LONDON, ON, May 31 /CNW/ -SECOND QUARTER FINANCIAL HIGHLIGHTS
(three months ended April 30, 2007 compared to three months ended
April 30, 2006 unless otherwise noted)
- Lending assets increased by 13% to $900 million from $797 million a
year ago and from $895 million at the end of the previous quarter.
- New loans and leases for the six months ended April 30, 2007,
totalled $248 million compared to $210 million for the same period a
year ago.
- Net interest income from lending for the six months ended
April 30, 2007, totalled $9.3 million compared to $8.8 million for
the same period a year ago.
- Total assets increased to $1.37 billion from $1.20 billion a year ago
and from $1.36 billion at the end of the previous quarter.
- Net earnings of $344,000 or $0.02 per share ($0.02 diluted) compared
to $2.0 million or $0.15 per share ($0.14 diluted) last year.
- On a year-to-date basis, net earnings of $1.4 million or $0.10 per
share ($0.09 diluted) compared to $3.7 million or $0.27 per share
($0.26 diluted) for the same period last year.PRESIDENT'S COMMENTS
This quarter we paid a special dividend of 0.53 of a Discovery Air Inc.
(DA) share for every share of Pacific & Western Credit Corp. held. Considering
the DA share price at the time of the payment was $1.80, this amounted to
$13.0 million of dividends or approximately $0.95 per Pacific & Western Credit
Corp. share. For income tax purposes this gave rise to a gain of $2.3 million
and a one time income tax provision for this quarter of $420,000. However for
accounting purposes, the gain is not recognized in our earnings.
Lending operations continued to make good progress in booking new loans
and leases. This quarter we were successful in booking $137 million of new
loans and leases, and on a year-to-date basis $248 million in new loans and
leases. This is an 18% increase over loans and leases booked last year during
the same six month period. However, as we have discussed in previous releases,
the buoyant economic conditions particularly in our Southwestern Ontario real
estate market continue to give rise to rapid pay downs. Pay downs for the six
month period ending April 30, 2007 totalled $210 million, which included the
repayment of a $40 million facility towards the end of April granted to London
Health Sciences. This gave rise to a slight increase in our lending portfolio
which grew from the previous quarter by only $5 million to $900 million.
Spread on our lending portfolio on a year-to-date basis decreased slightly
from 2.30% last year during the same period to 2.11% producing net interest
income of $9.3 million for the six month period. This represented a 5%
increase over that achieved during the same period last year.
We expect our loan fundings to grow quite rapidly during this quarter, as
this is the quarter that we normally see accelerated draw downs in our real
estate construction loans. Secondly, some large lending transactions we have
been working on for some time are expected to close during this quarter. As
you know our bank targets a low risk segment of the lending market and has
faced considerable compression of spreads in this market with the persistence
of our strong economy. Indeed, corporate spreads over Government Canada Bonds
are now at historic lows. This has resulted in spreads in our lending
portfolio declining somewhat from 2.30% to 2.11% but has had a very
significant negative effect on our securities portfolio's spread. The spread
realized on our securities portfolio for the six month period ending April 30
was only 11 basis points versus a normal spread of about 80 basis points. This
has resulted in an overall weighted average spread reducing from historic
levels of approximately 175 basis points to 136 basis points for this quarter.
We view this as a relatively temporary situation, but in the meantime are
working on transactions that will allow us to deploy our excess lending
capacity and securities of approximately $600 million in high volume, low risk
assets such as CMHC insured mortgages and hospital project financing.
Last quarter we announced that we had formed a new subsidiary company,
which is a sister company to our Bank, called Versabanq Innovations. Versabanq
Innovations' web site is www.versabanq.com. Pacific & Western Bank of Canada
is unique amongst the small financial institutions in that it was conceived to
apply new information technology to the banking industry and indeed for many
years we had more people involved in IT development than we've had lenders. We
believe we have created the very best banking software available and as the
name Versabanq denotes we believe it is the most versatile software in the
industry. It is able to accommodate any kind of lending transaction from
personal loans and home mortgages to loans and leases with unusual repayment
schedules. It also accommodates the new regulatory requirements under Basel
II, and its greatest strength is that it enables small financial institutions
to achieve Basel II compliance. We plan to market this software to small
financial institutions throughout North America, which should provide a new
revenue stream for our company.
We feel that the Canadian market particularly is ready for a new type of
banking where the interface is solely by way of laptop or personal digital
assistant. To be ready for this, Versabanq has developed a prototype
BlackBerry application to enable people to do their banking solely over the
BlackBerry. In order to provide more banking products and convenience to our
100,000 deposit customers, Visa has approved us to issue a credit card. Our
team is working on all the details to bring this card to our customers early
in fiscal 2008. This will allow our deposit customers more convenient access
to their deposits through banking machines and the ability to do credit card
transactions. Additionally we expect this to be a significant new revenue
source for our Bank.
As you know, in 2005 we provided a very successful solution for an
aviation customer that resulted in the formation of Discovery Air and since
then, some very large gains for our Bank allowing us to pay a substantial
special dividend. We still have 1.3 million shares of Discovery Air with a
book value of $1.38 per share and we also have a call option expiring
October 30, 2011 for 9.4 million shares exercisable at $2.00 per share. We
believe that Discovery Air still has considerable upside and will again
provide significant gains for our company. Considering we have huge excess
lending capacity we do not intend to sell the Discovery Air shares
prematurely.
Despite the compression of spreads in our core lending markets and our
treasury portfolio, we have not chosen to chase yield into riskier markets,
but rather to stick with "our knitting" and continue to pursue low risk
lending opportunities.
I continue to be very excited about the prospects for Pacific & Western's
growth and I believe the markets that are now reachable by our state of the
art information technology will provide for huge earnings growth.FINANCIAL HIGHLIGHTS
for the three months ended for the six months ended
----------------------------------------------- -------------------------
(unaudited)
($ thousands,
except per April 30 April 30 April 30 April 30
share amounts) 2007 2006 2007 2006
----------------------------------------------- -------------------------
Results of
operations (teb)
Net interest
income per
financial
statements $ 4,043 $ 4,544 $ 8,505 $ 9,091
Teb adjustment 492 352 935 778
Net interest
income 4,535 4,896 9,440 9,869
Spread 1.36% 1.70% 1.41% 1.70%
Provision for
credit losses 72 78 501 127
Net interest
income after
provision for
credit losses 4,463 4,818 8,939 9,742
Other income 294 1,251 1,253 2,083
Total revenue 4,757 6,069 10,192 11,825
Non-interest
expenses 3,548 3,104 7,206 6,388
Net earnings 344 2,042 1,435 3,701
Earnings per
common share:
Basic $ 0.02 $ 0.15 $ 0.10 $ 0.27
Diluted $ 0.02 $ 0.14 $ 0.09 $ 0.26
Efficiency ratio $ 0.73 $ 0.51 $ 0.67 $ 0.53
Return on average
common
shareholders'
equity 1.91% 15.60% 4.14% 14.09%
Return on average
total assets 0.10% 0.71% 0.21% 0.64%
Gross impaired
loans to total
assets 0.19% 0.03% 0.19% 0.03%
Number of full
time equivalent
staff 64 50 64 50
----------------------------------------------- -------------------------
Balance Sheet
Summary
Cash and
securities $ 432,535 $ 386,635 $ 432,535 $ 386,635
Total loans 899,971 796,866 899,971 796,866
Total assets 1,366,834 1,203,713 1,366,834 1,203,713
Average assets 1,362,781 1,180,672 1,348,281 1,167,470
Deposits 1,155,383 953,912 1,155,383 953,912
Notes payable 35,523 36,186 35,523 36,186
Shareholders'
equity 64,523 56,696 64,523 56,696
----------------------------------------------- -------------------------
Capital ratios
(Based on the
subsidiary Pacific
& Western Bank
of Canada)
Assets to
capital ratio 14.32 13.61 14.32 13.61
Tier 1 risk-based
capital ratio 8.43% 8.34% 8.43% 8.34%
Total risk-based
capital ratio 12.45% 12.12% 12.45% 12.12%
----------------------------------------------- -------------------------Non-GAAP measures:
Like most banks, the Corporation analyzes revenue on a taxable equivalent
basis (teb) to permit uniform measurement and comparison of net interest
income. Net interest income includes tax-exempt income on certain securities.
Since this income is not taxable, the rate of interest or dividends received
is lower than would apply to a loan or taxable security of the same amount.
The taxable equivalent basis includes an adjustment that increases interest
income and the provision for income taxes by the same amount that adjusts the
income on the tax-exempt securities to what income would have been had it been
taxed at the statutory rate.
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 second quarter of fiscal 2007 should be read in
conjunction with the unaudited interim consolidated financial statements for
the period ended April 30, 2007, included herein, and the audited consolidated
financial statements and MD&A for the year ended October 31, 2006, 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,
2006, remain substantially unchanged.
Overview
Net earnings for the quarter were $344,000 or $0.02 per share ($0.02
diluted) compared to $2.0 million or $0.15 per share ($0.14 diluted) for the
same period a year ago. For the six months ended April 30, 2007, net earnings
were $1.4 million or $0.10 per share ($0.09 diluted) compared to $3.7 million
or $0.27 per share ($0.26 diluted) a year ago. Net earnings for the quarter
and for the six months decreased from the same periods a year ago primarily as
a result of a decrease in net interest income from our securities portfolio,
an increase in non-interest expenses and a tax provision of $420,000 relating
to a gain for income tax purposes arising from the special dividend
distributed in the quarter.
Net interest income (teb) for the quarter was $4.5 million compared to
$4.9 million for the same period a year ago and for the six months was
$9.4 million compared to $9.9 million. Other income for the quarter was
$294,000 compared to $1.3 million a year ago and for the six months was $1.3
million compared to $2.1 million for the same period a year ago.
At April 30, 2007, total assets increased to $1.37 billion from
$1.20 billion a year ago and from $1.36 billion at the end of the previous
quarter. Lending assets increased to $900 million at the end of the quarter
from $797 million a year ago and showed modest growth from $895 million at the
end of the previous quarter. Credit quality remains strong with gross impaired
loans at the end of the quarter of $2.5 million or 0.19% of total assets,
unchanged from the previous quarter and compared to $380,000 or 0.03% of total
assets a year ago.
Total Revenue (teb)
Total revenue (teb), which is comprised of net interest income after
provision for credit losses and other income, was $4.8 million for the quarter
compared to $6.1 million a year ago and for the six months was $10.2 million
compared to $11.8 million for the same period a year ago.
Net Interest Income
Net interest income (teb) was $4.5 million for the quarter, compared to
$4.9 million a year ago and for the six months was $9.4 million compared to
$9.9 million a year ago. The decrease in net interest income from a year ago
was primarily due to a compression of spreads, particularly in our securities
portfolio. Our cost of funds for the quarter has increased over the past year
to 4.06% from 3.67%, in line with increases in the interest rate environment
and as a result of increased competition for new deposits. However, due to
excess liquidity and competitive pricing in the market, we have not seen a
comparable increase in yields on new loans or securities with our total yield
(teb) decreasing over the past several quarters. As a result, spread (teb),
which is net interest income as a percentage of average assets, was 1.36% for
the quarter compared to 1.70% a year ago and for the six months was 1.41%
compared to 1.70% a year ago. For the six months ended April 30, 2007, spread
on our loan portfolio was 2.11% compared to 2.30% a year ago and on our
securities was 0.42% compared to 0.91% for the same period.
Other Income
Other income for the quarter was $294,000 consisting primarily of
business advisory fees earned from Discovery Air Inc. (DA) compared to
$1.3 million for the same period a year ago which related to a dilution gain
resulting from the issue of shares by DA. As the Corporation no longer
accounts for its investment in DA on an equity basis, it no longer recognizes
dilution gains on any shares which DA may issue. For the six months ended
April 30, 2007, other income was $1.3 million and included a gain of $888,000
relating to the disposition of DA shares when a special dividend was declared
by the Corporation. Other income for the six months a year ago was
$2.1 million and included fees of $678,000 for providing wind up services to a
client.
Non-Interest Expenses
Non-interest expenses for the quarter were $3.5 million compared to
$3.1 million for the same period a year ago and for the six months ended April
30, 2007, non-interest expenses were $7.2 million compared to $6.4 million for
the same period last year. Non-interest expenses for the quarter and on a
year-to-date basis increased from last year primarily as a result of higher
salaries and benefits due to increased staff levels and costs of approximately
$350,000 for the six months related to the office in Calgary which opened in
the summer of 2006.
Our efficiency ratio (teb), which measures the cost of the Corporation to
earn $1 of revenue, was $0.73 for the quarter compared to $0.51 for the same
period last year and for the six months was $0.67 compared to $0.53 for the
same period a year ago. The change in the efficiency ratio was due primarily
to increased non-interest expenses in the quarter and year-to-date and the
decrease in other income for the same periods. At April 30, 2007, our ratio of
assets per full time employee was $21.4 million compared to $24.1 million a
year ago. At this level, the Corporation continues to lead the other domestic
banks.
Income Taxes
The income tax provision for the quarter was $373,000 compared to
$688,000 last year and for the six months was $616,000 compared to
$1.3 million for same period a year ago. In the current quarter the actual
effective income tax rate increased over our expected effective income tax
rate as a result of an income tax provision of $420,000 relating to a gain of
$2.3 million for income tax purposes which resulted from the disposition of DA
shares when they were distributed as a special dividend in the quarter. For
income tax purposes, this gain was measured at the distribution date versus
the declaration date for accounting purposes. On a year-to-date basis, the
difference in the effective rate from our statutory rate was also impacted by
non-taxable income from securities earned in the period.
In the current quarter and for the six months ended April 30, 2007, the
Corporation's statutory federal and provincial income tax rate was
approximately 36%, the same rate that was in effect for 2006. We anticipate
that in the remaining quarters of 2007, our effective rate will approximate
18%.
Balance Sheet
Total assets at April 30, 2007, were $1.37 billion compared to
$1.20 billion a year ago and $1.36 billion at the end of the previous quarter
with the largest increase from a year ago being in lending assets which grew
13% from $797 million to $900 million.
Cash and Securities
Cash and securities, which are held for liquidity management purposes and
to earn investment income, increased to $433 million from $387 million a year
ago and from $414 million at the end of the previous quarter. The increase in
cash and securities from a year ago was primarily in cash and short term
investments which were held for liquidity purposes and to earn spread income,
as well as corporate preferred shares which are held for the preferential tax
treatment their dividends receive.
At April 30, 2007, the net unrealized loss in our securities portfolio
totalled $210,000 compared to $326,000 at the end of the previous quarter and
$5.2 million a year ago. The change in unrealized losses from a year ago was a
result of changes in market conditions and the impact of recording an
impairment writedown of $3.2 million in the third quarter of 2006. This
writedown related to an investment included in our securities portfolio which
had been trading below our book value and was determined to be an other than
temporary decline.
Mortgages and Loans
Lending assets grew to $900 million at the end of the quarter from
$797 million a year ago and from $895 million at the end of the previous
quarter. New lending in the quarter totalled $137 million bringing new loan
fundings for the six months to $248 million compared to $210 million for the
same period a year ago. However, new lending was offset by loan repayments of
$132 million in the quarter and $212 million for the six months. Loan
categories which saw increases from a year ago were insured residential
mortgages and loans and leases to public sector entities and investment grade
corporations. These increases were offset by decreases in personal loans which
consist of immigrant investor loans.
Other Assets
Other assets totalled $34.3 million at the end of the quarter compared to
$49.3 million at the end of the previous quarter and $20.2 million a year ago.
Included in other assets is the Corporation's investment in DA, which at April
30, 2007, had a fair value of $16.9 million including an unrealized gain of
$2.0 million which is included in accumulated other comprehensive income. The
decrease in other assets from the previous quarter was due primarily to the
disposition of DA shares when they were distributed as a special dividend.
Deposits and Financing
Deposits are used as a primary source of financing growth in assets and
are raised entirely through an agent network across Canada. Deposits at the
end of the quarter decreased slightly to $1.16 billion from $1.17 billion at
the end of the previous quarter but increased from $954,000 a year ago. A
second source of financing asset growth is the use of margin lines and
securities sold under repurchase agreements, the total of which was
$103 million at the end of the quarter, compared to $150 million a year ago
and $60 million at the end of the previous quarter. From time to time, the
Corporation uses this source of financing when the cost of borrowing is less
than the interest rates that would have to be paid on new deposits.
Notes payable at April 30, 2007, were $35.5 million compared to
$36.2 million a year ago with the decrease due to the reclassification of
deferred financing charges totalling $700,000 as required under the new
accounting standard on Financial Instruments.
Credit Quality
Gross impaired loans at the end of the quarter totalled $2.5 million or
0.19% of total assets, unchanged from the end of the previous quarter and
compared to $380,000 or 0.03% of total assets a year ago. The provision for
credit losses for the quarter was $72,000 compared to $78,000 a year ago and
for the six months ended April 30, 2007, were $501,000 compared to $127,000.
During the previous quarter, specific provisions totalling $294,000 were
recorded, increasing the provisions against two loans which had been
previously classified as impaired. Total allowances for credit losses,
including specific and general allowances, were $3.1 million at the end of the
quarter compared to $2.0 million a year ago.
Shareholders' Equity
Shareholders' equity at the end of the quarter was $64.5 million compared
to $56.7 million a year ago with the increase due primarily to the retention
of earnings, offset by the special dividend valued at $10.8 million. Total
common shares outstanding at the end of the quarter were 13,756,752 compared
to 13,344,595 a year ago with the increase due to the exercise of common share
options. Outstanding common share options totalled 1,073,078 at the end of the
quarter compared to 1,365,700 a year ago. Our book value per common share at
the end of the quarter was $4.43 compared to $3.98 a year ago.
Updated Share Information
At May 30, 2007, there were no changes in common shares outstanding or
common share options since April 30, 2007.
Capital Management
The Bank's total risk-based capital ratio, which is the ratio of
regulatory capital to risk-weighted assets, was 12.45% at the end of the
quarter compared to 12.32% at the end of the previous quarter and 12.12% a
year ago. The Bank has an internal target for its risk-based capital ratio of
11% and manages its regulatory capital and risk-weighted assets so this target
is exceeded. The Bank's Tier 1 risk-based capital ratio, which is the ratio of
Tier 1 capital to risk-weighted assets, was 8.43% at the end of the quarter
compared to 8.10% at the end of the previous quarter and 8.34% a year ago. The
Bank's assets to capital ratio was 14.32 at the end of the quarter compared to
13.95 at the end of the previous quarter and 13.61 a year ago.
Performance Targets
Performance targets established for the 2007 fiscal year and 2007
year-to-date are noted below with actual results for the six months ended
April 30, 2007.2007
--------------------------------------
Annual Year-to-Date Year-to-Date
Target Target Results
-------------------------------------------------------------------------
Earnings per common share $ 0.43 $ 0.17 $ 0.10
Spread (teb) 1.67% 1.60% 1.41%
Loan growth 33.00% 15.00% 4.20%
Total asset growth 12.00% 6.00% 2.80%
Return on average common
shareholders' equity 8.72% 6.89% 4.14%
Return on average total assets 0.42% 0.34% 0.21%
As noted earlier, actual results for the six month period ended April 30,
2007, fell short of year-to-date targets due to the short fall in lending
assets and a compression of spreads primarily in our securities portfolio. In
addition, net earnings were negatively impacted by a tax provision of $420,000
on a gain of $2.3 million for income tax purposes which resulted from the
disposition of DA shares distributed as a special dividend.
Summary of Quarterly Results
(thousands of
dollars except
per share amounts) 2007 2006
------------------- ----------------- -----------------------------------
Q2 Q1 Q4 Q3 Q2(*) Q1(*)
Results of
operations:
Total interest
income per
financial
statements $17,538 $18,163 $18,677 $16,418 $15,104 $15,138
Teb adjustment 492 444 432 440 352 427
Total interest
income 18,030 18,607 19,109 16,858 15,456 15,565
Yield on
assets (%) 5.42% 5.49% 5.79% 5.37% 5.37% 5.40%
Interest expense 13,495 13,701 14,415 12,200 10,560 10,591
Cost of funds (%) 4.06% 4.04% 4.37% 3.89% 3.67% 3.68%
Net interest
income 4,535 4,906 4,694 4,658 4,896 4,974
Spread (%) 1.36% 1.45% 1.42% 1.48% 1.70% 1.72%
Provision for
credit losses 72 429 339 321 78 49
Other income 294 959 1,116 12,963 1,251 832
Total revenue 4,757 5,436 5,471 17,300 6,069 5,757
Non-interest
expenses 3,548 3,658 3,252 3,215 3,104 3,284
Income before
income taxes 1,209 1,778 2,219 14,085 2,965 2,473
Income tax
provision 865 687 737 2,282 1,040 1,051
Non-controlling
interest - - - - 117 237
Net earnings 344 1,091 1,482 11,803 2,042 1,659
Earnings
per share
- basic $ 0.02 $ 0.08 $ 0.11 $ 0.88 $ 0.15 $ 0.12
- diluted $ 0.02 $ 0.07 $ 0.10 $ 0.85 $ 0.14 $ 0.12
(thousands of
dollars except
per share amounts) 2005
------------------- -----------------
Q4(*) Q3(*)
Results of
operations:
Total interest
income per
financial
statements $13,845 $13,117
Teb adjustment 484 423
Total interest
income 14,329 13,540
Yield on
assets (%) 5.21% 5.11%
Interest expense 9,846 10,000
Cost of funds (%) 3.58% 3.77%
Net interest
income 4,483 3,540
Spread (%) 1.63% 1.34%
Provision for
credit losses 147 91
Other income 2,592 4,275
Total revenue 6,928 7,724
Non-interest
expenses 3,904 3,652
Income before
income taxes 3,024 4,072
Income tax
provision 1,196 1,507
Non-controlling
interest (72) (826)
Net earnings 1,756 1,739
Earnings
per share
- basic $ 0.13 $ 0.12
- diluted $ 0.13 $ 0.12
(*) Results for these quarters include the results of the operations for
DA accounted for on the consolidation basis. DA was subsequently
accounted for on the equity basis until October 31, 2006.Net interest income and spread (teb) for the second quarter decreased
from previous quarters and from a year ago as a result of a compression of
spreads primarily in our securities portfolio, competitive pricing for new
loans and increased competition for new deposits resulting in an increase in
our cost of funds. Other income was less in the second quarter compared to
previous quarters as there were no gains from DA realized in the period.
Non-interest expenses in the second quarter were comparable to the previous
quarter but increased from a year ago as a result of higher salaries and
benefits due to increased staff levels and the costs of the office in Calgary
which opened during the summer of 2006. The income tax provision increased in
the second quarter as a result of a tax provision on a gain for income tax
purposes which resulted from the disposition of DA shares when they were
distributed as a special dividend in the quarter.
Changes in Accounting Policies
Newly issued accounting standards by The Canadian Institute of Chartered
Accountants relating to comprehensive income, equity, financial instruments
and hedges were adopted by the Corporation effective November 1, 2006. As a
result of these new standards, a new category, accumulated other comprehensive
income, forms part of Shareholders' Equity and certain unrealized gains or
losses on available-for-sale financial instruments are reported in accumulated
other comprehensive income until realization.
At April 30, 2007, accumulated other comprehensive income totalled
$1.3 million and consisted of unrealized losses of $210,000 related to
securities held as available-for-sale, unrealized gains of $2.0 million
related to our investment in DA which has been designated as
available-for-sale and deferred losses of $450,000 related to previously
closed cash flow hedges no longer included in other assets. These amounts were
before future income taxes totalling $134,000 which are also included in
accumulated other comprehensive income.
The new accounting standard relating to hedges requires the Corporation
to fair value the hedging item and the hedged item with the changes recorded
through net earnings. As a result of this standard, at April 30, 2007,
mortgages and loans and other liabilities include fair value adjustments
totalling $2.1 million however, there was no impact on net earnings as the
fair value adjustment to mortgages and loans and other assets was offset by
the increase in the fair value adjustment of the corresponding hedges recorded
in other liabilities.
Controls and Procedures
During the most recent interim period, there have been no changes in the
Corporation's policies and procedures and other processes that comprise its
internal control over financial reporting, that have materially affected, or
are reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
Dated: May 30, 2007
Forward-Looking Statements
The statements in this management's discussion and analysis which relate
to the future are forward-looking statements. By their very nature,
forward-looking statements involve inherent risks and uncertainties, both
general and specific, and 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.
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. There is no undertaking 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.PACIFIC & WESTERN CREDIT CORP.
Consolidated Balance Sheet
(thousands of dollars)
April 30 October 31 April 30
2007 2006 2006
------------ ------------ ------------
(unaudited) (unaudited)
Assets
Cash resources $ 136,383 $ 207,720 $ 100,719
Securities 296,152 217,698 285,916
Mortgages and loans 899,971 863,830 796,866
Other assets 34,328 40,481 20,212
------------ ------------ ------------
$ 1,366,834 $ 1,329,729 $ 1,203,713
------------ ------------ ------------
------------ ------------ ------------
Liabilities and
Shareholders' Equity
Deposits $ 1,155,383 $ 1,210,555 $ 953,912
Notes payable 35,523 36,184 36,186
Other liabilities 111,405 12,340 156,919
------------ ------------ ------------
1,302,311 1,259,079 1,147,017
------------ ------------ ------------
Shareholders' equity
Share capital 39,884 37,775 37,106
Retained earnings 23,386 32,875 19,590
Accumulated other
comprehensive income (note 1) 1,253 - -
------------ ------------ ------------
64,523 70,650 56,696
------------ ------------ ------------
$ 1,366,834 $ 1,329,729 $ 1,203,713
------------ ------------ ------------
------------ ------------ ------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Earnings
(thousands of dollars)
for the three for the six
months ended months ended
------------------------- --------------------------
April 30 April 30 April 30 April 30
2007 2006 2007 2006
------------------------- --------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income
Interest income
on loans $ 12,779 $ 11,095 $ 25,873 $ 22,589
Interest and
income from
securities 4,145 3,425 8,614 6,550
Loan fee income 614 584 1,214 1,103
------------------------- --------------------------
17,538 15,104 35,701 30,242
Interest expense
Deposits and other 12,636 9,711 25,467 19,444
Notes payable 859 849 1,729 1,707
------------------------- --------------------------
13,495 10,560 27,196 21,151
------------------------- --------------------------
Net interest
income 4,043 4,544 8,505 9,091
Provision for
credit losses 72 78 501 127
------------------------- --------------------------
Net interest
income after
provision for
credit losses 3,971 4,466 8,004 8,964
Other income 294 1,251 1,253 2,083
------------------------- --------------------------
4,265 5,717 9,257 11,047
------------------------- --------------------------
Non-interest
expenses
Salaries and
benefits 2,094 1,763 4,214 3,624
General and
administrative 1,003 1,086 2,140 2,226
Premises and
equipment 451 255 852 538
------------------------- --------------------------
3,548 3,104 7,206 6,388
------------------------- --------------------------
Earnings before
income taxes
and other 717 2,613 2,051 4,659
Income tax
provision (note 3) 373 688 616 1,312
Non-controlling
interest - (117) - (354)
------------------------- --------------------------
Net earnings $ 344 $ 2,042 $ 1,435 $ 3,701
------------------------- --------------------------
------------------------- --------------------------
Basic earnings
per share $ 0.02 $ 0.15 $ 0.10 $ 0.27
------------------------- --------------------------
------------------------- --------------------------
Diluted earnings
per share $ 0.02 $ 0.14 $ 0.09 $ 0.26
------------------------- --------------------------
------------------------- --------------------------
Weighted average
number of common
shares 13,730,000 13,330,000 13,599,000 13,330,000
------------------------- --------------------------
------------------------- --------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars)
for the three months ended for the six months ended
-------------------------- --------------------------
April 30 April 30 April 30 April 30
2007 2006 2007 2006
-------------------------- --------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Common shares
Balance, beginning
of period $ 34,345 $ 33,298 $ 33,986 $ 33,191
Proceeds of shares
issued 1,544 55 1,898 162
Amount transferred
from contributed
surplus 5 - 10 -
-------------------------- -------------------------
Balance, end of
period $ 35,894 $ 33,353 $ 35,894 $ 33,353
-------------------------- -------------------------
Class A preferred
shares
-------------------------- -------------------------
Balance, beginning
and end of period $ 3,545 $ 3,545 $ 3,545 $ 3,545
-------------------------- -------------------------
Stock-based
compensation
Balance, beginning
of period $ 392 $ 208 $ 244 $ 58
Fair value of stock
option transactions
(note 3) 58 - 211 150
Amount transferred
to common shares (5) - (10) -
-------------------------- -------------------------
Balance, end of
period $ 445 $ 208 $ 445 $ 208
-------------------------- -------------------------
Retained earnings
Balance, beginning
of period $ 23,042 $ 17,548 $ 32,875 $ 16,129
Transitional
adjustment
(note 1a) - - 103 -
Net earnings 344 2,042 1,435 3,701
Dividends in kind - - (10,787) -
Dividends on
preferred shares - - (240) (240)
-------------------------- -------------------------
Balance, end of
period $ 23,386 $ 19,590 $ 23,386 $ 19,590
-------------------------- -------------------------
Accumulated other
comprehensive
income, net of
taxes (note 1)
Balance, beginning
of period $ 3,674 $ - $ - $ -
Transitional
adjustment - - 3,982 -
Net unrealized
losses on assets
held as
available-for-sale (2,202) - (1,442) -
Amount transferred
to net income for
hedges 53 - 106 -
Amount transferred
to net income for
sale of available
-for-sale securities (272) - (1,393) -
-------------------------- -------------------------
(2,421) - (2,729) -
-------------------------- -------------------------
Balance, end of
period $ 1,253 $ - $ 1,253 $ -
-------------------------- -------------------------
Total shareholders'
equity $ 64,523 $ 56,696 $ 64,523 $ 56,696
-------------------------- -------------------------
-------------------------- -------------------------
Accumulated other
comprehensive
income, net of
taxes
Balance, end of
period, consists
of:
Net unrealized
gains on assets
held as
available-for-sale $ 1,543 $ - $ 1,543 $ -
Deferred losses
related to
previously closed
cash flow hedges (290) - (290) -
-------------------------- -------------------------
Balance, end of
period $ 1,253 $ - $ 1,253 $ -
-------------------------- -------------------------
Comprehensive
income
Total net income $ 344 $ - $ 1,435 $ -
Other comprehensive
income (loss) (2,421) - (2,729) -
-------------------------- -------------------------
Total comprehensive
income (loss) $ (2,077) $ - $ (1,294) $ -
-------------------------- -------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Cash Flows
(thousands of dollars)
for the three months ended for the six months ended
--------------------------- -------------------------
April 30 April 30 April 30 April 30
2007 2006 2007 2006
--------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by
(used in):
Operations:
Net earnings $ 344 $ 2,042 $ 1,435 $ 3,701
Items not involving
cash:
Provision for credit
losses 72 78 501 127
Future income tax
provision 732 783 616 1,568
Stock-based
compensation
(note 3) 58 - 211 250
Gain on disposal
of shares - - (888) -
Non-controlling
interest - (117) - (354)
Dilution gains - (1,289) - (1,289)
Equity earnings - 55 - 55
Change in other
assets and
liabilities (5,371) (2,551) (8,606) 3,308
-------------------------- -------------------------
(4,165) (999) (6,731) 7,366
-------------------------- -------------------------
Investing:
Securities (24,377) (7,395) (78,664) (6,065)
Mortgages and loans (3,692) (23,899) (35,449) (43,491)
-------------------------- -------------------------
(28,069) (31,294) (114,113) (49,556)
-------------------------- -------------------------
Financing:
Deposits (18,854) (12,483) (55,172) 18,154
Short term
financings 43,271 61,092 103,021 52,301
Proceeds of common
shares issued 1,544 55 1,898 162
Dividends paid - - (240) (240)
-------------------------- -------------------------
25,961 48,664 49,507 70,377
-------------------------- -------------------------
Increase (decrease)
in cash resources (6,273) 16,371 (71,337) 28,187
Cash resources,
beginning of period 142,656 84,348 207,720 72,532
-------------------------- -------------------------
Cash resources, end
of period $ 136,383 $ 100,719 $ 136,383 $ 100,719
-------------------------- -------------------------
-------------------------- -------------------------
Supplementary cash
flow information:
Interest paid
during the period $ 11,034 $ 9,092 $ 21,024 $ 17,619
Income taxes paid
during the period $ 78 $ 16 $ 342 $ 836
PACIFIC & WESTERN CREDIT CORP.
Notes to the interim consolidated financial statements (unaudited)
For the six months ended April 30, 2007
1. Basis of presentation
The interim consolidated financial statements of Pacific & Western
Credit Corp. (the Corporation) should be read in conjunction with the
Corporation's consolidated financial statements for the year ended
October 31, 2006, which are available on SEDAR at www.sedar.com.
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
using the same accounting policies and methods as were used for the
Corporation's financial statements for the year ended October 31,
2006, with the exception of accounting policies relating to newly
issued accounting standards by The Canadian Institute of Chartered
Accountants. These new accounting policies include those relating to
financial instruments, hedges and comprehensive income are as
follows:
a) Financial instruments:
All financial assets are classified as one of the following:
held-to-maturity, loans and receivables, held for trading or
available-for-sale. All financial liabilities are classified as
held for trading or other liabilities. Financial assets and
liabilities held for trading are measured at fair value with
gains and losses recognized in net earnings. 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.
At November 1, 2006, all of the assets in the Corporation's
securities portfolio as well as its investment in Discovery Air
Inc. (DA) were designated as available-for-sale.
At November 1, 2006, a transitional adjustment to accumulated
other comprehensive income totalled $3,982,000 and consisted of
unrealized losses of $1,075,000 related to securities held as
available-for-sale, unrealized gains of $6,150,000 related to
our investment in DA which is included in other assets and
deferred losses of $618,000 related to previously closed cash
flow hedges that are no longer included in other assets. In
addition, other liabilities increased by $475,000 relating to
future income taxes on the above items.
At November 1, 2006 a transitional adjustment to retained
earnings of $103,000 was recorded related to changing the
amortization method on financial instruments from the
straight-line method to the effective interest rate method.
b) Hedges:
In a fair value hedging relationship, the carrying value of the
hedged item is adjusted by gains or losses attributable to the
hedged risk and recorded in net earnings. This change in fair
value of the hedged item, to the extent the hedging
relationship is effective, is offset by changes in the fair
value of the derivative also measured at fair value on the
balance sheet date, with changes in value recorded through net
earnings.
At November 1, 2006, mortgages and loans and other liabilities
increased by $1,915,000 relating to the transitional adjustment
for the fair value however, there was no impact on retained
earnings.
c) Comprehensive income:
Unrealized gains and losses on financial instruments that are
held as available-for-sale, and changes in the fair value of
cash flow hedging instruments, are recorded in other
comprehensive income, net of tax, until recognized in earnings.
2. Allowance for credit losses
for the three months ended
---------------------------------------------------
April 30, April 30,
2007 2006
---------------------------------------------------
(thousands of General Specific Total Total
dollars) allowance allowance allowance allowance
---------------------------------------------------------------------
Balance,
beginning of
the period $ 2,343 $ 652 $ 2,995 $ 1,940
Provision for
credit losses 72 - 72 78
Recoveries
(write-offs) - 35 35 (1)
---------------------------------------------------------------------
Balance, end
of period $ 2,415 $ 687 $ 3,102 $ 2,017
---------------------------------------------------------------------
for the six months ended
---------------------------------------------------
April 30, April 30,
2007 2006
---------------------------------------------------
(thousands of General Specific Total Total
dollars) allowance allowance allowance allowance
---------------------------------------------------------------------
Balance,
beginning of
the period $ 2,208 $ 358 $ 2,566 $ 1,889
Provision for
credit losses 207 294 501 127
Recoveries
(write-offs) - 35 35 1
---------------------------------------------------------------------
Balance, end
of period $ 2,415 $ 687 $ 3,102 $ 2,017
---------------------------------------------------------------------
Impaired loans at April 30, 2007 totalled $2,544,000 (April 30, 2006
- $380,000).
3. Income taxes
for the three months ended for the six months ended
-------------------------- ------------------------
(thousands of April 30, April 30, April 30, April 30,
dollars) 2007 2006 2007 2006
------------------------------------------- -------------------------
Tax provision at
basic rate of
36% $ 258 $ 940 $ 738 $ 1,677
Changes resulting
from:
Non-taxable income
from securities (276) (204) (526) (452)
Dividend in kind 420 - 420 -
Gains - (232) (160) (232)
Other permanent
differences (29) 184 144 319
------------------------------------------- -------------------------
Balance, end
of period $ 373 $ 688 $ 616 $ 1,312
------------------------------------------- -------------------------
4. Share capital and stock-based compensation
Employee Stock Options
-------------------------
Weighted-
Common average
shares exercise
outstanding Number price
---------------------------------------------------------------------
Outstanding, October 31, 2006 13,421,585 1,291,160 $ 7.65
Granted - 117,235 11.76
Exercised 335,167 (335,167) 6.09
Expired - (200) 11.70
---------------------------------------------------------------------
Outstanding, April 30, 2007 13,756,752 1,073,028 $ 8.58
---------------------------------------------------------------------
In addition, at April 30, 2007, there were 1,142,556 (2006-1,142,556)
preferred shares outstanding.
During the six months ended April 30, 2007, the Corporation
recognized $211,000 (2006-$250,000) of salaries and benefits expense
relating to the estimated fair value of stock options granted. The
fair value of options granted during the period was estimated using
the Black-Scholes option pricing model based on the following
weighted-average assumptions: (i) risk-free interest rate of 4.07%
(2006-3.90%), (ii) expected option life of 5 years (2006-5 years),
(iii) expected volatility of 30% (2006-45%), and (iv) expected
forfeiture rate of 5% (2006-5%). The weighted average fair value of
options granted was estimated at $3.87 (2005-$4.94) per share.
During the six months ended April 30, 2007, $10,000 (2006-$nil) was
transferred from contributed surplus to common shares relating to the
exercise of options that had previously been expensed.
5. Special dividend
On March 7, 2007, the Corporation distributed a special dividend to
the holders of its common shares, to shareholders of record at the
close of business on February 16, 2007. The dividend was comprised of
Class A common shares of DA and was payable based on .53 of a DA
share for every one common share of the Corporation held.
The value of the special dividend on the declaration date was
determined to be $10,787,000, which resulted in a gain of $888,000
being transferred from other comprehensive income to net income in
the period.
6. Derivative instruments
At April 30, 2007, the Corporation had outstanding contracts for
asset liability management purposes to swap between floating and
fixed interest rates with notional amounts totalling $68,742,000
(2006-$48,007,000). The Corporation only enters into these interest
rate contracts for its own account and does not act as an
intermediary in this market. These contracts have a current
replacement cost of $nil (2006-$nil), a credit equivalent amount of
$981,000 (2006-$680,000) and a risk weighted balance of $196,000
(2006-$136,000). At April 30, 2007, these contracts were in an
unfavorable position of $2,118,000 (2006-$282,000). Under the new
accounting standard relating to hedges, this amount is included in
other liabilities on the consolidated balance sheet, however there is
no impact on net earnings.
At April 30, 2007, the Corporation had outstanding credit derivative
contracts for credit risk management purposes under which the
Corporation would be compensated by the counterparty to the contract
for losses on a security or loan in the event a default occurs. At
April 30, 2007, the counterparties to these contracts which totalled
$20.6 million (2006-$44.3 million) consisted of Canadian chartered
banks. The contracts have a nominal fair value and mature within
three years.
7. Commitments and contingencies
The amount of credit related commitments represents the maximum
amount of additional credit that the Corporation could be obligated
to extend. 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.
Loan commitments $120,321,000
Letters of credit 24,537,000
------------
$144,858,000
------------
The Corporation has guaranteed the repayment of bank indebtedness of
one of its equity investments to the extent of $1,000,000. The
guarantee expires when the related bank indebtedness has been repaid
in full. Payments under the guarantee would be required if the
investee fails to meet the scheduled repayments. While the
Corporation does not expect to be required to make any payments
related to the guarantee, any amounts paid may not be recoverable.
Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is
a branchless financial institution with over $1.3 billion in assets. PWBank
specializes in providing innovative financing to large corporate and
government entities including hospitals, school boards, universities and
colleges, municipalities and provincial and federal government agencies. With
no retail operations or store fronts, PWBank is one of the most efficiently
operating financial institutions in Canada. These overhead savings translate
into very competitive rates for our clients.
Pacific & Western Bank of Canada is wholly owned by Pacific & Western
Credit Corp., whose shares trade on the TSX under the symbol PWC.
On behalf of the Board of Directors: David R. Taylor, President & C.E.O.
For further information: Investor Relations: Bruce Schruder, Vice
President, Investor Relations & Marketing, (800) 244-1509,
InvestorRelations@pwbank.com; Public Relations & Media: Tel Matrundola, Vice
President, Public & Strategic Initiatives, (416) 203-0882, telm@pwbank.com; To
receive company news releases via e-mail: Karen McConnell, (519) 675-4204,
karenm@pwbank.com; Further information on PWC is available through Pacific &
Western's corporate web site at http://www.pwbank.com.
