has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Gross impaired loans at July 31, 2013, totalled $1.8 million or 0.15% of total loans compared to $1.7 million or 0.14% of total loans at the end of the previous quarter and $1.7 million or 0.14% of total loans a year ago. Provisions for credit losses in the current quarter totalled $154,000 compared to $266,000 in the previous quarter and $249,000 a year ago. For the nine months ended July 31, 2013, provisions for credit losses totalled $399,000 compared to $433,000 for the same period a year ago. The change in the provision for credit losses from a year ago was due to additional provisions and write-offs related to credit card receivables.

At July 31, 2013, the Corporation's collective allowance totalled $3.2 million virtually unchanged from a year ago. Included in the Corporation's collective allowance at July 31, 2013 was $744,000 relating to credit card receivables compared to $250,000 a year ago. The Corporation's individual allowance for credit losses totalled $1.7 million compared to $1.7 million a year ago and net impaired loans at July 31, 2013 totalled $93,000 compared to $51,000 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 $25.5 million at July 31, 2013 compared to $24.8 million at the end of the previous quarter and $30.4 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.3 million compared to $11.0 million last year and capital assets and prepaid expenses of $14.2 million at July 31, 2013 compared to $19.4 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 raised and deposit levels are highly sensitive to interest rates being offered by the Bank for new deposits. Deposits at July 31, 2013 totalled $1.20 billion compared to $1.19 billion at the end of the previous quarter and $1.32 billion a year ago, and consist primarily of guaranteed investment certificates. The decrease in total deposits from a year ago is due to the decrease in total assets, specifically the level of cash and securities. Of the total amount of deposits, $38.2 million or approximately 3.2% of total deposits at the end of the current quarter were in the form of demand deposits compared to $34.9 million or approximately 2.6% of total deposits a year ago, with the remaining deposits having fixed terms.

In order to diversify its sources of deposits and reduce its cost of new deposits, the Corporation has identified another 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 in April 2012. These services are now being offered to trustees in the bankruptcy industry across Canada and at July 31, 2013, deposits from this source totalled $14.7 million.

An additional 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 July 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 July 31, 2013, other liabilities totalled $18.7 million compared to $16.2 million at the end of the previous quarter and $30.6 million a year ago with the change due to a decrease in the fair value of derivatives as interest rate swap contracts were unwound during the first 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 July 31, 2013, the amount of securitization liabilities totalled $43.5 million compared to $43.5 million a year ago. The Corporation has not entered into any securitization transactions in the current fiscal year nor does it expect to in the remainder of the year.

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 $41.0 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $82.7 million at July 31, 2013 compared to $80.0 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 an external party. These subordinated notes, of which $11.5 million are callable, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.

Preferred Share Liabilities

At July 31, 2013, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million before deducting issue and conversion costs. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.3 million, net of issue and conversion costs 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, 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 $42.3 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%.

Shareholders' Equity

At July 31, 2013, shareholders' equity was $15.7 million compared to $16.3 million at the end of previous quarter and $19.9 million a year ago with the decrease due primarily to operating losses. Common shares outstanding at July 31, 2013 totalled 31,308,091 compared to 28,077,872 a year ago with the change due to 1,928,565 common shares issued since last year as part of the dividends on the Class B Preferred Shares and 1,301,654 common shares issued under private placements. Common share options outstanding totalled 517,683 at the end of the quarter compared to 1,163,033 a year ago with the change due to the issue of 50,000 common share options and 695,350 common share options which expired during the past year.

At July 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 July 31, 2013 was $0.36 compared to $0.40 at the end of the previous quarter and $0.52 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 July 31, 2013 would be $1.39 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 August 28, 2013, there were no changes since July 31, 2013 in the number of outstanding common shares, common share options and Class A or Class B Preferred Shares.

Off-Balance Sheet Arrangements

As at July 31, 2013, the Corporation does not have any significant off-balance sheet arrangements other than loan commitments and letters of credit resulting from normal course business activities. See Note 12 to the unaudited interim consolidated financial statements.

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. See Note 13 to the unaudited interim consolidated financial statements for details on related party transactions and balances.

Subsequent Event and Proposed Transactions

On August 20, 2013, the Bank filed its final prospectus and on August 27, 2013 its common shares began trading on the Toronto Stock Exchange. Under the terms of the IPO, 400,000 common shares of the Bank were issued at a price of $7.25 per share before commissions and other expenses of the offering. In addition, under a secondary offering, the Corporation sold 1,100,000 of its common shares of the Bank at $7.25 per share before commissions. From the net proceeds the Corporation purchased an additional 620,206 shares of the Bank for $4,496,494.  As a result of these transactions, the Corporation's ownership interest in the Bank decreased from 100% to 92%.

As part of the IPO, the syndicate of agents have been granted an Over-Allotment Option exercisable in whole or in part for a period of 30 days following the closing of the IPO, to purchase up to an additional 225,000 Common Shares from the Bank at a price of $7.25 per Common Share.

As noted previously, on March 7, 2013, approval was received from the Corporation's Series C Note holders to modify its Series C Notes. This modification to the Series C Notes allows the Corporation at its option, 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 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 also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation. Effective August 27, 2013, as a result of the completion of the Bank's IPO and the listing of the Bank's common shares, the Series C Notes were modified. At this point in time, the Corporation has not determined whether the modification of the Series C notes constitutes an extinguishment and reissuance of the debt for accounting purposes. Extinguishment of the debt could result in $3.5 million of unamortized issue costs and discounts related to the Series C Notes being written off.  This potential non-cash adjustment would not have an impact on the equity or regulatory capital of the Bank.

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.

Capital Management and Capital Resources

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 non-viability contingent capital (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 requires that all Canadian banks must comply with the Basel III standards on an "all-in" basis that became 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 and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.5% 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, total capital of the Bank totalled $134.4 million at July 31, 2013 compared to $133.1 million at the end of the previous quarter. The Bank exceeded the new capital requirements with a CET1 ratio of 10.52% compared to 10.34% at the end of the previous quarter. In addition, the Bank's total capital ratio was 12.14% at July 31, 2013 compared to 11.94% at the end of the previous quarter and its assets-to-capital ratio at July 31, 2013 was 9.75 compared to 9.69 at the end of the previous quarter.

See note 14 to the interim consolidated financial statements for more information regarding capital management.

The operations of the Corporation are not dependent upon significant amounts of capital assets to generate revenue.  Currently, the Corporation does not have any commitments for capital expenditures or for significant additions to its level of capital assets.

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.

               
      July 31, 2013   July 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      $ 5,049  $ (4,997)    $ 5,975 $ (5,919)
Sensitivity of projected net interest                  
  income during a 60 month period    $ 2,906  $ (2,890)    $ 9,364  $ (9,983)
                       
Duration difference between assets and liabilities (months)   2.9         3.7    

 

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 year with the proceeds being invested in cash or short term liquid securities as well as the Corporation unwinding interest rate swaps during the first quarter of fiscal 2013.

The decision to unwind the swap contracts 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.

Liquidity

Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations for the next 12 months. 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 the next 12 months is expected to come primarily from cash and proceeds from sales of securities.

The unaudited Consolidated Statement of Cash Flows for the Corporation for the nine months ended July 31, 2013 shows cash used from operations in excess of cash provided by operations of $116.4 million compared to cash used of $62.2 million for the nine months ended July 31, 2012. The Corporation's operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow).  Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the Corporation may manage the amount of deposits it receives and loans it funds in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations.  The Corporation will continue to fund its operations and meet contractual obligations as they become due from cash on hand and from managing the amount of deposits it receives as compared to the amount of loans it funds.  See Note 12 to the unaudited interim consolidated financial statements

Contractual Obligations

Contractual obligations of the Corporation as disclosed in its MD&A and audited consolidated financial statements for the year ended October 31, 2012, have not changed significantly during the nine months ended July 31, 2013.

Summary of Quarterly Results

(thousands of dollars except per share amounts)   2013     2012     2011
      Q3     Q2     Q1       Q4     Q3     Q2     Q1       Q4
                                                     
Results of operations:                                                    
Total interest income     $ 15,246    $ 14,779    $ 15,705      $ 15,264    $ 15,356    $ 14,928    $ 15,021      $ 14,798
Interest expense     11,356     11,145     11,735       12,069     12,244     12,581     12,022       12,374
Net interest income     3,890     3,634     3,970       3,555     3,112     2,347     2,999       2,424
Provision for (recovery of) credit losses     154     266     (21)       28     249     -     184       118
Other income     315     400     1,280       2,370     3,573     3,939     3,405       8,649
Restructuring costs     (287)     (118)     -       -     -     -     -       -
Total revenue *     3,764     3,650     5,271       5,897     6,436     6,286     6,220       10,955
Non-interest expenses     5,222     5,828     5,547       6,426     6,162     5,724     5,759       6,680
Income (loss) before income taxes     (1,458)     (2,178)     (276)       (529)     274     562     461       4,275
Income tax provision (recovery)     735     393     822       2,165     888     1,473     1,314       5,558
 Net income (loss)    $ (2,193)    $ (2,571)    $ (1,098)      $ (2,694)    $ (614)    $ (911)    $ (853)      $ (1,283)
Earnings (loss) per share                                                    
  - basic    $ (0.07)    $ (0.09)    $ (0.04)      $ (0.10)    $ (0.02)    $ (0.03)    $ (0.03)      $ (0.05)
  - diluted    $ (0.07)    $ (0.09)    $ (0.04)      $ (0.10)   $ (0.02)    $ (0.03)    $ (0.03)      $ (0.05)
                                                     
* Total revenue is an Additional GAAP measure-See Basis of Presentation

 

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 increases in 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 previous quarters on the sale of securities and in the fourth quarter of 2012 and first quarter of 2013 from the sale of loans. The provisions for credit losses recorded in the last two quarters were due primarily to write-offs and adjustments in the collective allowance relating to credit card receivables.

Non-interest expenses have decreased over the last eight quarters as a result of a strategy to reduce overhead expenses, a reduction in staff complement and the timing of expenses. Non-interest expenses increased in the fourth quarter of 2012 as a result of expenses being incurred relating to professional and consulting fees and increased costs relating to credit card operations.

The provision for income taxes in each of the first three quarters of 2013 reflects the effective statutory income tax rate of the Bank applied to earnings and includes income taxes 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 that 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 has been no change in accounting policies nor any significant new policies adopted during the current period.

In preparing the 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 periods. Areas where significant judgment was applied or estimates were developed include assessments of fair value and impairments of financial instruments, the calculation of the allowance for credit losses, 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.

The policies discussed below are considered particularly significant as they require management to make estimates or judgements, some of which may relate to matters that are inherently uncertain.

Financial Instruments

All financial assets are classified as one of the following:  held-to-maturity, loans and receivables, financial assets recorded at fair value through profit or loss or available-for-sale.  All financial liabilities are classified as fair value through profit or loss or other liabilities.  Financial assets and liabilities recorded at fair value through profit or loss are measured at fair value with gains and losses recognized in net income.  Financial assets held-to-maturity, loans and receivables and financial liabilities other than those held for trading, are measured at amortized cost based on the effective interest method.  Available-for-sale instruments are measured at fair value with gains and losses, net of tax, recognized in other comprehensive income.

Estimates of fair value are developed using a variety of valuation methods and assumptions. The Corporation follows a fair value hierarchy to categorize the inputs used to measure fair value for its financial instruments.  The fair value hierarchy is based on quoted prices in active markets (Level 1), valuation techniques using inputs other than quoted prices but with observable market data (Level 2), or valuation techniques using inputs that are not based on observable market data (Level 3).  Valuation techniques may require the use of inputs, transaction values derived from models and input assumptions sourced from pricing services. Valuation inputs are either observable or unobservable. The Corporation looks to external readily observable market inputs when available and may include certain prices and rates for shorter-dated Canadian yield curves and bankers acceptances. Unobservable inputs may include credit spreads, probability of default and recovery rates.

Fair value measurements that fall into Level 2 of the fair value hierarchy comprise derivatives and Canadian municipal and corporate bonds that are classified as available-for-sale. Fair value of derivatives is estimated using a discounted cash flow valuation technique based on observable market data including interest rates, the Corporation's and the counterparty's credit spreads, corresponding market interest rate volatility levels and other market-based pricing factors.  For Canadian municipal and corporate bonds, fair value measurement is primarily based on quotes received from brokers that represent transaction prices in markets for identical instruments.

Securities

The Corporation holds securities primarily for liquidity purposes with the intention of holding the securities to maturity or until market conditions render alternative investments more attractive.  Settlement date accounting is used for all securities transactions.

At the end of each reporting period, the Corporation assesses whether or not there is any objective evidence to suggest that a security may be impaired.  Objective evidence of impairment results from one or more events that occur after the initial recognition of the security which has an impact that can be reliably estimated on the estimated future cash flows of the security such as financial difficulty of the issuer.  An impairment loss is recognized for an equity instrument if the decline in fair value is significant or prolonged, as such circumstances provide objective evidence of impairment.

Impairment losses on a held-to-maturity security are recognized in income and loss in the period they are identified.  When there is objective evidence of impairment of an available-for-sale security, the cumulative loss that has been recorded in accumulated other comprehensive income is reclassified to income or loss.  For available-for-sale debt securities, if in a subsequent period the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was first recognized, then the previously recognized impairment loss is adjusted through income or loss to reflect the net recoverable amount of the impaired security.  No adjustments of impairment losses are recognized for available-for-sale equity securities.

Loans

Loans are initially measured at fair value plus incremental direct transaction costs.  Loans are subsequently measured at amortized cost, net of allowance for credit losses, using the effective interest method.  On a monthly basis, the Corporation assesses whether or not there is any objective evidence to suggest that the carrying value of the loans may be impaired.  Impairment assessments are facilitated through the identification of loss events and assessments of their impact on the estimated future cash flows of the loans.

A loan is classified as impaired when, in management's opinion, there has been deterioration in credit quality to the extent that there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest.  Loans, except credit cards, where interest or principal is contractually past due 90 days are automatically recognized as impaired, unless management determines that the loan is fully secured, in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to current status.  All loans, except credit cards, are classified as impaired when interest or principal is past due 180 days, except for loans guaranteed or insured by the Canadian government, provinces, territories, or a Canadian government agency, which are classified as impaired when interest or principal is contractually 365 days in arrears.  Credit card receivables are written off when payments are 180 days past due, or upon receipt of a bankruptcy notification.

As loans are classified as loans and receivables and measured at amortized cost, an impairment loss is measured as the difference between the carrying amount and the present value of future cash flows discounted using the effective interest rate computed at initial recognition, if future cash flows can be reasonably estimated.  When the amounts and timing of cash flows cannot be reasonably estimated, the carrying amount of the loan is reduced to its estimated net realizable value based on either:

(i) the fair value of any security underlying the loan, net of expected costs of realization,

or,

(ii)  observable market prices for the loan.

Impairment losses are recognized in income or loss.  If, in a subsequent period, the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was first recognized, then a recovery of a portion or all of the previously recognized impairment loss is adjusted through income or loss to reflect the net recoverable amount of the impaired loan.

Real estate held for resale is recorded at the lower of cost and fair value, less costs to sell.

Allowance for Credit Losses

The Corporation maintains an allowance for credit losses which, in management's opinion, is adequate to absorb all credit related losses in its loan portfolio. The allowance for credit losses consists of both individual and collective allowances and is reviewed on a monthly basis.  The allowance is presented as a component of loans on the Corporation's consolidated balance sheets.

The Corporation considers evidence of impairment for loans at both an individual asset and collective level.  All individually significant loans are assessed for impairment first.  All individually significant loans found not to be specifically impaired and all loans which are not individually significant are then collectively assessed for impairment by aggregating them into groups with similar credit risk characteristics.

The collective impairment allowance is determined by reviewing factors including historical loss experience in portfolios of similar credit risk characteristics, current portfolio credit quality trends, probability of default and recovery rates, and business and economic conditions. Historical loss experience is adjusted based on current observable data to reflect effects of current conditions that did not affect the period in which the historical loss experience is based. The collective impairment allowance may also be adjusted by management using its judgment taking into account other observable and unobservable factors.

Corporate Income Taxes

Current income taxes are calculated based on taxable income at the reporting period end.  Taxable income differs from accounting income because of differences in the inclusion and deductibility of certain components of income which are established by Canadian taxation authorities.  Current income taxes are measured at the amount expected to be recovered or paid using statutory tax rates at the reporting period end.

The Corporation follows the asset and liability method of accounting for deferred income taxes.  Deferred income tax assets and liabilities arise from temporary differences between financial statement carrying values and the respective tax base of those assets and liabilities.  Deferred income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years when temporary differences are expected to be recovered or settled.

Deferred income tax assets are recognized in the Corporation's consolidated financial statements to the extent that it is probable that the Corporation will have sufficient taxable income to enable the benefit of the deferred income tax asset to be realized.  Unrecognized deferred income tax assets are reassessed for recoverability at each reporting period end

The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income during the carry-forward period sufficient to offset the income tax losses and deductible temporary timing differences.  While management is of the opinion that it is probable that the Bank will be able to realize the deferred income tax asset, there is no guarantee the Bank will be able to generate sufficient taxable income during the carry-forward period.  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.

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, 2015, with earlier application permitted. In July 2013, the IASB deferred the mandatory effective date for the adoption of IFRS 9 to a date yet to be determined and to allow entities to early adopt only the own credit requirement in IFRS 9. 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.

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.

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 Sheets
(Unaudited)

(thousands of Canadian dollars)                          
              July 31     October 31     July 31
As at             2013     2012     2012
                           
Assets                          
                           
Cash and cash equivalents   $ 96,772    $ 132,766    $ 195,500
Securities (note 4)           88,479     167,227     57,727
Loans, net of allowance for credit losses (note 5)     1,193,561     1,210,311     1,255,595
Other assets            25,542     24,953     30,363
                           
    $ 1,404,354    $ 1,535,257    $ 1,539,185
                           
Liabilities and Shareholders' Equity                  
                           
Deposits    $ 1,201,593    $ 1,317,298    $ 1,323,494
Notes payable (note 6)         82,653     82,172     80,020
Securitization liabilities (note 7)         43,511     43,356     43,458
Other liabilities            18,652     32,711     30,635
Preferred share liabilities (note 8)       42,285     41,823     41,675
              1,388,694     1,517,360     1,519,282
                           
Shareholders' equity :                      
  Share capital (note 9)       25,623     21,888     21,221
  Retained earnings (deficit)       (9,991)     (4,063)     (1,369)
  Accumulated other comprehensive income      28     72     51
              15,660     17,897     19,903
                           
    $ 1,404,354    $ 1,535,257    $ 1,539,185
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     for the nine months ended
            July 31     July 31     July 31     July 31
            2013     2012     2013     2012
                               
Interest income:                          
  Loans $ 13,366    $ 13,762    $ 40,125    $ 39,478
  Securities         666     646     2,153     3,053
  Loan fees         1,214     948     3,452     2,774
            15,246     15,356     45,730     45,305
                               
Interest expense:                          
  Deposits and other       7,956     8,902     24,167     27,036
  Notes payable       2,170     2,128     6,382     6,169
  Preferred share liabilities     1,230     1,214     3,687     3,642
            11,356     12,244     34,236     36,847
                               
Net interest income       3,890     3,112     11,494     8,458
                               
Other income (note 10)       315     3,573     1,995     10,917
Restructuring costs       (287)     -     (405)     -
Net interest and other income      3,918     6,685     13,084     19,375
                               
Provision for credit losses (note 5)     154     249     399     433
Net interest and other income after provision for credit losses   3,764     6,436     12,685     18,942
                               
Non-interest expenses:                          
  Salaries and benefits       2,601     2,775     7,954     8,112
  General and administrative     2,202     2,952     7,427     8,133
  Premises and equipment     419     435     1,216     1,400
            5,222     6,162     16,597     17,645
                               
Income (loss) before income taxes     (1,458)     274     (3,912)     1,297
                               
Income taxes (note 11)       735     888     1,950     3,675
                               
Net loss $ (2,193)    $ (614)    $ (5,862)    $ (2,378)
                               
Basic earnings (loss) per share  $ (0.07)    $ (0.02)    $ (0.20)    $ (0.09)
                               
Diluted earnings (loss) per share  $ (0.07)    $ (0.02)    $ (0.20)    $ (0.09)
                               
Weighted average number of common shares outstanding   30,395,000     27,375,000     29,688,000     26,917,000
                               
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     for the nine months ended
      July 31     July 31     July 31     July 31
      2013     2012     2013     2012
                                   
Net loss   $ (2,193)    $ (614)    $ (5,862)    $ (2,378)
                                   
Other comprehensive income (loss), net of tax                          
  Net unrealized gains (losses) on assets held as
available-for-sale (1)
    (1)     (887)     (18)     (238)
  Amount transferred to income or loss on disposal of
available-for-sale assets (2)
    (1)     (1,998)     (26)     (7,079)
                (2)     (2,885)     (44)     (7,317)
                                   
Comprehensive loss   $ (2,195)    $ (3,499)    $ (5,906)    $ (9,695)
(1)  Net of income tax benefit (expense) for three months of $nil (2012 - $328) and nine months of $7 (2012-$88)
(2)  Net of income tax benefit (expense) for three months of $nil (2012 - $739) and nine months of $10 (2012-$2,618)

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     for the nine months ended
            July 31     July 31     July 31     July 31
            2013     2012     2013     2012
                             
Common shares (note 9):                        
                         
Balance, beginning of the period   $ 17,104    $ 63,208    $ 14,914    $ 61,886
Issued on payment of Class B preferred share dividends     674     674     2,022     2,022
Issued during the period, net of issue costs     842     842     1,684     816
Reduction of stated capital (note 9)     -     (50,472)     -     (50,472)
                             
Balance, end of the period   $ 18,620    $ 14,252    $ 18,620    $ 14,252
                         
Common share warrants:                        
                             
Balance, beginning of the period   $ -    $ 2,003    $ 2,003    $ 2,003
Amount transferred to contributed surplus on expiry     -     -     (2,003)     -
                             
Balance, end of the period   $ -    $ 2,003    $ -    $ 2,003
                             
Preferred shares (note 9):                          
                             
Class A preferred shares                          
Balance, beginning and end of the period   $ 1,061    $ 1, 061    $ 1,061    $ 1,061
                             
Class B preferred shares                          
Balance, beginning and end of the period   $ 3,187    $ 3,187    $ 3,187    $ 3,187
                             
Contributed surplus (note 9):                          
                             
Balance, beginning of the period   $ 2,748    $ 712    $ 724    $ 688
Fair value of stock options granted     7     6     28     30
Amount transferred from common share warrants     -     -     2,003     -
                             
Balance, end of the period   $ 2,755    $ 718    $ 2,755    $ 718
                             
Retained earnings (deficit):                          
                             
Balance, beginning of the period   $ (7,798)    $ (51,227)    $ (4,063)    $ (49,397)
Net loss           (2,193)     (614)     (5,862)     (2,378)
Dividends paid         -     -     (66)     (66)
Reduction of stated capital (note 9)     -     50,472     -     50,472
                             
Balance, end of the period   $ (9,991)    $ (1,369)    $ (9,991)    $ (1,369)
                               
Accumulated other comprehensive income net of taxes:                        
                               
Balance, beginning of the period   $ 30    $ 2,936    $ 72    $ 7,368
Other comprehensive income (loss)     (2)     (2,885)     (44)     (7,317)
                             
Balance, end of the period   $ 28    $ 51    $ 28    $ 51
                             
Total shareholders' equity   $ 15,660    $ 19,903    $ 15,660    $ 19,903
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)              
              July 31     July 31
For the nine months ended       2013     2012
                     
Cash provided (used in):                
                     
Operations:                  
  Net loss   $ (5,862)    $ (2,378)
  Items not involving cash:              
      Provision for credit losses     399     433
      Change in derivative financial instruments     -     (96)
      Deferred income taxes     790     2,334
      Stock-based compensation     28     30
      Gain on disposal of securities     -     (10,141)
      Gain on sale of lending assets     (1,009)     -
      Interest income       (45,730)     (45,305)
      Interest expense        34,236     36,847
  Interest received          44,192     43,865
  Interest paid          (35,959)     (36,178)
  Income taxes paid        (1,031)     (1,341)
  Mortgages and loans       17,557     (108,657)
  Deposits         (115,705)     53,764
  Change in other assets and liabilities     (8,347)     4,579
              (116,441)     (62,244)
Investing:                  
  Purchase of securities       (27,985)     (39,218)
  Proceeds from sale and maturity of securities     106,814     99,287
              78,829     60,069
Financing:                  
  Proceeds on issuance of notes payable     -     2,000
  Proceeds of shares issued       1,684     842
  Dividends paid         (66)     (66)
              1,618     2,776
                     
(Decrease) Increase in cash and cash equivalents     (35,994)     601
                     
Cash and cash equivalents, beginning of the period     132,766     194,899
                     
Cash and cash equivalents, end of the period    $ 96,772    $ 195,500
                     
Cash and cash equivalents is represented by:            
                     
  Cash   $ 96,772    $ 96,911
  Cash equivalents         -     98,589
                     
Cash and cash equivalents, end of the period    $ 96,772    $ 195,500
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 and nine month periods ended July 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 and nine months ended July 31, 2013 and 2012 were approved by the Board of Directors on August 28, 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 judgments

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 periods. 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.

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:

                       
          July 31     October 31     July 31
          2013     2012     2012
                       
Available-for-sale securities                    
Securities issued or guaranteed by:                    
  Canadian federal government      $ 28,360    $ 76,841    $ 30,003
  Canadian provincial governments       18,609     48,526     9,939
  Canadian municipal governments       965     1,581     1,648
Corporate debt         25,329     25,012     853
Total available-for-sale securities      $ 73,263    $ 151,960    $ 42,443
                       
Held-to-maturity security                      
Corporate debt        $ 15,216    $ 15,267    $ 15,284
Total securities        $ 88,479    $ 167,227    $ 57,727

 

5. Loans:

a) Portfolio analysis:

                       
          July 31     October 31     July 31
          2013     2012     2012
                       
Residential mortgages                      
  Insured        $ 24,921    $ 35,966    $ 36,451
  Uninsured         247,403     230,129     235,329
Securitized mortgages         41,245     41,894     42,100
Government financing         143,419     172,326     185,968
Corporate loans         616,553     630,738     644,970
Corporate leases         90,433     71,131     87,958
Other loans         3,869     5,080     5,097
Credit card receivables         26,226     23,397     17,820
          1,194,069     1,210,661     1,255,693
                       
Allowance for credit losses:                      
  Collective         (3,235)     (3,283)     (3,182)
  Individual         (1,662)     (1,579)     (1,672)
          (4,897)     (4,862)     (4,854)
                       
          1,189,172     1,205,799     1,250,839
                       
Accrued interest         4,389     4,512     4,756
                       
Total loans, net of allowance for credit losses    $ 1,193,561    $ 1,210,311    $ 1,255,595



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

                       
          July 31     October 31     July 31
          2013     2012     2012
                       
Residential mortgages        $ 564   $ 600    $ 530
Corporate and government loans         1,919     2,307     2,372
Other loans         8     24     30
Credit card receivables         744     352     250
         $ 3,235    $ 3,283    $ 3,182

 

The Corporation holds collateral against the majority of its 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.

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                             
                      July 31     July 31
                      2013     2012
For the three months ended       Collective     Individual     Total
Allowance
    Total
Allowance
                             
Balance, beginning of the period      $ 3,302    $ 1,622    $ 4,924   $ 4,612
Provision for credit losses       114     40     154     249
Recoveries (write-offs)       (181)     -     (181)     (7)
                             
Balance, end of the period      $ 3,235   $ 1,662    $ 4,897   $ 4,854
                             
                             
                      July 31     July 31
                      2013     2012
For the nine months ended       Collective     Individual     Total
Allowance
    Total
Allowance
                             
Balance, beginning of the period      $ 3,283    $ 1,579    $ 4,862   $ 4,387
Provision for credit losses       282     117     399     433
Recoveries (write-offs)       (330)     (34)     (364)     34
                             
Balance, end of the period      $ 3,235    $ 1,662   $ 4,897    $ 4,854

 

c)  Impaired loans:

                       
      July 31, 2013
      Gross
impaired
  Individual
allowance
  Net impaired
                       
Residential mortgages      $ 1,749   $ 1,662   $   87
Other loans       6     -       6
       $ 1,755    $ 1,662   $   93
                       
                       
      July 31, 2012
      Gross
impaired
  Individual
allowance
  Net impaired
                       
Residential mortgages      $ 1,695    $ 1,672   $   23
Other loans       28     -       28
       $ 1,723    $ 1,672   $   51

 

Impaired loans at July 31, 2013 include foreclosed real estate held for sale with a gross carrying value of $111,000 (2012 - $159,000) and a related allowance of $111,000 (2012 - $120,000). 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 and nine months ended July 31, 2013 was $40,000 (2012 - $38,000) and $117,000 (2012 - $111,000) respectively. An individual allowance has been recognized on the impaired loans to reflect the estimated recoverable amounts for impaired loans.

At July 31, 2013, loans, other than credit card receivables, past due but not impaired, totalled $nil (2012 - $nil). At July 31, 2013, credit card receivables overdue by one day or more but not impaired totalled $2,080,000 (2012 - $849,000).

6. Notes payable:

                           
              July 31     October 31      July 31
              2013     2012     2012
                           
Ten year term Series C Notes unsecured, maturing 2018, net of
issue costs of $1,065 (October 31, 2012 -$1,183, July 31, 2012
- $1,221) , effective interest of 10.56%
                 
                 
   $ 58,156   $ 57,774   $ 57,653
                           
Ten year term, unsecured, $11.5 million callable, subordinated
notes payable by the Bank to a third party, maturing between
2019 and 2021, net of issue costs of $1,203 (October 31, 2012 -
$1,302, July 31, 2012 - $1,333), effective interest of 10.92% 
                 
                 
                 
    20,297     22,198     22,167
                           
Notes payable, unsecured, effective interest of 6.05%      4,200     2,200     200
                           
             $ 82,653    $ 82,172   $ 80,020

 

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 $41,035,000 (2012 - $41,837,000) are pledged as collateral for these liabilities.

8. Preferred share liabilities:

At July 31, 2013, the Corporation has outstanding 1,909,458 (2012 - 1,909,458) Class B Preferred Shares with a total face value of $47.7 million (October 31, 2012 - $47.7 million, July 31, 2012 - $47.7 million) less issue costs of $2.1 million (October 31, 2012 - $2.3 million, July 31, 2012 - $2.4 million).  As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.3 million (October 31, 2012 - $41.8 million, July 31, 2012 - $41.7 million), net of issue costs, 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, July 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 Sheets.

As the preferred shares must be redeemed by the Corporation in 2019 for approximately $47.7 million, the preferred share liability amount of $42.3 million (October 31, 2012 - $41.8 million, July 31, 2012 - $41.7 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           -     50,000     1.26
Issued for cash proceeds       1,301,654     -     -
Issued pursuant to Class B Preferred Share dividend     1,483,946     -     -
Expired           -     (695,350)     2.99
Outstanding, July 31, 2013        31,308,091     517,683    $ 6.82

 

At July 31, 2013, there were 314,572 (2012 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (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 and nine months ended July 31, 2013 of $7,000 (2012 - $6,000) and $28,000 (2012 - $30,000) respectively. During the nine months ended July 31, 2013, 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 $1.26 per share and expire in February, 2023. 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 1.53%, (ii) expected option life of 60 months and (iii) expected volatility of 65.45%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.70 per option. No additional options were issued during the three months ended July 31, 2013.

During the nine months ended July 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 additional options were issued during the three months ended July 31, 2012.

During the three months ended July 31, 2013, the Corporation issued nil DSU's (2012 - nil) to its directors, with a total of 144,131 DSU's (2012 - 128,574) issued for the nine months ended July 31, 2013. The amounts recorded in the Consolidated Statement of Income (Loss) relating to DSU's for the three and nine months ended July 31, 2013 was $nil (2012 - $12,000) and $139,000 expense (2012 - $225,000) respectively.  At July 31, 2013 there were 443,587 (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       for the nine months ended
          July 31     July 31       July 31     July 31
          2013     2012       2013     2012
                               
Gain on sale of securities      $ -    $ 2,998      $ -    $ 10,141
Gain on sale of loans         -     -       1,009     -
Credit card non-interest revenue       306     259       823     375
Other income         9     316       163     305
Mark-to-market adjustment for derivatives       -     -       -     96
                               
         $ 315    $ 3,573      $ 1,995    $ 10,917

 

11. Income taxes:

The Corporation's statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous period. 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:

                                   
              for the three months ended       for the nine months ended
              July 31     July 31       July 31     July 31
              2013     2012       2013     2012
                                   
Income tax on earnings of the Bank      $ 348    $ -      $ 790    $ -
Income tax on dividends paid by the Corporation       387     454       1,160     1,341
Tax on gain on sale of securities         -     810       -     2,710
Substantively enacted rate changes       -     (376)       -     (376)
                                   
             $ 735    $ 888      $ 1,950    $ 3,675


12. 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.

                           
                July 31         July 31
                2013         2012
                           
Loan commitments            $   129,009      $   216,184
Undrawn credit card lines               139,481         92,845
Letters of credit               20,529         26,434
                           
             $   289,019      $   335,463

 

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:

                           
                July 31         July 31
                2013         2012
                           
Collateral related to derivative transactions            $   3,964     $   16,213
Collateral related to letters of credit               9,298         9,245
                           
             $   13,262      $   25,458

 

13. 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 July 31, 2013 amounts due from Senior Executive Officers totalled $725,000 (2012 - $961,000) 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 and nine months ended July 31, 2013 was $9,000 (2012 - $10,000) and $28,000 (2012 - $30,000) respectively. There was no provision for credit losses related to loans issued to key management personnel for the three and nine months ended July 31, 2013 and 2012.

14. 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 July 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 requires that all Canadian banks must comply with the Basel III standards on an "all-in" basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. The 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:

                         
                  July 31, 2013
                  "All-in"     "Transitional"
                         
Common Equity Tier 1 (CET1) capital                  
  Directly issued qualifying common share capital       $ 133,965    $ 133,965
  Retained earnings (deficit)           (8,979)     (8,979)
  Accumulated other comprehensive income         28     28
CET1 before regulatory adjustments           125,014     125,014
  Regulatory adjustments applied to CET1          (8,523)     -
Total Common Equity Tier 1 capital          $ 116,491    $ 125,014
                         
Additional Tier 1 capital                     
  Directly issued qualifying Additional Tier 1 instruments         -     -
Total Tier 1 capital             $ 116,491    $ 125,014
                         
Tier 2 capital                      
  Directly issued capital instruments subject to phase out from Tier 2        $ 21,500    $ 21,500
Tier 2 capital before regulatory adjustments         21,500     21,500
  Regulatory adjustments applied to Tier 2         (3,545)     -
Total Tier 2 capital            $ 17,955    $ 21,500
Total capital               $ 134,446    $ 146,514
Total risk-weighted assets         $ 1,107,029    $ 1,119,096
Capital ratios                      
  CET1 Ratio             10.52%     11.17%
  Tier 1 Capital Ratio             10.52%     11.17%
  Total Capital Ratio             12.14%     13.09%

 

c) Assets-to-Capital Multiple:

The Bank's growth in total assets is governed 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:

             
            July 31
            2013
             
Total assets (on and off-balance sheet)        $ 1,427,871
Capital            
  Common shares        $ 133,965
  Retained earnings (deficit)         (8,979)
  Accumulated other comprehensive income         28
  Subordinated notes (leverageable amount)         21,500
Total regulatory capital        $ 146,514
             
Assets-to-capital ratio         9.75

 

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

15. 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.

                                       
        July 31, 2013     July 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     $   5,049   $   (4,997)     $   5,975   $   (5,919)
Sensitivity of projected net interest                                    
  income during a 60 month period     $   2,906   $   (2,890)     $   9,364   $   (9,983)
                                       
Duration difference between assets and                                    
  liabilities (months)         2.9                 3.7        

 

16. 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 loans and leases 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     July 31, 2013
                Commercial
lending
    Credit card
lending
    Corporate
head office
    Intersegment
eliminations
    Total
                                       
Net interest income          $ 6,363    $ 370    $ (2,843)    $ -    $ 3,890
Other income (charges)         (278)     306     -     -     28
Net interest income and other income       6,085     676     (2,843)     -     3,918
Provision for (recovery of) credit losses       (215)     369     -     -     154
Net interest and other income (loss) after                                
  provision for credit losses             6,300     307     (2,843)     -     3,764
Non-interest expenses         4,887     494     141     (300)     5,222
Income (loss) before income taxes       1,413     (187)     (2,984)     300     (1,458)
Income tax expense           348     -     387     -     735
Net income (loss)          $ 1,065   $ (187)    $ (3,371)   $ 300    $ (2,193)
                                       
                                       
For the three months ended     July 31, 2012
                Commercial
lending
    Credit card
lending
    Corporate
head office
    Intersegment
eliminations
    Total
                                       
Net interest income          $ 4,990   $ 69    $ (2,730)    $ 783    $ 3,112
Other income           3,314     259     -     -     3,573
Net interest income and other income       8,304     328     (2,730)     783     6,685
Provision for (recovery of) credit losses       112     137     -     -     249
Net interest and other income (loss) after                                
  provision for credit losses             8,192     191     (2,730)     783     6,436
Non-interest expenses         5,177     989     296     (300)     6,162
Income (loss) before income taxes       3,015     (798)     (3,026)     1,083     274
Income tax expense (recovery)         434     -     454     -     888
Net income (loss)          $ 2,581    $ (798)    $ (3,480)   $ 1,083   $ (614)
                                       
                                       
For the nine months ended     July 31, 2013
                Commercial
lending
    Credit card
lending
    Corporate
head office
    Intersegment
eliminations
    Total
                                       
Net interest income          $ 17,901    $ 858    $ (8,389)    $ 1,124   $ 11,494
Other income           383     823     -     384     1,590
Net interest income and other income (charges)     18,284     1,681     (8,389)     1,508     13,084
Provision for (recovery of) credit losses       (365)     764     -     -     399
Net interest and other income (loss) after                                 
  provision for credit losses             18,649     917     (8,389)     1,508     12,685
Non-interest expenses         14,647     2,175     675     (900)     16,597
Income (loss) before income taxes       4,002     (1,258)     (9,064)     2,408     (3,912)
Income tax expense           790     -     1,160     -     1,950
Net income (loss)          $ 3,212    $ (1,258)    $ (10,224)   $ 2,408   $ (5,862)
                                       
Total assets          $ 1,381,116   $ 26,226   $ 1,258    $ (4,246)   $ 1,404,354
Total liabilities          $ 1,282,328    $ -    $ 106,394    $ (28)    $ 1,388,694
                                       
                                       
For the nine months ended     July 31, 2012
                Commercial
lending
    Credit card
lending (1) 
    Corporate
head office
    Intersegment
eliminations
 
Total
                                     
Net interest income          $ 14,042   $ 63    $ (8,072)   $ 2,425    $ 8,458
Other income           10,542     375     -     -     10,917
Net interest income and other income (charges)     24,584     438     (8,072)     2,425     19,375
Provision for credit losses         176     257     -     -     433
Net interest and other income (loss) after                                 
  provision for credit losses             24,408     181     (8,072)     2,425     18,942
Non-interest expenses         15,124     2,400     1,006     (885)     17,645
Income (loss) before income taxes       9,284     (2,219)     (9,078)     3,310     1,297
Income tax expense           2,334     -     1,341     -     3,675
Net income (loss)          $ 6,950   $ (2,219)    $ (10,419)   $ 3,310    $ (2,378)
                                       
Total assets          $ 1,520,949    $ 17,820    $ 1,512    $ (1,096)    $ 1,539,185
Total liabilities          $ 1,444,780   $ -    $ 102,765    $ (28,263)    $ 1,519,282
                                       
Note 1:  Credit card lending segment launched operations on January 2, 2012.      

 

17. Subsidiary company information:

The following table presents summary financial information of the Bank:

Consolidated balance sheets                      
              July 31     October 31     July 31
              2013     2012     2012
                           
Cash and cash equivalents        $ 94,370    $ 129,466   $ 193,800
Securities             88,479     167,227     57,727
Loans, net of allowance for credit losses       1,193,561     1,210,311     1,255,595
Other assets           30,932     27,164     31,647
             $ 1,407,342    $ 1,534,168   $ 1,538,769
                           
Deposits            $ 1,201,593   $ 1,317,298   $ 1,323,494
Subordinated notes payable         20,297     49,815     49,773
Securitization liabilities         43,511     43,356     43,458
Other liabilities           16,927     30,595     28,055
              1,282,328     1,441,064     1,444,780
                           
Shareholder's equity           125,014     93,104     93,989
                           
             $ 1,407,342    $ 1,534,168   $ 1,538,769

 

Consolidated statements of income                                      
                for the three months ended     for the nine months ended
                  July 31       July 31         July 31       July 31
                  2013       2012         2013       2012
                                             
Interest income            $   15,242    $   15,350      $   45,713    $   45,282
Interest expense               8,509       10,291         26,954       31,177
Net interest income               6,733       5,059         18,759       14,105
Other income               315       3,573         1,995       10,917
Debt and other restructuring costs           (287)       -         (789)       -
Net interest income and other income           6,761       8,632         19,965       25,022
Provision for credit losses             154       249         399       433
Net interest and other income after                                       
  provision for credit losses               6,607       8,383         19,566       24,589
Non-interest expenses             5,381       6,166         16,822       17,524
Income before income taxes             1,226       2,217         2,744       7,065
Income taxes               348       434         790       2,334
Net income             $   878    $   1,783      $   1,954    $   4,731

 

18. Subsequent event:

On August 20, 2013, the Bank filed its final prospectus and on August 27, 2013 its common shares began trading on the Toronto Stock Exchange. Under the terms of the IPO, 400,000 common shares of the Bank were issued at a price of $7.25 per share before commissions and other expenses of the offering. In addition, under a secondary offering, the Corporation sold 1,100,000 of its common shares of the Bank at $7.25 per share before commissions. From the net proceeds the Corporation purchased an additional 620,206 shares of the Bank for $4,496,494.  As a result of these transactions, the Corporation's ownership interest in the Bank decreased from 100% to 92%.

As part of the IPO, the syndicate of agents have been granted an Over-Allotment Option exercisable in whole or in part for a period of 30 days following the closing of the IPO, to purchase up to an additional 225,000 Common Shares from the Bank at a price of $7.25 per Common Share.

As noted previously, on March 7, 2013, approval was received from the Corporation's Series C Note holders to modify its Series C Notes. This modification to the Series C Notes allows the Corporation at its option, 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 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 also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation. Effective August 27, 2013, as a result of the completion of the Bank's IPO and the listing of the Bank's common shares, the Series C Notes were modified. At this point in time, the Corporation has not determined whether the modification of the Series C notes constitutes an extinguishment and reissuance of the debt for accounting purposes. Extinguishment of the debt could result in $3.5 million of unamortized issue costs and discounts related to the Series C Notes being written off.

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 commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.

Pacific & Western Credit Corp. 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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