PACIFIC & WESTERN CREDIT CORP. ANNOUNCES RESULTS FOR ITS FOURTH QUARTER ENDED
OCTOBER 31, 2010
LONDON, ON, Dec. 9 /CNW/ -
FOURTH QUARTER SUMMARY
(three months ended October 31, 2010, compared to three months ended October 31, 2009, unless otherwise noted):
Pacific & Western Bank of Canada
- Net income (loss) of the Corporation's subsidiary, Pacific & Western
Bank of Canada (the "Bank"), for the three months ended October 31,
2010 was $922,000 compared to ($127,000) for the same period last
year and for the year ending October 31, 2010 was $467,000 compared
to ($3.9 million) last year.
- Total revenue (teb) for the Bank for the three months ended October
31, 2010 was $6.2 million compared to $5.5 million for the same
period last year. For the year ending October 31, 2010, total revenue
(teb) was $19.7 million compared to $11.2 million last year.
- Net interest margin or spread (teb) for the Bank was 1.44% for the
three months ended October 31, 2010 compared to 1.79% for the same
period last year and for the year ending October 31, 2010, increased
to 1.34% from 0.91% last year. Net interest margin or spread for the
current quarter was less than the same period a year ago due to a
high level of gains on sale of securities earned in the fourth
quarter last year.
- Credit quality remains strong with gross impaired loans decreasing to
$3.3 million or 0.25% of total assets at October 31, 2010 from $6.4
million or 0.45% of total assets a year ago.
Pacific & Western Credit Corp.
- Net income (loss) of Pacific & Western Credit Corp. (the
"Corporation") for the three months ended October 31, 2010 was ($1.4
million) or ($0.10) per share (($0.10) diluted) compared to ($2.1
million) or ($0.15) per share (($0.15) diluted) for the same period
last year. Prior to the deduction of interest expense relating to
dividends on Class B Preferred Shares, net income (loss) of the
Corporation for the current quarter was ($183,000) compared to ($1.5
million) last year.
- Net income (loss) of the Corporation for the year ended October 31,
2010 was ($8.1 million) or ($0.58) per share (($0.58) diluted)
compared to ($9.9 million) or ($0.74) per share (($0.74) diluted)
last year. Prior to the deduction of interest expense relating to
dividends on Class B Preferred Shares, net income (loss) of the
Corporation for the current year was ($3.6 million) compared to ($9.4
million) last year.
PRESIDENT'S COMMENTS
I am pleased to advise that our Bank returned to profitability in 2010. The Bank earned $922,000 after tax during the fourth quarter of 2010 bringing net income for the year to $467,000. The Bank's turnaround was driven primarily by a recovery in its lending operations, which earned $19.5 million for the year. This net revenue figure for lending operations is almost double that earned in the previous year and is a record level for the Bank. Lending spread continued to recover throughout the year reaching 2.14% in the fourth quarter. This is a considerable improvement over the spread of 1.47% earned on the lending portfolio in 2009. We expect lending spread to continue to gradually improve as thinly priced loans booked in previous years are replaced with loans with much wider spreads that are now available in our niche markets. Last quarter we had loan commitments outstanding of $182,000,000 and this quarter our loan commitments have grown to $236,000,000. This increased level of loan commitments bodes well for the continued growth of our loan portfolio and profits.
Asset quality, which has always been a strength of our Bank, continues to be much better than our peers, as illustrated by a gross impaired loan to total assets ratio of only .25%.
The Bank reaped the benefit of significant comprehensive income for the year of $7,200,000, increasing its shareholders' equity from $80.8 million to $88.1 million and regulatory capital from $121.8 million to $129.2 million.
The upward trending profits of our Bank reduced PWC's consolidated net loss before dividends paid on our Class B preferred shares from $1,300,000 in the previous quarter to $183,000 this quarter. As the Bank's profits continue to increase we expect to soon eliminate this loss altogether.
During 2010 we successfully completed a number of initiatives to reduce our Bank's vulnerability to market fluctuations and energize its lending operations. Although there was a cost associated with these initiatives, these have now been completed and we can look forward to steadily increasing earnings.
FINANCIAL HIGHLIGHTS
for the three
(unaudited) months ended for the year ended
----------------------------------------------- -------------------------
($ thousands, except October 31 October 31 October 31 October 31
per share amounts) 2010 2009 2010 2009
----------------------------------------------- -------------------------
Pacific & Western
Bank of Canada
Balance Sheet Summary
Cash and
securities $ 323,652 $ 442,310 $ 323,652 $ 442,310
Total loans 964,862 929,831 964,862 929,831
Average loans 960,431 962,817 947,347 1,020,319
Total assets 1,315,888 1,407,855 1,315,888 1,407,855
Deposits 1,150,903 1,217,136 1,150,903 1,217,136
Subordinated notes
payable 41,500 41,500 41,500 41,500
Shareholder's
equity 88,092 80,848 88,092 80,848
Capital ratios
(Based on the
subsidiary Pacific
& Western Bank of
Canada)
Total regulatory
capital $ 129,182 $ 121,769 $ 129,182 $ 121,769
Risk weighted
assets 965,716 920,744 965,716 920,744
Assets-to-capital
ratio 10.39 11.81 10.39 11.81
Tier 1 risk-based
capital ratio 9.08% 8.82% 9.08% 8.82%
Total risk-based
capital ratio 13.38% 13.23% 13.38% 13.23%
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Results of operations
(teb)
Net interest income
per financial
statements $ 4,609 $ 6,147 $ 15,687 $ 10,482
Teb adjustment 626 667 2,562 2,734
Net interest
income (teb) 5,235 6,814 18,249 13,216
Spread 1.44% 1.79% 1.34% 0.91%
Provision for
(recovery of)
credit losses (473) 3,183 (1,163) 3,449
Other income 451 1,887 286 1,449
Total revenue 6,159 5,518 19,698 11,216
Non-interest
expenses 4,221 4,269 16,850 14,630
Net income (loss) 922 (127) 467 (3,925)
Return on average
total assets 0.26% -0.03% 0.30% -0.27%
Gross impaired
loans to total
assets 0.25% 0.45% 0.25% 0.45%
Provision for
(recovery of)
credit losses as
a % of average
loans -0.05% 0.33% -0.12% 0.34%
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Pacific & Western
Credit Corp.,
(consolidated)
Results of operations
Net income (loss)
for the Bank $ 922 $ (127) $ 467 $ (3,925)
Deduct additonal
interest expense
on notes (840) (1,249) (3,606) (5,096)
Deduct additional
non-interest
expenses of the
parent (265) (133) (436) (326)
------------------------- -------------------------
Net loss before
interest expense
relating to Class B
Preferred Shares (183) (1,509) (3,575) (9,347)
Interest expense
relating to Class B
Preferred Shares (1,196) (548) (4,499) (548)
Net loss for the
Corporation $ (1,379) $ (2,057) $ (8,074) $ (9,895)
Loss per common
share:
Basic $ (0.10) $ (0.15) $ (0.58) $ (0.74)
Diluted $ (0.10) $ (0.15) $ (0.58) $ (0.74)
Return on average
common shareholders'
equity -58.33% -65.50% -72.71% -71.16%
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Non-GAAP measures
Tax equivalent basis (teb) - like most banks, the Corporation, and its 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 fourth quarter of fiscal 2010 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2010, included herein, and the audited consolidated financial statements and MD&A for the year ended October 31, 2009, 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, 2009, 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 October 31, 2010 was ($1.4 million) or ($0.10) per share (($0.10) diluted) compared to ($2.1 million) or ($0.15) per share (($0.15) diluted) for the same period last year. For the year, net income (loss) was ($8.1 million) or ($0.58) per share (($0.58) diluted) compared to ($9.9 million) or ($0.74) per share (($0.74) diluted) last year. The results of the Corporation for the current periods compared to the prior year reflected increased spreads its Bank subsidiary was able to earn on its lending assets and a decrease in its cost of deposits. However the improved results in the Bank were negatively impacted by amounts relating to dividends on Class B preferred shares issued by the Corporation in the fourth quarter of 2009 and first quarter of 2010 which are recorded as interest expense in the consolidated financial statements as the Class B Preferred Shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet. Prior to the deduction of the dividends, net income (loss) for the three months ending October 31, 2010 was ($183,000) compared to ($1.5 million) for the same period a year ago and for the year ended October 31, 2010 was ($3.6 million) compared to ($9.4 million) last year.
Pacific & Western Bank of Canada
Net income (loss) for the Bank for the three months ending October 31, 2010 was $922,000 compared to ($127,000) for the same period a year ago, an improvement of $1.0 million, and for the year ending October 31, 2010 was $467,000 compared to ($3.9 million) a year ago, an improvement of $4.4 million. Net income (loss) of the Bank for the current quarter improved from the same period a year ago primarily as a result of improved net interest margin or spread earned on lending assets and a higher level of provisions for credit losses recorded in the same period a year ago. Net income (loss) of the Bank for the year improved from last year as a result of an increase in net interest income and spread primarily on lending assets and a higher level of provisions for credit losses recorded last year, offset slightly by lower amounts of other income earned in the current year. Spread (teb) for the three months ended October 31, 2010 was 1.44% compared to 1.79% for the same period and for the year increased to 1.34% from 0.91% last year. The improvement in spread for the year was due primarily to thinly priced loans booked several years ago maturing and being replaced by loans with wider spreads and a decrease in the Bank's cost of deposits. Spread for the current quarter was less than the same period a year ago due to a high level of gains on sale of securities earned in the fourth quarter last year.
At October 31, 2010, total assets of the Bank were $1.32 billion compared to $1.41 billion a year ago and lending assets were $965 million compared to $930 million a year ago, an increase of 4%. Credit quality remained strong, with gross impaired loans decreasing to $3.3 million at October 31, 2010 from $6.4 million a year ago. At October 31, 2010, the ratio of gross impaired loans as a percentage of total assets was 0.25% compared to 0.45% a year ago. Cash and securities of the Bank at October 31, 2010 were $324 million compared to $442 million a year ago. Cash and securities decreased from a year ago as until recently, the Corporation maintained high liquidity levels as a protection against possible disruptions and uncertainties in the financial markets. The Corporation is of the view that many of these uncertainties have subsided and as a result, the Corporation is reducing its liquidity levels to more normal levels.
Total Revenue (teb)
Pacific & Western Credit Corp.
Consolidated total revenue (teb) of the Corporation, which is comprised of net interest income after the provision for (recovery of) credit losses and other income, was $4.1 million for the fourth quarter compared to $3.5 million for the same period a year ago. For the year ending October 31, 2010, total revenue (teb) was $11.6 million compared to $5.6 million last year. Total revenue increased from last year primarily as a result of increased net interest income earned in the Bank in the current year and a recovery from credit losses in the current year compared to provisions for credit losses recorded last year.
Pacific & Western Bank of Canada
Total revenue (teb) of the Bank was $6.2 million for the current quarter compared to $5.5 million for the same quarter last year, an increase of $641,000, and $19.7 million for the year compared to $11.2 million for the previous year, an increase of $8.5 million. As noted above, the increase in total revenue (teb) was due to increased net interest income earned on lending assets, a decrease in the Bank's cost of deposits and a recovery from credit losses in the current year compared to provisions for credit losses recorded last year offset slightly by lower amounts of other income in the current year.
Net Interest Income and Net Interest Margin
Pacific & Western Credit Corp.
Consolidated net interest income (teb) of the Corporation was $3.2 million for the quarter and $10.1 million for the year ending October 31, 2010 compared to $4.8 million for the same quarter last year and $7.6 million for the year. Prior to deducting amounts for interest expense relating to dividends on Class B Preferred Shares which were issued during the fourth quarter of 2009 and first quarter of 2010, net interest income (teb) for the current quarter was $4.4 million and $14.6 million for the year ended October 31, 2010 compared to $5.3 million and $8.1 million respectively last year. Net interest income (teb) for the current quarter decreased from a year ago primarily as a result of gains from the sale of securities earned in the fourth quarter last year. Net interest income (teb) for the year ending October 31, 2010 increased from a year ago primarily as a result of wider spreads being earned on lending assets and a decrease in the Bank's cost of deposits in the current year.
Pacific & Western Bank of Canada
Net interest income (teb) of the Bank was $5.2 million for the fourth quarter and $18.2 million for the year ending October 31, 2010 compared to $6.8 million and $13.2 million respectively for the same periods last year. Net interest margin or spread (teb) for the Bank, which is net interest income as a percentage of average assets, was 1.44% for the quarter compared to 1.79% for the same period a year ago and for the year ending October 31, 2010 increased to 1.34% from 0.91% a year ago. The change in net interest income and spread for the quarter compared to a year ago was due primarily to gains totalling $4.7 million from the sale of securities earned in the fourth quarter last year. The increase in net interest income and spread for the year compared to last year was due primarily to an increase in net interest income from loans and a decrease in the Bank's cost of deposits. Net interest income from loans includes loan fees which totalled $974,000 for the current quarter compared to $375,000 last year and $4.2 million for the year compared to $1.7 million last year. The increase in loan fees reflects increasing lending activity and new loan commitments which should result in increased loan fundings in the coming months. Interest expense on deposits decreased from last year as a result of deposits maturing over the past year being replaced with deposits with lower interest rates. The majority of the maturing deposits had been booked during previous periods when interest rates on deposits were significantly higher due to the global economic crisis.
Other Income
Other income for the three months ended October 31, 2010 totalled $481,000 and for the year totalled $349,000. This is in comparison to other income of $1.9 million for the three months ended October 31, 2009 and $1.5 million for the prior year. Other income for the current quarter included fair value adjustments on interest rate swaps relating to securitized mortgages and fair value adjustments totalling $283,000 relating to a security in the Corporation's treasury portfolio. These amounts were offset by a loss of ($463,000) on the sale of shares of Discovery Air Inc. which are included in Other Assets on the Consolidated Balance Sheet. For the year, other income included gains totalling $1.4 million resulting from securitization activities and a gain of $267,000 resulting from the sale of foreclosed real estate. These amounts were reduced by mark-to-market adjustments totalling ($499,000) and an impairment writedown of ($326,000), both of which related to securities in the Corporation's treasury portfolio. Other income in the prior year included gains on sale of held-for-trading assets and real estate held for sale totalling $1.7 million partially offset by fair value adjustments on derivatives totalling ($296,000).
Non-Interest Expenses
Non-interest expenses for the Corporation on a consolidated basis were $4.5 million for the fourth quarter and $17.3 million for the year ended October 31, 2010. This is in comparison to $4.4 million and $15.0 million respectively for the same periods a year ago. The increase in non-interest expenses for the year compared to last year was in general and administrative expenses which increased due to volume related expenses and higher amounts for consulting and professional fees and in salaries and benefits which increased due to new hires and salary adjustments over the past year. Expenses for premises and equipment for the year were comparable with those incurred in 2009. Non-interest expenses of the Bank were not significantly different from those of the Corporation on a consolidated basis.
Income Taxes
The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 31% compared to 32% last year with the difference due to changes in enacted statutory income tax rates. The effective rate is impacted by non-taxable dividend income earned on preferred shares held in its treasury portfolio, the tax benefit on operating losses in the parent company not being recorded for accounting purposes and other items not being taxable or deductible for income tax purposes. These items resulted in an effective tax rate of 39% for the current quarter and 2.2% for the year ended October 31, 2010. For the current quarter and year ending October 31, 2010, the Corporation and the Bank's provision (recovery) for income taxes was $390,000 and ($181,000) respectively.
At October 31, 2010, the future income tax asset of the Bank was $10.7 million and is primarily a result of income tax losses from previous periods, the benefit of which was recorded in those periods. This amount compares to $12.7 million a year ago with the decrease due to changes in the market value of preferred shares which are deducted for income tax purposes. The income tax loss carry forwards in the Bank are not scheduled to begin expiring until 2029 if unutilized. The income tax losses in the Bank which gave rise to the future income tax asset were caused in part by declines in the market value of preferred shares, being mostly those of Canadian banks and insurance companies and operating losses of the Bank. The ultimate realization of the future income tax asset cannot be determined with certainty, however management is of the opinion that it is more likely than not that the Bank will be able to realize the future income tax asset in future years.
The realization of the future income tax asset is dependent upon the Bank being able to generate taxable income sufficient to offset these income tax losses. The ability to generate sufficient taxable income may be dependent upon the Bank generating income from operations or on converting non-taxable income sources to taxable income sources during the carry-forward period. It is also dependent upon the market value of the preferred shares recovering in value as they are carried at market value for income tax purposes with mark-to-market adjustments being added to or deducted from taxable income. At October 31, 2010, the market value of the preferred shares had increased in value from a year ago as they traded at a value of $8.3 million below their amortized cost compared to $16.4 million below their amortized cost at October 31, 2009, reflecting improvements in market conditions in the financial services industry and in the global economy.
Balance Sheet
Total assets of the Corporation at October 31, 2010, were $1.32 billion compared to $1.41 billion a year ago. As the difference between the consolidated total assets and liabilities of the Corporation and the total assets and liabilities of the Bank is not significant, the discussion below with respect to the balance sheet will be with respect to that of the Corporation on a consolidated basis.
Cash and Securities
Cash and securities, which are held for liquidity management purposes and to earn investment income, totalled $332 million at October 31, 2010 compared to $444 million a year ago. Securities in the Corporation's treasury portfolio consist typically of Government of Canada and Canadian provincial and municipal bonds and corporate debt and preferred shares.
At October 31, 2010, the net unrealized loss in the Corporation's securities portfolio was $9.0 million compared to a net unrealized loss of $17.8 million a year ago with the change due primarily to improvements in the market value of the preferred shares referred to above. These amounts 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 on market values as all of the securities the Corporation owns are publicly traded. During the year, the Corporation recorded an impairment charge of ($326,000) relating to a security in its treasury portfolio as its market value had traded below the Corporation's amortized cost for an extended period of time. The Corporation is of the view that the unrealized losses on the other securities it owns do not represent other than temporary declines in value and additional impairment writedowns are not required at this time.
As noted previously, the Corporation's holdings of equity securities, consisting primarily of major Canadian banks and insurance companies' preferred shares, traded at a value of $8.3 million below their amortized cost at October 31, 2010 compared to $16.4 million below their amortized cost at October 31, 2009. The Corporation intends to hold these securities until a recovery in value is achieved. The preferred shares have provisions that will allow the issuers to redeem them at various dates commencing over the years 2011 to 2014; however, there is no promise or legal requirement for the issuers to redeem these shares on those dates. Further recovery in their market values is dependent upon future market conditions or the ultimate future redemption of the shares by the issuers. Management is of the opinion that it is likely that these preferred shares will be redeemed by the issuers at their redemption dates.
Until recently, the Corporation maintained high liquidity levels as a buffer against possible disruptions and uncertainties in the financial markets. The Corporation is of the view that many of these uncertainties have subsided and as a result, the Corporation is reducing its liquidity levels to more normal levels. The reduction in the level of liquidity is expected to have a positive impact on spread and assuming no negative changes in the current economic environment, liquidity levels are expected to be maintained at the current levels.
Mortgages and Loans
Mortgages and loans totalled $965 million at October 31, 2010 compared to $930 million a year ago with the increase being primarily in public sector and corporate loans and leases, partially offset by decreases in residential construction mortgages. The increase in mortgages and loans over the previous year is net of loan securitizations which saw a total of $24.4 million of CMHC loans securitized realizing gains totalling $1.4 million for the year. New lending in the fourth quarter totalled $126 million bringing total new lending for the year to $437 million compared to $431 million last year. Loan repayments for the fourth quarter totalled $123 million bringing total loan repayments to $407 million for the year compared to $613 million last year. Loan commitments at the end of the year were approximately $236 million compared to approximately $109 million a year ago. As noted previously and as evidenced by the increase in loan fee income and loan commitments compared to a year ago, the Corporation is seeing increases in the demand for financing in its niche markets and expects to see increases in new lending in the coming months.
Credit Quality
Gross impaired loans at October 31, 2010 totalled $3.3 million or 0.25% of total assets compared to $6.4 million or 0.45% of total assets a year ago. Gross impaired loans decreased as a result of impaired loans totalling $3.3 million being written off during the year against allowances in the same amount and foreclosed real estate which was classified as an impaired loan being sold in the year. This sale resulted in a gain of approximately $267,000 and is included in Other Income in the Consolidated Statement of Operations. Gross impaired loans at October 31, 2010 consist primarily of loans totalling $2.2 million to individuals who invested in provincially sponsored immigrant investor funds.
Provisions for (recovery of) credit losses in the fourth quarter totalled ($473,000) compared to a provision of $3.2 million a year ago and for the year totalled ($1.2 million) compared to a provision of $3.5 million for the previous year. The recovery of credit losses recorded in the current quarter and for the year relates primarily to a reduction in the amount of the Corporation's total general allowance related to personal loans, based on the results of the Corporation's general allowance model. The Corporation's general allowance totalled $3.8 million at October 31, 2010 compared to $8.4 million a year ago. The Corporation is of the view that any credit losses which exist in its loan portfolio but cannot be specifically identified at this time are adequately provided for.
Other Assets
Other assets totalled $26.2 million at October 31, 2010 compared to $35.1 million a year ago. Included in Other Assets is the future income tax asset of the Bank totalling $10.7 million compared to $12.7 million a year ago and capital assets and prepaid expenses totalling $13.4 million at October 31, 2010 compared to $14.8 million last year.
Deposits and Other Liabilities
Deposits are used as a primary source of financing growth in assets and are raised entirely through a well established and well diversified deposit broker network across Canada. Deposits at October 31, 2010, totalled $1.15 billion compared to $1.22 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $36.2 million or approximately 3.1% of total deposits at the end of the year were in the form of demand deposits compared to $40.4 million or approximately 3.3% of total deposits a year ago, with the remaining deposits having fixed terms.
A second source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. From time to time, the Corporation uses these sources of short term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At October 31, 2010, the Corporation did not have any amounts outstanding relating to securities sold under repurchase agreements or margin lines compared to $46.6 million outstanding a year ago.
Notes Payable
Notes payable, net of issue costs, totalled $75.6 million at October 31, 2010 compared to $77.9 million a year ago with the decrease due primarily to the repayment of the Corporation's Series A Notes totalling $2.6 million which matured in April 2010. Excluding issue costs, notes payable consist of Series C Notes totalling $55.3 million maturing in 2018 and short term notes totalling $5.2 million maturing in 2012. Notes payable bear interest at rates ranging from 4.0% to 9.00% per annum. In addition, the Corporation has outstanding subordinated notes payable totalling $21.5 million issued by the Bank to a third party. These subordinated notes bear interest at 11%, are callable by the Bank, and mature in 2019.
Preferred Share Liabilities
At October 31, 2010 the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million, before deduction of issue costs of $2.7 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $40.7 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 Balance Sheet as Preferred Share Liabilities. In addition, an amount of $4.3 million, representing the equity portion of the Class B Preferred Shares, net of issue costs, has been included in Shareholders' Equity on the Corporation's Consolidated Balance Sheet. As the Class B Preferred Shares may be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $40.7 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 October 31, 2010, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations due in the coming year. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on outstanding Class B Preferred Shares. The funding for the obligations of the Corporation beyond 2011 is expected to come primarily from cash on hand in the Corporation, the issuance of securities and interest income earned by the Corporation.
Shareholders' Equity
At October 31, 2010, Shareholders' Equity was $17.1 million compared to $14.7 million a year ago with the increase due primarily to an increase in Accumulated Comprehensive Income (Loss) as a result of the increase in the value of preferred shares offset by the net loss incurred in the year. Accumulated Other Comprehensive Income (Loss) which is included in Shareholder's Equity, was ($6.4 million) compared to ($13.2 million) a year ago.
Common shares outstanding at October 31, 2010 totalled 14,434,242 compared to 13,680,412 a year ago with the change due to 753,830 common shares issued as part of the dividends on the Class B Preferred Shares. Outstanding common share options totalled 508,333 at the end of the year compared to 859,033 a year ago with the change due to additional common share options granted in the year, less common share options which expired during the year. The Corporation's book value per common share at the end of the year was $0.82 compared to $0.77 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 October 31, 2010 would be $2.38 per share.
At October 31, 2010, there were 314,572 Class A Preferred Shares outstanding, unchanged from a year ago, and 1,909,458 Class B Preferred Shares outstanding compared to 1,326,558 outstanding last year with the increase due to 582,900 Class B Preferred Shares being issued.
Updated Share Information
As at December 8, 2010, there were no changes in the number of outstanding common shares, common share options, Class A or Class B Preferred Shares since October 31, 2010.
Amendment of Financial Statements
Opening retained earnings (deficit) for the year ending October 31, 2010 have been restated to reflect an amendment to the Corporation's earnings for the year ended October 31, 2008 resulting from a change in accounting with respect to the separation of an embedded derivative contained in a collateral debt obligation (CDO), an investment in the Corporation's securities portfolio. This change in accounting has been applied retrospectively to November 1, 2006 and was a result of a commentary issued by the CICA Accounting Standards Board Staff in February of 2009 clarifying application of Section 3855 - Financial Instruments of the CICA Handbook and reflecting the conclusions of the commentary. This change in accounting should have been applied in the Corporation's 2009 fiscal year.
As a result of the above, opening Retained Earnings (deficit) of the Corporation for the year ended October 31, 2010 has been adjusted from ($6.4 million) to ($12.4 million) and Accumulated Other Comprehensive Income (Loss) has been adjusted from ($16.3 million) to ($13.1 million). The overall impact to total shareholders' equity as a result of the above was a decrease of approximately $2.8 million.
For more information on the amendment of the financial statements, see Note 2 to the interim consolidated financial statements.
Capital Management
Total regulatory capital in the Corporation's principal subsidiary, the Bank, was $129.2 million at the end of the year compared to $121.8 million a year ago with the increase due primarily to improvements in the market value of preferred shares of Canadian banks and insurance companies which the Bank holds in its securities portfolio, and operating results of the Bank over the past year. 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 13.38% at the end of the year compared to 13.23% a year ago. The Bank's Tier 1 risk-based capital ratio, which is the ratio of Tier 1 capital to risk-weighted assets, was 9.08% at the end of the year compared to 8.82% last year. The Bank's assets-to-capital ratio was 10.39 at the end of the year compared to 11.81 a year ago.
See note 11 to the interim consolidated financial statements for more information regarding capital management.
Summary of Quarterly Results for the Corporation
(thousands of dollars
except per share
amounts) 2010
--------------------- ---------------------------------------------------
Q4 Q3 Q2 Q1
Results of
operations:
Total interest
income per financial
statements $ 15,217 $ 15,805 $ 13,976 $ 17,047
Teb adjustment 626 643 623 669
Total interest income 15,843 16,448 14,599 17,716
Interest expense 12,674 14,096 13,512 14,244
Net interest income 3,169 2,352 1,087 3,472
Provision for (recovery
of) credit losses (473) 19 (735) 26
Impairment writedowns - - (326) -
Other income (charges) 481 (215) 388 21
Total revenue 4,123 2,118 1,884 3,467
Non-interest expenses 4,486 4,338 4,251 4,211
Income (loss) before
income taxes (363) (2,220) (2,367) (744)
Income tax provision
(recovery) (1,016) 305 463 596
Net income
(loss)* $ (1,379) $ (2,525) $ (2,830) $ (1,340)
Earnings (loss)
per share
-basic $ (0.10) $ (0.18) $ (0.21) $ (0.10)
-diluted $ (0.10) $ (0.18) $ (0.21) $ (0.10)
(thousands of dollars
except per share
amounts) 2009
--------------------- ---------------------------------------------------
Q4 Q3 Q2 Q1
Results of
operations:
Total interest
income per financial
statements $ 21,783 $ 19,476 $ 19,338 $ 18,401
Teb adjustment 667 621 701 745
Total interest income 22,450 20,097 20,039 19,146
Interest expense 17,698 19,877 18,560 18,013
Net interest income 4,752 220 1,479 1,133
Provision for (recovery
of) credit losses 3,183 148 8 110
Impairment writedowns - - - -
Other income (charges) 1,887 507 (275) (670)
Total revenue 3,456 579 1,196 353
Non-interest expenses 4,405 3,816 3,328 3,418
Income (loss) before
income taxes (949) (3,237) (2,132) (3,065)
Income tax provision
(recovery) 1,108 (268) 47 (375)
Net income
(loss)* $ (2,057) $ (2,969) $ (2,179) $ (2,690)
Earnings (loss)
per share
-basic $ (0.15) $ (0.22) $ (0.16) $ (0.20)
-diluted $ (0.15) $ (0.22) $ (0.16) $ (0.20)
The financial results of the Corporation for each of the last eight quarters are summarized above. In general, the Corporation's results over the periods, particularly total interest income and net interest income, reflect the impact of additional capital buffers maintained by the Bank as well as the cost of maintaining higher levels of liquidity, both a reflection of the recent liquidity crisis. An additional factor in this trend over the past eight quarters was the additional interest expense incurred as a result of Class B Preferred Shares issued in the fourth quarter of 2009.
Total interest income for the fourth quarter of 2010 was comparable to the previous quarter and increased from the second quarter due to increases in lending assets. Total interest income for the first quarter was higher than the subsequent quarters primarily as a result of gains realized from the sale of securities during that quarter. Net interest income (teb) for the fourth quarter increased from previous quarters as a result of increases in the spread earned on lending assets, and a decrease in interest expense relating to deposits due to a large amount of deposits which matured over the past several months.
The provision for credit losses in the fourth quarter showed a net recovery of $473,000 due primarily to a reduction in the Corporation's general allowance for credit losses relating to its personal loan portfolio.
Other income in the fourth quarter was $481,000 and included mark-to-market adjustments on interest rate swaps relating to securitized mortgages and mark-to-market adjustments totalling $283,000 relating to a security in the Corporation's treasury portfolio.
Non-interest expenses in the fourth quarter of 2010 were comparable with previous quarters and increased from a year ago primarily in the categories of general and administrative expenses and salaries and benefits. General and administrative expenses increased from a year ago due to volume related expenses and higher amounts for consulting and professional fees. Salaries and benefits increased over last year as a result of annual salary adjustments and new hires during the year.
Significant Accounting Policies
Significant accounting policies are detailed on pages 58 to 61 of the Corporation's 2009 Annual Report. An additional accounting policy for the year ending October 31, 2010 relating to securitizations is as follows:
Securitization transactions
For each securitization transaction, where the Corporation retains the servicing rights, an asset is recognized as securitization retained interests on the Consolidated Balance Sheet. Securitization retained interests are investments classified as available-for-sale securities and are carried at fair value with changes in fair value reported in other comprehensive income, net of income taxes.
When mortgages are sold in a securitization transaction under terms that transfer control to third parties, the transaction is recorded as a sale and related mortgage assets are removed from the Consolidated Balance Sheet. In the securitization transaction, certain interests are retained, including the right to receive the future excess interest spread and the mortgage servicing obligation. The servicing liability is included in other liabilities. A gain or loss on the sale of mortgages is recognized immediately in the Consolidated Statement of Operations. The amount of the gain or loss recognized depends in part on the previous carrying amount of the mortgages involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. To obtain fair values, the Corporation uses estimates based on estimates of key assumptions including prepayment rates and discount rates commensurate with the risks involved.
Future Change in Accounting Policies
International Financial Reporting Standards
The Canadian Institute of Chartered Accountants has announced that public companies will be required to transition from Canadian Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). For the Corporation, this will take place with its fiscal period commencing November 1, 2011. This transition date will require the restatement for comparative purposes of amounts reported by the Corporation for the interim periods and for the year ending October 31, 2011.
The Corporation continues its process of transition from current Canadian GAAP to IFRS. It has a project team assigned to plan for and achieve a smooth transition to IFRS. Regular reporting to the Audit Committee of the Board of Directors on the status of the IFRS implementation continues to take place. The Corporation also provides frequent updates of its IFRS implementation status to its external auditors and to the Office of the Superintendent of Financial Institutions (OSFI). During the fourth quarter, management made presentations on IFRS, including reporting on its implementation status, to the Audit Committee of the Board of Directors and IFRS training for the Board of Directors took place.
The implementation project consists of three phases which include: research, diagnostic and planning phase; impact analysis, evaluation and design phase; and implementation, training and review phase. The Corporation has completed the research, diagnostic and planning phase, including the establishment of a detailed timetable with benchmarks, and has completed several aspects of the impact analysis, evaluation and design phase. The Corporation has completed the evaluation and design phase and continues its impact analysis taking into account potential changes to the transition date of the standard on derecognition as discussed below. The results thus far of the Corporation's analysis of IFRS and comparison with Canadian GAAP have identified several differences. However the differences identified thus far are not expected to have a material impact on the reporting results and financial position of the Corporation other than those differences relating to derecognition on transfers of certain financial assets. The impact of these differences is not known at this time as it is dependent on the value of financial assets transferred and the choice made by the Corporation as to the implementation date of the standard.
Under IFRS certain financial assets that previously qualified for derecognition on transfer are expected to be re-recognized. This would result in an adjustment to retained earnings intended to unwind the previously reported impact of all securitization transactions undertaken and retroactively re-recognize the assets that were previously considered to have been sold as amortizing assets that continue to reside on the Consolidated Balance Sheet, earning spread income over their term. The International Accounting Standards Board has recently changed the implementation date of the derecognition standard to allow entities to select their date of transition to IFRS as the implementation date. The Corporation expects to select their date of transition to IFRS as their implementation date of the derecognition standard and as a result will not be required to re-recognize assets that were sold prior to October 31, 2010.
As the Corporation prepares for its transition to IFRS, it continues to monitor all ongoing changes to IFRS and adjust its transition and implementation plans accordingly. The Corporation's transition remains in line with its implementation schedule and is on track to meet the timelines essential to changeover.
Risk Management
The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2009, and are found on pages 40 to 43 of the Corporation's 2009 Annual Report.
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: December 8, 2010
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 2009 Annual Report.
The foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. The forward-looking information contained in the management's discussion and analysis is presented to assist our shareholders in understanding our financial position and may not be appropriate for any other purposes. Except as required by securities law, we do not undertake to update any forward-looking statement that is contained in this management's discussion and analysis or made from time to time by the Corporation or on its behalf.
PACIFIC & WESTERN CREDIT CORP.
Consolidated Balance Sheet
(thousands of dollars)
October 31 October 31
2010 2009
------------ ------------
(unaudited) (restated-
note 2)
Assets
Cash resources $ 96,989 $ 172,297
Securities 234,661 271,660
Mortgages and loans 964,862 929,831
Other assets 26,220 35,132
------------ ------------
$ 1,322,732 $ 1,408,920
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Deposits $ 1,150,903 $ 1,217,136
Notes payable 75,559 77,933
Other liabilities 38,396 71,293
------------ ------------
1,264,858 1,366,362
------------ ------------
Preferred share liabilities 40,744 27,892
Shareholders' equity
Share capital 44,054 40,226
Deficit (20,548) (12,407)
Accumulated other comprehensive income (loss) (6,376) (13,153)
------------ ------------
17,130 14,666
------------ ------------
$1,322,732 $1,408,920
------------ ------------
------------ ------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Operations
(thousands of dollars)
for the three
months ended for the year ended
------------------------- -------------------------
October 31 October 31 October 31 October 31
2010 2009 2010 2009
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest income
Interest income on
loans $ 11,506 $ 13,285 $ 44,383 $ 56,083
Interest and income
from securities 2,737 8,123 13,493 21,255
Loan fee income 974 375 4,168 1,660
------------------------- -------------------------
15,217 21,783 62,044 78,998
Interest expense
Deposits and other 9,409 14,720 41,672 64,708
Notes payable 2,069 2,430 8,355 8,892
Preferred share
liabilities 1,196 548 4,499 548
------------------------- -------------------------
12,674 17,698 54,526 74,148
------------------------- -------------------------
Net interest income 2,543 4,085 7,518 4,850
Provision for
(recovery of)
credit losses (473) 3,183 (1,163) 3,449
------------------------- -------------------------
Net interest income
after provision for
(recovery of) credit
losses 3,016 902 8,681 1,401
Other income 481 1,887 349 1,449
------------------------- -------------------------
3,497 2,789 9,030 2,850
------------------------- -------------------------
Non-interest expenses
Salaries and benefits 1,980 1,858 7,576 6,942
General and
administrative 2,008 2,030 7,689 5,936
Premises and
equipment 498 517 2,020 2,089
------------------------- -------------------------
4,486 4,405 17,285 14,967
------------------------- -------------------------
Loss before income
taxes (989) (1,616) (8,255) (12,117)
Income taxes
(recovery) 390 441 (181) (2,222)
------------------------- -------------------------
Net loss $ (1,379) $ (2,057) $ (8,074) $ (9,895)
------------------------- -------------------------
------------------------- -------------------------
Basic loss per share $ (0.10) $ (0.15) $ (0.58) $ (0.74)
------------------------- -------------------------
------------------------- -------------------------
Diluted loss per
share $ (0.10) $ (0.15) $ (0.58) $ (0.74)
------------------------- -------------------------
------------------------- -------------------------
Weighted average
number of common
shares 13,986,000 13,656,000 14,285,000 13,646,000
------------------------- -------------------------
------------------------- -------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Comprehensive Income (Loss)
(thousands of dollars)
for the three
months ended for the year ended
------------------------- -------------------------
October 31 October 31 October 31 October 31
2010 2009 2010 2009
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Total net loss $ (1,379) $ (2,057) $ (8,074) $ (9,895)
Other comprehensive
income (loss), net
of tax:
Net unrealized
gains on assets
held as available-
for-sale(1) 4,559 (2,345) 6,992 1,767
Amount transferred
to net loss for
available-for-sale
assets(2) 768 377 (446) 984
Amount transferred
to net loss for
impairment writedown
on available-for-sale
assets(3) - - 231 -
------------------------- -------------------------
Total other comp-
rehensive income 5,327 (1,968) 6,777 2,751
------------------------- -------------------------
Total comprehensive
income (loss) $ 3,948 $ (4,025) $ (1,297) $ (7,144)
------------------------- -------------------------
(1) Net of income tax benefit (expense) for the three months of ($1,862)
(2009-$958) and year of ($2,856) (2009-($721)).
(2) Net of income tax benefit (expense) for the three months of ($313)
(2009-($157)) and year of $390 (2009-($413)).
(3) Net of income tax benefit (expense) for the three months of $nil
(2009-$nil) and year of ($95) (2009-$nil).
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars)
for the three
months ended for the year ended
------------------------- -------------------------
October 31 October 31 October 31 October 31
2010 2009 2010 2009
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
(restated- (restated-
note 2) note 2)
Common shares
Balance, beginning
of period $ 37,621 $ 35,663 $ 35,817 $ 35,663
Issued on payment of
Class B preferred
share dividend 674 154 2,478 154
------------------------- -------------------------
Balance, end of
period $ 38,295 $ 35,817 $ 38,295 $ 35,817
------------------------- -------------------------
Class A preferred
shares
Balance, beginning
of period $ 1,061 $ 3,545 $ 1,061 $ 3,545
Converted during
the year - (2,484) - (2,484)
------------------------- -------------------------
Balance, end of
period $ 1,061 $ 1,061 $ 1,061 $ 1,061
------------------------- -------------------------
Class B preferred
shares
Balance, beginning
of period $ 4,262 $ - $ 3,022 $ -
Shares issued, net
of costs - 3,022 1,240 3,022
------------------------- -------------------------
Balance, end of
period $ 4,262 $ 3,022 $ 4,262 $ 3,022
------------------------- -------------------------
Contributed surplus
Balance, beginning
of period $ 421 $ 298 $ 326 $ 179
Fair value of stock
option transactions
(note 7) 15 28 110 147
------------------------- -------------------------
Balance, end of
period $ 436 $ 326 $ 436 $ 326
------------------------- -------------------------
Deficit
Balance, beginning
of period $ (19,169) $ (10,235) $ (12,407) $ (2,157)
Net loss (1,379) (2,057) (8,074) (9,895)
Dividends on
preferred shares - (115) (67) (355)
------------------------- -------------------------
Balance, end of
period $ (20,548) $ (12,407) $ (20,548) $ (12,407)
------------------------- -------------------------
Accumulated other
comprehensive income
(loss), net of taxes
Balance, beginning of
period $ (11,703) $ (11,185) $ (13,153) $ (15,904)
Other comprehensive
income 5,327 (1,968) 6,777 2,751
------------------------- -------------------------
Balance, end of
period $ (6,376) $ (13,153) $ (6,376) $ (13,153)
------------------------- -------------------------
Total shareholders'
equity $ 17,130 $ 14,666 $ 17,130 $ 14,666
---------------------------------------------------
---------------------------------------------------
PACIFIC & WESTERN CREDIT CORP.
Consolidated Statement of Cash Flows
(thousands of dollars)
for the three
months ended for the year ended
------------------------- -------------------------
October 31 October 31 October 31 October 31
2010 2009 2010 2009
------------------------- -------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by
(used in):
Operations:
Net loss $ (1,379) $ (2,057) $ (8,074) $ (9,895)
Items not involving
cash:
Provision for
(recovery of)
credit losses (473) 3,183 (1,163) 3,449
Stock-based comp-
ensation (note 7) 15 28 110 147
Future income tax
recovery 390 441 (181) (2,222)
Gain on sale of
securities (600) (4,648) (2,641) (9,970)
Gains realized on
securitization - - (1,348) -
Impairment write
downs on securities - - 326 -
Gain on real estate
held for resale - (626) (267) (626)
Change in derivative
financial instruments 815 (1,823) (246) 296
Unrealized (gains)
losses on held-for-
trading securities (283) - 499 -
Loss on sale of
available-for-sale
assets 463 - 463 -
Interest expense on
preferred share
liabilities 795 154 2,478 154
Change in other assets
and liabilities 33,861 (3,765) 18,813 (6,157)
------------------------- -------------------------
33,604 (9,113) 8,769 (24,824)
------------------------- -------------------------
Investing:
Purchase of securities (105,425) (119,137) (680,187) (975,356)
Proceeds from sale and
maturity of securities 238,832 231,055 726,870 876,806
Mortgages and loans (29,527) 60,426 (56,303) 178,043
Proceeds from mortgage
securitizations - - 24,332 -
Securitization retained
interests - - 2,383 -
------------------------- -------------------------
103,880 172,344 17,095 79,493
------------------------- -------------------------
Financing:
Deposits (258,896) (245,352) (66,233) (172,319)
Notes payable - (7,647) (2,612) 35,893
Preferred share
liabilities - - 14,318 -
Short term financings - 46,578 (46,578) 46,578
Dividends paid - (115) (67) (355)
------------------------- -------------------------
(258,896) (206,536) (101,172) (90,203)
------------------------- -------------------------
Decrease in cash
resources (121,412) (43,305) (75,308) (35,534)
Cash resources,
beginning of period 218,401 215,602 172,297 207,831
------------------------- -------------------------
Cash resources, end
of period $ 96,989 $ 172,297 $ 96,989 $ 172,297
------------------------- -------------------------
------------------------- -------------------------
Supplementary cash
flow information:
Interest paid during
the period $ 16,180 $ 33,677 $ 52,137 $ 77,598
Income taxes paid
during the period $ - $ - $ - $ -
PACIFIC & WESTERN CREDIT CORP.
Notes to the interim consolidated financial statements (unaudited)
For the year ended October 31, 2010
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, 2009, 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,
2009. An additional accounting policy for the year ended October 31,
2010 relating to securitizations is discussed below:
The risk management policies and procedures of the Corporation
relating to credit, liquidity, and market risk are included on pages
40 - 43 in the 2009 annual report and are an integral part of the
Interim Consolidated Financial Statements.
Securitization transactions
For each securitization transaction, where the Corporation retains
the servicing rights, an asset is recognized as securitization
retained interests on the Consolidated Balance Sheet. Securitization
retained interests are investments classified as available-for-sale
securities and are carried at fair value with changes in fair value
reported in other comprehensive income, net of income taxes.
When mortgages are sold in a securitization transaction under terms
that transfer control to third parties, the transaction is recorded
as a sale and related mortgage assets are removed from the
Consolidated Balance Sheet. In the securitization transaction,
certain interests are retained, including the right to receive the
future excess interest spread and the mortgage servicing obligation.
The servicing liability is included in other liabilities. A gain or
loss on the sale of mortgages is recognized immediately in the
Consolidated Statement of Operations. The amount of the gain or loss
recognized depends in part on the previous carrying amount of the
mortgages involved in the transfer, allocated between the assets sold
and the retained interests based on their relative fair values at the
date of transfer. To obtain fair values, the Corporation uses
estimates based on estimates of key assumptions including prepayment
rates and discount rates commensurate with the risks involved.
2. Amendment to Financial Statements
Opening retained earnings (deficit) for the year ending October 31,
2010 have been restated to reflect an amendment to the Corporation's
earnings for the year ended October 31, 2008 as a result of a change
in accounting with respect to the separation of an embedded
derivative contained in a collateral debt obligation (CDO), an
investment in the Corporation's securities portfolio. This change in
accounting has been applied retrospectively to November 1, 2006 and
was a result of a commentary issued by the CICA Accounting Standards
Board Staff in February of 2009 clarifying application of Section
3855 - Financial Instruments of the CICA Handbook and reflecting the
conclusions of the commentary. This change in accounting should have
been applied in the Corporation's 2009 fiscal year.
During the quarter ending April 30, 2010, the Corporation re-examined
contractual aspects of the CDO which the Corporation had purchased in
2006 and reclassified to the held-to-maturity category from the
available-for-sale category on August 1, 2008. Based on this re-
examination, the Corporation concluded that the investment in the CDO
contained an embedded derivative which under the CICA commentary
issued in 2009, should have been separated retroactively to the
adoption of Section 3855 on November 1, 2006. As a result, the
Corporation has retrospectively amended its accounting with respect
to it's investment in the CDO. The impact of this change in
accounting is that the earnings (loss) of the Corporation for the
year ended October 31, 2008 have been adjusted to ($26.0 million)
from the previously reported amount of ($20.0 million). Accordingly,
ending retained earnings (deficit) for the Corporation as at October
31, 2008 has been adjusted from $3.8 million to ($2.2 million) and
Accumulated Other Comprehensive Income (Loss) has been adjusted from
($19.1 million) to ($15.9 million). In addition total Shareholders'
Equity has been adjusted from $24.1 million to $21.3 million. Basic
and diluted earnings (loss) per share for the year ended October 31,
2008 have been adjusted to ($1.93) from the previously reported
amount of ($1.49). The impact on the results of the Corporation for
the year ended October 31, 2009 has been determined not to be
material.
As a result of the above, opening Retained Earnings (deficit) of the
Corporation for the year ended October 31, 2010 has been adjusted
from ($6.4 million) to ($12.4 million) and Accumulated Other
Comprehensive Income (Loss) has been adjusted from ($16.3 million)
to ($13.1 million). The overall impact to total Shareholders' Equity
as a result of the above was a decrease of approximately
$2.8 million.
3. Securities
The Corporation's cash and securities are comprised of cash, federal
government treasury bills, federal, provincial and municipal
government bonds, government insured mortgage-backed securities,
corporate bonds and corporate preferred shares. The Corporation does
not have any direct exposure to asset-backed commercial paper in its
treasury portfolio.
During the three months ended April 30, 2010 the Corporation recorded
an impairment charge of $326,000 relating to an equity security in
its treasury portfolio as its market value had traded below the
Corporation's amortized cost for an extended period of time. The
Corporation is of the view that the unrealized losses in the other
securities it owns do not represent other than temporary declines in
value and impairment writedowns are not required at this time.
4. Allowance for credit losses
for the three months ended
---------------------------------------
October
October 31, 2010 31, 2009
---------------------------------------
General Specific Total Total
(thousands of dollars) allowance allowance allowance allowance
---------------------------------------------------------------------
Balance, beginning of the
period $ 4,285 $ 1,048 $ 5,333 $ 6,308
Provision for (recovery of)
credit losses (473) - (473) 3,183
Recoveries (write-offs) - - - 43
---------------------------------------------------------------------
Balance, end of period $ 3,812 $ 1,048 $ 4,860 $ 9,534
---------------------------------------------------------------------
for the year ended
----------------------------------------
October
October 31, 2010 31, 2009
----------------------------------------
General Specific Total Total
(thousands of dollars) allowance allowance allowance allowance
---------------------------------------------------------------------
Balance, beginning of the
period $ 8,401 $ 1,133 $ 9,534 $ 6,042
Provision for (recovery of)
credit losses (1,259) 96 (1,163) 3,449
Recoveries (write-offs) (3,330) (181) (3,511) 43
---------------------------------------------------------------------
Balance, end of period $ 3,812 $ 1,048 $ 4,860 $ 9,534
---------------------------------------------------------------------
Gross impaired loans at October 31, 2010 totalled $3,252,000 (October
31, 2009 - $6,395,000). Loans past due but not impaired at October
31, 2010 totalled $nil (October 31, 2009 - $969,000).
Loans are secured primarily by collateral mortgages against real
estate with respect to real estate lending and specific charges
against equipment being financed for other lending activities.
5. Notes payable
At October 31, 2010 notes payable, excluding issue costs, consist of
Series C Notes totalling $55.3 million which mature in 2018, and
short term notes totalling $5.2 million which mature in 2012. Notes
payable bear interest at rates ranging from 4.0% to 9.00% per annum.
In addition, the Corporation has subordinated notes of the Bank
totalling $21.5 million owing to a third party. These subordinated
notes bear interest at 11%, are callable by the Bank and mature in
2019.
6. Preferred share liabilities
At October 31, 2010 the Corporation had 1,909,458 Class B Preferred
Shares outstanding with a total value of $47.7 million less issue
costs of $2.7 million. As these Class B Preferred Shares carry
certain redemption features and are convertible into common shares of
the Corporation, an amount of $40.7 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 Balance Sheet as a
Preferred Share Liability. In addition, an amount of $4.3 million,
representing the equity element of the Class B Preferred Shares, net
of issue costs, has been included in Shareholders' Equity on the
Corporation's Consolidated Balance Sheet.
As the Class B Preferred Shares can be redeemed by the Corporation in
2019 for approximately $47.7 million, the preferred share liability
amount of $40.7 million will be increased 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 Operations calculated using an
effective interest rate of 11.8%.
7. Shareholders' equity
i. Share capital:
Employee Stock Options
------------------------
Weighted-
Common average
shares exercise
outstanding Number price
---------------------------------------------------------------------
Outstanding, October 31, 2009 13,680,412 859,033 $ 8.69
Granted - 80,000 4.56
Issued pursuant to Class B
Preferred Share dividend 753,830 - -
Expired - (430,700) 8.89
---------------------------------------------------------------------
Outstanding, end of period 14,434,242 508,333 $ 7.87
---------------------------------------------------------------------
At October 31, 2010, there were 314,572 (2009 - 314,572) Class A
Preferred Shares outstanding and 1,909,458 (2009 - 1,326,558) Class B
Preferred Shares outstanding.
During the year ended October 31, 2010, the Corporation recognized
$110,000 (2009 - $147,000) of compensation expense relating to the
estimated fair value of stock options granted. The fair value of
options granted during the period was estimated using the Black-
Scholes option pricing model based on the following weighted-average
assumptions: (i) risk-free interest rate of 2.31% (2009 - 2.41%),
(ii) expected option life of 5 years (2009-5 years), (iii) expected
volatility of 45% (2009-45%), and (iv) expected forfeiture rate of 5%
(2009 - 5%). The weighted average fair value of options granted was
estimated at $1.38 (2009 -$1.26) per share.
ii. Accumulated other comprehensive income (loss):
The balance in accumulated other comprehensive income (loss), net of
income taxes, consists of:
October 31 October 31
(thousands of dollars) 2010 2009
---------------------------------------------------------------------
Net unrealized losses on assets held as
available-for-sale* $ (6,376) $ (13,153)
---------------------------------------------------------------------
Balance, end of period $ (6,376) $ (13,153)
---------------------------------------------------------------------
* Net of income tax benefit of $2,604 (2009 - $4,603).
8. Derivative instruments
At October 31, 2010, the Corporation had outstanding contracts for
asset liability management purposes to swap between floating and
fixed interest rates with notional amounts totalling $209,060,000
(2009 - $263,128,000). 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 $261,200 (2009 - $1,025,000), a credit equivalent
amount of $3,058,000 (2009 - $3,799,000) and a risk-weight of
$612,000 (2009 - $760,000). As required under the accounting standard
relating to hedges, at October 31, 2010, $19,907,000 (2009 -
$17,887,000) 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.
In addition, the Corporation enters into interest rate swap
arrangements with accredited counterparties in order to transact with
the Canada Housing Trust, as it securitizes mortgages under the
Canada Mortgage Bond Program. Changes in the fair values of these
arrangements are in included in gains on securitization activities
and included in other income (charges) in the Consolidated Statement
of Operations. Approved counterparties are limited to Canadian
chartered banks. At October 31, 2010 the notional amount of these
contracts totalled $24,817,000 which is included in the total above.
9. 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.
(thousands of dollars)
---------------------------------------------------------------------
Loan commitments $ 236,003
Letters of credit 26,731
---------------------------------------------------------------------
$ 262,734
---------------------------------------------------------------------
In the ordinary course of business, the Corporation and its
subsidiaries are party to claims or possible claims against it.
Management of the Corporation believes that the resolution of any
outstanding claims will not be material to the financial position of
the Corporation.
In the ordinary course of business, cash and securities are pledged
against liabilities and off-balance sheet items. Details of assets
pledged are as follows:
October 31 October 31
(thousands of dollars) 2010 2009
---------------------------------------------------------------------
Collateral related to derivative contracts $ 19,367 $ 14,271
Collateral related to letters of credit 5,111 2,940
Obligations related to securities sold under
repurchase agreements - 46,578
---------------------------------------------------------------------
$ 24,478 $ 63,789
---------------------------------------------------------------------
10. Securitization activities
The Corporation securitizes Government of Canada guaranteed
residential mortgages through the creation of mortgage backed
securities and removes the mortgages from its consolidated balance
sheet. As at October 31, 2010, outstanding securitized mortgages
totalled $24,126,000.
Retained interests are accounted for at the settlement date. The fair
value of the retained interest is determined with internal valuation
models using market data inputs, where possible, by discounting the
expected future cash flows at similar Government of Canada bond
interest rates plus a spread. The Corporation has assumed no credit
risk for purposes of measuring its retained interests since all
mortgages securitized to date are Government of Canada guaranteed.
For the year ended October 31, 2010, mortgages securitized and sold
totalled $24,368,000 for cash proceeds of $24,332,000. The retained
rights to future excess interest totalled $2,383,000 and the
servicing liability recorded totalled $181,000. The weighted-average
key assumptions used in measuring the retained interests at the date
of securitization included a discount rate of 2.78% and a rate of
1.42% for the excess spread. It was determined that a 10% and a 20%
adverse change in the discount rate used to determine the carrying
value of the retained interests would not have a material impact on
the financial position of the Corporation.
Gains on mortgages securitized and sold during the year totalled
$1,348,000 and are included in other income in the Consolidated
Statement of Operations
11. Capital Management
i. Overview
The Corporation's policy is to maintain a strong capital base so as
to maintain investor, creditor and market confidence and to sustain
future development of the business. The impact of the level of
capital on shareholders' return is also important and the Corporation
recognizes the need to maintain a balance between the higher returns
that might be possible with greater leverage and the advantages and
security afforded by a sound capital position.
The Corporation's primary subsidiary is Pacific & Western Bank of
Canada (the Bank) and as a result, the following discussion on
capital management is with respect to the capital of the Bank. The
Bank operates as a bank under the Bank Act (Canada) and is regulated
by the Office of the Superintendent of Financial Institutions Canada
(OSFI). OSFI sets and monitors capital requirements for the Bank.
Capital is managed in accordance with policies and plans that are
regularly reviewed and approved by the Board of Directors and take
into account forecasted capital needs and markets. The goal is to
maintain adequate regulatory capital to be considered well
capitalized, protect consumer deposits and provide capacity for
internally generated growth and strategic opportunities that do not
otherwise require accessing the public capital markets, all the while
providing a satisfactory return for shareholders. The Bank's
regulatory capital is comprised of share capital, retained earnings
and unrealized gains (losses) on available-for-sale equity securities
(Tier 1 capital) and subordinated notes (Tier 2 capital).
Consistent with capital adequacy guidelines issued by OSFI, the Bank
has implemented an internal capital adequacy assessment process
(ICAAP) aimed at ensuring that capital levels remain adequate in
relation to current and future risks. 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.
ii. 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:
October 31 October 31
(thousands of dollars) 2010 2009
---------------------------------------------------------------------
(restated-
note 2)
Total assets (on and off-balance sheet) $ 1,342,619 $ 1,438,207
---------------------------------------------------------------------
Capital
Common shares $ 95,365 $ 95,365
Retained earnings (deficit) (897) (1,364)
Unrealized loss on available-for-sale
equity securities (6,786) (12,822)
Subordinated debentures 41,500 40,590
---------------------------------------------------------------------
Total regulatory capital $ 129,182 $ 121,769
---------------------------------------------------------------------
Assets-to-capital ratio 10.39 11.81
---------------------------------------------------------------------
iii. Risk-Based Capital Ratios:
OSFI requires banks to measure capital adequacy in accordance with
guidelines for determining risk-adjusted capital and risk-weighted
assets including off-balance sheet credit instruments. Based on the
deemed credit risk for each type of asset, a weighting of 0% to 150%
is assigned to determine the risk-based capital ratio. OSFI requires
banks to maintain a minimum total risk-based capital ratio of 10% and
a Tier 1 risk-based capital ratio in excess of 7%. The guidelines
also require the inclusion of an explicit capital charge for
operational risk in determining the amount of risk-weighted assets.
The Bank's risk-based capital ratios are as follows:
October 31 October 31
2010 2009
---------------------------------------------------------------------
Notional/ Risk Notional/ Risk
(thousands of Drawn Weighted Drawn Weighted
dollars) Amount Balance Amount Balance
---------------------------------------------------------------------
Balance sheet
assets $ 1,315,888 $ 837,361 $ 1,407,855 $ 845,879
Off-balance sheet
assets 495,921 117,623 402,639 63,477
Charge for
operational risk 10,732 11,388
---------------------------------------------------------------------
Total risk-weighted
assets $ 965,716 $ 920,744
---------------------------------------------------------------------
Regulatory capital 129,182 121,769
---------------------------------------------------------------------
Total risk-based
capital ratio 13.38% 13.23%
---------------------------------------------------------------------
Tier 1 risk-based
capital ratio 9.08% 8.82%
---------------------------------------------------------------------
12. Interest Rate Position
The Corporation 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. The
duration difference between assets and liabilities below decreased
from a year ago primarily as a result of the amount of shorter term
liquid assets maintained at October 31, 2010.
October 31 October 31
2010 2009
---------------------------------------------------------------------
(thousands of Increase Decrease Increase Decrease
dollars) 100 bps 100 bps 100 bps 100 bps
---------------------------------------------------------------------
Maximum interest
exposure during a
12 month period $ 3,441 n/m $ 1,884 n/m
Maximum interest
exposure during a
60 month period $ 2,483 n/m $ 2,469 n/m
---------------------------------------------------------------------
Duration difference
between assets and
liabilities (months) 0.6 2.2
---------------------------------------------------------------------
n/m - not meaningful
13. Subsidiary company information:
The following table presents summary financial information of the
Bank:
October 31 October 31
(thousands of dollars) 2010 2009
------------------------------------------------------- -------------
(unaudited) (unaudited)
(restated-
note 2)
Cash resources $ 88,991 $ 170,650
Securities 234,661 271,660
Mortgages and loans 964,862 929,831
Other assets 27,374 35,714
------------- -------------
$ 1,315,888 $ 1,407,855
------------- -------------
------------- -------------
Deposits $ 1,150,903 $ 1,217,136
Subordinated notes payable 41,500 41,500
Other liabilities 35,393 68,371
------------- -------------
1,227,796 1,327,007
------------- -------------
Share capital 95,365 95,365
Retained earnings (deficit) (897) (1,364)
Accumulated other comprehensive income
(loss) (6,376) (13,153)
------------- -------------
Shareholder's equity 88,092 80,848
------------- -------------
$ 1,315,888 $ 1,407,855
------------- -------------
------------- -------------
for the three months ended for the year ended
-------------------------- ---------------------------
(thousands of October 31 October 31 October 31 October 31
dollars) 2010 2009 2010 2009
----------------------------------------- ---------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Interest
income $ 15,194 $ 22,048 $ 62,003 $ 78,984
Interest
expense 10,585 15,901 46,316 68,502
------------ ------------- ------------- -------------
Net interest
income 4,609 6,147 15,687 10,482
Provision for
(recovery of)
credit losses (473) 3,183 (1,163) 3,449
------------ ------------- ------------- -------------
Net interest
income after
provision for
credit losses 5,082 2,964 16,850 7,033
Other income 451 1,887 286 1,449
------------ ------------- ------------- -------------
Net interest
income and
other income 5,533 4,851 17,136 8,482
Non-interest
expenses 4,221 4,269 16,850 14,630
------------ ------------- ------------- -------------
Income (loss)
before income
taxes 1,312 582 286 (6,148)
Income taxes
(recovery) 390 709 (181) (2,223)
------------ ------------- ------------- -------------
Net income
(loss) $ 922 $ (127) $ 467 $ (3,925)
------------ ------------- ------------- -------------
Pacific & Western Bank of Canada (PWBank), a Canadian Schedule I chartered bank, is a branchless financial institution. PWBank specializes in providing financing throughout Canada to well established corporations and government entities, including hospitals, school boards, universities and colleges, municipalities, provinces and territories, 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.
Investor Relations: Wade MacBain, Director, (800) 244-1509, [email protected]
Public Relations & Media: Tel Matrundola, Vice-President, (866) 787-9936, [email protected]
To receive company news releases, please contact: Carla McPhee at [email protected], (519) 675-4204
For further information: Visit our website at: http://www.pwbank.com
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