Pacific & Western Credit Corp. announces results for its second quarter ended April 30, 2012

LONDON, ON, June 7, 2012 /CNW/ - SECOND QUARTER SUMMARY

(three months ended April 30, 2012, compared to three months ended April 30, 2011, unless otherwise noted)

Pacific & Western Credit Corp. (the "Corporation") implemented International Financial Reporting Standards (IFRS) as of November 1, 2011 and prior period results have been restated to an IFRS basis. Key results for the second quarter of 2012 include the following:

Pacific & Western Bank of Canada

  • Net income for Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, for the three months ended April 30, 2012 was $1.1 million compared to $428,000 for the same period a year ago. Included in net income for the three months ended April 30, 2012 was a loss from credit card operations of $935,000.
  • For the six months ended April 30, 2012, net income of the Bank was $2.9 million compared to $1.7 million last year. Included in net income for the six months ended April 30, 2012 was a loss from credit card operations of $1.4 million.
  • Total revenue (teb) for the three months ended April 30, 2012 increased to $8.3 million from $5.1 million a year ago and for the six months ended April 30, 2012, total revenue increased to $16.5 million compared to $12.1 million last year.
  • Lending assets at April 30, 2012 increased to $1.19 billion from $1.07 billion a year ago, an increase of 11%.
  • Credit quality remains strong with gross impaired loans at April 30, 2012 decreasing to $1.7 million or 0.14% of total loans from $2.2 million or 0.21% of total loans a year ago.

Pacific & Western Credit Corp.

  • Net income (loss) of Pacific & Western Credit Corp. for the three months ended April 30, 2012 was ($911,000) or ($0.03) per share (($0.03) diluted) compared to ($2.1 million) or ($0.14) per share (($0.14) diluted) for the same period a year ago. Prior to the payment of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income (loss) of the Corporation for the current quarter was $357,000 compared to ($944,000) a year ago.
  • Net income (loss) of Pacific & Western Credit Corp. for the six months ended April 30, 2012 was ($1.8 million) or ($0.07) per share (($0.07) diluted) compared to ($3.4 million) or ($0.23) per share (($0.23) diluted) for the same period a year ago. Prior to the payment of dividends on Class B Preferred Shares, net income (loss) of the Corporation for the period was $664,000 compared to ($1.0 million) a year ago.

PRESIDENT'S COMMENTS

Strong performance by the Bank's lending team and gains earned on the sale of the Bank's preferred share portfolio were again key drivers to the Bank and PWCC's continued improvement and earnings.  During the 2nd quarter, the Bank earned $2.2 million (TEB) before income taxes and $1.1 million after income taxes.  PWCC earned $562,000 before income taxes and had a loss of $911,000 after income taxes.  PWCC's income tax provision includes $433,000 relating to a refundable income tax on dividends paid on its Class B Preferred Shares and an income tax provision of $1.0 million relating to gains made by the Bank on the sale of preferred shares.  The latter tax provision had no impact on shareholders' equity.

The Bank's core lending operations continued to grow during the quarter with average loan balances increasing from $1,174,689,000 to $1,205,785,000 over the previous quarter.  Loan spreads declined slightly from the previous quarter's 2.07% before provisions to 1.97% before provisions.  This decline was caused by a slight difference between the spread on loans drawn during the quarter and loans repaid.  I expect loan spreads throughout the remainder of the year to increase as the last remaining thinly priced hospital loan repaid in early May.  Net income achieved by the Bank during the quarter was $1.1 million, a decrease from that achieved in the previous quarter.  This change was primarily attributable to start-up costs associated with the launch of the Bank's Trustee Deposit and Home Hardware Credit Card Programs.  The Home Hardware Credit Card Program cost the Bank $935,000 during the quarter versus $438,000 in the previous quarter.  We expect this loss to diminish month by month as the Bank's credit card receivable balances build.  Credit quality, which has been an enduring strength of the Bank, remained outstanding during the quarter with gross impaired loans decreasing to $1,690,000 or .14% of total loans from $2,236,000 or .21% of total loans a year ago.  At April 30th, the Bank's collateral coverage over its commercial loan portfolio was considerably higher than the industry average and more than double the loan balance.

On April 2nd we launched a new deposit product for the trustees in the bankruptcy industry.  Two of Canada's largest trustees are now dealing with us on a pilot basis and all being well, we expect to fully roll out this new product to the entire industry this fall.  This new product should greatly increase the diversity of our Bank's deposit gathering network and result in a significant reduction to its cost of funds.

I am very pleased with the progress that we have made during the first six months of our fiscal year.  Our core lending operations are performing very well with no loan losses and increasing revenues.  The three initiatives that we developed over the last few years to diversify and increase our revenue streams are now operational.  With respect to the Bulk Finance Program, we have now established relationships with eleven new loan and lease vendors and expect that our bulk loan and lease portfolio will grow by approximately $10 million per month based on these relationships.  This program is particularly attractive to us in that it is easily hedged by our GIC deposits, presents minimal risk and produces a reasonable rate of return.  On January 2nd we launched a Home Hardware Credit Card Program and now have over 16,000 new cards issued.  Credit card balances are growing rapidly and we expect this program will be a significant contributor to our bottom line early in the new year.  While our Trustee Deposit Program has just recently been launched, we are very excited about its potential to diversify our deposit gathering network and significantly reduce our cost of funds.  We have already established relationships with the two largest trustees in Canada and believe that our custom banking software will prove to be very attractive to the entire industry.

Now that all three of our special initiatives have come to fruition, our efforts are turning towards growing the Bank's balance sheet and profitability.

FINANCIAL HIGHLIGHTS                        
(unaudited)         for the three months ended     for the six months ended
              April 30     April 30     April 30     April 30
($ thousands, except per share amounts)     2012     2011     2012     2011
Pacific & Western Bank of Canada                        
Balance Sheet Summary                          
  Cash and securities      453,639    $   423,816    $  453,639    $   423,816
  Total loans         1,193,718     1,073,507     1,193,718     1,073,507
  Average loans         1,205,785     1,071,085     1,162,622     1,030,189
  Total assets         1,678,601     1,527,283     1,678,601     1,527,283
  Deposits         1,468,220     1,331,379     1,468,220     1,331,379
  Subordinated notes payable     49,732     50,077     49,732     50,077
  Shareholder's equity       92,433     93,000     92,433     93,000
Capital ratios (2011 amounts based on CGAAP)                        
  Total regulatory capital      153,457     144,616    $  153,457     144,616
  Assets-to-capital ratio       11.12     10.54     11.12     10.54
  Tier 1 risk-based capital ratio     8.64%     8.75%     8.64%     8.75%
  Total risk-based capital ratio      13.20%     13.12%     13.20%     13.12%
Results of operations (teb) *                        
  Net interest income per financial statements     4,274     3,808     9,046   $   8,050
  Teb adjustment       70     499     329     1,047
  Net interest income (teb)       4,344     4,307     9,375     9,097
  Spread          1.09%     1.21%     1.19%     1.28%
  Other income          3,939     920     7,344     3,200
  Provision for credit losses     -     78     184     154
  Total revenue         8,283     5,149     16,535     12,143
  Net income          1,110     428     2,948     1,666
  Return on average total assets     0.28%     0.12%     0.37%     0.23%
  Gross impaired loans to total loans     0.14%     0.21%     0.14%     0.21%
  Provision for (recovery of) credit losses as
a % of average loans
      0.00%     0.01%     0.02%     0.01%
Segmented operations summary                        
  Commercial Lending net income     2,045     428     4,369   $   1,666
  Loan spread         1.97%     2.14%     2.02%     2.08%
  Credit Card Services net loss     (935)     -     (1,421)   $   -
  Credit card receivables       9,657     -     9,657   $   -
  Number of credit cards outstanding     15,900     -     15,900     -
Pacific & Western Credit Corp., (consolidated)                        
Results of operations                           
  Net income of the Bank      $   1,110     428     2,948   $   1,666
  Deduct interest expense on notes of the parent     (663)     (1,030)     (1,289)     (1,943)
  Non-interest expenses of the parent     343     (107)     (108)     (496)
  Net income (loss) before the following:     790     (709)     1,551     (773)
  Interest expense relating to Class B
Preferred Share dividends
    (1,268)     (1,202)     (2,428)     (2,401)
  Provision for taxes       (433)     (235)     (887)     (235)
  Net loss of the Corporation    $   (911)     (2,146)     (1,764)   $   (3,409)
  Loss per common share:                          
    Basic        $   (0.03)     (0.14)     (0.07)   $   (0.23)
    Diluted       $   (0.03)     (0.14)     (0.07)   $   (0.23)

*Non-GAAP measures
Tax equivalent basis (teb) - like most banks, the Corporation's wholly-owned subsidiary Pacific & Western Bank of Canada analyzes revenue on a 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 2012 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended April 30, 2012, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Corporation's first quarter interim financial statements and its audited consolidated financial statements for the year ended October 31, 2011, together with notes which were prepared in accordance with previous Canadian Generally Accounting Principles ("CGAAP") and MD&A, all of which are available on SEDAR at www.sedar.com. Except as discussed below, all other factors discussed and referred to in the MD&A for the year ended October 31, 2011, remain substantially unchanged.

Overview

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

Pacific & Western Credit Corp.

Net income (loss) of the Corporation for the three months ending April 30, 2012 was ($911,000) or ($0.03) per share (($0.03) diluted) compared to ($2.1 million) or ($0.14) per share (($0.14) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the three months ending April 30, 2012 was $357,000 compared to ($944,000) last year. These dividends are recorded as interest expense in the consolidated financial statements as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Statement of Financial Position. Net income (loss) of the Corporation for the six months ending April 30, 2012 was ($1.8 million) or ($0.07) per share (($0.07) diluted) compared to ($3.4 million) or ($0.23) per share (($0.23) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the six months ending April 30, 2012 was $664,000 compared to ($1.0 million) last year.

Pacific & Western Bank of Canada

Net income of the Bank for the three months ending April 30, 2012 was $1.1 million compared to $428,000 for the same period a year ago and for the six months ending April 30, 2012, net income was $2.9 million compared to $1.7 million a year ago. The increase in net income of the Bank for the current quarter was due primarily to an increase in net interest income and a higher level of gains from the sale of preferred shares, reduced by the impact of the Bank's private label credit card program which was launched on January 2, 2012.  For the three months ended April 30, 2012, the contribution from credit card services was ($935,000) and for the year-to-date was ($1.4 million). Gains from the sale of preferred shares on an after-tax basis for the current quarter totalled $2.9 million and for the six months ending April 30, 2012 totalled $5.2 million.

Net interest income (non-teb) for the Bank for the three months ended April 30, 2012 was $4.3 million compared to $3.8 million last year and for the six months ended April 30, 2012, net interest income for the Bank was $9.1 million compared to $8.1 million last year. On a teb basis, net interest income was $4.3 million compared to $4.3 million a year ago and for the six months ended April 30, 2012 was $9.4 million compared to $9.1 million a year ago.

At April 30, 2012, total assets of the Bank were $1.68 billion compared to $1.53 billion a year ago with the increase due to growth in lending assets which increased to $1.19 billion at April 30, 2012 from $1.07 billion last year, as well as cash and securities which increased to $454 from $424 million last year. The growth in lending assets was due primarily to an increase in commercial term mortgages and loans and residential construction mortgages. Also included in lending assets at April 30, 2012 were credit card receivables totalling $9.6 million relating to the private label credit card program which was launched on January 2, 2012.

Credit quality remains strong, with gross impaired loans decreasing to $1.7 million at April 30, 2012 from $2.2 million a year ago. At April 30, 2012, the ratio of gross impaired loans as a percentage of total loans was 0.14% compared to 0.21% last year.

Total Revenue (teb)

Total revenue (teb) of the Bank for the three months ended April 30, 2012 was $8.3 million compared to $5.1 million for the same period last year and for the six months ended April 30, 2012, total revenue (teb) was $16.5 million compared to $12.1 million last year. Total revenue increased from a year ago due to the growth in net interest income in the current periods and gains on the sale of preferred shares, which are included in other income, being higher than that recorded a year ago. The increase in total revenue (teb) was impacted in the current periods due to a lower teb adjustment as a result of sales of preferred shares over the past year which resulted in a lower level of non-taxable dividends being received.

The provision for credit losses, which is also included in total revenue, was $nil in the current quarter compared to $78,000 a year ago and for the six months ended April 30, 2012 was $184,000 compared to $154,000 a year ago. Included in the provision for credit losses for the six month period were provisions totalling $120,000 relating to credit card receivables.

Net Interest Income and Net Interest Margin

Net interest income for the Bank for the three months ended April 30, 2012 was $4.3 million compared to $3.8 million a year ago and on a teb basis was $4.3 million compared to $4.3 million a year ago. The teb adjustment for the current quarter was less than a year ago as a result of the sale of preferred shares over the past year which reduced the amount of non-taxable dividends received. For the six months ended April 30, 2012, net interest income for the Bank was $9.1 million compared to $8.1 million and on a teb basis was $9.4 million compared to $9.1 million a year ago. The teb adjustment for the six month period was less than a year ago as a result of the sale of preferred shares over the past year. Net interest income increased from a year ago primarily as a result of the growth in lending assets but was impacted by a lower level of net interest income earned on the Bank's treasury portfolio due primarily to the sale of preferred shares over the past year which reduced the yield from treasury assets, as well as the cost of holding higher levels of liquid assets in order to fund a large volume of deposits maturing in the third quarter of 2012.

Net interest margin or spread (teb) for the Bank for the three months ended April 30, 2012 was 1.09% compared to 1.21% last year and for the six months ended April 30, 2012 was 1.19% compared to 1.28% last year. While the Bank saw its spread from lending assets in the current quarter and for the six months increase from the same periods a year ago, overall spread (teb) for the current quarter was less than last year due to the higher level of liquid assets being held and a lower level of preferred shares being held which had a higher after tax yield.

Other Income  

Other income for the three months ended April 30, 2012 was $3.9 million compared to $919,000 for the same period a year ago and for the six months ended April 30, 2012 was $7.3 million compared to $3.1 million a year ago. Other income in the current quarter includes gains totalling $3.9 million from the sale of preferred shares compared to $709,000 a year ago and for the six months ended April 30, 2012, gains from the sale of preferred shares totalled $7.1 million compared to $3.2 million a year ago. Also included in other income is non-interest revenue earned from credit card services totalling $102,000 for the current quarter and $116,000 for the six months ended April 30, 2012.

Non-Interest Expenses

Non-interest expenses, including those relating to credit card services, totalled $5.7 million for the current quarter compared to $4.3 million for the same period a year ago and for the six months ended April 30, 2012 totalled $11.5 million compared to $8.9 million. The increase in non-interest expenses for the current quarter and for the six month period was due to increases in general and administrative expenses relating to credit card services and other volume related expenses. In addition, salaries and benefits increased in the current periods compared to a year ago as a result of increased staff in the lending and credit card areas and higher amounts being recorded for stock-based compensation, including deferred share units. Non-interest expenses relating to credit card services totalled $977,000 for the current quarter and for the six months ended April 30, 2012 totalled $1.4 million.

Income Taxes

The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 29%, unchanged from a year ago. The effective rate is impacted by the tax benefit on operating losses in the parent company not being recorded for accounting purposes, non-taxable dividend income earned on preferred shares held in the Bank's treasury portfolio, and other items not being taxable or deductible for income tax purposes with the primary item being the dividends on Class B Preferred Shares recorded as interest expense in the Consolidated Statement of Income (Loss).

                         
      for the three months ended     for the six months ended
      April 30     April 30     April 30     April 30
      2012     2011     2012     2011
                         
Tax on gain on sale of securities    $   1,040     191    $   1,900    $   864
Refundable income tax on dividends paid by the Corporation     433     235     887     235
Other     -     (133)     -     115
                         
     $   1,473    $   293    $   2,787    $   1,214

 

For the current quarter the provision for income taxes was $1.5 million compared to $293,000 a year ago and includes an income tax provision of $433,000 in the parent company relating to a refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares, and an income tax provision of $1.0 million relating to gains on the sale of preferred shares. For the six months ending April 30, 2012, the provision for income taxes was $2.8 million compared to $1.2 million a year ago and includes an income tax provision of $887,000 in the parent company relating to the refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares and an income tax provision of $1.9 million relating to gains on the sale of preferred shares.

At April 30, 2012, the deferred tax asset in the Bank was $11.3 million compared to $12.1 million a year ago and is primarily a result of income tax losses from previous periods, the benefit of which was recorded at the time. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

The ultimate realization of the deferred 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 deferred tax asset in future years. The realization of the deferred tax asset is dependent upon the Bank being able to generate taxable income in future years sufficient to offset the income tax losses. The ability to generate sufficient taxable income may be dependent upon the Bank generating income from operations or on converting non-taxable income sources to taxable income sources during the carry-forward period. At April 30, 2012, the Bank had significantly reduced its holdings of preferred shares and the market value of the remaining preferred shares had increased from a year ago. At the end of the current quarter, the value of preferred shares held by the Bank totalled $9.5 million compared to $59.4 million a year ago.

Comprehensive Income (Loss)

Total comprehensive income (loss) is comprised of the net loss for the period and other comprehensive income (loss) consisting primarily of unrealized gains and losses on available-for-sale securities. Total comprehensive income (loss) for the three months ended April 30, 2012 was ($3.1 million) compared to ($1.3 million) and for the six months ended April 30, 2012, total comprehensive income (loss) was ($5.6 million) compared to ($2.2 million) a year ago. The differences from a year ago are due to higher amounts of unrealized gains on available-for-securities recorded in comprehensive income (loss) in previous years being reversed when realized in net loss in the current period.

Segment Analysis 

Commercial Lending  

The commercial lending segment consists of the operations of the Bank related to issuing mortgages, loans and leases. The commercial lending segment is supported by deposit taking activities and treasury activities. During the three months ended April 30, 2012, net income of the commercial lending operations totalled $2.0 million compared to $428,000 a year ago with the increase due primarily to growth in net interest income from lending and gains on the sale of preferred shares in the quarter. For the six months ended April 30, 2012, net income of the commercial lending segment totalled $4.4 million compared to $1.7 million with the increase also due primarily to a growth in net interest income and gains on the sale of preferred shares.

For the three months ended April 30, 2012, net interest income from commercial lending totalled $4.3 million compared to $3.8 million last year and for the six months ended April 30, 2012, net interest income from commercial lending totalled $9.1 million compared to $8.1 million last year.

For the three months ended April 30, 2012, non-interest expenses for the commercial lending segment totalled $5.1 million compared to $4.2 million a year ago and for the six months ended April 30, 2012, non-interest expenses for the commercial lending segment totalled $9.9 million compared to $7.9 million a year ago. Non-interest expenses increased from the previous periods as a result of volume related expenses and an increase in salaries and benefits due to additional staff being hired, primarily in the lending area.

Credit Card Services 

On January 2, 2012, the Bank launched its private label credit card program and in the second quarter, the Corporation began reporting credit card services as a reporting segment. As at April 30, 2012, 15,900 credit cards had been issued and the amount of credit card receivables totalled $9.6 million compared to $2.3 million at the end of the previous quarter. For the three months ended April 30, 2012, net interest income from credit card services totalled ($2,000) and for the six month period net interest income totalled ($6,000). Net interest income from credit card services was impacted by incentive programs being introduced to generate new cards being issued.  Non-interest revenue from credit card services in the form of fees totalled $102,000 in the quarter and for the six month period totalled $116,000.

For the three months ending April 30, 2012, the Bank recorded a collective allowance of $58,000 on outstanding credit card balances and for the year-to-date has recorded a collective allowance of $120,000 on outstanding credit card balances.

Non-interest expenses relating to credit card services totalled $977,000 in the current quarter and for the six months ended April 30, 2012 totalled $1.4 million. These expenses consisted of salaries and benefits relating to the credit card operations, expenses for activities carried out by external parties to administer processing of the credit cards, marketing and promotional costs as well as general and administrative expenses.

Consolidated Statement of Financial Position

Total assets of the Corporation at April 30, 2012, were $1.68 billion compared to $1.53 billion a year ago with the increase due primarily to growth in lending assets which increased from $1.07 billion to $1.19 billion at April 30, 2012, an increase of 11%.

Cash and Securities

Cash and cash equivalents typically consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Corporation's treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers' acceptances and corporate debt and preferred shares. Cash and securities, which are held primarily for liquidity management purposes, totalled $455 million or 27% of total assets at April 30, 2012 compared to $432 million or 28% of total assets a year ago. Cash and cash equivalents formed $378 million of the total amount of cash and securities at April 30, 2012 compared to $230 million of the total amount a year ago and increased as a result of the Corporation focusing its strategy on holding higher levels of liquid assets and reducing its holdings of preferred shares over the past year. In addition, current market conditions enable the Corporation to earn higher yields on cash and cash equivalents than on government securities.

Although the preferred shares held by the Corporation in its treasury portfolio yielded an attractive after-tax rate of return, the Corporation undertook the strategy of reducing its holdings of preferred shares in order to reduce the impact on regulatory capital of mark-to-market adjustments on the preferred shares as regulatory capital includes unrealized gains and losses on available-for-sale equity securities. As well, future changes in global banking regulations makes the holdings other financial institutions' preferred shares unattractive due to additional negative impacts on regulatory capital.

At April 30, 2012, the net unrealized gain in the Corporation's securities portfolio was $381,000 compared to a net unrealized gain of $18.7 million a year ago with the change due to gains being realized over the past year, primarily through the sale of preferred shares. The unrealized gains are recorded net of income taxes in Accumulated Other Comprehensive Income (Loss). The fair values of securities held in the Corporation's treasury portfolio are based primarily on market values as the securities the Corporation owns are publicly traded. The Corporation is of the view that there is no objective evidence of impairment relating to any unrealized losses on the remaining securities it owns and no further impairment charges are required at this time.

Mortgages and Loans

Mortgages and loans totalled $1.19 billion at April 30, 2012, compared to $1.07 billion a year ago with the increase from last year primarily in commercial term mortgages and loans and residential construction mortgages. Mortgages and loans totalled $1.22 billion at the end of the previous quarter with the decrease due primarily to a hospital loan and a public sector loan totalling $57 million which repaid in the current quarter. However average loans outstanding during the current quarter totalled $1.21 billion compared to $1.17 billion in the previous quarter.

New lending in the current quarter totalled $95 million compared to $113 million a year ago and loan repayments for the current quarter totalled $119 million compared to $107 million last year. Loan commitments at April 30, 2012 were $237 million compared to $233 million a year ago. At April 30, 2012, the Corporation's lease portfolio totalled $133 million compared to $159 million a year ago. While the Corporation has seen significant repayments in its lease portfolio over the past year resulting in a decrease in total leases outstanding, it is continuing to enter into agreements with vendors for its bulk lease financing program. It currently has agreements with six vendors and expects to see accelerated growth in this market in the coming months.

Included in mortgages and loans are credit card receivables totalling $9.6 million. As noted previously, on January 2, 2012 the Corporation launched its private label credit card program and at April 30, 2012, a total of 15,900 credit cards had been issued. The Corporation expects to see significant growth in credit card receivables in the coming months as the spring and summer months arrive.

Credit Quality

Gross impaired loans at April 30, 2012 totalled $1.7 million or 0.14% of total loans compared to $2.2 million or 0.21% of total loans a year ago. The Corporation has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Provisions for credit losses in the current quarter were $nil compared to $78,000 a year ago. As noted previously, the provision for credit losses in the current quarter included a recovery of $58,000 on loans and receivables but was offset by a provision for credit losses in the same amount relating to credit card receivables. For the six months ended April 30, 2012, the provision for credit losses totalled $184,000 compared to $154,000 for the same period a year ago.

At April 30, 2012 the Corporation's collective allowance totalled $3.0 million compared to $3.2 million a year ago. At April 30, 2012, the Corporation's individual allowance for credit losses totalled $1.6 million compared to $1.5 million a year ago. Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Corporation is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.

Other Assets 

Other assets totalled $29.8 million at April 30, 2012 compared to $28.7 million a year ago. Included in other assets is the deferred tax asset of the Bank totalling $11.3 million compared to $12.1 million last year and capital assets and prepaid expenses totalling $14.9 million at April 30, 2012 compared to $14.3 million last year.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at April 30, 2012 totalled $1.47 billion compared to $1.33 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $34.6 million or approximately 2.3% of total deposits at the end of the quarter were in the form of demand deposits compared to $34.0 million or approximately 2.5% of total deposits a year ago, with the remaining deposits having fixed terms. Total deposits increased from last year in order to fund the growth in lending assets and to provide for liquidity to cover deposit maturities in the coming months.

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

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 short-term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At April 30, 2012, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.

Other liabilities consist primarily of the fair value of derivatives and accounts payable and accruals. At April 30, 2012, other liabilities totalled $28.2 million compared to $21.8 million a year ago. The fair value of derivatives at the end of the current quarter totalled $15.4 million compared to $13.0 million last year with the increase due primarily to changes in interest rates from a year ago. Under the accounting standard for hedges, the offsetting amount is included in the carrying values of the assets to which they relate.

Securitization Liabilities 

The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At April 30, 2012, the amount of securitization liabilities totalled $43.3 million compared to $32.9 million a year ago with the increase due to securitization transactions entered into between May 1, 2011 and October 31, 2011. The Corporation has not entered into any securitization transactions in the current year.

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $42.0 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $77.9 million at April 30, 2012 compared to $90.2 million a year ago with the decrease due to subordinated notes issued by the Bank to an external party being repurchased by the Corporation. Excluding issue costs, notes payable consist of Series C Notes totalling $61.7 million maturing in 2018 and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum.

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

Preferred Share Liabilities

At April 30, 2012, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million, before deducting issue costs of $2.4 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.5 million, net of issue and conversion costs, representing the fair value of the Corporation's obligation to make future payments of principal and interest has been classified on the Corporation's Consolidated Statement of Financial Position as Preferred Share Liabilities.  In addition, an amount of $4.3 million, net of issue costs, representing the equity portion of the Class B Preferred Shares, has been included in Shareholders' Equity on the Corporation's Consolidated Statement of Financial Position. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $41.5 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount, with the increase included in interest expense in the Consolidated Statement of Operations, calculated using an effective interest rate of 11.8%.

Liquidity

At April 30, 2012, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations due to the end of fiscal 2013. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on Class B Preferred Shares. The funding for the obligations of the Corporation beyond 2013 is expected to come primarily from cash and interest income earned by the Corporation.

Shareholders' Equity

At April 30, 2012, Shareholders' Equity was $19.2 million compared to $16.5 million a year ago with the increase due primarily to the issue of common shares and warrants pursuant to a public offering which closed during 2011, partially offset by net losses incurred since last year.

Common shares outstanding at April 30, 2012 totalled 27,173,439 compared to 15,853,526 a year ago with the change due to 7,476,000 common shares issued in 2011 under a public offering, 2,200,000 common shares issued in 2011 under private placements and 1,643,913 common shares issued since last year as part of the dividends on the Class B Preferred Shares. Common share options outstanding totalled 1,163,033 at the end of the quarter compared to 508,333 a year ago with the change due to common share options issued, net of the expiry of common share options.

In addition, the Corporation has 5,398,700 warrants outstanding at April 30, 2012 resulting from the public offering and the private placement which if exercised would result in one common share being issued for $2.80, as well as 747,600 broker warrants outstanding which if exercised would result in a unit consisting of one common share and one-half warrant being issued for $2.25, and 56,070 broker warrants which if exercised would result in one warrant being issued for $0.22. All the warrants currently expire in November 2012.

At April 30, 2012, there were 314,572 Class A Preferred Shares outstanding, unchanged from a year ago and 1,909,458 Class B Preferred Shares outstanding, also unchanged from a year ago.

The Corporation's book value per common share at April 30, 2012 was $0.51 compared to $0.71 a year ago. Assuming the outstanding Class B Preferred Shares are converted into common shares on the basis of $5.00 per share, the Corporation's book value per common share at April 30, 2012 would be $1.64 per share.

Updated Share Information

As at June 6, 2012, there were no changes in the number of outstanding common shares, common share warrants or options, Class A or Class B Preferred Shares since April 30, 2012.

Capital Management

Regulatory capital in the Corporation's principal subsidiary, the Bank, totalled $153.5 million at April 30, 2012 compared to $144.6 million a year ago with the increase due primarily to $4.0 million of additional Tier 1 capital in the form of common shares being issued by the Bank to the Corporation in 2011, operating results of the Bank over the past year and changes in the market value of available-for-sale equity securities which the Bank holds in its treasury portfolio. Regulatory capital includes the after-tax effect of unrealized gains and losses on 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 13.20% at April 30, 2012 compared to 13.12% 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 8.64% at the end of the quarter compared to 8.75% last year. The Bank's assets-to-capital ratio was 11.12 at the end of the quarter compared to 10.54 a year ago. The changes in the Bank's capital ratios from a year ago were due to the increase in regulatory capital as well as an increase in risk-weighted assets, primarily from the growth in lending assets.

As per OSFI's Capital Adequacy Guidelines, financial institutions may elect a phase-in of the impact of the conversion to IFRS on their regulatory capital reporting. The Bank made this election to phase-in the IFRS conversion impact over a five quarter period starting with the first quarter ending January 31, 2012. The phase-in amount is based on the impact on Retained Earnings (Deficit) of IFRS conversion as at November 1, 2011 and is recognized in regulatory capital on a straight-line basis. The estimate of the phase-in amount over the full five quarters is a reduction of regulatory capital of approximately $14.0 million and relates primarily to the impairment, net of income taxes, in previous years of available-for-sale securities.  In the absence of this election, the Bank's Tier 1 and Total capital would have been 7.93% and 12.12% respectively at April 30, 2012.

See note 15 to the interim consolidated financial statements for more information regarding capital management.

Summary of Quarterly Results

                                          CGAAP
(thousands of dollars except per share amounts)     2012     2011     2010
      Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3
                                                 
Results of operations:                                                
Total interest income      14,928     15,021    $   14,798     14,584   $  13,594   $   13,389     13,648   $   13,459
Interest expense     12,581     12,022     12,374     12,969     11,995     11,235     11,105     11,750
Net interest income     2,347     2,999     2,424     1,615     1,599     2,154     2,543     1,709
Provision for (recovery of) credit losses     -     185     118     37     78     76     (473)     19
Other income (charges)     3,939     3,405     8,649     315     919     2,210     481     (215)
Total revenue     6,286     6,219     10,955     1,893     2,440     4,288     3,497     1,475
Non-interest expenses     5,724     5,758     6,680     5,582     4,293     4,630     4,486     4,338
Income (loss) before income taxes     562     461     4,275     (3,689)     (1,853)     (342)     (989)     (2,863)
Income tax provision (recovery)     1,473     1,314     5,558     (154)     293     921     390     (338)
Net income (loss)    $   (911)     (853)      (1,283)      (3,535)   $    (2,146)   $    (1,263)      (1,379)   $    (2,525)
Earnings (loss) per share                                                

- basic     (0.03)     (0.03)     (0.06)     (0.17)   $   (0.14)    $   (0.09)     (0.10)    $   (0.18)

- diluted     (0.03)     (0.03)     (0.06)     (0.17)   $   (0.14)   $  (0.09)     (0.10)   $   (0.18)

 

The financial results of the Corporation for each of the last eight quarters are summarized above. The Corporation's results, particularly total interest income and net interest income are comparable between quarters and over the past eight quarters reflect the increase in lending assets with some seasonality occurring during the spring and summer months due to residential construction lending. Other income during the quarters shows variability due to the level of gains realized in each quarter on the sale of preferred shares held in the Corporation's treasury portfolio.

Non-interest expenses over the past year have been comparable between quarters but have increased since last year. Non-interest expenses increased in the fourth quarter of 2011 as a result of expenses being incurred totalling approximately $1.3 million relating to professional and consulting fees for implementation of the Corporation's private label credit card program. Non-interest expenses increased over the past year due to increased staff relating to lending operations and the credit card program and increased general and administrative expenses incurred to administer the credit card program which launched on January 2, 2012.

The provision for income taxes in the fourth quarter of 2011 includes an income tax adjustment of $2.8 million relating to income taxes in the parent company and in the first two quarters of 2012, includes an income tax provision in the parent company relating to a refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares.

Subsequent Event

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

Significant Accounting Policies

Significant accounting policies are detailed on pages 58 to 63 of the Corporation's 2011 Annual Report. There have been no changes in accounting policies or new significant accounting policies adopted during the current period.

Future Change in Accounting Policies

International Financial Reporting Standards

IFRS 9: Financial instruments (IFRS 9)

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

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

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2011, and are found on pages 39 to 43 of the Corporation's 2011 Annual Report.

Controls and Procedures

Due to the Corporation's adoption of IFRS effective November 1, 2011, management identified and implemented changes to certain accounting processes and procedures during the period November 1, 2011 to April 30, 2012 in order to comply with IFRS. These changes relate to conversion of historical CGAAP financial information to IFRS for comparative purposes, as well as:

  • Accounting for securitized mortgages on the Corporation's Statement of Financial Position.
  • Accounting for securitization liabilities.
  • Accounting for securitized mortgages interest income and securitization liability interest expense.
  • Accounting for impaired available-for-sale securities and sales of impaired available-for-sale securities.
  • Accounting for loan fee income.

In addition during the current period, as a result of the launch of the Corporation's private label credit card program in January 2012, certain accounting processes and procedures were implemented relating to the recording of outstanding credit card receivable balances, recording of related collective allowances, recording of revenue from credit cards and recording of expenses relating to the credit card program.

As a result, management revised certain existing controls over financial reporting and implemented new controls to provide reasonable assurance that the risk of material misstatements in the Corporation's financial reporting has been reduced to an acceptably low level.

There were no other changes in the Corporation's policies and procedures and other processes during the three months ended April 30, 2012 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: June 6, 2012

Forward-Looking Statements

The statements in this management's discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see pages 43 and 44 of our 2011 Annual Report.

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

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Financial Position
(Unaudited)

(thousands of Canadian dollars)                  
        April 30     October 31     April 30
As at     2012     2011     2011
                     
Assets                  
                     
Cash and cash equivalents   $   378,115    $    194,899    $    229,593
Securities (note 5)     76,740     130,844     202,035
Loans, net of allowance for credit losses (note 6)   1,193,718     1,131,526     1,073,507
Other assets      29,774     28,100     28,666
                     
      $    1,678,347    $     1,485,369      1,533,801
                     
Liabilities and Shareholders' Equity                  
                     
Deposits    $    1,468,220    $     1,269,730    $     1,331,379
Notes payable (note 7)     77,874     77,581     90,189
Securitization liabilities (note 8)     43,330     43,247     32,947
Other liabilities      28,167     30,024     21,777
Preferred share liabilities (note 9)     41,534     41,256     40,995
        1,659,125     1,461,838     1,517,287
                     
Shareholders' equity (note 19):                  
  Share capital (note 10)     71,246     69,900     48,471
  Retained earnings (deficit)     (52,302)     (50,472)     (45,654)
  Accumulated other comprehensive income      278     4,103     13,697
        19,222     23,531     16,514
                     
      $    1,678,347    $     1,485,369    $     1,533,801

 

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

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

(thousands of Canadian dollars, except per share amounts)                        
        for the three months ended     for the six months ended
        April 30     April 30     April 30     April 30
        2012     2011     2012     2011
                           
Interest income:                        
  Loans   $   12,989    $    11,046    $    25,716    $    21,787
  Securities     1,155     2,034     2,407     3,843
  Loan fees     784     514     1,826     1,353
        14,928     13,594     29,949     26,983
                           
Interest expense:                        
  Deposits and other     9,290     8,513     18,134     16,460
  Notes payable     2,023     2,280     4,041     4,369
  Preferred share liabilities     1,268     1,202     2,428     2,401
        12,581     11,995     24,603     23,230
                           
Net interest income     2,347     1,599     5,346     3,753
                           
Other income (note 11)     3,939     919     7,344     3,129
Net interest and other income      6,286     2,518     12,690     6,882
                           
Provision for credit losses (note 6)     -     78     184     154
Net interest and other income after provision for credit losses   6,286     2,440     12,506     6,728
                           
Non-interest expenses:                        
  Salaries and benefits     2,546     2,066     5,337     4,389
  General and administrative     2,649     1,808     5,181     3,644
  Premises and equipment     529     419     965     890
        5,724     4,293     11,483     8,923
                           
Income (loss) before income taxes     562     (1,853)     1,023     (2,195)
                           
Income taxes     1,473     293     2,787     1,214
                           
Net loss   $   (911)    $    (2,146)    $    (1,764)    $    (3,409)
                           
Basic earnings (loss) per share    $   (0.03)    $    (0.14)    $    (0.07)    $    (0.23)
                           
Diluted earnings (loss) per share    $   (0.03)    $    (0.14)    $    (0.07)    $    (0.23)
                           
Weighted average number of common shares outstanding     26,941,000     15,674,000     26,685,000     15,081,000

 

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

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

(thousands of Canadian dollars)                        
        for the three months ended     for the six months ended
        April 30     April 30     April 30     April 30
        2012     2011     2012     2011
                           
Net loss   $   (911)    $    (2,146)    $    (1,764)    $    (3,409)
                           
Other comprehensive income, net of tax                        
  Net unrealized gains on assets held as available-for-sale (1)     366     935     1,255     2,672
  Amount transferred to income or loss on disposal of available-for-sale assets (2)     (2,582)     (90)     (5,080)     (1,501)
        (2,216)     845     (3,825)     1,171
                           
Comprehensive loss   $   (3,127)    $    (1,301)    $    (5,589)    $    (2,238)

 

(1)  Net of income tax benefit (expense) for three months of ($135) (2011 - ($346)) and six months of ($464) (2011 - ($989))
(2)  Net of income tax benefit (expense) for three months of $955 (2011 - $45) and six months of $1,879 (2011 - $639)

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

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

(thousands of Canadian dollars)                        
      for the three months ended     for the six months ended
      April 30     April 30     April 30     April 30
      2012     2011     2012     2011
                         
Common shares (note 10):                        
                         
Balance, beginning of the period   $   62,560     38,969     61,886    $   38,295
Issued on payment of Class B preferred share dividends     673     674     1,347     1,348
Issued during the period     -     3,100     -     3,100
Issue costs     (25)     (45)     (25)     (45)
                         
Balance, end of the period   $   63,208    $    42,698    $    63,208    $    42,698
                         
Common share warrants:                        
                         
Balance, beginning and end of the period   $   2,003    $    -    $    2,003    $    -
                         
Preferred shares (note 10):                        
                         
Class A preferred shares                        
Balance, beginning and end of the period   $   1,061    $    1,061    $    1,061    $    1,061
                         
Class B preferred shares                        
Balance, beginning and end of the period   $   4,262    $    4,262    $    4,262    $    4,262
                         
Contributed surplus (note 10):                        
                         
Balance, beginning of the period   $   706    $    443    $    688    $    436
Fair value of stock options granted     6     7     24     14
                         
Balance, end of the period   $   712    $    450    $    712    $    450
                         
Retained earnings (deficit):                        
                         
Balance, beginning of the period   $   (51,391)    $    (43,508)    $    (50,472)    $    (42,179)
Net loss     (911)     (2,146)     (1,764)     (3,409)
Dividends paid     -     -     (66)     (66)
                         
Balance, end of the period   $   (52,302)    $    (45,654)    $    (52,302)    $    (45,654)
                         
Accumulated other comprehensive income (loss) net of taxes:                        
                         
Balance, beginning of the period   $   2,494    $    12,852    $    4,103    $    12,526
Other comprehensive income     (2,216)     845     (3,825)     1,171
                         
Balance, end of the period   $   278    $    13,697    $    278    $    13,697
                         
Total shareholders' equity   $   19,222    $    16,514    $    19,222    $    16,514

 

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

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

(thousands of Canadian dollars)            
          April 30     April 30
For the six months ended     2012     2011
                 
Cash provided (used in):            
                 
Operations:            
  Net loss   $   (1,764)    $    (3,409)
  Items not involving cash:            
    Provision for credit losses     184     154
    Change in derivative financial instruments     (96)     172
    Deferred income taxes     1,900     1,214
    Stock-based compensation     24     14
    Gain on disposal of securities     (7,143)     (3,201)
    Unrealized gains on held-for-trading securities     -     (487)
    Interest income     (29,949)     (26,983)
    Interest expense      24,603     23,230
  Mortgages and loans     (66,010)     (95,428)
  Interest received      29,086     25,368
  Proceeds from mortgage securitizations     -     8,575
  Deposits     198,490     180,476
  Interest paid      (21,539)     (16,334)
  Income taxes paid      (887)     (2,308)
  Change in other assets and liabilities     376     (9,709)
          127,275     81,344
Investing:            
  Purchase of securities     -     (120)
  Proceeds from sale and maturity of securities     56,007     33,991
          56,007     33,871
Financing:            
  Proceeds on issuance of notes payable     -     14,400
  Proceeds of shares issued     -     3,055
  Dividends paid     (66)     (66)
          (66)     17,389
                 
Increase in cash and cash equivalents     183,216     132,604
                 
Cash and cash equivalents, beginning of the period     194,899     96,989
                 
Cash and cash equivalents, end of the period   $    378,115    $     229,593
                 
Cash and cash equivalents is represented by:            
                 
  Cash   $    138,192   $    117,172
  Cash equivalents     239,923     112,421
                 
Cash and cash equivalents, end of the period   $    378,115    $     229,593

 

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

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

Three and six month periods ended April 30, 2012 and 2011


1. Reporting entity:

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

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

2. Basis of preparation:

a) Statement of compliance

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting.

The interim Consolidated Financial Statements should be read in conjunction with the Corporation's audited Consolidated Financial Statements for the year ended October 31, 2011 and its first quarter of 2012 interim financial statements. As these condensed statements are being prepared for interim reporting purposes, they do not include all of the disclosures required for annual financial statements prepared under IFRS. Transitional reconciliations and disclosures required under IFRS that were not included in the Corporation's most recent annual financial statements or in the first quarter interim Consolidated Financial Statements have been included in Note 4.

The interim Consolidated Financial Statements for the three and six month periods ended April 30, 2012 and 2011 were approved by the Board of Directors on June 6, 2012.

b) Functional and presentation currency

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

3. Significant accounting policies:

These interim Consolidated Financial Statements are the Corporation's second set of interim financial statements prepared under IFRS. As a result of the application of the new accounting framework, certain accounting policies have changed as those applied at October 31, 2011 were consistent with Canadian Generally Accepted Accounting Principles (CGAAP). The Corporation's accounting policies under IFRS were disclosed in detail in the January 31, 2012 interim Consolidated Financial Statements and were applied consistently to all periods presented. There have been no changes to the IFRS accounting policies applied in the April 30, 2012 interim Consolidated Financial Statements, except as described below.

a) Segment reporting:

The Corporation manages and reports on separate operating segments when a component of operations earns revenues and generates expenses for the Corporation, whose operating results are regularly reviewed by the chief decision makers.

4. Transition to IFRS:

Newly adopted accounting standards

Canadian publicly accountable enterprises are required to transition from CGAAP to IFRS effective for fiscal years beginning on or after January 1, 2011. For the Corporation, the change in financial reporting standards is effective for interim and annual financial statements of the fiscal year ending October 31, 2012, however transitional rules require restatement of comparative amounts for the interim and annual financial statements of the fiscal year ending October 31, 2011. Consequently, the Corporation's transition date to IFRS is November 1, 2010.

Beginning with the interim period ended January 31, 2012, the Consolidated Financial Statements are prepared in accordance with IFRS. All adjustments to the Consolidated Financial Statements to facilitate the first time adoption of IFRS have been stipulated in "IFRS 1: First-time adoption of International Financial Reporting Standards". The majority of the transitional adjustments required as a result of the adoption of IFRS are applied retrospectively against opening retained earnings at November 1, 2010, unless IFRS 1 specifically provides for prospective application.

The elected exemptions and mandatory exceptions from full retrospective application of IFRS were disclosed in detail in the January 31, 2012 interim Consolidated Financial Statements, along with accounting policy changes that had a quantitative impact on the financial statements at November 1, 2010 and October 31, 2011. There have been no changes in the previously disclosed exemptions, exceptions, accounting policies applied, or disclosures previously presented, however the quantitative impact of these accounting policy changes for the three and six month periods ended April 30, 2012 are outlined below:

Reconciliation of the Consolidated Statement of Financial Position - April 30, 2011

                                 
        Balance           IFRS Adjustment           Balance
As at April 30, 2011     CGAAP     Securitization     AFS*     Other      IFRS
                                 
Assets                              
                                 
Cash and cash equivalents   $   229,593   $ -   $ -   $ -    $    229,593
Securities     205,142     (3,107)     -     -     202,035
Loans, net of allowances for credit losses     1,043,331     32,565     -     (2,389)     1,073,507
Other assets     27,064     1,198     -     404     28,666
                                 
      $    1,505,130     30,656     -     (1,985)    $     1,533,801
                                 
Liabilities and Shareholders' Equity                              
                                 
Deposits   $    1,331,379     -     -     -    $     1,331,379
Notes payable     90,189     -     -     -     90,189
Securitization liabilities     -     32,947     -     -     32,947
Other liabilities     22,530     (1,304)     -     551     21,777
Preferred share liabilities     -     -     -     40,995     40,995
        1,444,098     31,643     -     41,546     1,517,287
                                 
Preferred share liabilities     40,995     -     -       (40,995)     -
                                 
Shareholders' equity:                              
  Share capital     48,471     -     -     -     48,471
  Retained earnings (deficit)     (24,619)     (718)     (17,793)     (2,524)     (45,654)
  Accumulated other comprehensive income (loss)     (3,815)     (269)     17,793     (12)     13,697
        20,037     (987)     -     (2,536)     16,514
                                 
      $    1,505,130   $ 30,656   $ -   $ (1,985)    $     1,533,801
                                 
* AFS=Impairment of Available-For-Sale Securities                              

 

Reconciliation of Net Income (Loss) and Total Comprehensive Income (Loss) - for the three and six months ended April 30, 2011

                       
      Balance IFRS Adjustment   Balance
For the three months ended April 30, 2011     CGAAP   Securitization   AFS   Other    IFRS
                       
Interest income   $ 13,353 $   366 $ - $ (125) $   13,594
Interest expense     11,673   322   -   -   11,995
Net interest income     1,680   44   -   (125)   1,599
Provision for credit losses     42   -   -   36   78
Net interest income after provision for credit losses     1,638   44   -   (161)   1,521
Other income      706   59   214   (60)   919
Net interest income and other income      2,344   103   214   (221)   2,440
Non-interest expense     4,332   -   -   (39)   4,293
Loss before income taxes     (1,988)   103   214   (182)   (1,853)
Income tax expense      188   19   62   24   293
Net income (loss)   $ (2,176)  $  84 $   152  $   (206) $   (2,146)
                       
Other comprehensive income, net of tax:                      
                       
Net unrealized gains (losses) on assets held as available-for-sale     922   (11)   -   24   935
Amount transferred to profit or loss on disposal of available-for-sale assets     62   -   (152)   -   (90)
Total other comprehensive income     984   (11)   (152)   24   845
Total comprehensive income (loss)    $ (1,192) $  73 $ - $   (182) $   (1,301)
                       
                       
                       
      Balance IFRS Adjustment   Balance
For the six months ended April 30, 2011     CGAAP   Securitization   AFS   Other    IFRS
                       
Interest income    $ 26,516 $   746 $ -  $ (279) $   26,983
Interest expense     22,597   633   -   -   23,230
Net interest income     3,919   113   -   (279)   3,753
Provision for credit losses     82   -   -   72   154
Net interest income after provision for credit losses     3,837   113   -   (351)   3,599
Other income     1,068   (338)   2,459   (60)   3,129
Net interest income and other income      4,905   (225)   2,459   (411)   6,728
Non-interest expense     8,720   -   -   203   8,923
Loss before income taxes     (3,815)   (225)   2,459   (614)   (2,195)
Income tax expense (recovery)     190   (65)   713   376   1,214
Net income (loss)     $ (4,005) $   (160)  $   1,746   $ (990) $   (3,409)
                       
Other comprehensive income, net of tax:                      
                       
Net unrealized gains (losses) on assets held as available-for-sale     2,316   (20)   -   376   2,672
Amount transferred to profit or loss on disposal of available-for-sale assets     245   -   (1,746)   -   (1,501)
Total other comprehensive income     2,561   (20)   (1,746)   376   1,171
Total comprehensive income (loss)   $  (1,444) $   (180) $ - $   (614) $   (2,238)

 

5. Securities:

Portfolio analysis:

                 
        April 30   October 31   April 30
        2012   2011   2011
                 
Available-for-sale securities            
Securities issued or guaranteed by:            
  Canadian federal government  $   19,752  $ 28,940  $ 43,363
  Canadian provincial governments   -   21,214   25,770
  Canadian municipal governments   3,964   4,622   5,350
Corporate debt     43,290   46,069   65,999
Corporate equity     9,734   29,999   60,419
Total available-for-sale securities $  $ 76,740  $ 130,844  $ 200,901
                 
Held-to-maturity securities            
Corporate debt   $   -  $ -  $ 1,134
Total securities   $   76,740  $ 130,844  $ 202,035
                 

6. Loans:

a) Portfolio analysis:

             
    April 30   October 31   April 30
    2012   2011   2011
             
Residential mortgages            
  Insured $   36,733 $   36,685 $   49,182
  Uninsured   207,044   176,555   175,008
Securitized mortgages   42,340   42,712   32,388
Corporate and government loans   893,300   869,767   811,476
Credit cards   9,657   -   -
Other loans   4,719   4,833   5,358
    1,193,793   1,130,552   1,073,412
             
Allowance for credit losses:            
  Collective   (2,979)   (2,827)   (3,230)
  Individual   (1,633)   (1,560)   (1,494)
    (4,612)   (4,387)   (4,724)
             
    1,189,181   1,126,165   1,068,688
             
Accrued interest   4,537   5,361   4,819
             
Total loans, net of allowance for credit losses $  1,193,718 $  1,131,526 $  1,073,507
             

 

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

             
    April 30   October 31   April 30
    2012   2011   2011
             
Residential mortgages  $   514 $   367 $   422
Corporate and government loans   2,307   2,408   2,232
Other loans   38   52   576
Credit cards   120   -   -
   $   2,979 $   2,827 $   3,230
             

The Corporation holds collateral against loans in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the nature of the underlying collateral. For mortgages secured by real estate, the value of collateral is determined at the time of borrowing by an appraisal. For loans secured by equipment, the value of collateral is assigned by the nature of the underlying equipment held. The fair value of collateral securing loans that are not impaired at April 30, 2012 totalled $2,220,761,000 (2011 - $1,593,239,000)

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                 
            April 30   April 30
            2012   2011
            Total   Total
For the three months ended   Collective   Individual   Allowance   Allowance
                 
Balance, beginning of the period $   3,006 $   1,597 $   4,603 $   4,859
Provision for (recovery of) credit losses   (36)   36   -   78
Recoveries (write-offs)   9   -   9   (213)
                 
Balance, end of the period $   2,979 $   1,633 $   4,612 $   4,724
                 
                 
            April 30   April 30
            2012   2011
            Total   Total
For the six months ended   Collective   Individual   Allowance   Allowance
                 
Balance, beginning of the period $   2,827 $   1,560 $   4,387 $   5,426
Provision for (recovery of) credit losses   111   73   184   154
Recoveries (write-offs)   41   -   41   (856)
                 
Balance, end of the period $   2,979 $   1,633 $   4,612 $   4,724
                 

c)  Impaired loans:

             
  April 30, 2012
    Gross   Individual    
    impaired   allowance   Net impaired
             
Residential mortgages $   1,656 $ 1,633 $   23
Other loans   34   -   34
Credit cards   -   -   -
  $   1,690 $   1,633 $   57
             
             
  October 31, 2011
    Gross   Individual    
    impaired   allowance   Net impaired
             
Residential mortgages $   1,588 $   1,560 $   28
Other loans   45   -   45
Credit cards   -   -   -
  $   1,633 $   1,560 $   73
             
             
  April 30, 2011
    Gross   Individual    
    impaired   allowance   Net impaired
             
Residential mortgages $   1,664 $   1,489 $   175
Other loans   572   5   567
Credit cards   -   -   -
  $   2,236 $   1,494 $   742
             

 

Impaired loans at April 30, 2012 include foreclosed real estate held for sale with a gross carrying value of $159,000 (2011 - $149,000) and a related allowance of $120,000 (2011 - $110,000). Real estate held for sale is measured at the lower of cost and the fair value less costs to sell.

Interest income recognized on impaired loans for the three and six months ended April 30, 2012 was $37,000 (2011 - $36,000) and $73,000 (2011 - $73,000) respectively. An individual allowance has been recognized equal to the entire amount of interest accrued on impaired loans to reflect the recoverable amounts for impaired loans.

At April 30, 2012, loans, other then credit card receivables, past due but not impaired totalled $32,000 (2011 - $65,000). At April 30, 2012, credit card receivables past due but not impaired totalled $487,000 (2011 - $nil).

7. Notes payable:

             
    April 30   October 31   April 30
    2012   2011   2011
             
Ten year term Series C Notes unsecured, maturing
2018, net of note issue costs of $4,167, effective interest
of 10.56% 
$   57,538 $   57,309 $   57,001
             
Notes payable, unsecured, maturing 2012, net of note
issue costs of $nil, effective interest of 7.00% 
  200   200   3,111
             
Ten year term, unsecured, callable, subordinated notes
payable by the Bank to a third party, maturing between
2019 and 2021, net of note issue costs of $1,364,
effective interest of 10.92% 
  20,136   20,072   30,077
             
  $   77,874 $   77,581 $   90,189

 

8. Securitization liabilities:

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

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020.  Securitized insured mortgages with a carrying value of $42,033,000 (2011 - $32,419,000) are pledged as collateral for these liabilities.

9. Preferred share liabilities:

At April 30, 2012, the Corporation has outstanding 1,909,458 (2011 - 1,909,458) Class B Preferred Shares with a total value of $47.7 million (2011 - $47.7 million) less issue costs of $2.4 million (2011 - $2.6 million).  As these Class B preferred shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.5 million (2011 - $41.0 million), net of issue costs, representing the fair value of the Corporation's obligation to make future payments of principle and interest has been classified on the Corporation's Consolidated Statement of Financial Position as a preferred share liability.  In addition, an amount of $4.3 million (2011 - $4.3 million) representing the equity element of the Class B Preferred Shares, net of issue costs, has been classified in share capital on the Consolidated Statement of Financial Position.

As the preferred shares must be redeemed by the Corporation for approximately $47.7 million (2011 - $47.7 million), the preferred share liability amount of $41.5 million (2011 - $41.0 million) is being adjusted over the remaining term to redemption, until the liability amount is equal to the estimated redemption amount with the increase included in interest expense in the Consolidated Statement of Income calculated using the effective interest rate of 11.8%.

10. Share capital:

         
    Stock Options
        Weighted-
  Common     average
  shares     exercise
  outstanding Number   price
         
Outstanding, October 31, 2011  26,237,594 1,143,033 $   4.93
Granted - 50,000   1.90
Issued for cash proceeds - -   -
Issued pursuant to Class B Preferred Share dividend 935,845 -   -
Expired - (30,000)   6.00
Outstanding, April 30, 2012  27,173,439 1,163,033 $ 4.77

 

At April 30, 2012, the Corporation has 6,202,370 (2011 - nil) warrants outstanding to acquire common shares and common share warrants. In addition, at April 30, 2012, there were 314,572 (2011 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (2011 - 1,909,458) Class B Preferred Shares outstanding.

The Corporation recognized compensation expense relating to the estimated fair value of stock options granted for the three and six months ended April 30, 2012 of $6,000 (2011 - $7,000) and $24,000 (2011 - $14,000) respectively. During the quarter ended January 31, 2012, 50,000 options were granted to an officer who is a member of the Corporation's key management personnel. These options are exercisable into common shares at $1.90 per share and expire in January, 2022. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.31%, (ii) expected option life of 60 months and (iii) expected volatility of 57.71%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.95 per option. No additional options were granted during the quarter ended April 30, 2012.

During the quarter ended January 31, 2012, the Corporation issued 128,574 DSU's (2011 - 46,669) to its directors, with no additional grants of DSU's in the second quarter of 2012 or 2011. The amounts recorded in the Statement of Income (Loss) relating to DSU's for the three and six months ended April 30, 2012 was $111,000 recovery (2011 - $147,000 recovery) and $213,000 expense (2011 - $82,000 expense) respectively.

11. Other income:

                 
  for the three months ended   for the six months ended
    April 30   April 30   April 30   April 30
    2012   2011   2012   2011
                 
Gain on sale of securities $   3,944 $   709 $   7,143 $   3,201
Credit card non-interest revenue   102   -   116   -
Other income (charges)   -   163   (11)   100
Mark-to-market adjustment for derivatives   (107)   47   96   (172)
                 
  $   3,939 $   919 $   7,344 $   3,129

 

12. Derivative instruments:

At April 30, 2012, the Corporation had outstanding contracts for asset liability management purposes to swap from fixed to floating interest rates with notional amounts totalling $150,855,000 (2011 - $205,095,000), all of which qualified for hedge accounting. 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 risk-weight of $384,000 (2011 - $682,000) for purposes of determining the Bank's regulatory capital ratios.  As required under the accounting standard relating to hedges, at April 30, 2012, $15,402,000 (2011 - $13,031,000) 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. Approved counterparties are limited to Canadian chartered banks.

In 2011, the Corporation had entered into interest rate swaps that did not qualify for hedge accounting as a result of transactions with the Canada Housing TrustTM. At April 30, 2011 the notional amount of these contracts totalled $673,000.

13. 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.

           
    April 30      April 30
    2012      2011
           
Loan commitments  $ 236,565   $ 233,159
Undrawn credit card lines     73,081      -
Letters of credit     27,100     25,019
           
  $ 336,746   $ 258,178

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:

           
    April 30     April 30
    2012     2011
           
Collateral related to derivative transactions  $ 15,439   $ 12,871
Collateral related to letters of credit     9,180     5,080
           
  $ 24,619   $ 17,951

14. Related party transactions:

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

The Corporation issues both mortgages and personal loans to employees and Executive Officers. At April 30, 2012 balances due from Executive Officers totalled $945,000 (2011 - $2,750,000) of which $nil (2011- $1,850,000) are secured by residential or other property.

The interest rates charged on these loans are similar to those charged in an arms-length transaction. Interest income earned on the above loans for the three and six months ended April 30, 2012 was $10,000 (2011 - $29,000) and $21,000 (2011 - $59,000) respectively. There was $nil provision for credit losses related to loans issued to key management personnel for the three and six months ended April 30, 2012 and 2011.

15. Capital management:

a) Overview:

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

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

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

The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders.  The Bank's regulatory capital is comprised of share capital, retained earnings and unrealized losses on available-for-sale equity securities (Tier 1 capital) and unrealized gains on available-for-sale equity and the face value of subordinated notes (Tier 2 capital).  Subordinated notes included in regulatory capital is limited to 50% of Tier 1 capital (leverageable amount).

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

During the period ended April 30, 2012, there were no material changes in the Bank's management of capital.

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:

         
    April 30   April 30
    2012   2011
    IFRS   CGAAP
         
Total assets (on and off-balance sheet) $  1,705,702 $  1,523,631
Capital        
  Common shares $   103,965 $   99,965
  Retained earnings (deficit)   (11,810)   104
  Unrealized gain (loss) on available-for-sale equity securities   2,725   (3,658)
  Subordinated notes (leverageable amount)   50,244   48,205
  OSFI phase-in adjustment of the impact of IFRS   8,333   -
Total regulatory capital $   153,457 $   144,616
         
Assets-to-capital ratio   11.12   10.54
         

The Bank was in compliance with the assets-to-capital ratio prescribed by OSFI throughout the periods presented. Regulatory capital and related calculations for all comparable periods presented are reported under CGAAP as the Corporation is not required by OSFI to restate such figures.

c) Risk-Based Capital Ratio:

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 recommends that banks maintain a minimum total risk-based capital ratio in excess of 10% and a Tier 1 risk-based capital ratio in excess of 7%.

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

                   
    April 30, 2012     April 30, 2011
        IFRS         CGAAP
    Notional   Risk     Notional   Risk
    Drawn   Weighted     Drawn   Weighted
    Amount   Balance     Amount   Balance
                   
Balance sheet assets $  1,678,601 $  1,016,485   $  1,498,612 $   962,274
Off-balance sheet assets   487,602   120,455     528,853   117,493
Charge for operational risk       25,659         22,308
Total risk-weighted assets     $  1,162,599       $  1,102,075
Regulatory capital       153,457         144,616
Total risk-based capital ratio       13.20%         13.12%
Tier 1 risk-based capital ratio       8.64%         8.75%

 

Impact of IFRS on Regulatory Capital

Reporting of the Bank's regulatory capital under IFRS commenced on November 1, 2011. As per OSFI's Capital Adequacy Guidelines, financial institutions may elect a phase-in of the impact of the conversion to IFRS on their regulatory capital reporting. The Bank made this election to phase-in the IFRS conversion impact over a five quarter period starting with the first quarter ending January 31, 2012. The phase-in amount is based on the impact on Retained Earnings (Deficit) of IFRS conversion as at November 1, 2011 and is recognized in regulatory capital on a straight-line basis. The estimate of the phase-in amount over the full five quarters is a reduction of regulatory capital of approximately $14.0 million and relates primarily to the impairment in previous years of available-for-sale securities.  In the absence of this election, the Bank's Tier 1 and Total capital ratios would be 7.93% and 12.12% respectively at April 30, 2012.

16. Interest rate position:

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

                   
  April 30, 2012   April 30, 2011
    Increase 100   Decrease 100     Increase 100   Decrease 100
    bps   bps     bps   bps
                   
Sensitivity of projected net interest                  
  income during a 12 month period $   5,295 $   (5,261)   $   2,108    n/m 
Sensitivity of projected net interest                  
  income during a 60 month period   (579) $   896     3,580    n/m 
                   
Duration difference between assets and                  
  liabilities (months)   1.2         0.8    

 

*n/m - not meaningful due to current level of market interest rates

17. Segment information:

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

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

Reportable segment financial results are based on internal financial reporting documents which are provided to the Corporation's chief decision makers. Accounting policies applied and measurement bases used are consistent with those applied in the preparation of the Corporation's Consolidated Financial Statements. The financial results for all segments are presented on a consolidated basis. Transactions between segments have been eliminated.

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

                         
                        April 30,
For the three months ended April 30, 2012   2011
    Commercial   Credit card   Corporate   Intercompany        
    lending   lending (1)   head office   eliminations   Total   Total
                         
Net interest income (loss) $   4,276 $   (2) $   (2,758) $   831 $   2,347 $ 1,599
Other income   3,837   102   -   -   3,939   919
Net interest income and other income (charges)   8,113   100   (2,758)   831   6,286   2,518
Provision for (recovery of) credit losses   (58)   58   -   -   -   78
Net interest and other income (loss) after provision for credit losses   8,171   42   (2,758)   831   6,286   2,440
Non-interest expense   5,086   977   (54)   (285)   5,724   4,293
Income (loss) before income taxes   3,085   (935)   (2,704)   1,116   562   (1,853)
Income tax expense   1,040   -   433   -   1,473   293
Net income (loss) $   2,045 $   (935) $   (3,137) $   1,116 $   (911) $ (2,146)
                         
                         
                        April 30,
For the six months ended April 30, 2012   2011
    Commercial   Credit card   Corporate   Intercompany        
    lending   lending (1)   head office   eliminations   Total   Total
                         
Net interest income (loss) $   9,052 $   (6) $   (5,342) $   1,642 $   5,346 $   3,753
Other income    7,228   116   -   -   7,344   3,129
Net interest income and other income (charges)   16,280   110   (5,342)   1,642   12,690   6,882
Provision for credit losses   64   120   -   -   184   154
Net interest and other income (loss) after provision for credit losses   16,216   (10)   (5,342)   1,642   12,506   6,728
Non-interest expense   9,947   1,411   710   (585)   11,483   8,923
Income (loss) before income taxes   6,269   (1,421)   (6,052)   2,227   1,023   (2,195)
Income tax expense    1,900   -   887   -   2,787   1,214
Net income (loss) $   4,369 $   (1,421) $   (6,939) $  2,227 $ (1,764) $ (3,409)
                         
Note 1:  Credit card lending segment launched operations on January 2, 2012.                    

 

18. Subsidiary company information:

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

Consolidated balance sheets            
    April 30   October 31    April 30
    2012   2011   2011
             
Cash and cash equivalents  $   376,899 $   188,994 $   221,781
Securities   76,740   130,844   202,035
Loans, net of allowance for credit losses   1,193,718   1,131,526   1,073,507
Other assets   31,244   31,105   29,960
   $  1,678,601 $  1,482,469 $  1,527,283
             
Deposits  $  1,468,220 $  1,269,730 $  1,331,379
Subordinated notes payable   49,732   49,651   50,077
Securitization liabilities   43,330   43,247   32,947
Other liabilities   24,886   26,530   19,880
    1,586,168   1,389,158   1,434,283
             
Shareholder's equity   92,433   93,311   93,000
             
   $  1,678,601 $  1,482,469 $  1,527,283
             

Consolidated statements of income                  
  for the three months ended   for the six months ended
    April 30   April 30     April 30   April 30
    2012   2011     2012   2011
                   
Interest income $   14,924 $   13,571   $   29,932 $   26,934
Interest expense   10,650   9,763     20,886   18,884
Net interest income   4,274   3,808     9,046   8,050
Other income    3,939   920     7,344   3,200
Net interest income and other income   8,213   4,728     16,390   11,250
Provision for credit losses   -   78     184   154
Net interest and other income after provision for credit losses   8,213   4,650     16,206   11,096
Non-interest expense   6,063   4,164     11,358   8,450
Loss before income taxes   2,150   486     4,848   2,646
Income tax expense    1,040   58     1,900   980
Net income $   1,110 $   428   $   2,948 $   1,666

 

19. Subsequent event:

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



Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $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:
Wade MacBain at wadem@pwbank.com (519) 675-4201

 

 

 

 

SOURCE Pacific

For further information:

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

Profil de l'entreprise

Pacific & Western Credit Corp.

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