LONDON, ON, Aug. 30 /CNW/ -THIRD QUARTER FINANCIAL HIGHLIGHTS
- Lending assets increased 13% to $923 million from $820 million a
year ago and from $900 million at the end of the previous quarter.
- Fundings of new loans and leases for the three months ended
July 31, 2007 totalled $125 million compared to $118 million for
the same period a year ago and on a year-to-date basis, totalled
$373 million compared to $328 million for the same period a year
ago.
- Total assets were $1.23 billion compared to $1.29 billion a year
ago and $1.37 billion at the end of the previous quarter.
- Net earnings for the quarter were $127,000 or $0.01 per share
($nil diluted) compared to $11.8 million or $0.88 per share ($0.85
diluted) last year.
- On a year-to-date basis, net earnings were $1.6 million or $0.10
per share ($0.10 diluted) compared to $15.5 million or $1.15 per
share ($1.11 diluted) for the same period last year.PRESIDENT'S COMMENTS
This quarter saw funding of new loans and leases total $125 million,
bringing new loans and leases funded for the nine-month period to $373 million
compared to $328 million for the same period a year ago. Taking into
consideration loan repayments for the nine months, total lending assets
increased by 13% to $923 million from $820 million a year ago. However,
despite this increase in lending assets, net interest income for the nine
months decreased from $14.5 million to $13.4 million. This decrease was due
primarily to a 33 basis point reduction in spread on the lending portfolio,
which for the nine months declined from 2.13% last year to 1.80%. We have seen
similar decreases in spreads on our treasury portfolio.
We have chosen to remain committed to our original strategy of lending
and investing only in low-risk areas, believing that the unusual market
conditions that gave rise to this compression of spreads would eventually end.
This is now occurring as a result of the recent liquidity crunch and we are
now seeing a rather dramatic increase, of approximately 50 basis points, in
the spreads available on our lending and treasury portfolios. As well, we are
seeing renewed interest in our receivable purchase program as corporations are
seeking alternate funding sources. Recently we have agreed to provide a $150
million receivable purchase line to another financial institution, and I
expect more substantial lines to follow.
Our partnership with EllisDon Corporation to provide infrastructure
financing to Ontario's hospital projects, announced previously in the quarter,
is also proceeding and we hope to be announcing the financing of the first of
a number of hospitals in the near future. I am also pleased to report that our
Visa card initiative is proceeding on schedule and we have now begun serious
discussions with potential partners to launch our card. We hope to be in a
position to announce a partnership in the near future with revenues expected
to flow from this initiative in another six months. Finally, our Versabanq
Innovations software company which created, what we believe to be, a state of
the art banking software package, is on track to commercialize this product by
having the software benchmarked by a third party agency.
The first nine months of this year have been challenging for Pacific &
Western in that our low-risk lending and investing strategy has caused us to
suffer a significant compression of spreads and a reduction of net interest
income. However, that situation is no longer the case and I expect spreads and
net interest income to return to normal levels. This year we committed
significant resources to our Visa card, receivable purchase program and
Versabanq software initiatives which all seem close to paying significant
dividends. I am pleased with the low-risk strategy that we have adhered to and
look forward to reaping the benefits of this strategy and the unique
initiatives we are pursuing.FINANCIAL HIGHLIGHTS
for the three months for the nine months
ended ended
------------------------------------------------- -----------------------
(unaudited)
($ thousands, except July 31 July 31 July 31 July 31
per share amounts) 2007 2006 2007 2006
------------------------------------------------- -----------------------
Results of operations (teb)
Net interest income per
financial statements $ 3,373 $ 4,218 $ 11,878 $ 13,039
Teb adjustment 559 440 1,494 1,218
Net interest income 3,932 4,658 13,372 14,527
Spread 1.20% 1.48% 1.40% 1.61%
Provision for credit
losses 142 321 643 448
Net interest income
after provision for
credit losses 3,790 4,337 12,729 14,079
Other income 108 12,963 1,361 15,046
Total revenue 3,898 17,300 14,090 29,125
Non-interest expenses 3,643 3,215 10,849 9,603
Net earnings 127 11,803 1,562 15,504
Earnings per common
share:
Basic $ 0.01 $ 0.88 $ 0.10 $ 1.15
Diluted $ - $ 0.85 $ 0.10 $ 1.11
Efficiency ratio 90% 18% 73% 32%
Return on average common
shareholders' equity 0.45% 78.88% 2.97% 35.83%
Return on average
total assets 0.04% 3.76% 0.16% 1.71%
Gross impaired loans
to total assets 0.21% 0.12% 0.21% 0.12%
Number of full time
equivalent staff 62 52 62 52
------------------------------------------------- -----------------------
Balance Sheet Summary
Cash and securities $ 266,588 $ 428,980 $ 266,588 $ 428,980
Total loans 923,385 819,899 923,385 819,899
Total assets 1,225,583 1,287,458 1,225,583 1,287,458
Average assets 1,296,209 1,245,586 1,277,656 1,209,343
Deposits 1,116,317 1,134,242 1,116,317 1,134,242
Notes payable 35,847 36,186 35,847 36,186
Shareholders' equity 60,981 68,526 60,981 68,526
------------------------------------------------- -----------------------
Capital ratios
(Based on the subsidiary
Pacific & Western Bank
of Canada)
Total regulatory
capital $ 93,701 $ 102,402 $ 93,701 $ 102,402
Risk weighted assets 752,461 780,315 752,461 780,315
Assets to capital ratio 13.36 12.76 13.36 12.76
Tier 1 risk-based
capital ratio 8.47% 9.53% 8.47% 9.53%
Total risk-based
capital ratio 12.45% 13.12% 12.45% 13.12%
------------------------------------------------- -----------------------Non-GAAP measures:
Like most banks, the Corporation analyzes revenue on a taxable equivalent
basis (teb) to permit uniform measurement and comparison of net interest
income. Net interest income includes tax-exempt income on certain securities.
Since this income is not taxable, the rate of interest or dividends received
is lower than would apply to a loan or taxable security of the same amount.
The taxable equivalent basis includes an adjustment that increases interest
income and the provision for income taxes by the same amount that adjusts the
income on the tax-exempt securities to what income would have been had it been
taxed at the statutory rate.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
This management's discussion and analysis (MD&A) of operations and
financial condition for the third quarter of fiscal 2007 should be read in
conjunction with the unaudited interim consolidated financial statements for
the period ended July 31, 2007, included herein, and the audited consolidated
financial statements and MD&A for the year ended October 31, 2006, which are
available on SEDAR at www.sedar.com. Except as discussed below, all other
factors discussed and referred to in the MD&A for the year ended October 31,
2006, remain substantially unchanged.
Overview
Net earnings for the quarter were $127,000 or $0.01 per share ($nil
diluted) compared to $11.8 million or $0.88 per share ($0.85 diluted) for the
same period a year ago. For the nine months ended July 31, 2007, net earnings
were $1.6 million or $0.10 per share ($0.10 diluted) compared to $15.5 million
or $1.15 per share ($1.11 diluted) a year ago. Net earnings for the quarter
and for the nine months decreased from the same periods a year ago primarily
as a result of a decrease in other income and a decrease in net interest
income, primarily in our securities portfolio. Net interest income (teb) for
the quarter was $3.9 million compared to $4.7 million for the same period a
year ago and for the nine months was $13.4 million compared to $14.5 million a
year ago. Other income for the quarter was $108,000 compared to $13.0 million
a year ago and for the nine months was $1.4 million compared to $15.0 million
for the same period a year ago. Other income decreased from a year ago
primarily due to dilution gains that were realized in 2006 when shares were
issued by Discovery Air Inc. (DA), a company which was a subsidiary of the
Corporation in 2006.
At July 31, 2007, total assets were $1.23 billion compared to
$1.29 billion a year ago and $1.37 billion at the end of the previous quarter.
Lending assets increased to $923 million at the end of the quarter from
$820 million a year ago and from $900 million at the end of the previous
quarter. Credit quality remains strong with gross impaired loans at the end of
the quarter of $2.6 million or 0.21% of total assets compared to $2.5 million
or 0.19% of total assets at the end of the previous quarter and $1.5 million
or 0.12% of total assets a year ago.
Total Revenue (teb)
Total revenue (teb), which is comprised of net interest income after
provision for credit losses and other income, was $3.9 million for the quarter
compared to $17.3 million a year ago and for the nine months was $14.1 million
compared to $29.1 million for the same period a year ago.
Net Interest Income
Net interest income (teb) was $3.9 million for the quarter, compared to
$4.7 million a year ago and for the nine months was $13.4 million compared to
$14.5 million a year ago. Net interest margin (teb), which is net interest
income as a percentage of average assets, was 1.20% for the quarter compared
to 1.48% a year ago and for the nine months was 1.40% compared to 1.61%. The
decrease in net interest income and net interest margin was due primarily to a
compression of spreads, particularly in our securities portfolio which for the
nine months ended July 31, 2007, was 0.45% compared to 0.75% for the same
period a year ago. Net interest margin on our loan portfolio for the nine
months was 1.80% compared to 2.13% a year ago with the decrease due primarily
to a change in the mix in our loan portfolio and competitive market
conditions. In addition, our cost of funds for the quarter increased to 4.17%
from 3.89% a year ago and on a year-to-date basis, has increased from 3.69% to
4.27% with the change due to increases in the interest rate environment and
increased competition for new deposits. However, due to excess liquidity and
competitive pricing in the market, we have not seen a comparable increase in
yields on new loans or securities.
Other Income
Other income for the quarter was $108,000 compared to $13.0 million for
the same period a year ago. This decrease was a result of the third quarter of
the previous year including a dilution gain of $15.6 million resulting from
the issue of shares by DA and a write down of $3.4 million relating to an
investment included in our securities portfolio which had been trading below
our book value for a prolonged period of time. As the Corporation no longer
accounts for its investment in DA on the equity basis, it no longer recognizes
dilution gains on shares which DA may issue. For the nine months ended
July 31, 2007, other income was $1.4 million and included a gain of $888,000
relating to the disposition of DA shares when a special dividend was declared
earlier in the year by the Corporation.
Non-Interest Expenses
Non-interest expenses for the quarter were $3.6 million compared to
$3.2 million for the same period a year ago and for the nine months ended July
31, 2007, were $10.8 million compared to $9.6 million for the same period last
year. Non-interest expenses for the quarter and on a year-to-date basis
increased from last year primarily as a result of higher salaries and benefits
due to increased staff levels and costs of the office in Calgary which opened
in August, 2006. In addition, the Corporation continues to incur costs which
are included in non-interest expenses relating to its credit card initiative
and Versabanq Innovations Inc.
Our efficiency ratio (teb), which measures the cost of the Corporation to
earn a dollar of revenue, was 90% for the quarter compared to 18% for the same
period last year and for the nine months was 73% compared to 32% for the same
period a year ago. The change in the efficiency ratio was due primarily to the
decrease in net interest and other income in the current quarter and
year-to-date. At July 31, 2007, our ratio of assets per full time employee was
$19.8 million compared to $24.8 million a year ago and at this level, the
Corporation continues to lead the other domestic banks.
Income Taxes
In the current quarter and for the nine months ended July 31, 2007, the
Corporation's statutory federal and provincial income tax rate was
approximately 36%, the same rate that was in effect for 2006. However, the
effective rate was reduced by non-taxable income earned on preferred shares in
our securities portfolio. We anticipate that in the remaining quarter of 2007,
our effective rate will approximate 12%.
Balance Sheet
Total assets at July 31, 2007, were $1.23 billion compared to
$1.29 billion a year ago and $1.37 billion at the end of the previous quarter.
Total assets decreased from the previous quarter and from a year ago as a
result of a decrease in securities owned that were sold under repurchase
agreements. However, this decrease was partially offset by an increase in
lending assets which grew to $923 million from $900 million at the end of the
previous quarter and from $820 million a year ago.
Cash and Securities
Cash and securities, which are held for liquidity management purposes and
to earn investment income, were $267 million compared to $429 million a year
ago and $433 million at the end of the previous quarter. Securities which are
owned by the Corporation consist of government bonds and investment grade
corporate debt and preferred shares. Corporate preferred shares are held for
the preferential tax treatment their dividends receive. The Corporation does
not own any asset backed commercial paper and therefore is not exposed to any
direct losses from this type of security as a result of recent market
instabilities. The decrease in cash and securities from a year ago and from
the previous quarter was due to a decrease in securities owned that were sold
under repurchase agreements as the spread which the Corporation could earn on
these securities was negligible.
At July 31, 2007, the net unrealized loss in our securities portfolio
which is included in accumulated other comprehensive income (loss) totalled
$6.0 million compared to $210,000 at the end of the previous quarter and
$623,000 a year ago. The change in unrealized losses from the previous quarter
was due to recent changes in interest rates which caused decreases in market
values of fixed rate preferred shares of investment grade corporations in our
securities portfolio.
Mortgages and Loans
Lending assets grew to $923 million at the end of the quarter from
$820 million a year ago and from $900 million at the end of the previous
quarter. New lending in the quarter totalled $125 million, exceeding loan
fundings of $118 million a year ago and bringing loan fundings for the nine
months to $373 million compared to $328 million a year ago. New lending was
offset by loan repayments of $101 million in the quarter and $314 million for
the nine months. The outlook for new loan funding continues to be promising
with total loans committed to at July 31, 2007, approximating $117 million.
Loan categories which saw increases from a year ago were insured
residential mortgages and commercial loans and mortgages to investment grade
corporations. These increases were offset by decreases in residential
development construction loans and personal loans which consist of immigrant
investor loans. Although the changes in our loan portfolio have resulted in
lower overall spreads, we have maintained our focus on low risk lending
opportunities and have retained our strong credit standards rather than
looking to the subprime lending market to increase earnings. At July 31, 2007,
the Corporation does not have any exposure to subprime loans and therefore is
not exposed to any direct losses from this market.
Other Assets
Other assets totalled $35.6 million at the end of the quarter compared to
$34.3 million at the end of the previous quarter and $38.6 million a year ago.
Included in other assets is the Corporation's investment in DA, which at
July 31, 2007, had a market value of $16.8 million including an unrealized
gain of $2.0 million which is included in accumulated other comprehensive
income (loss).
Deposits and Financing
Deposits are used as a primary source of financing growth in assets and
are raised entirely through an agent network across Canada. Deposits at the
end of the quarter were $1.12 billion compared to $1.16 billion at the end of
the previous quarter and $1.13 billion a year ago. A second source of
financing asset growth is the use of margin lines and securities sold under
repurchase agreements. From time to time, the Corporation uses these sources
of financing when the cost of borrowing is less than the interest rates that
would have to be paid on new deposits. At the end of the quarter, the
Corporation did not have any amounts outstanding from these sources as it was
determined that they were not economical. This is in comparison to
$103 million outstanding at the end of the previous quarter and $40 million a
year ago.
Notes payable at July 31, 2007, were $35.8 million compared to
$36.2 million a year ago with the decrease due to the reclassification of
deferred financing charges as required under the new accounting standard on
Financial Instruments.
Credit Quality
Gross impaired loans at the end of the quarter totalled $2.6 million or
0.21% of total assets, compared to $2.5 million or 0.19% of total assets at
the end of the previous quarter and $1.5 million or 0.12% of total assets a
year ago. The provision for credit losses for the quarter was $142,000
compared to $321,000 a year ago and for the nine months ended July 31, 2007,
was $643,000 compared to $448,000. Total allowances for credit losses,
including specific and general allowances, were $3.2 million at the end of the
quarter compared to $2.3 million a year ago. As discussed previously, the
Corporation does not have any exposure to the subprime lending market and
therefore will not suffer any direct losses as a result of recent market
instability.
Shareholders' Equity
Shareholders' equity at the end of the quarter was $61.0 million compared
to $68.5 million a year ago with the decrease due primarily to the special
dividend of $10.8 million declared and distributed earlier in the year and the
decrease in accumulated other comprehensive income (loss). These decreases
were partially offset by the issue of common shares on exercise of stock
options and the retention of earnings. Total common shares outstanding at the
end of the quarter were 13,753,652 compared to 13,348,695 a year ago with the
increase due primarily to the exercise of common share options. Outstanding
common share options totalled 1,071,028 at the end of the quarter compared to
1,365,550 a year ago. Our book value per common share at the end of the
quarter was $4.18 compared to $4.87 a year ago with the decrease due primarily
to the payment of the special dividend earlier in the year.
On July 17, 2007, the Corporation announced that it had filed a Notice of
Intention to make a Normal Course Issuer Bid, pursuant to which the
Corporation may purchase for cancellation up to 1 million of its common
shares. The Bid will terminate on July 18, 2008. The price that the
Corporation pays for any common shares is the market price at the time of
purchase. The Corporation believes that the market price of its common shares
is unusually low and does not fully reflect the value of its business and
future business prospects. As a result, the Corporation believes that
purchasing its common shares represents an attractive investment opportunity
and an appropriate and desirable use of available funds. To the end of
July 31, 2007, the Corporation had repurchased for cancellation 3,100 common
shares for a total cost of $23,000.
Updated Share Information
At August 29, 2007, there were 13,740,452 common shares outstanding with
the change due to 13,200 common shares repurchased for cancellation under the
Normal Course Issuer Bid. There have been no changes in the amount of common
share options outstanding since July 31, 2007.
Capital Management
Total regulatory capital in the Corporation's principal subsidiary,
Pacific & Western Bank of Canada, totalled $93.7 million at the end of the
quarter compared to $96.9 million at the end of the previous quarter and
$102.4 million a year ago. The decrease in total regulatory capital from a
year ago was a result of a dividend of $11 million paid earlier in the year to
the Corporation. At July 31, 2007, regulatory capital consisted of
$63.7 million in shareholder's equity (Tier 1 capital) and $30 million in
subordinated debentures of the Bank (Tier 2 capital).
The Bank's total risk-based capital ratio, which is the ratio of
regulatory capital to risk-weighted assets, was 12.45% at the end of the
quarter compared to 12.45% at the end of the previous quarter and 13.12% a
year ago. The Bank has an internal target for its risk-based capital ratio of
11% and manages its regulatory capital and risk-weighted assets so this target
is exceeded. The Bank's Tier 1 risk-based capital ratio, which is the ratio of
Tier 1 capital to risk-weighted assets, was 8.47% at the end of the quarter
compared to 8.43% at the end of the previous quarter and 9.53% a year ago. The
Bank's assets to capital ratio was 13.36 at the end of the quarter compared to
14.32 at the end of the previous quarter and 12.76 a year ago.
Performance Targets
Performance targets established for the 2007 fiscal year and 2007
year-to-date are noted below with actual results for the nine months ended
July 31, 2007.2007
-----------------------------------
Annual Year-to-Date Year-to-Date
Target Target Results
-------------------------------------------------------------------------
Earnings per common share $0.43 $0.29 $0.10
Spread (teb) 1.67% 1.64% 1.40%
Loan growth 33.00% 22.00% 6.90%
Total asset growth 12.00% 12.00% -7.80%
Return on average common shareholders'
equity 8.72% 5.93% 2.97%
Return on average total assets 0.42% 0.29% 0.16%As noted earlier, actual results for the nine months ended July 31, 2007,
fell short of year-to-date targets due to the short fall in lending assets and
a compression of spreads primarily in our securities portfolio. In addition,
net earnings for the nine months were negatively impacted by a tax provision
in the second quarter of $420,000 on a gain of $2.3 million for income tax
purposes which resulted from the disposition of DA shares distributed as a
special dividend.
Summary of Quarterly Results(thousands of dollars
except per share amounts) 2007 2006
------------------------- ----------------------------------- -----------
Q3 Q2 Q1 Q4
Results of operations:
Total interest income
per financial statements $ 16,978 $ 17,538 $ 18,163 $ 18,677
Teb adjustment 559 492 444 432
Total interest income 17,537 18,030 18,607 19,109
Yield on assets (%) 5.37% 5.42% 5.49% 5.79%
Interest expense 13,605 13,495 13,701 14,415
Cost of funds (%) 4.17% 4.06% 4.04% 4.37%
Net interest income 3,932 4,535 4,906 4,694
Net interest margin (%) 1.20% 1.36% 1.45% 1.42%
Provision for credit losses 142 72 429 339
Other income 108 294 959 1,116
Total revenue 3,898 4,757 5,436 5,471
Non-interest expenses 3,643 3,548 3,658 3,252
Income before income taxes 255 1,209 1,778 2,219
Income tax provision 128 865 687 737
Non-controlling interest - - - -
Net earnings 127 344 1,091 1,482
Earnings per share
- basic $ 0.01 $ 0.02 $ 0.08 $ 0.11
- diluted $ - $ 0.02 $ 0.07 $ 0.10
(thousands of dollars
except per share amounts) 2006 2005
------------------------- ----------------------------------- -----------
Q3 Q2(*) Q1(*) Q4(*)
Results of operations:
Total interest income
per financial
statements $ 16,418 $ 15,104 $ 15,138 $ 13,845
Teb adjustment 440 352 427 484
Total interest income 16,858 15,456 15,565 14,329
Yield on assets (%) 5.37% 5.37% 5.40% 5.21%
Interest expense 12,200 10,560 10,591 9,846
Cost of funds (%) 3.89% 3.67% 3.68% 3.58%
Net interest income 4,658 4,896 4,974 4,483
Net interest margin (%) 1.48% 1.70% 1.72% 1.63%
Provision for credit losse 321 78 49 147
Other income 12,963 1,251 832 2,592
Total revenue 17,300 6,069 5,757 6,928
Non-interest expenses 3,215 3,104 3,284 3,904
Income before income taxes 14,085 2,965 2,473 3,024
Income tax provision 2,282 1,040 1,051 1,196
Non-controlling interest - 117 237 (72)
Net earnings 11,803 2,042 1,659 1,756
Earnings per share
- basic $ 0.88 $ 0.15 $ 0.12 $ 0.13
- diluted $ 0.85 $ 0.14 $ 0.12 $ 0.13
(*) Results for these quarters include the results of the operations for
DA accounted for on the consolidation basis. DA was subsequently
accounted for on the equity basis until October 31, 2006.Net interest income and net interest margin (teb) for the third quarter
decreased from previous quarters and from a year ago as a result of a
compression of spreads primarily in our securities portfolio, competitive
pricing for new loans and increased competition for new deposits resulting in
an increase in our cost of funds. Other income was less in the third quarter
compared to previous quarters as there were no gains from DA realized in the
period. Non-interest expenses in the third quarter were comparable to the
previous quarter but increased from a year ago as a result of higher salaries
and benefits due to increased staff levels and the costs of the office in
Calgary which opened in August 2006. The income tax provision increased in the
second quarter as a result of a tax provision on a gain for income tax
purposes which resulted from the disposition of DA shares when they were
distributed as a special dividend in that quarter.
Changes in Accounting Policies
Newly issued accounting standards by The Canadian Institute of Chartered
Accountants relating to comprehensive income, equity, financial instruments
and hedges were adopted by the Corporation effective November 1, 2006. As a
result of these new standards, a new category, accumulated other comprehensive
income, forms part of Shareholders' Equity and certain unrealized gains or
losses on available-for-sale financial instruments are reported in accumulated
other comprehensive income until realization.
At July 31, 2007, accumulated other comprehensive loss totalled
$2.5 million and consisted of unrealized losses of $6.0 million related to
securities held as available-for-sale, unrealized gains of $2.0 million
related to our investment in DA which has been designated as
available-for-sale and deferred losses of $371,000 related to previously
closed cash flow hedges no longer included in other assets. These amounts were
before future income tax recoveries totalling $1.9 million which are also
included in accumulated other comprehensive income (loss).
The new accounting standard relating to hedges requires the Corporation
to fair value the hedging item and the hedged item with the changes recorded
through net earnings. As a result of this standard, at July 31, 2007,
mortgages and loans and other assets include fair value adjustments totalling
$421,000 however, there was no impact on net earnings as the fair value
adjustment to mortgages and loans and other assets offset each other.
Controls and Procedures
During the most recent interim period, there have been no changes in the
Corporation's policies and procedures and other processes that comprise its
internal control over financial reporting, that have materially affected, or
are reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
Dated: August 29, 2007
Forward-Looking Statements
The statements in this management's discussion and analysis which relate
to the future are forward-looking statements. By their very nature,
forward-looking statements involve inherent risks and uncertainties, both
general and specific, and risks exist that predictions, forecasts, projections
and other forward-looking statements will not be achieved. Readers are
cautioned not to place undue reliance on these forward-looking statements as a
number of important factors could cause actual results to differ materially
from the plans, objectives, expectations, estimates and intentions expressed
in such forward-looking statements. These factors include, but are not limited
to, the strength of the Canadian economy in general and the strength of the
local economies within Canada in which we conduct operations; the effects of
changes in monetary and fiscal policy, including changes in interest rate
policies of the Bank of Canada; the effects of competition in the markets in
which we operate; inflation; capital market fluctuations; the timely
development and introduction of new products in receptive markets; the impact
of changes in the laws and regulations regulating financial services; changes
in tax laws; technological changes; unexpected judicial or regulatory
proceedings; unexpected changes in consumer spending and savings habits; and
our anticipation of and success in managing the risks implicated by the
foregoing.
The foregoing list of important factors is not exhaustive. When relying
on forward-looking statements to make decisions, investors and others should
carefully consider the foregoing factors and other uncertainties and potential
events. There is no undertaking to update any forward-looking statement that
is contained in this management's discussion and analysis or made from time to
time by the Corporation.PACIFIC & WESTERN CREDIT CORP.
Consolidated Balance Sheet
(thousands of dollars)
July 31 October 31 July 31
2007 2006 2006
------------ ------------ ------------
(unaudited) (unaudited)
Assets
Cash resources $ 25,714 $ 207,720 $ 135,010
Securities 240,874 217,698 293,970
Mortgages and loans 923,385 863,830 819,899
Other assets 35,610 40,481 38,579
------------ ------------ ------------
$ 1,225,583 $ 1,329,729 $ 1,287,458
------------ ------------ ------------
------------ ------------ ------------
Liabilities and Shareholders' Equity
Deposits $ 1,116,317 $ 1,210,555 $ 1,134,242
Notes payable 35,847 36,184 36,186
Other liabilities 12,438 12,340 48,504
------------ ------------ ------------
1,164,602 1,259,079 1,218,932
------------ ------------ ------------
Shareholders' equity
Share capital 39,917 37,775 37,134
Retained earnings 23,513 32,875 31,392
Accumulated other comprehensive
income (loss) (note 1) (2,449) - -
------------ ------------ ------------
60,981 70,650 68,526
------------ ------------ ------------
$ 1,225,583 $ 1,329,729 $ 1,287,458
------------ ------------ ------------
------------ ------------ ------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Earnings
(thousands of dollars)
for the three for the nine
months ended months ended
------------------------- -------------------------
July 31 July 31 July 31 July 31
2007 2006 2007 2006
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income
Interest income on
loans $ 12,923 $ 12,090 $ 38,796 $ 34,679
Interest and income
from securities 3,486 3,850 12,100 10,400
Loan fee income 569 478 1,783 1,581
------------------------- -------------------------
16,978 16,418 52,679 46,660
Interest expense
Deposits and other 12,701 11,311 38,168 30,755
Notes payable 904 889 2,633 2,596
------------------------- -------------------------
13,605 12,200 40,801 33,351
------------------------- -------------------------
Net interest income 3,373 4,218 11,878 13,309
Provision for credit
losses 142 321 643 448
------------------------- -------------------------
Net interest income
after provision
for credit losses 3,231 3,897 11,235 12,861
Other income 108 12,963 1,361 15,046
------------------------- ------------------------
3,339 16,860 12,596 27,907
------------------------- ------------------------
Non-interest expenses
Salaries and benefits 2,048 1,801 6,262 5,425
General and
administrative 1,134 1,092 3,274 3,318
Premises and equipment 461 322 1,313 860
------------------------- -------------------------
3,643 3,215 10,849 9,603
------------------------- -------------------------
Earnings (loss) before
income taxes and other (304) 13,645 1,747 18,304
Income tax (recovery)
provision (431) 1,842 185 3,154
Non-controlling
interest - - - 354
------------------------- -------------------------
Net earnings $ 127 $ 11,803 $ 1,562 $ 15,504
------------------------- -------------------------
------------------------- -------------------------
Basic earnings per
share $ 0.01 $ 0.88 $ 0.10 $ 1.15
------------------------- -------------------------
------------------------- -------------------------
Diluted earnings per
share $ - $ 0.85 $ 0.10 $ 1.11
------------------------- -------------------------
------------------------- -------------------------
Weighted average number
of common shares 13,757,000 13,347,000 13,652,000 13,335,000
------------------------- -------------------------
------------------------- -------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars)
for the three for the nine
months ended months ended
------------------------- -------------------------
July 31 July 31 July 31 July 31
2007 2006 2007 2006
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Common shares
Balance, beginning of
period $ 35,894 $ 33,353 $ 33,986 $ 33,191
Shares issued - 28 1,898 190
Shares repurchased (23) - (23) -
Amount transferred
from contributed
surplus - - 10 -
------------------------- -------------------------
Balance, end of
period $ 35,871 $ 33,381 $ 35,871 $ 33,381
------------------------- -------------------------
Class A preferred
shares
------------------------- -------------------------
Balance, beginning
and end of period $ 3,545 $ 3,545 $ 3,545 $ 3,545
------------------------- -------------------------
Stock-based compensation
Balance, beginning
of period $ 445 $ 208 $ 244 $ 58
Fair value of stock
option transactions
(note 3) 56 - 267 150
Amount transferred to
common shares - - (10) -
------------------------- -------------------------
Balance, end of
period $ 501 $208 $ 501 $ 208
------------------------- -------------------------
Retained earnings
Balance, beginning
of period $ 23,386 $ 19,590 $ 32,875 $ 16,129
Transitional
adjustment (note 1a) - - 103
Net earnings 127 11,803 1,562 15,504
Dividends in kind
(note 5) - - (10,787) -
Dividends on
preferred shares - - (240) (240)
------------------------- -------------------------
Balance, end of
period $ 23,513 $ 31,393 $ 23,513 $ 31,393
------------------------- -------------------------
Accumulated other
comprehensive income
(loss), net of taxes
(note 1)
Balance, beginning of
period $ 1,253 $ - $ - $ -
Transitional
adjustment - - 3,982 -
Net unrealized losses
on assets held as
available-for-sale (3,799) - (5,241) -
Amount transferred to
net income for hedges 53 - 159 -
Amount transferred to
net income for sale
of available-for-sale
securities 44 (1,349)
------------------------- -------------------------
(3,702) - (6,431) -
------------------------- -------------------------
Balance, end of
period $ (2,449) $ - $ (2,449) $ -
------------------------- -------------------------
Total shareholders'
equity $ 60,981 $ 68,527 $ 60,981 $ 68,527
------------------------- -------------------------
------------------------- -------------------------
Accumulated other
comprehensive income
(loss), net of taxes
Balance, end of period,
consists of:
Net unrealized losses
on assets held as
available-for-sale $ (2,212) $ - $ (2,212) $ -
Deferred losses
related to previously
closed cash flow
hedges (237) - (237) -
------------------------- -------------------------
Balance, end of
period $ (2,449) $ - $ (2,449) $ -
------------------------- -------------------------
Comprehensive income
(loss)
Total net income $ 127 $ - $ 1,562 $ -
Other comprehensive
income (loss) (3,702) - (6,431) -
------------------------- -------------------------
Total comprehensive
income (loss) $ (3,575) $ - $ (4,869) $ -
------------------------- -------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Cash Flows
(thousands of dollars)
for the three for the nine
months ended months ended
------------------------- -------------------------
July 31 July 31 July 31 July 31
2007 2006 2007 2006
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by (used in):
Operations:
Net earnings $ 127 $ 11,803 $ 1,562 $ 15,504
Items not involving
cash:
Provision for credit
losses 142 321 643 448
Other provisions - 3,982 - 3,982
Future income tax
(recovery) provision (431) 1,828 185 3,091
Stock-based
compensation (note 3) 56 - 267 250
Gain on disposal of
shares - - (888) -
Non-controlling
interest - - - (354)
Dilution gains - (15,647) - (16,936)
Equity earnings - (969) - (914)
Change in derivative
financial instruments 2,652 - 648 -
Change in other assets
and liabilities 4,594 1,857 (2,008) 5,470
------------------------- -------------------------
7,140 3,175 409 10,541
------------------------- -------------------------
Investing:
Securities 49,472 (11,420) (29,192) (17,485)
Mortgages and loans (25,171) (27,549) (60,620) (71,040)
------------------------- -------------------------
24,301 (38,969) (89,812) (88,525)
------------------------- -------------------------
Financing:
Deposits (39,066) 180,330 (94,238) 198,484
Short term financings (103,021) (110,273) - (57,972)
Proceeds of common
shares issued - 28 1,898 190
Shares repurchased (23) - (23) -
Dividends paid - - (240) (240)
------------------------- -------------------------
(142,110) 70,085 (92,603) 140,462
------------------------- -------------------------
Increase (decrease)
in cash resources (110,669) 34,291 (182,006) 62,478
Cash resources,
beginning of period 136,383 100,719 207,720 72,532
------------------------- -------------------------
Cash resources,
end of period $ 25,714 $ 135,010 $ 25,714 $ 135,010
------------------------- -------------------------
------------------------- -------------------------
Supplementary cash
flow information:
Interest paid during
the period $ 22,549 $ 13,429 $ 43,573 $ 31,048
Income taxes paid
during the period $ 79 $ 17 $ 421 $ 853
PACIFIC & WESTERN CREDIT CORP.
Notes to the interim consolidated financial statements (unaudited)
For the nine months ended July 31, 2007
1. Basis of presentation
The interim consolidated financial statements of Pacific & Western
Credit Corp. (the Corporation) should be read in conjunction with the
Corporation's consolidated financial statements for the year ended
October 31, 2006, which are available on SEDAR at www.sedar.com.
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
using the same accounting policies and methods as were used for the
Corporation's financial statements for the year ended October 31,
2006, with the exception of accounting policies relating to newly
issued accounting standards by The Canadian Institute of Chartered
Accountants. These new accounting policies include those relating to
financial instruments, hedges and comprehensive income are as
follows:
a) Financial instruments:
All financial assets are classified as one of the following: held-
to-maturity, loans and receivables, held for trading or available-
for-sale. All financial liabilities are classified as held for
trading or other liabilities. Financial assets and liabilities
held for trading are measured at fair value with gains and losses
recognized in net earnings. Financial assets held-to-maturity,
loans and receivables and financial liabilities other than those
held-for-trading, are measured at amortized cost based on the
effective interest method. Available-for-sale instruments are
measured at fair value with gains and losses, net of tax,
recognized in other comprehensive income.
At November 1, 2006, all of the assets in the Corporation's
securities portfolio as well as its investment in Discovery Air
Inc. (DA) were designated as available-for-sale.
At November 1, 2006, a transitional adjustment to accumulated
other comprehensive income totalled $3,982,000 and consisted of
unrealized losses of $1,075,000 related to securities held as
available-for-sale, unrealized gains of $6,150,000 related to our
investment in DA which is included in other assets and deferred
losses of $618,000 related to previously closed cash flow hedges
that are no longer included in other assets. In addition, other
liabilities increased by $475,000 relating to future income taxes
on the above items.
At November 1, 2006 a transitional adjustment to retained earnings
of $103,000 was recorded related to changing the amortization
method on financial instruments from the straight-line method to
the effective interest rate method.
b) Hedges:
In a fair value hedging relationship, the carrying value of the
hedged item is adjusted by gains or losses attributable to the
hedged risk and recorded in net earnings. This change in fair
value of the hedged item, to the extent the hedging relationship
is effective, is offset by changes in the fair value of the
derivative also measured at fair value on the balance sheet date,
with changes in value recorded through net earnings.
At November 1, 2006, mortgages and loans and other liabilities
increased by $1,915,000 relating to the transitional adjustment
for the fair value however, there was no impact on retained
earnings.
c) Comprehensive income:
Unrealized gains and losses on financial instruments that are held
as available-for-sale, and changes in the fair value of cash flow
hedging instruments, are recorded in other comprehensive income,
net of tax, until recognized in earnings.
2. Allowance for credit losses
for the three months ended
-----------------------------------------
July 31, July 31,
2007 2006
-----------------------------------------
General Specific Total Total
(thousands of dollars) allowance allowance allowance allowance
---------------------------------------------------------------------
Balance, beginning of the
period $ 2,415 $ 687 $ 3,102 $ 2,017
Provision for credit losses 121 21 142 321
Recoveries (write-offs) - - - (63)
---------------------------------------------------------------------
Balance, end of period $ 2,536 $ 708 $ 3,244 $ 2,275
---------------------------------------------------------------------
for the nine months ended
-----------------------------------------
July 31, July 31,
2007 2006
-----------------------------------------
General Specific Total Total
(thousands of dollars) allowance allowance allowance allowance
---------------------------------------------------------------------
Balance, beginning of the
period $ 2,208 $ 358 $ 2,566 $ 1,889
Provision for credit losses 328 315 643 448
Recoveries (write-offs) - 35 35 (62)
---------------------------------------------------------------------
Balance, end of period $ 2,536 $ 708 $ 3,244 $ 2,275
---------------------------------------------------------------------
Gross impaired loans at July 31, 2007 totalled $2,616,000
(July 31, 2007 - $1,501,000).
3. Income taxes
for the three for the nine
months ended months ended
------------------- -------------------
July 31 July 31 July 31 July 31
(thousands of dollars) 2007 2006 2007 2006
------------------------------------------------- -------------------
Tax provision at basic rate
of 36% $ (109) $ 4,912 $ 629 $ 6,589
Changes resulting from:
Non-taxable income from
securities (338) (255) (864) (707)
Dividend in kind - - 420 -
Gains - (2,838) (160) (3,070)
Other permanent differences 16 23 160 342
------------------------------------------------- -------------------
Income tax (recovery)
provision $ (431) $ 1,842 $ 185 $ 3,154
------------------------------------------------- -------------------
In addition, included in accumulated other comprehensive income
(loss) at July 31, 2007, is a future income tax asset of $1.8 million
relating to assets held as available-for-sale and a future income tax
asset of $134,000 relating to deferred losses on previously closed
cash flow hedges.
4. Share capital and stock-based compensation
Employee
Stock Options
---------------------
Weighted-
Common average
shares exercise
outstanding Number price
---------------------------------------------------------------------
Outstanding, October 31, 2006 13,421,585 1,291,160 $ 7.65
Granted - 117,235 11.76
Exercised 335,167 (335,167) 6.09
Expired - (2,200) 10.15
Repurchased (3,100) - -
---------------------------------------------------------------------
Outstanding, end of period 13,753,652 1,071,028 $ 8.58
---------------------------------------------------------------------
In addition, at July 31, 2007, there were 1,142,556 (2006-1,142,556)
preferred shares outstanding.
During the nine months ended July 31, 2007, the Corporation
recognized $267,000 (2006-$250,000) of salaries and benefits expense
relating to the estimated fair value of stock options granted. The
fair value of options granted during the period was estimated using
the Black-Scholes option pricing model based on the following
weighted-average assumptions: (i) risk-free interest rate of 4.07%
(2006-3.90%), (ii) expected option life of 5 years (2006-5 years),
(iii) expected volatility of 30% (2006-45%), and (iv) expected
forfeiture rate of 5% (2006-5%). The weighted average fair value of
options granted was estimated at $3.87 (2006-$4.94) per share.
During the nine months ended July 31, 2007, $10,000 (2006-$nil) was
transferred from contributed surplus to common shares relating to the
exercise of options that had previously been expensed.
On July 17, 2007, the Corporation announced that it had filed a
Notice of Intention to make a Normal Course Issuer Bid, pursuant to
which the Corporation may purchase for cancellation up to 1 million
of its common shares. The bid will terminate on July 18, 2008. The
price that the Corporation pays for any common shares will be the
market price at the time of acquisition. To July 31, 2007, the
Corporation had repurchased for cancellation 3,100 common shares for
a total cost of $23,000.
5. Special dividend
On March 7, 2007, the Corporation distributed a special dividend to
common shareholders of record at the close of business on
February 16, 2007. The dividend was comprised of Class A common
shares of DA and was payable based on .53 of a DA share for every one
common share of the Corporation held.
The value of the special dividend on the declaration date was
determined to be $10,787,000, which resulted in a gain of $888,000
being transferred from other comprehensive income to net income in
the period.
6. Derivative instruments
At July 31, 2007, the Corporation had outstanding contracts for asset
liability management purposes to swap between floating and fixed
interest rates with notional amounts totalling $72,011,000
(2006-$47,231,000). The Corporation only enters into these interest
rate contracts for its own account and does not act as an
intermediary in this market. These contracts have a current
replacement cost of $nil (2006-$nil), a credit equivalent amount of
$1,035,000 (2006-$673,000) and a risk weighted balance of $207,000
(2006-$135,000). At July 31, 2007, these contracts were in a
favorable position of $424,000 (2006-unfavorable position of
$604,000). Under the new accounting standard relating to hedges, this
amount is included in other assets on the consolidated balance sheet,
however there is no impact on net earnings.
At July 31, 2007, the Corporation had outstanding credit derivative
contracts for credit risk management purposes under which the
Corporation would be compensated by the counterparty to the contract
for losses on a security or loan in the event a default occurs. At
July 31, 2007, the counterparties to these contracts which totalled
$19.4 million (2006-$40.3 million) consisted of Canadian chartered
banks. The contracts have a nominal fair value and mature within
three years.
7. Commitments and contingencies
The amount of credit related commitments represents the maximum
amount of additional credit that the Corporation could be obligated
to extend. The amount with respect to the letters of credit are not
necessarily indicative of credit risk as many of these arrangements
are contracted for a limited period of usually less than one year and
will expire or terminate without being drawn upon.
Loan commitments $ 116,741,000
Letters of credit 29,465,000
---------------
$ 146,206,000
---------------
The Corporation has guaranteed the repayment of bank indebtedness of
one of its equity investments to the extent of $1,000,000. The
guarantee expires when the related bank indebtedness has been repaid
in full. Payments under the guarantee would be required if the
investee fails to meet the scheduled repayments. While the
Corporation does not expect to be required to make any payments
related to the guarantee, any amounts paid may not be recoverable.
8. Segmented information
The Corporation operates in one business segment which provides
lending services to public sector, commercial and personal
markets. Its lending activities are to clients in all of the
Canadian provinces and territories. The segmented information
reported in the prior year as Other Operations related to the
Corporation's investment in Discovery Air Inc., which due to the
Corporation's dilution of its interest in 2006, is now accounted for
as an available-for-sale asset.
Pacific & Western Bank of Canada (PWBank), a Schedule I chartered
bank, is a branchless financial institution with over $1.2 billion in
assets. PWBank specializes in providing innovative financing to large
corporate and government entities including hospitals, school boards,
universities and colleges, municipalities and provincial and federal
government agencies. With no retail operations or store fronts,
PWBank is one of the most efficiently operating financial
institutions in Canada. These overhead savings translate into very
competitive rates for our clients.Pacific & Western Bank of Canada is wholly owned by Pacific & Western
Credit Corp., whose shares trade on the TSX under the symbol PWC.
On behalf of the Board of Directors: David R. Taylor, President & C.E.O.
Further information on PWC is available through Pacific & Western's
corporate web site at http://www.pwbank.com.
For further information: Investor Relations: Bruce Schruder, Vice
President, Investor Relations & Marketing, (800) 244-1509,
InvestorRelations@pwbank.com; Public Relations & Media: Tel Matrundola, Vice
President, Public & Strategic Initiatives, (416) 203-0882, telm@pwbank.com; To
receive company news releases via e-mail: Karen McConnell, (519) 675-4204,
karenm@pwbank.com
