TORONTO, Sept. 3 /CNW/ -THIRD QUARTER SUMMARY
(three months ended July 31, 2009, compared to three months ended July 31,
2008, unless otherwise noted)
- At July 31, 2009, total regulatory capital of the Bank increased by
14% to $127.8 million from $111.8 million a year ago and from $121.8
million at the end of the previous quarter.
- Mortgages and loans increased to $996 million from $949 million a
year ago.
- Net income (loss) for the quarter was ($3.0 million) or ($0.22) per
share (($0.22) diluted) compared to ($4.2 million) or ($0.31) per
share (($0.31) diluted) for the same period last year. For the nine
months ended July 31, 2009, net income (loss) was ($7.8 million) or
($0.59) per share (($0.59) diluted) compared to ($4.3 million) or
($0.33) per share (($0.33) diluted) for the same period a year ago.
- Net income (loss) and net interest income continue to be impacted by
a compression of spreads resulting from declines in interest rates
and challenging economic conditions.
- On August 31, 2009, the Corporation issued $33.2 million of new Class
"B" Preferred Shares as a result of conversions of Class "A"
Preferred Shares, Series A Notes and Series C Notes.PRESIDENT'S COMMENTS
This quarter our Bank continued to benefit from a recovery in value of
its preferred share portfolio, increasing its total regulatory capital from
$121.8 million at the end of the previous quarter to $127.8 million. This
gave rise to a significant increase in our Bank's total risk-based capital
ratio from 12.81% to 13.42%. PWC's shareholders' equity also benefited,
increasing by 28%. With the increase in regulatory capital, our Bank is well
positioned to take advantage of the numerous lending opportunities that exist
in its target markets. Our net interest income and spread continues to be
negatively impacted by the rapid decline in interest rates associated with our
assets that has not yet been equaled by a decline in the interest rates
associated with our deposits. However, over the next 45 days we will have
completed the rollover of approximately $800 million in GICs that began
maturing this summer. The interest rates on these new deposits are
approximately 2.5% less than what we had been paying. We will begin to
realize the benefit of this rollover in the fourth quarter, and the full
benefit will be realized in the first quarter of 2010. At the end of August,
we issued $33.2 million of our new Class "B" Preferred Shares. This took
place through conversions from our Series C Notes, Series A Notes and Class
"A" Preferred Shares. We plan to continue issuing these new Class "B"
Preferred Shares from time to time to further to build our regulatory capital
in order to fuel growth and diversity in our lending portfolio.FINANCIAL HIGHLIGHTS
for the for the
(unaudited) three months ended nine months ended
--------------------------------------------------- --------------------
($ thousands, except July 31 July 31 July 31 July 31
per share amounts) 2009 2008 2009 2008
--------------------------------------------------- --------------------
Results of operations (teb)
Net interest income (loss)
per financial statements $ (401) $ 944 $ 765 $ 7,441
Teb adjustment 621 679 2,067 2,184
Net interest income 220 1,623 2,832 9,625
Spread 0.05% 0.46% 0.24% 0.89%
Provision for credit losses 148 242 266 314
Net interest income after
provision for credit losses 72 1,381 2,566 9,311
Other income (charges) 507 (3,564) (438) (3,520)
Total revenue 579 (2,183) 2,128 5,791
Non-interest expenses 3,816 3,523 10,562 10,745
Net income (loss) (2,969) (4,215) (7,838) (4,280)
Earnings (loss) per
common share:
Basic $ (0.22) $ (0.31) $ (0.59) $ (0.33)
Diluted $ (0.22) $ (0.31) $ (0.59) $ (0.33)
Efficiency ratio n/m n/m n/m $ 1.76
Return on average common
shareholders' equity -79.92% -42.21% -56.52% -13.22%
Return on average total
assets -0.73% -1.21% -0.67% -0.39%
Gross impaired loans to
total assets 0.70% 0.55% 0.70% 0.55%
Provision for credit losses
as a % of average loans 0.01% 0.02% 0.03% 0.03%
Number of full time
equivalent staff 54 58 54 58
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Balance Sheet Summary
Cash and securities $ 598,132 $ 446,908 $ 598,132 $ 446,908
Total loans 995,802 948,596 995,802 948,596
Average loans 1,020,179 969,155 1,053,305 963,162
Total assets 1,624,114 1,430,395 1,624,114 1,430,395
Average assets 1,603,718 1,382,332 1,568,291 1,444,526
Deposits 1,462,488 1,173,732 1,462,488 1,173,732
Notes payable 107,903 68,850 107,903 68,850
Shareholders' equity 20,891 39,946 20,891 39,946
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Capital ratios
(Based on the subsidiary
Pacific & Western Bank of
Canada)
Total regulatory capital $ 127,778 $ 111,838 $ 127,778 $ 111,838
Risk weighted assets 951,852 1,021,160 951,852 1,021,160
Assets-to-capital ratio 12.90 13.11 12.90 13.11
Tier 1 risk-based capital
ratio 9.06% 8.99% 9.06% 8.99%
Total risk-based capital
ratio 13.42% 10.95% 13.42% 10.95%
--------------------------------------------------- --------------------Non-GAAP measures:
Like most banks, Pacific & Western Credit Corp. (the "Corporation")
through its wholly-owned subsidiary Pacific & Western Bank of Canada (the
"Bank") 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
CONDITIONThis management's discussion and analysis (MD&A) of operations and
financial condition for the third quarter of fiscal 2009 should be read in
conjunction with the unaudited interim consolidated financial statements for
the period ended July 31, 2009, included herein, and the audited consolidated
financial statements and MD&A for the year ended October 31, 2008, 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,
2008, remain substantially unchanged.
Overview
Net income (loss) for the quarter was ($3.0 million) or ($0.22) per share
(($0.22) diluted) compared to ($4.2 million) or ($0.31) per share (($0.31)
diluted) for the same period a year ago. On a year-to-date basis, net income
(loss) was ($7.8 million) or ($0.59) per share (($0.59) diluted) compared to
($4.3 million) or ($0.33) per share ($0.33 diluted) for the same period a year
ago. Net income (loss) for the current quarter was impacted primarily by a
decrease in net interest income (teb) which was $220,000 for the quarter
compared to $1.6 million for the same period a year ago. On a year-to-date
basis, net interest income (teb) was $2.8 million compared to $9.6 million for
the same period a year ago. The decrease in net interest income was due
primarily to a compression of spreads caused by a rapid decline in interest
rates associated with our interest earning assets that was not equalled by a
similar decline in the interest rates on our deposits. In addition, net
interest income was impacted by higher interest charges incurred on interest
rate swap agreements used to hedge longer term lending assets. The Corporation
believes that interest rates have bottomed out and is seeing market spreads
normalizing with deposit costs trending downwards compared to a year ago.
These factors combined with our ongoing repricing of existing loans on renewal
and interest rates on new lending to reflect current market conditions are
positive indications for future profitability. Despite the compression of
spreads experienced by the Corporation over the past year, it has maintained
its focus on low risk lending and investing opportunities and does not have
any direct exposure to the North American subprime lending market or to
asset-backed commercial paper.
At July 31, 2009, total assets were $1.6 billion compared to $1.4 billion
a year ago and $1.6 billion at the end of the previous quarter. Lending assets
were $996 million at the end of the quarter compared to $949 million a year
ago. Credit quality remains strong with a ratio of gross impaired loans as a
percentage of assets of 0.70% at the end of the quarter compared to 0.55% a
year ago.
Total Revenue (teb)
Total revenue (teb), which is comprised of net interest income after the
provision for credit losses and other income (charges), was $579,000 for the
quarter compared to ($2.2 million) a year ago with the difference being due to
a decrease in net interest income for the current quarter partially offset by
the impact of an impairment charge of $3.7 million in the same quarter a year
ago. On a year-to-date basis, total revenue (teb) was $2.1 million compared to
$5.8 million a year ago. The decrease in total revenue from a year ago was due
primarily to a decrease in net interest income and charges totalling $483,000
million included in other income (charges) recorded in the current period
relating to mark-to-market adjustments on interest rate swap contracts that
had been entered into for interest risk management purposes.
Net Interest Income
Net interest income (teb) was $220,000 for the quarter compared to $1.6
million a year ago and on a year-to-date basis was $2.8 million compared to
$9.6 million for the same period a year ago. Net interest margin or spread
(teb), which is net interest income as a percentage of average assets, was
0.05% for the quarter compared to 0.46% a year ago. On a year-to-date basis,
spread (teb) was 0.24% compared to 0.89% for the same period a year ago. As
discussed above, the decrease in spread from a year ago was due primarily to a
rapid decline in interest rates associated with our interest earning assets
that was not equalled by a similar decline in the interest rates on our
deposits. The large majority of our deposits are fixed term deposits versus
demand deposits and therefore interest rates on deposits reset more slowly
than on our interest earning assets. An additional factor was increased
interest expense in 2009 compared to 2008 as a result of Series C and short
term notes payable issued in the past year. As well, net interest income and
spread declined as a result of higher levels of liquidity maintained in the
Corporation due to the current economic environment. These liquid assets were
held primarily in cash or cash equivalents with little or no spread being
earned. With a large amount of deposits scheduled to mature during our fourth
quarter, most of which had been booked a year ago at higher interest rates due
to the liquidity crisis, the Corporation expects to see its interest expense
decrease as these deposits are replaced at much lower interest rates.
Non-Interest Expenses
Non-interest expenses for the quarter were $3.8 million compared to $3.5
million a year ago and for the nine month period ending July 31, 2009 were
$10.6 million compared to $10.8 million for the same period a year ago. The
increase in non-interest expenses for the quarter compared to a year ago was
primarily in general and administrative expenses relating to volume related
expenses and higher amounts for capital taxes, consulting and professional
fees. For the nine month period, these increases were offset by overall
targeted reductions in discretionary spending.
Income Taxes
The Corporation's statutory federal and provincial income tax rate is
approximately 32% compared to 34% last year with the difference due to rate
reductions which were substantively enacted in the previous year. However, the
Corporation's effective rate was impacted by non-taxable dividend income
earned on preferred shares in our securities portfolio and the tax benefit on
losses in the parent company not being recorded for accounting purposes. These
items resulted in an effective tax rate of 23% and an income tax recovery of
$889,000 compared to 34% and an income tax recovery of $2.2 million for the
same period last year. For the nine months ended July 31, 2009, the
Corporation had an effective tax rate of 25% and an income tax recovery of
$2.7 million compared to an effective tax rate of 40% and an income tax
recovery of $2.9 million for the same period a year ago.
At July 31, 2009, the Corporation had a future income tax asset of
approximately $11.2 million which is primarily a result of income tax losses
in the Bank from the current and previous periods, the benefit of which was
recorded at the time. This amount compares to $6.6 million a year ago with the
increase due to changes in the market value of preferred shares which are
deducted for income tax purposes offset by operating losses of the Bank over
the past year. The income tax loss carryforwards in the Bank are not scheduled
to begin expiring until 2027 if unutilized.
As noted above, a significant portion of the future income tax asset
relates to income tax losses in the Bank caused primarily by declines in the
market value of preferred shares, being primarily those of Canadian banks and
insurance companies. The ultimate realization of the future income tax asset
cannot be determined with certainty however management is of the opinion that
it is more likely than not that the Bank will be able to realize the future
income tax asset in future years. The realization of the future income tax
asset is dependent upon the Bank being able to generate taxable income
sufficient to offset these income tax losses. The ability to generate
sufficient taxable income may be dependent upon the Bank increasing regulatory
capital to facilitate growth in its lending portfolio, or on converting
non-taxable income sources to taxable income sources during the carry-forward
period. It is also dependent upon the market value of the preferred shares
recovering in value as they are carried at market value for income tax
purposes with mark to market adjustments being added to or deducted from
taxable income. As discussed below, at July 31, 2009, these preferred shares
traded at a value approximately $17.6 million below their amortized cost,
increasing from a value of $25.3 million below their amortized cost at April
30, 2009 reflecting general improvements in market conditions in the financial
services industry.
Balance Sheet
Total assets at July 31, 2009, were $1.6 billion compared to $1.4 billion
a year ago. The increase from a year ago was primarily in cash and securities
which increased to $598 million from $447 million and in mortgages and loans
which grew to $996 million from $949 million a year ago.
Cash and Securities
Cash and securities, which are held for liquidity management purposes and
to earn investment income, totalled $598 million compared to $447 million a
year ago with the increase due to higher liquidity levels being maintained as
a result of current market conditions and as a contingency against a large
amount of deposits maturing in the fourth quarter of fiscal 2009. Securities
typically consist of Government of Canada treasury bills and bonds and
corporate debt and preferred shares. Over the past quarter, the Corporation
has been redeploying some of its holdings of excess cash into highly liquid
corporate debt in order to earn increased returns on its securities portfolio
while still maintaining strong credit quality. The Corporation expects that
the increased holdings of corporate bonds will result in an overall increase
in net interest income and spread in the coming months. The Corporation does
not own any asset-backed commercial paper and therefore is not exposed to any
direct losses from this type of security as a result of market instabilities.
Included in corporate debt is an investment in a collateral debt
obligation (CDO) with an amortized cost of $5.9 million and a fair value based
on external valuation models of $744,000. During 2008, the Corporation
reclassified the CDO from the available-for-sale category to held-to-maturity.
This reclassification was based on the view that carrying the investment at
amortized cost was more appropriate given the lack of verifiable inputs for
the valuation model being used to determine fair value and the Corporation's
intention to hold the investment to maturity. This CDO was arranged by a major
Canadian bank, is secured by corporate credits and matures in 2013.
At July 31, 2009, the net unrealized loss in our securities portfolio was
$14.8 million compared to a net unrealized loss of $20.2 million a year ago.
These amounts are recorded net of income taxes in Accumulated Other
Comprehensive Income (Loss). The decrease in the net unrealized loss from the
end of the previous year is related primarily to increases in the market value
of the Corporation's investments in the preferred shares of major Canadian
banks and insurance companies. With the exception of the value of the CDO, the
fair values of all securities are based on market values as all of the
remaining securities we own are publicly traded.
The Corporation's holdings of equity securities, consisting primarily of
major Canadian banks and insurance companies' preferred shares, are subject to
market fluctuations and at July 31, 2009, traded at a value approximately
$17.6 million below their amortized cost compared to $25.3 million below
amortized cost at the end of the previous quarter and $15.8 million below
amortized cost a year ago. The Corporation intends to hold these securities
until a recovery in value is achieved. The preferred shares have provisions
that will allow the issuer to redeem at various dates commencing over the
years 2010 to 2013; however, there is no promise or legal requirement for the
issuers to redeem these shares on those dates. Further recovery in their
market values is dependent upon future market conditions or the ultimate
future redemption of the shares by the issuers. Management is of the opinion
that it is likely that these preferred shares will be redeemed by the issuers
at their redemption dates.
Mortgages and Loans
Mortgages and loans grew to $996 million at the end of the quarter from
$949 million a year ago with the growth primarily in corporate loans and
mortgages. As noted above, the Corporation has maintained its focus on low
risk lending and investing opportunities, continuing to provide financing to
public sector entities and high quality corporate borrowers. New lending in
the quarter totalled $53 million compared to $93 million for the same period a
year ago and on a year-to-date basis totalled $350 million compared to $229
million for the same period a year ago. Loan repayments for the current
quarter totalled $88 million and for the year-to-date totalled $476 million.
The amounts for new lending and loan repayments for the current periods
include the purchase and sale of insured mortgage pools which were sold
primarily for liquidity and capital management purposes. As a result of the
economic conditions over the past year, the Corporation has seen a slowdown in
new lending particularly in its residential construction portfolio with fewer
housing starts in the geographic areas in which the Corporation operates.
However the Corporation is starting to see improvements in the demand for
financing from its niche markets and expects to see increases in new lending
in the coming months.
Credit Quality
Gross impaired loans at the end of the quarter totalled $11.3 million or
0.70% of total assets compared to $7.9 million or 0.55% of total assets a year
ago. Impaired loans at July 31, 2009 consist primarily of loans totalling $3.7
million to individuals who invested in a government mandated immigrant
investor fund which were classified as impaired in the third quarter, and
property consisting mainly of a healthcare facility foreclosed on settlement
of loans. We are currently in discussions with a qualified buyer for the
healthcare facility and expect to close this transaction in the coming weeks
with no loss being incurred. Our loans continue to be well managed with the
provision for credit losses for the quarter totalling $148,000 and $266,000
for the year-to-date compared to $242,000 and $314,000 for the same periods a
year ago.
Other Assets
Other assets totalled $30.2 million at the end of the quarter compared to
$34.9 million a year ago. Included in other assets is the Corporation's
investment in Discovery Air Inc. (DA) which is accounted for as an
available-for-sale asset and carried at market value, and the future income
tax asset referred to previously. At July 31, 2009, the investment in DA had a
carrying value of $2.4 million compared to $9.2 million a year ago with the
change due to a decrease in the investment's market value.
Deposits and Financing
Deposits are used as a primary source of financing growth in assets and
are raised entirely through a well established and well diversified deposit
broker network across Canada. Deposits at the end of the quarter were $1.5
billion compared to $1.2 billion a year ago and consist primarily of
guaranteed investment certificates. Of these amounts, $41.0 million or
approximately 3% of total deposits, was in the form of demand deposits at the
end of the quarter compared to $15.0 million or approximately 1% of total
deposits a year ago, with the remaining deposits having fixed terms.
A second 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 financing when the
cost of borrowing is less than the interest rates that would have to be paid
on new deposits. At the end of the quarter, there were no amounts outstanding
related to margin lines or securities sold under repurchase agreements.
Notes Payable
Notes payable, net of issue costs, totalled $107.9 million at July 31,
2009 compared to $68.9 million a year ago with the increase due to new notes
being issued over the past year. Net proceeds from the issuance of additional
notes payable were used primarily to increase the level of regulatory capital
in the Bank and for working capital purposes in the parent company. At July
31, 2009, excluding share issue costs, notes payable consist of Series C Notes
totalling $76.0 million maturing in 2018, Series A Notes totalling $11.5
million maturing in 2010 and short term notes totalling $5.2 million maturing
in 2009 and 2010. Notes payable bear interest at rates ranging from 7.0% to
9.25% per annum. In addition, as described below, the Corporation has
outstanding subordinated notes payable of the Bank totalling $21.5 million
owing to a third party. These subordinated notes bear interest at 11% and
mature in 2019.
At July 31, 2009, a difference of approximately $67 million currently
exists between subordinated notes of the Bank owned by Pacific & Western
Credit Corp. and the notes payable it has issued to outside parties. This has
resulted in a deficiency in cash flows and net interest income in Pacific &
Western Credit Corp. on a non-consolidated basis. As discussed below,
management plans to reduce this difference by the parent company issuing
equity with the proceeds being invested in a combination of equity and
interest earning subordinated debt of the Bank.
Shareholders' Equity
At the end of the quarter, shareholders' equity was $20.9 million
compared to $39.9 million a year ago with the decrease due primarily to the
net loss incurred over the past year and the change in Accumulated Other
Comprehensive Income (Loss). Accumulated Other Comprehensive Income (Loss) at
July 31, 2009 was ($14.3 million) compared to ($19.0 million) a year ago with
the change due primarily to increases in the market value of preferred shares
owned by the Corporation in his securities portfolio.
Common shares outstanding at the end of the quarter totalled 13,642,452
compared to 13,644,252 a year ago with the change due to shares repurchased
for cancellation. Outstanding common share options totalled 869,533 at the end
of the quarter compared to 1,079,410 a year ago. Our book value per common
share at the end of the quarter was $1.27 compared to $2.67 a year ago.
On June 26, 2009, at Special Meetings of the Common Shareholders, Series
A Noteholders and Series C Noteholders, a resolution authorizing the creation
of Class "B" Preferred Shares, and resolutions authorizing the conversions of
the Series A Notes and Series C Notes into Class "B" Preferred Shares, were
passed. The conversion of Series A Notes into Series C Notes was also
authorized. The right to convert may only be exercised up to and including
August 28, 2009, and the effective date of the conversions will be August 31,
2009. All conversions are at the option of the holder.
On July 27, 2009, at a Special Meeting of the Class "A" Preferred
Shareholders, a resolution authorizing the conversion of Class "A" Preferred
Shares into Class "B" Preferred Shares was passed. The right to convert may
only be exercised up to and including August 28, 2009, and the effective date
of the conversions will be August 31, 2009. All conversions are at the option
of the holder.
There were no Class "B" Preferred Shares issued or outstanding at July
31, 2009.
More information with respect to the amendments described above are
available on SEDAR at www.sedar.com.
Updated Share Information
As at September 2, 2009, there was no change in the number of common
shares or common share options outstanding since July 31, 2009. At September
2, 2009, as noted below, there were 314,572 Class "A" Preferred Shares
outstanding with the change since July 31, 2009 due to conversions into the
new Class "B" Preferred Shares. At September 2, 2009, there were 1,326,558
Class "B" Preferred Shares outstanding as a result of conversions of Class "A"
Preferred Shares, Series A Notes and Series C Notes.
Subsequent event
On August 31, 2009, the Corporation issued 1,326,558 Class "B" Preferred
Shares with a total value of $33.2 million. The issuance of these Class "B"
Preferred Shares was a result of the conversion of Class "A" Preferred Shares,
Series A Notes and Series C Notes. After these conversions, the Corporation
has 314,572 Class "A" Preferred Shares outstanding, Series A Notes totalling
$2.6 million and Series C Notes totalling $55.3 million.
Capital Management
Total regulatory capital in the Corporation's principal subsidiary, the
Bank, was $127.8 million at the end of the quarter compared to $121.8 million
at the end of the previous quarter and $111.8 million a year ago. The increase
in total regulatory capital from the previous quarter and from a year ago was
due primarily to additional capital invested in the Bank and increases in the
market value of preferred shares of Canadian banks and insurance companies
which the Bank holds in its securities portfolio, reduced by operating losses
over the past year in the Bank. Regulatory capital includes the after tax
effect of unrealized gains and losses of available-for-sale equity securities
owned by the Bank.
The Bank's total risk-based capital ratio, which is the ratio of
regulatory capital to risk-weighted assets, was 13.42% at the end of the
quarter compared to 12.81% at the end of the previous quarter and 10.95% a
year ago. The Bank's Tier 1 risk-based capital ratio, which is the ratio of
Tier 1 capital to risk-weighted assets, was 9.06% at the end of the quarter
compared to 8.60% at the end of the previous quarter and 8.99% a year ago. The
Bank's assets-to-capital ratio was 12.90 at the end of the quarter compared to
13.21 at the end of the previous quarter and 13.11 a year ago. See note 8 to
the interim consolidated financial statements for more information regarding
capital management.
For a period of time during the quarter ended January 31, 2009, the Bank
estimated that it had, on a temporary basis, exceeded by a minor amount, the
assets-to-capital multiple established by OSFI. This exception took place
primarily as a result of a rapid decline in the market value of preferred
shares held in the Bank's securities portfolio which are primarily those of
major Canadian banks and insurance companies. This decline took place as a
result of market volatility versus any credit impairment in the issuers of the
securities. In January 2009, the Bank's adherence to this requirement was
re-established and has been adhered to since that date.PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Operations
(thousands of dollars)
for the for the
three months ended nine months ended
-------------------------- -------------------------
July 31 July 31 July 31 July 31
2009 2008 2009 2008
-------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income
Interest income on
loans $ 12,168 $ 12,633 $ 42,798 $ 39,908
Interest and income
from securities 6,797 2,600 13,132 12,060
Loan fee income 511 789 1,285 2,536
-------------------------- -------------------------
19,476 16,022 57,215 54,504
Interest expense
Deposits and other 17,215 13,925 49,988 44,031
Notes payable 2,662 1,153 6,462 3,032
-------------------------- -------------------------
19,877 15,078 56,450 47,063
-------------------------- -------------------------
Net interest income
(loss) (401) 944 765 7,441
Provision for credit
losses 148 242 266 314
-------------------------- -------------------------
Net interest income
(loss) after
provision for credit
losses (549) 702 499 7,127
Impairment writedown
on securities - (3,703) - (3,703)
Other income (charges) 507 139 (438) 183
-------------------------- -------------------------
(42) (2,862) 61 3,607
-------------------------- -------------------------
Non-interest expenses
Salaries and benefits 1,743 1,934 5,084 6,046
General and
administrative 1,583 1,105 3,906 3,247
Premises and equipment 490 484 1,572 1,452
-------------------------- -------------------------
3,816 3,523 10,562 10,745
-------------------------- -------------------------
Loss before income
taxes (3,858) (6,385) (10,501) (7,138)
Income tax recovery (889) (2,170) (2,663) (2,858)
-------------------------- -------------------------
Net loss $ (2,969) $ (4,215) $ (7,838) $ (4,280)
-------------------------- -------------------------
-------------------------- -------------------------
Basic loss per share $ (0.22) $ (0.31) $ (0.59) $ (0.33)
-------------------------- -------------------------
-------------------------- -------------------------
Diluted loss per
share $ (0.22) $ (0.31) $ (0.59) $ (0.33)
-------------------------- -------------------------
-------------------------- -------------------------
Weighted average
number of common
shares 13,642,000 13,637,000 13,642,000 13,630,000
-------------------------- -------------------------
-------------------------- -------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Comprehensive Income (Loss)
(thousands of dollars)
for the for the
three months ended nine months ended
-------------------------- -------------------------
July 31 July 31 July 31 July 31
2009 2008 2009 2008
-------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss $ (2,969) $ (4,215) $ (7,838) $ (4,280)
Other comprehensive
income (loss), net of
tax:
Net unrealized gains
(losses) on assets
held as available-
for-sale(1) 7,350 (5,474) 4,111 (13,149)
Amount transferred to
net loss for
hedges(2) - 55 - 164
Amount transferred
to net loss for
available-for-sale
assets(3) 184 30 608 (127)
Amount transferred to
net loss for
impairment writedown
on available-for-
sale assets(4) - 1,863 - 663
-------------------------- -------------------------
Other comprehensive
income (loss) 7,534 (3,526) 4,719 (12,449)
-------------------------- -------------------------
Total comprehensive
income (loss) $ 4,565 $ (7,741) $ (3,119) $ (16,729)
-------------------------- -------------------------
(1) Net of income tax benefit (expense) for the three months of ($2,913)
(2008-$2,313) and nine months of ($1,679) (2008-$5,555)
(2) Net of income tax benefit (expense) for the three months of $nil
(2008-($27)) and nine months of $nil (2008-($83))
(3) Net of income tax benefit (expense) for the three months of ($79)
(2008-($14)) and nine months ($256) (2008-$63)
(4) Net of income tax benefit (expense) for the three months of $nil
(2008-($876)) and nine months $nil (2008 - ($341)).
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars)
for the for the
three months ended nine months ended
-------------------------- -------------------------
July 31 July 31 July 31 July 31
2009 2008 2009 2008
-------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Common shares
Balance, beginning of
period $ 35,663 $ 35,518 $ 35,663 $ 35,743
Shares issued - 252 - 288
Shares repurchased - (66) - (327)
-------------------------- -------------------------
Balance, end of
period $ 35,663 $ 35,704 $ 35,663 $ 35,704
-------------------------- -------------------------
Class A preferred
shares
-------------------------- -------------------------
Balance, beginning and
end of period $ 3,545 $ 3,545 $ 3,545 $ 3,545
-------------------------- -------------------------
Contributed surplus
Balance, beginning of
period $ 243 $ 80 $ 179 $ 182
Fair value of stock
option transactions
(note 5) 55 97 119 526
Repurchase of shares - (95) - (626)
-------------------------- -------------------------
Balance, end of
period $ 298 $ 82 $ 298 $ 82
-------------------------- -------------------------
Retained earnings
(deficit)
Balance, beginning of
period $ (1,313) $ 23,820 $ 3,796 $ 24,125
Net loss (2,969) (4,215) (7,838) (4,280)
Dividends on preferred
shares - - (240) (240)
-------------------------- -------------------------
Balance, end of
period $ (4,282) $ 19,605 $ (4,282) $ 19,605
-------------------------- -------------------------
Accumulated other
comprehensive income
(loss), net of taxes
Balance, beginning of
period $ (21,867) $ (15,464) $ (19,052) $ (6,541)
Other comprehensive
income (loss) 7,534 (3,526) 4,719 (12,449)
-------------------------- -------------------------
Balance, end of
period $ (14,333) $ (18,990) $ (14,333) $ (18,990)
-------------------------- -------------------------
Total shareholders'
equity $ 20,891 $ 39,946 $ 20,891 $ 39,946
-------------------------- -------------------------
-------------------------- -------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Cash Flows
(thousands of dollars)
for the for the
three months ended nine months ended
-------------------------- -------------------------
July 31 July 31 July 31 July 31
2009 2008 2009 2008
-------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by (used
in):
Operations:
Net loss $ (2,969) $ (4,215) $ (7,838) $ (4,280)
Items not involving
cash:
Provision for credit
losses 148 242 266 334
Stock-based
compensation (note 5) 55 97 119 526
Future income tax
provision (recovery) (889) (2,170) (2,663) (2,858)
Gain on sale of
available-for-sale
securities (4,119) (9) (5,322) (673)
Impairment writedown
on securities - 3,703 - 3,703
Change in derivative
financial instruments 741 - 1,527 197
Change in other assets
and liabilities (1,732) (10,203) (1,800) (19,373)
-------------------------- -------------------------
(8,765) (12,555) (15,711) (22,424)
-------------------------- -------------------------
Investing:
Purchase of securities (307,714) (513,639) (856,219) (1,250,022)
Proceeds from sale and
maturity of securities 210,357 438,491 645,751 1,348,864
Mortgages and loans 36,149 42,100 117,617 39,951
-------------------------- -------------------------
(61,208) (33,048) (92,851) 138,793
-------------------------- -------------------------
Financing:
Deposits 44,825 (40,391) 73,033 (109,024)
Notes payable 9,652 30,553 43,540 35,553
Short term financings - 119,740 - 69,823
Proceeds of common
shares issued - 252 - 288
Shares repurchased - (161) - (953)
Dividends paid - - (240) (240)
-------------------------- -------------------------
54,477 109,993 116,333 (4,553)
-------------------------- -------------------------
Increase (decrease) in
cash resources (15,496) 64,390 7,771 111,816
Cash resources,
beginning of period 231,098 160,847 207,831 113,421
-------------------------- -------------------------
Cash resources, end
of period $ 215,602 $ 225,237 $ 215,602 $ 225,237
-------------------------- -------------------------
-------------------------- -------------------------
Supplementary cash
flow information:
Interest paid during
the period $ 19,349 $ 20,583 $ 42,921 $ 43,667
Income taxes paid
during the period $ - $ - $ - $ 68
PACIFIC & WESTERN CREDIT CORP.
Notes to the interim consolidated financial statements (unaudited)
For the nine months ended July 31, 2009
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, 2008, 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,
2008.
The risk management policies and procedures of the Corporation
relating to credit, liquidity, and market risk are included on pages
38 - 41 in the 2008 annual report and are an integral part of the
Interim Consolidated Financial Statements.
2. Securities
The Corporation's cash and securities are comprised of cash, federal
government treasury bills, federal and provincial government bonds,
government insured mortgage-backed securities, corporate bonds and
corporate preferred shares. The Corporation does not have any direct
exposure to asset-backed commercial paper in its treasury portfolio.
Included in cash and securities at July 31, 2009 is an investment in
a collateral debt obligation (CDO). This CDO, which is classified as
held-to-maturity, and matures in 2013, has an amortized cost of
$5.9 million (2008 - $10 million) and a fair value of $744,000 (2008
- $5.2 million). Fair value was determined by the use of external
valuation models which incorporate observable market parameters.
These include observable interest rates, credit spreads and loss
expectations. The fair value amount determined based on the above may
not ultimately reflect what the Corporation would receive if it were
to sell the CDO in the market. The CDO is secured by corporate
credits and does not have any direct residential sub-prime exposure.
3. Allowance for credit losses
for the three months ended
---------------------------------------------------
July 31, July 31,
2009 2008
---------------------------------------------------
General Specific Total Total
(thousands of dollars) allowance allowance allowance allowance
-------------------------------------------------------------------------
Balance, beginning of
the period $ 5,167 $ 993 $ 6,160 $ 3,298
Provision (recovery)
for credit losses 100 48 148 242
Recoveries - - - -
-------------------------------------------------------------------------
Balance, end of
period $ 5,267 $ 1,041 $ 6,308 $ 3,540
-------------------------------------------------------------------------
for the nine months ended
---------------------------------------------------
July 31, July 31,
2009 2008
---------------------------------------------------
General Specific Total Total
(thousands of dollars) allowance allowance allowance allowance
-------------------------------------------------------------------------
Balance, beginning of
the period $ 5,212 $ 830 $ 6,042 $ 3,206
Provision (recovery)
for credit losses 55 211 266 314
Recoveries - - - 20
-------------------------------------------------------------------------
Balance, end of
period $ 5,267 $ 1,041 $ 6,308 $ 3,540
-------------------------------------------------------------------------
Gross impaired loans at July 31, 2009 totalled $11,293,000 (July 31,
2008 - $7,931,000). Loans past due but not impaired at July 31, 2009
totalled $849,000 (July 31, 2008 - $539,000). Loans are secured
primarily by collateral mortgages against real estate with respect to
real estate lending and specific charges against equipment being
financed for other lending activities.
4. Notes payable
At July 31, 2009 notes payable consist of Series C Notes totalling
$76.0 million which mature in 2018, Series A Notes totalling
$11.5 million which mature in 2010 and short term notes totalling
$5.2 million which mature in 2009 and 2010. Notes payable bear
interest at rates ranging from 7.0% to 9.25% per annum. In addition,
the Corporation has subordinated notes of the Bank totalling
$21.5 million owing to a third party. These subordinated notes bear
interest at 11% and mature in 2019.
5. Shareholders' equity
a. Share capital and contributed surplus:
Employee Stock Options
------------------------
Weighted-
Common average
shares exercise
outstanding Number price
---------------------------------------------------------------------
Outstanding, October 31, 2008 13,642,452 1,077,110 $ 9.02
Granted - 50,000 5.00
Exercised - - -
Expired - (257,577) 9.29
Repurchased - - -
---------------------------------------------------------------------
Outstanding, end of period 13,642,452 869,533 $ 8.71
---------------------------------------------------------------------
In addition, at July 31, 2009, there were 1,142,556 (2008 -
1,142,556) Class "A" preferred shares outstanding and no Class "B"
preferred shares issued or outstanding.
During the nine months ended July 31, 2009, the Corporation
recognized $119,000 (2008 - $267,000) 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 2.41% (2008 - 4.03%), (ii) expected option life of 5 years (2008 -
5 years), (iii) expected volatility of 45% (2008 - 30%), and (iv)
expected forfeiture rate of 5% (2008 - 5%). The weighted average fair
value of options granted was estimated at $1.26 (2008 - $2.66) per
share.
On June 26, 2009, at Special Meetings of the Common Shareholders,
Series A Noteholders and Series C Noteholders, a resolution
authorizing the creation of Class "B" Preferred Shares, and
resolutions authorizing the conversions of the Series A Notes and
Series C Notes into Class "B" Preferred Shares, were passed. The
conversion of Series A Notes into Series C Notes was also authorized.
The right to convert may only be exercised up to and including
August 28, 2009, and the effective date of the conversions will be
August 31, 2009. All conversions are at the option of the holder.
On July 27, 2009, at a Special Meeting of the Class "A" Preferred
Shareholders, a resolution authorizing the conversion of Class "A"
Preferred Shares into Class "B" Preferred Shares was passed. The
right to convert may only be exercised up to and including August 28,
2009, and the effective date of the conversions will be August 31,
2009. All conversions are at the option of the holder.
b. Accumulated other comprehensive income (loss):
The balance in accumulated other comprehensive income (loss), net of
income taxes, consists of:
July 31 July 31
2009 2008
-------------------------
Net unrealized losses on assets held as
available-for-sale $ (14,333) $ (18,963)
Deferred losses related to previously
closed cash flow hedges - (27)
-------------------------
Balance, end of period $ (14,333) $ (18,990)
-------------------------
Net of income tax benefit of $5,736,000 (2008 - $6,802,000).
6. Derivative instruments
At July 31, 2009, the Corporation had outstanding contracts for asset
liability management purposes to swap between floating and fixed
interest rates with notional amounts totalling $437,458,000 (2008 -
$174,187,000). 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
$1,004,000 (2008 - $193,000), a credit equivalent amount of
$5,268,000 (2008 - $2,346,000) and a risk-weight of $1,054,000 (2008
- $469,000). As required under the accounting standard relating to
hedges, at July 31, 2009, $27,253,000 (2008 - $12,033,000) relating
to these contracts was included in other liabilities and the
offsetting amount included in the carrying values of the assets to
which they relate.
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. 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.
Loan commitments $147,265,000
Letters of credit 27,502,000
-------------
$174,767,000
-------------
In the ordinary course of business, the Corporation and its
subsidiaries are party to claims or possible claims against it.
Management of the Corporation believes that the resolution of any
outstanding claims will not be material to the financial position of
the Corporation.
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
2009 2008
-------------------------
Collateral related to derivative contracts $ 28,910 $ 6,133
Collateral related to letters of credit 2,942 2,896
Obligations related to securities sold under
repurchase agreements - 119,741
-------------------------
$ 31,852 $ 128,770
-------------------------
8. 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 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 for shareholders. The Bank's
regulatory capital is comprised of share capital, retained earnings
and accumulated other comprehensive income (loss) (Tier 1 capital)
and 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.
b. Assets-to-Capital Multiple:
The Bank's growth in total assets is limited by a permitted assets-
to-capital multiple which is prescribed by OSFI and is defined as the
ratio of the total assets of the Bank to its regulatory capital. The
Bank's assets-to-capital multiple is calculated as follows:
July 31 July 31
(thousands of dollars) 2009 2008
---------------------------------------------------------------------
Total assets (on and off-balance sheet) $ 1,648,301 $ 1,466,342
---------------------------------------------------------------------
Capital
Common shares $ 95,365 $ 86,870
Retained earnings 4,715 20,941
Unrealized loss on available-for-sale equity
securities (13,802) (15,973)
Subordinated debentures 41,500 20,000
---------------------------------------------------------------------
Total regulatory capital $ 127,778 $ 111,838
---------------------------------------------------------------------
Assets-to-capital ratio 12.90 13.11
---------------------------------------------------------------------
For a period of time during the first quarter ended January 31, 2009,
the Bank estimated that it had, on a temporary basis, exceeded by a
minor amount, the assets-to-capital multiple established by OSFI.
This exception took place primarily as a result of a decrease in the
market value of preferred shares held in the Bank's securities
portfolio and which are primarily those of major Canadian banks and
insurance companies. This decrease took place as a result of market
volatility versus any credit impairment in the issuers of the
securities. In January 2009, the Bank's adherence to this requirement
was re-established and has been adhered to since that date.
c. Risk-Based Capital Ratios:
OSFI 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. Based on the
deemed credit risk for each type of asset, a weighting of 0% to 150%
is assigned to determine the risk-based capital ratio. OSFI requires
banks to maintain a minimum total risk-based capital ratio of 10% and
a Tier 1 risk-based capital ratio in excess of 7%.
In June 2004, the Basel Committee on Banking Supervision released its
report entitled "International Convergence of Capital Measurement and
Capital Standards: A Revised Framework" (Basel II). The new framework
is designed to more closely align regulatory capital requirements
with underlying risks by introducing changes in the treatment of
credit risk. An explicit new capital charge for operational risk was
introduced, as well as increased supervisory review of capital
adequacy and expansion of the related public disclosure. The new
Basel II Framework was effective November 1, 2007 for Canadian banks.
The Bank's risk-based capital ratios are presented below using the
guidelines under Basel II.
July 31 July 31
2009 2008
---------------------------------------------------------------------
Notional/ Risk Notional/ Risk
(thousands of Drawn Weighted Drawn Weighted
dollars) Amount Balance Amount Balance
---------------------------------------------------------------------
Balance sheet
assets $ 1,620,799 $ 880,695 $ 1,429,915 $ 782,056
Off-balance sheet
assets 612,225 52,710 664,871 197,238
Charge for
operational risk 18,447 41,866
---------------------------------------------------------------------
Total risk-weighted
assets $ 951,852 $ 1,021,160
---------------------------------------------------------------------
Regulatory capital 127,778 111,838
---------------------------------------------------------------------
Total risk-based
capital ratio 13.42% 10.95%
---------------------------------------------------------------------
Tier 1 risk-based
capital ratio 9.06% 8.99%
---------------------------------------------------------------------
9. Comparative figures
Certain comparative figures have been reclassified to conform to the
current period's presentation.
10. Subsequent event:
On August 31, 2009, the Corporation issued 1,326,558 Class "B"
Preferred Shares with a total value of $33.2 million. The issuance of
these Class "B" Preferred Shares was a result of the conversion of
Class "A" Preferred Shares, Series A Notes and Series C Notes. After
these conversions, the Corporation has 314,572 Class "A" Preferred
Shares outstanding, Series A Notes totalling $2.6 million and Series
C Notes totalling $55.3 million.Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank,
is a branchless financial institution with approximately $1.6 billion in
assets. PWBank specializes in providing innovative financing to large
corporate and government entities including hospitals, school boards,
universities and colleges, municipalities and provincial and federal
government agencies.
Pacific & Western Bank of Canada is wholly owned by Pacific & Western
Credit Corp., whose shares trade on the TSX under the symbol PWC.On behalf of the Board of Directors: David R. Taylor, President & C.E.O.
To receive company news releases, please contact:
Carla McPhee at carlam@pwbank.com, (519) 675-4204
For further information: Investor Relations: Wade McBain at (800)
244-1509 or InvestorRelations@pwbank.com; Public Relations & Media: Tel
Matrundola, Vice-President, (416) 203-0882, telm@pwbank.com, Visit our website
at: http://www.pwbank.com
