Pacific & Western Bank of Canada - Third Quarter Report July 31, 2013
LONDON, ON, Aug. 29, 2013 /CNW/ -
THIRD QUARTER SUMMARY
(three months ended July 31, 2013, compared to three months ended July 31, 2012, unless otherwise noted)
- Net interest income and spread for Pacific & Western Bank of Canada ("the Bank") for the three months ended July 31, 2013 increased to $6.7 million and 1.91% respectively from $6.1 million and 1.77% for the previous quarter and from $5.1 million and 1.25% respectively for the same period a year ago.
- For the nine months ended July 31, 2013, net interest income and spread increased to $18.8 million and 1.71% respectively from $14.1 million and 1.24% a year ago.
- Credit quality continues to remain strong with gross impaired loans at July 31, 2013 totalling $1.8 million or 0.15% of total loans compared to $1.7 million or 0.14% of total loans a year ago. Net impaired loans totalled $93,000 at July 31, 2013 compared to $51,000 a year ago.
- At July 31, 2013, the Bank's Common Equity Tier 1 (CET1) ratio was 10.52% compared to 10.34% at the end of the previous quarter.
- Net income (loss) for the Bank for the three months ended July 31, 2013 was $878,000 compared to ($39,000) for the previous quarter and $1.8 million for the same period a year ago. Net income for the same period a year ago included pre-tax gains from the sale of securities totalling $3.0 million.
- Net income for the Bank for the nine months ended July 31, 2013 was $2.0 million compared to $4.7 million for the same period a year ago. Net income a year ago included pre-tax gains from the sales of securities which totalled $10.1 million and net income for the current period includes debt and other restructuring charges totalling $789,000.
PRESIDENT'S COMMENTS
I am pleased with the results of our third quarter. Our Bank's net interest income continued to grow with net interest income of $6.7 million for the third quarter compared to $6.1 million earned in the previous quarter and $5.1 million earned in the same quarter a year ago. This increase can be mainly attributed to a significant increase in spread, which improved by 53% over the same period last year to 1.91% this quarter. Credit quality continued to be outstanding with no loans in arrears at the end of the quarter. Unlike last year, total revenue for the current quarter was not bolstered by gains from the sale of assets, but included restructuring charges relating to reductions in staff.
Although it is possible that our Bank may still periodically realize gains from sales of assets, its primary source of revenue is now derived from sustainable net interest income from its growing loan and lease portfolio. Overall, our Bank's spread figures have now returned to pre liquidity crisis levels and compare favourably to the large banks.
Our three new programs continue to grow. Bulk financing assets increased by 25% during the quarter to $172 million and 81% over last year's balance. The loss incurred on our credit card program decreased from $579,000 in the previous quarter to $187,000 this quarter. Our trustee deposits initiative continues to gain acceptance as new trustees throughout Canada are continuing to move their banking to us. Overall, we are very pleased with the progress that we are making on the bulk financing and trustee deposits programs, and are working with our credit card partner to improve the profitability of that program.
On August 27th, we completed our Initial Public Offering and listed our Bank on the TSX. This was a key step in the Bank's evolution, providing it with direct access to the public markets. Our Bank raised net proceeds of $6 million increasing its CET1 capital to $123 million and resulting in the Bank's capital ratios significantly exceeding the industry average while providing ample capacity for growth.
These are exciting times for us shareholders. Our Bank has now been reconfigured so that it is able to earn ever increasing sustainable spread income, it has reduced its vulnerability to external factors and is well capitalized to provide for profitable growth.
| FINANCIAL HIGHLIGHTS | |||||||||||||||||
| (unaudited) | as at | as at | |||||||||||||||
| July 31 | July 31 | July 31 | July 31 | ||||||||||||||
| ($CDN thousands except per share amounts ) | 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Balance Sheet Summary | |||||||||||||||||
| Cash and securities | $ | 182,849 | $ | 251,527 | $ | 182,849 | $ | 251,527 | |||||||||
| Total loans | 1,193,561 | 1,255,595 | 1,193,561 | 1,255,595 | |||||||||||||
| Average loans | 1,194,443 | 1,233,487 | 1,201,936 | 1,202,380 | |||||||||||||
| Total assets | 1,407,342 | 1,538,769 | 1,407,342 | 1,538,769 | |||||||||||||
| Average assets | 1,398,679 | 1,610,014 | 1,470,755 | 1,512,252 | |||||||||||||
| Deposits | 1,201,593 | 1,323,494 | 1,201,593 | 1,323,494 | |||||||||||||
| Subordinated notes payable | 20,297 | 49,773 | 20,297 | 49,773 | |||||||||||||
| Shareholder's equity | 125,014 | 93,989 | 125,014 | 93,989 | |||||||||||||
| Capital ratios (2012 based on Basel II) | |||||||||||||||||
| Assets-to-capital ratio | 9.75 | 10.50 | 9.75 | 10.50 | |||||||||||||
| Risk-weighted assets | 1,107,029 | 1,175,584 | 1,107,029 | 1,175,584 | |||||||||||||
| Common Equity Tier 1 capital | 116,491 | n/a | 116,491 | n/a | |||||||||||||
| Common Equity Tier 1 ratio | 10.52% | n/a | 10.52% | n/a | |||||||||||||
| Tier 1 risk-based capital ratio | 10.52% | 8.46% | 10.52% | 8.46% | |||||||||||||
| Total risk-based capital ratio | 12.14% | 12.67% | 12.14% | 12.67% | |||||||||||||
| for the three months ended | for the nine months ended | ||||||||||||||||
| Results of operations | |||||||||||||||||
| Net interest income | $ | 6,733 | $ | 5,059 | $ | 18,759 | $ | 14,105 | |||||||||
| Spread | 1.91% | 1.25% | 1.71% | 1.24% | |||||||||||||
| Other income | 315 | 3,573 | 1,995 | 10,917 | |||||||||||||
| Debt and other restructuring charges | (287) | - | (789) | - | |||||||||||||
| Provision for credit losses | 154 | 249 | 399 | 433 | |||||||||||||
| Total revenue | 6,607 | 8,383 | 19,566 | 24,589 | |||||||||||||
| Net income before income taxes | 1,226 | 2,217 | 2,744 | 7,065 | |||||||||||||
| Net income | 878 | 1,783 | 1,954 | 4,731 | |||||||||||||
| Income per common share: * | |||||||||||||||||
| Basic | $ | 0.05 | $ | 0.13 | $ | 0.12 | $ | 0.34 | |||||||||
| Diluted | $ | 0.05 | $ | 0.13 | $ | 0.12 | $ | 0.34 | |||||||||
| Return on average total assets | 0.25% | 0.44% | 0.18% | 0.42% | |||||||||||||
| Gross impaired loans to total loans | 0.15% | 0.14% | 0.15% | 0.14% | |||||||||||||
| Provision for credit losses as a % of average loans | 0.01% | 0.02% | 0.03% | 0.04% | |||||||||||||
| Commercial Lending income before income taxes | $ | 1,413 | $ | 3,015 | $ | 4,002 | $ | 9,284 | |||||||||
| Loan spread | 2.23% | 2.04% | 2.21% | 2.03% | |||||||||||||
| * EPS for the three and nine months ended July 31, 2012 have been adjusted to reflect | |||||||||
| the 8:1 share consolidation which took place on December 31, 2012. | |||||||||
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 2013, dated August 28, 2013, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2013, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Bank's MD&A and the audited consolidated financial statements for the year ended October 31, 2012, 2011 and 2010 included in its Prospectus dated August 19, 2013 and posted on SEDAR. Except as discussed below, all other factors discussed and referred to in the Prospectus, remain substantially unchanged.
Basis of Presentation
Non-GAAP and Additional GAAP Measures
Net Interest Income and Net Interest Margin or Spread
Most banks analyze profitability by net interest income (as presented in the Consolidated Statements of Income (Loss)) and net interest margin or spread. Net interest margin or spread is defined as net interest income as a percentage of average total assets. Net interest margin or spread does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.
Total Revenue
An additional measure of profitability is total revenue which consists of net interest income, other income, restructuring charges and provisions for credit losses (as presented in the Consolidated Statements of Income.
Book Value Per Common Share
Book value per common share is defined as Shareholder's Equity divided by the number of common shares outstanding.
Overview
Pacific & Western Bank of Canada (the "Bank"), provides commercial lending services to selected niche markets and raises its deposits through a diversified deposit broker network across Canada. The Bank has operated as a Schedule I bank under the Bank Act (Canada) since August 1, 2002. Prior to that, the Bank had operated as a provincially licensed trust company since 1979. The Bank is a wholly-owned subsidiary of Pacific & Western Credit Corp. (the "Corporation" or "parent company") whose securities are listed and trade on the Toronto Stock Exchange.
On January 28, 2013, the Bank announced its plans to complete an Initial Public Offering (IPO) of its common shares. The final prospectus was filed on August 20, 2013 and the Bank's common shares were conditionally approved for listing on the Toronto Stock Exchange (TSX). See Subsequent Event and Proposed Transactions.
Net income (loss) of the Bank for the three months ending July 31, 2013 was $878,000 compared to ($39,000) for the previous quarter and $1.8 million for the same period a year ago. Included in net income for the same period a year ago were pre-tax gains of $3.0 million on the sale of securities. There were no gains realized on the sale of securities in the current quarter.
Net income of the Bank for the nine months ended July 31, 2013 was $2.0 million compared to $4.7 million for the same period a year ago. Included in net income for the same period a year ago were pre-tax gains of $10.1 million on the sale of securities. There were no gains realized on the sale of securities in the current period. Included in net income for the current period were debt and other restructuring costs totalling $789,000 relating to the retirement of subordinated notes payable to the parent company and severance costs incurred as a result of reductions in staff complement.
Net interest income and spread for the three months ended July 31, 2013 increased to $6.7 million and 1.91% respectively from $6.1 million and 1.77% for the previous quarter and from $5.1 million and 1.25% for the same period a year ago. For the nine months ended July 31, 2013, net interest income and spread increased to $18.8 million and 1.71% respectively from $14.1 million and 1.24% a year ago. Net interest income and spread increased from previous periods due to a combination of lower interest expense as a result of the repayment in March 2013 of subordinated notes payable to the parent company and the booking of new loans with larger spreads during the current periods.
At July 31, 2013, total assets of the Bank were $1.41 billion compared to $1.39 billion at the end of the previous quarter and $1.54 billion a year ago. The decrease in total assets from a year ago was due primarily to a lower level of cash and securities held at the end of the current quarter and a lower level of lending assets caused primarily by loan sales over the past year. Cash and securities decreased from the previous year due to a lower level of deposits maturing in the succeeding months requiring a lower level of liquid assets to fund their repayment.
Credit quality remains strong, with gross impaired loans totalling $1.8 million at July 31, 2013 compared to $1.7 million a year ago and net impaired loans of $93,000 compared to $51,000 a year ago. At July 31, 2013, the ratio of gross impaired loans as a percentage of total loans was 0.15% compared to 0.14% last year.
The Basel Committee on Banking Supervision published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). The Office of the Superintendent of Financial Institutions (OSFI) requires all Canadian banks to comply with the new Basel III standards on an "all in" basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio at January 1, 2013, and at January 1, 2014 an 8.5% Tier 1 capital ratio and 10.5% total capital, all of which include a 2.50% capital conservation buffer.
At July 31, 2013, the Bank significantly exceeded the new CET1 capital requirement of 7.0% with a ratio of 10.52%. In addition, its Tier 1 capital ratio was 10.52%; the total capital ratio was 12.14% and the assets-to-capital ratio at July 31, 2013 was 9.75.
Total Revenue
Total revenue consists of net interest income, other income, debt and restructuring charges and provisions for credit losses. For the three months ended July 31, 2013 total revenue of the Bank was $6.6 million compared to $5.7 million in the previous quarter and $8.4 million for the same period last year. Total revenue decreased from a year ago due primarily to gains totalling $3.0 million from the sale of securities realized last year compared to $nil in the current period, with the impact reduced by an increase of $1.7 million in net interest income in the period. Compared to the previous quarter, total revenue of the Bank increased due primarily to the growth in net interest income.
For the nine months ending July 31, 2013, total revenue of the Bank was $19.6 million compared to $24.6 million a year ago with the decrease due primarily to gains totalling $10.1 million from the sale of securities in the same period a year ago compared to $nil in the current period. This decrease was partially offset by an increase in net interest income which grew to $18.8 million in the current period from $14.1 million a year ago. In addition, included in total revenue for the current period are restructuring charges totalling $789,000 of which $384,000 was a result of the retirement of subordinated notes payable to the parent company and $405,000 related to severance costs incurred as a result of reductions in staff complement.
The provision for credit losses, which is also included in total revenue, was a provision of $154,000 in the current quarter compared to $266,000 for the previous quarter and a provision of $249,000 for the same period a year ago. Included in the provision for credit losses in the current quarter was an amount totalling $369,000 relating to credit card receivables compared to $137,000 for the same period last year. For the nine months ended July 31, 2013, the provision for credit losses was $399,000 compared to $433,000 for the same period a year ago. Included in the provision for credit losses in the current period was an amount totalling $764,000 related to credit card receivables compared to $257,000 for the same period last year.
Net Interest Income and Net Interest Margin
Net interest income of the Bank for the three months ended July 31, 2013 increased to $6.7 million from $6.1 million for the previous quarter and from $5.1 million for the same period a year ago. These increases were due primarily to loans that matured during the period being replaced with loans with larger spreads and a decrease in interest expense as a result of the repayment in March 2013 of subordinated notes payable to the parent company. Net interest margin or spread for the three months ended July 31, 2013 increased to 1.91% from 1.77% for the previous quarter and from 1.25% last year due to the factors noted above. On a year-to-date basis, net interest income of the Bank increased to $18.8 million from $14.1 million a year ago and net interest margin or spread increased to 1.71% from 1.24% a year ago due to the factors noted previously.
Other Income
Other income of the Bank for the three months ended July 31, 2013 was $315,000 compared to $400,000 for the previous quarter and $3.6 million for the same period a year ago. Other income for the current quarter includes non-interest revenue of $306,000 from credit cards compared to $261,000 for the previous quarter and $259,000 for the same period a year ago. Other income for the same period last year included gains of $3.0 million from the sale of securities held in the treasury portfolio.
On a year-to-date basis, other income of the Bank totalled $2.0 million compared to $10.9 million a year ago with the difference due primarily to gains totalling $10.1 million on the sale of securities compared to $nil in the current period. In addition, gains from the sale of loans totalled $1.0 million and are included in other income for the current period compared to $nil a year ago and non-interest revenue from credit cards for the current period totalled $824,000 compared to $375,000 for the same period a year ago. Non-interest revenue from credit cards increased in the current period compared to the same period last year due to increases in credit card receivable balances and an additional two months of credit card activities in 2013 as the credit card program was launched on January 2, 2012.
Non-Interest Expenses
Non-interest expenses of the Bank, including those relating to credit card operations, totalled $5.4 million for the current quarter compared to $5.8 million for the previous quarter and $6.2 million for the same period a year ago. The decrease in non-interest expenses from the previous periods was due primarily to a reduction in staff complement, a reduction in costs to operate the credit card program and timing of expenses. On a year-to-date basis, non-interest expenses of the Bank were $16.8 million for the current period compared to $17.5 million for the same period last year with the decrease due to the factors described above.
Income Taxes
The Bank's statutory federal and provincial income tax rate is approximately 27% compared to 29% for the previous periods. The effective rate is impacted by certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:
| (thousands of Canadian dollars) | for the three months ended | for the nine months ended | |||||||||||||
| July 31 | July 31 | July 31 | July 31 | ||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||||
| Income tax on earnings | $ | 348 | $ | - | $ | 790 | $ | - | |||||||
| Tax on gain on sale of securities | - | 810 | - | 2,710 | |||||||||||
| Substantively enacted rate changes | - | (376) | - | (376) | |||||||||||
| $ | 348 | $ | 434 | $ | 790 | $ | 2,334 | ||||||||
For the current quarter, the provision for income taxes was $348,000 relating to income tax on earnings. The income tax provision for the same quarter last year included a provision of $810,000 relating to gains on the sale of securities and a recovery of $376,000 resulting from a substantively enacted rate change that occurred during the third quarter last year. On a year-to-date basis, the provision for income taxes was $790,000 compared to $2.3 million for the same period last year. This decrease was due primarily to an income tax provision of $2.7 million on the sale of securities a year ago compared to $nil in the current period.
At July 31, 2013, the Bank has a deferred income tax asset of $8.3 million compared to $11.0 million a year ago with the decrease due to the tax effect of operating results over the past year, the recording of an income tax adjustment totalling $1.9 million in the previous year less tax rate adjustments recorded last year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $42 million from previous periods, the benefit of which was recorded at the time. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of the net income (loss) for the period and other comprehensive income (loss) which consists primarily of unrealized gains and losses on available-for-sale securities. Comprehensive income for the three months ended July 31, 2013 was $876,000 compared to a loss of $96,000 for the previous quarter and a loss of $1.1 million a year ago. The change from a year ago is due to the net income in the current period being greater than that of a year ago and amounts of unrealized gains on available-for-sale securities recorded in comprehensive income (loss) in previous years being reversed through other comprehensive income (loss) when realized last year. On a year-to-date basis, comprehensive income (loss) was $1.9 million compared to ($2.6 million) for the same period a year ago with the change due to same factors described previously.
Segment Analysis
Commercial Lending
The commercial lending segment consists of the operations of the Bank related to issuing mortgages, loans and leases. The commercial lending segment is supported by deposit taking, treasury and administrative activities of the Bank. For the three months ended July 31, 2013, net income of the commercial lending segment totalled $1.1 million compared to $540,000 for the previous quarter and $2.6 million a year ago with the difference due primarily to gains from the sale of securities a year ago which totalled $3.0 million compared to $nil in the current quarter. On a year-to-date basis, net income of the commercial lending segment totalled $3.2 million compared to $7.0 million for the same period a year ago with the difference due primarily to gains from the sale of securities which totalled $10.1 million last year.
Net interest income from commercial lending for the three months ended July 31, 2013, totalled $6.4 million compared to $5.8 million for the previous quarter and $5.0 million last year with the growth due primarily to increased yields on new loans and a decrease in interest expense. For the nine months ended July 31, 2013, net interest income from commercial lending totalled $17.9 million compared to $14.0 million for the same period a year ago.
Credit quality relating to the commercial lending segment remains strong with provisions (recoveries) for credit losses for the three months ended July 31, 2013 totalling ($215,000) compared to a provision of $36,000 for the previous quarter and a provision of $112,000 for the same period last year. For the nine months ended July 31, 2013, the provision for credit losses was a recovery of ($365,000) compared to a provision of $176,000 for the same period a year ago. Provisions (recoveries) for credit losses were lower in the current periods as a result of decreases in lending assets and maturities in the existing loan portfolio over the past year.
For the three months ended July 31, 2013, non-interest expenses for the commercial lending segment totalled $4.9 million compared to $4.9 million for the previous quarter and $5.2 million a year ago. On a year-to-date basis, non-interest expenses totalled $14.7 million compared to $15.1 million for the same period a year ago.
Credit Card Operations
This segment consists of income and expenses related to the Bank's private label credit card program which was launched on January 2, 2012. As at July 31, 2013, credit card receivables totalled $26.3 million compared to $23.8 million at the end of the previous quarter and $17.8 million a year ago. For the three months ended July 31, 2013, costs to operate the credit card program exceeded revenues by $187,000 compared to $579,000 for the previous quarter and $798,000 for the same period a year ago. For the nine months ended July 31, 2013, costs to operate the credit program exceeded revenues by $1.3 million compared to $2.2 million for the same period a year ago.
Net interest income from credit card operations for the three months ending July 31, 2013, totalled $370,000 compared to $269,000 for the previous quarter and $69,000 a year ago. For the nine months ended July 31, 2013, net interest income from credit card operations totalled $858,000 compared to $63,000 for the same period a year ago. Net interest income from credit card operations continues to be impacted by incentive programs with low or no interest rates used to generate the issue of new cards.
For the three months ended July 31, 2013, non-interest revenue from credit card operations in the form of credit card fees totalled $306,000 compared to $261,000 for the previous quarter and $259,000 a year ago. For the nine months ended July 31, 2013, non-interest revenue from credit card operations totalled $823,000 compared to $375,000 for the same period a year ago.
For the three months ending July 31, 2013, the Bank recorded a provision for credit losses of $369,000 relating to credit card receivables compared to $230,000 for the previous quarter and $137,000 a year ago. These provisions consist of adjustments to the collective allowance and write-offs of credit card balances. For the nine months ended July 31, 2013, the provision for credit card losses totalled $764,000 compared to $257,000 for the same period last year. At July 31, 2013, the collective allowance relating to credit card receivables totalled $744,000 compared to $250,000 a year ago.
Non-interest expenses relating to credit card operations totalled $494,000 for the current quarter compared to $879,000 for the previous quarter and $989,000 for the same period last year. On a year-to-date basis, non-interest expenses totalled $2.2 million compared to $2.4 million last year. Non-interest expenses relating to credit cards decreased in the current periods as a result of a decrease in staff complement and an effort to reduce non-variable costs. These expenses consist of salaries and benefits, expenses for activities carried out by external parties to administer processing of the credit cards and marketing and promotional costs and general and administrative expenses.
Consolidated Balance Sheet
Total assets of the Bank at July 31, 2013, were $1.41 billion compared to $1.39 billion at the end of the previous quarter and $1.54 billion a year ago with the change due primarily to decreases in cash and securities and a decrease in lending assets. Cash and securities decreased from a year ago due primarily to a lower level of deposits maturing in the coming months compared to a year ago requiring less cash to fund the maturities. Lending assets decreased from a year ago primarily as a result of loans sold over the past year.
Cash and Securities
Cash and cash equivalents consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Bank's treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers' acceptances and corporate debt. Cash and securities, which are held primarily for liquidity purposes, totalled $182.8 million or 13.0% of total assets compared to $167.2 million or 12.0% of total assets at the end of the previous quarter and $251.5 million or 16.3% of total assets a year ago. The decrease in cash and securities as a percentage of total assets from a year ago was a result of the Bank no longer having to hold the same levels of cash as deposit maturities in the coming months are less than those maturing a year ago. In addition, since July 31, 2012, the Bank shifted its strategy to hold larger amounts of cash and cash equivalents as a proportion of its treasury portfolio rather than holding securities that were not as liquid.
At July 31, 2013, net unrealized gains in the Bank's available-for-sale securities portfolio were $38,000 compared to net unrealized gains of $70,000 a year ago. In addition there was an unrealized loss of $559,000 at July 31, 2013 compared to an unrealized loss of $545,000 at the end of the previous quarter relating to a security the Bank classifies as held-to-maturity. This unrealized loss was due to changes in interest rates rather than due to changes in credit risk and management is of the opinion that no impairment charge is required at this time.
Loans
Loans totalled $1.19 billion at July 31, 2013, compared to $1.20 billion at the end of the previous quarter and $1.26 billion a year ago with the decrease from a year ago due primarily to the sale of loans which occurred over the past year. The Bank does not expect to see significant loan sales during the remainder of the year.
At July 31, 2013, the balances of individual loan categories remained relatively consistent with those from a year ago taking into account loan sales. Government financings have declined from a year ago due to market conditions and the Bank shifting its focus to corporate lending opportunities, primarily through its bulk financing initiative as described below.
The Bank's bulk financing portfolio showed significant growth totalling $171.6 million at July 31, 2013 compared to $137.8 million at the end of the previous quarter, an increase of 25%, and $94.8 million a year ago, an increase of 81%. The bulk financing program continues to be a key initiative for the Bank and is expected to be the primary area of growth in the Bank's lending portfolio. The Bank continues to enter into agreements with vendors for the program and expects to see continued growth in the coming months.
Overall, new lending for the quarter totalled $151.8 million compared to $117.9 million for the previous quarter and $166.0 million a year ago. Loan repayments for the quarter totalled $153.6 million compared to $93.6 million for the previous quarter and $135.0 million a year ago. On a year-to-date basis, new lending totalled $405.8 million compared to loan repayments of $421.4 million. Loan repayments for the current nine month period include loan sales totalling $37 million.
Credit Quality
The Bank has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Gross impaired loans at July 31, 2013, totalled $1.8 million or 0.15% of total loans compared to $1.7 million or 0.14% of total loans at the end of the previous quarter and $1.7 million or 0.14% of total loans a year ago. Provisions for credit losses in the current quarter totalled $154,000 compared to $266,000 in the previous quarter and $249,000 a year ago. For the nine months ended July 31, 2013, provisions for credit losses totalled $399,000 compared to $433,000 for the same period a year ago. The change in the provision for credit losses from a year ago was due to additional provisions and write-offs related to credit card receivables.
At July 31, 2013, the Bank's collective allowance totalled $3.2 million virtually unchanged from a year ago. Included in the Bank's collective allowance at July 31, 2013 was $744,000 relating to credit card receivables compared to $250,000 a year ago. The Bank's individual allowance for credit losses totalled $1.7 million compared to $1.7 million a year ago and net impaired loans at July 31, 2013 totalled $93,000 compared to $51,000 a year ago. Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Bank is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.
Other Assets
Other assets totalled $30.9 million at July 31, 2013 compared to $27.5 million at the end of the previous quarter and $31.6 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.3 million compared to $11.0 million last year and capital assets and prepaid expenses of $18.3 million at July 31, 2013 compared to $16.9 million last year.
Deposits and Other Liabilities
Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits raised and deposit levels are highly sensitive to interest rates being offered by the Bank for new deposits. Deposits at July 31, 2013 totalled $1.20 billion compared to $1.19 billion at the end of the previous quarter and $1.32 billion a year ago, and consist primarily of guaranteed investment certificates. The decrease in total deposits from a year ago is due to the decrease in total assets, specifically the level of cash and securities. Of the total amount of deposits, $38.2 million or approximately 3.2% of total deposits at the end of the current quarter were in the form of demand deposits compared to $34.9 million or approximately 2.6% of total deposits a year ago, with the remaining deposits having fixed terms.
In order to diversify its sources of deposits and reduce its cost of new deposits, the Bank has identified another source, that being deposits of trustees in the bankruptcy industry. The Bank has developed new banking software to serve this deposit market and launched this product in April 2012. These services are now being offered to trustees in the bankruptcy industry across Canada and at July 31, 2013, deposits from this source totalled $14.7 million.
An additional 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 Bank 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 July 31, 2013, the Bank did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.
Other liabilities consist primarily of accounts payable and accruals and the fair value of derivatives. At July 31, 2013, other liabilities totalled $16.9 million compared to $13.2 million at the end of the previous quarter and $28.1 million a year ago with the change due to a decrease in the fair value of derivatives as interest rate swap contracts were unwound during the first quarter. See Interest Rate Risk Management in this Management's Discussion and Analysis for more information.
Securitization Liabilities
The Bank has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At July 31, 2013, the amount of securitization liabilities totalled $43.5 million compared to $43.5 million a year ago. The Bank has not entered into any securitization transactions in the current fiscal year nor does it expect to in the remainder of the year.
The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $41.0 million are pledged as collateral for these liabilities.
Subordinated Notes Payable
Subordinated notes payable, net of issue costs, totalled $20.3 million at July 31, 2013 compared to $49.8 million a year ago. The change from last year was a result of the Bank repaying $30 million in subordinated notes to its parent company during the second quarter. Excluding issue costs, subordinated notes payable consist of $21.5 million issued by the Bank to an external party. These subordinated notes, of which $11.5 million are callable, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.
Shareholder's Equity
At July 31, 2013, shareholder's equity was $125.0 million compared to $124.1 million at the end of the previous quarter and $94.0 million a year ago with the change mainly due to the parent company investing $30 million in common shares of the Bank during the second quarter as well as earnings during the period.
Common shares outstanding at July 31, 2013 totalled 17,387,368 compared to 14,054,034 a year ago after adjusting for an 8:1 share consolidation on December 31, 2012. The increase from a year ago was due to $30 million invested in common shares by the Bank's parent during the second quarter. The total number of common shares outstanding is subject to adjustment once the offering price of the Initial Public Offering of the Bank is determined. See Updated Share Information.
The Bank's book value per common share at July 31, 2013 was $7.19 compared to $6.69 a year ago after adjusting for the share consolidation that took place on December 31, 2012.
Updated Share Information
As at August 28, 2013, there were 19,212,171 shares outstanding of the Bank. The increase from July 31, 2013 was a result of 1,424,803 shares being issued to the parent company; 804,597 shares issued whereby the number of shares issued in March 2013 was subject to adjustment once the IPO price was determined and 620,206 as a result of cash consideration being received of $4,496,494. In addition, 400,000 shares were issued pursuant to the IPO for gross proceeds of $2,900,000.
Off-Balance Sheet Arrangements
As at July 31, 2013, the Bank does not have any significant off-balance sheet arrangements other than loan commitments and letters of credit resulting from normal course business activities. See Note 11 to the unaudited interim consolidated financial statements.
Related Party Transactions
During the three and nine months ended July 31, 2013, the Bank incurred interest expense of $nil (2012 - $783,000) and $1,124,000 (2012 - $2,425,000) respectively on subordinated notes held by its parent company of which $nil (2012 - $263,000) in accrued interest was outstanding at July 31, 2013. During the three and nine months ended July 31, 2013, the Bank incurred management and other fees totalling $300,000 (2012 - $300,000) and $900,000 (2012 - $885,000) respectively paid to its parent company and a subsidiary of the parent.
The Bank's Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Bank has no other related parties for which there were transactions or outstanding balances during the period. See Note 12 to the unaudited interim consolidated financial statements for additional information on related party transactions and balances.
Subsequent Event and Proposed Transactions
On August 20, 2013, the Bank filed its final prospectus and on August 27, 2013 its common shares began trading on the Toronto Stock Exchange. Under the terms of the IPO, 400,000 common shares of the Bank were issued at a price of $7.25 per share before commissions and other expenses of the offering. In addition, under a secondary offering of the IPO, the parent company sold 1,100,000 of its common shares of the Bank at $7.25 per share before commissions. From the net proceeds the parent company purchased an additional 620,206 shares of the Bank for $4,496,494. As a result of these transactions, the Corporation's ownership interest in the Bank decreased from 100% to approximately 92%.
As part of the IPO, the syndicate of agents have been granted an Over-Allotment Option exercisable in whole or in part for a period of 30 days following the closing of the IPO, to purchase up to an additional 225,000 Common Shares from the Bank at a price of $7.25 per Common Share.
Risk Management
The risk management policies and procedures of the Bank are provided on pages 68-69 and 102-110 in its Prospectus dated August 19, 2013 and filed on SEDAR.
Capital Management and Capital Resources
The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). Significant changes under Basel III that are most relevant to the Bank include:
- Increased focus on tangible common equity.
- All forms of non-common equity such as the Bank's conventional subordinated notes must be non-viability contingent capital (NVCC) compliant. NVCC compliant means the subordinated notes must include a clause that would require conversion to common equity in the event that OSFI deems the institution to be insolvent or a government is ready to inject a "bail out" payment.
- Changes in the risk-weighting of certain assets.
- Additional capital buffers.
- New requirements for levels of liquidity and new liquidity measurements.
OSFI requires that all Canadian banks must comply with the Basel III standards on an "all-in" basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.5% capital conservation buffer. The Basel III rules provide for "transitional" adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.
Under the Basel III standards, total capital of the Bank totalled $134.4 million at July 31, 2013 compared to $133.1 million at the end of the previous quarter. The Bank exceeded the new capital requirements with a CET1 ratio of 10.52% compared to 10.34% at the end of the previous quarter. In addition, the Bank's total capital ratio was 12.14% at July 31, 2013 compared to 11.94% at the end of the previous quarter and its assets-to-capital ratio at July 31, 2013 was 9.75 compared to 9.69 at the end of the previous quarter.
See note 13 to the interim consolidated financial statements for more information regarding capital management.
The operations of the Bank are not dependent upon significant amounts of capital assets to generate revenue. Currently, the Bank does not have any commitments for capital expenditures or for significant additions to its level of capital assets.
Interest Rate Risk Management
The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholder's equity. The following table provides the duration difference between the Bank's assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's shareholder's equity over a 60 month period if no remedial actions are taken.
| July 31, 2013 | July 31, 2012 | ||||||||||||||
| Increase 100 bps |
Decrease 100 bps |
Increase 100 bps |
Decrease 100 bps |
||||||||||||
| Sensitivity of projected net interest | |||||||||||||||
| income during a 12 month period | $ | 5,049 | $ | (4,997) | $ | 5,975 | $ | (5,919) | |||||||
| Sensitivity of projected net interest | |||||||||||||||
| income during a 60 month period | $ | 2,906 | $ | (2,890) | $ | 9,364 | $ | (9,983) | |||||||
| Duration difference between assets and | |||||||||||||||
| liabilities (months) | 2.9 | 3.7 | |||||||||||||
The change in exposure to a decrease of 100 basis points in interest rates in a 60 month period from a year ago was due primarily to the change in the composition of the Bank's treasury portfolio through the sale of longer term securities over the past year with the proceeds being invested in cash or short term liquid securities as well as the Bank unwinding interest rate swaps during the first quarter of fiscal 2013.
The decision to unwind the swap contracts was made as the Bank decided to use on-balance sheet strategies to manage its interest rate risk rather than interest rate swaps. These strategies include the raising of longer term deposits and reducing the duration of its assets primarily by maintaining higher levels of shorter duration and highly liquid treasury assets. Another factor in unwinding its interest rate swap contracts was the decision to eliminate the basis risk that resulted from the decrease in the correlation between the yield on banker's acceptances and the GIC's the Bank issues that occurred during the global liquidity crisis.
Liquidity
The unaudited Consolidated Statement of Cash Flows for the Bank for the nine months ended July 31, 2013 shows cash used from operations in excess of cash provided by operations of $113.9 million compared to cash used of $55.3 million for the nine months ended July 31, 2012. The Bank's operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the Bank may manage the amount of deposits it receives and loans it funds in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Bank will continue to fund its operations and meet contractual obligations as they become due from cash on hand and from managing the amount of deposits it receives as compared to the amount of loans it funds. See Note 11 to the unaudited interim consolidated financial statements
Contractual Obligations
Contractual obligations of the Bank as disclosed in its prospectus dated August 19, 2013 and posted on SEDAR and the audited consolidated financial statements for the year ended October 31, 2012 appended to the prospectus, have not changed significantly at July 31, 2013.
Summary of Quarterly Results
| (thousands of dollars except per share amounts) | 2013 | 2012 | 2011 | |||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | |||||||||||||||||||
| Results of operations: | ||||||||||||||||||||||||||
| Total interest income | $ | 15,242 | $ | 14,776 | $ | 15,695 | $ | 15,620 | $ | 15,350 | $ | 14,924 | $ | 15,008 | $ | 14,618 | ||||||||||
| Yield on assets (%) | 4.32% | 4.29% | 4.20% | 4.04% | 3.78% | 3.73% | 3.90% | 3.93% | ||||||||||||||||||
| Interest expense | 8,509 | 8,679 | 9,766 | 10,117 | 10,291 | 10,650 | 10,236 | 9,954 | ||||||||||||||||||
| Cost of funds (%) | 2.41% | 2.52% | 2.61% | 2.62% | 2.54% | 2.66% | 2.66% | 2.68% | ||||||||||||||||||
| Net interest income | 6,733 | 6,097 | 5,929 | 5,503 | 5,059 | 4,274 | 4,772 | 4,664 | ||||||||||||||||||
| Net interest margin (%) * | 1.91% | 1.77% | 1.59% | 1.42% | 1.25% | 1.07% | 1.24% | 1.25% | ||||||||||||||||||
| Provision for (recovery of) credit losses | 154 | 266 | (21) | 28 | 249 | - | 184 | 118 | ||||||||||||||||||
| Other income | 315 | 400 | 1,280 | 2,370 | 3,573 | 3,939 | 3,405 | 8,811 | ||||||||||||||||||
| Debt and other restructuring charges | (287) | (502) | - | - | - | - | - | - | ||||||||||||||||||
| Total revenue * | 6,607 | 5,729 | 7,230 | 7,845 | 8,383 | 8,213 | 7,993 | 13,357 | ||||||||||||||||||
| Non-interest expenses | 5,381 | 5,761 | 5,680 | 6,819 | 6,166 | 6,063 | 5,295 | 4,336 | ||||||||||||||||||
| Income (loss) before income taxes | 1,226 | (32) | 1,550 | 1,026 | 2,217 | 2,150 | 2,698 | 9,021 | ||||||||||||||||||
| Income tax provision (recovery) | 348 | 7 | 435 | 1,933 | 434 | 1,040 | 860 | 2,794 | ||||||||||||||||||
| Net income (loss) | $ | 878 | $ | (39) | $ | 1,115 | $ | (907) | $ | 1,783 | $ | 1,110 | $ | 1,838 | $ | 6,227 | ||||||||||
| Earnings (loss) per share ** | ||||||||||||||||||||||||||
| - basic | $ | 0.05 | $ | 0.00 | $ | 0.08 | $ | (0.06) | $ | 0.13 | $ | 0.08 | $ | 0.13 | $ | 0.44 | ||||||||||
| - diluted | $ | 0.05 | $ | 0.00 | $ | 0.08 | $ | (0.06) | $ | 0.13 | $ | 0.08 | $ | 0.13 | $ | 0.44 | ||||||||||
| * Net interest margin and Total revenue are Non-GAAP and Additional GAAP measures. See Basis of Presentation-Non-GAAP and | |||||||||||||
| Additional GAAP measures | |||||||||||||
| ** EPS for all periods have been adjusted to reflect the 8:1 share consolidation which took place on December 31, 2012. | |||||||||||||
The financial results for each of the last eight quarters are summarized above. The Bank's results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect the increase in lending assets. Additional factors in the increase in net interest income were higher yields on loans booked, increasing 39 bps over the last eight quarters, and a decrease in the cost of deposits over the past year. Interest expense also decreased in the second and third quarter of 2013 as a result of the repayment of $30 million in subordinated notes payable to its parent company.
Other income during the quarters shows variability due to the level of gains realized in previous quarters on the sale of securities and in the fourth quarter of 2012 and first quarter of 2013 from the sale of loans. The provisions for credit losses recorded in the last two quarters were due primarily to write-offs and adjustments in the collective allowance relating to credit card receivables.
Non-interest expenses have decreased over the last six quarters as a result of a strategy to reduce overhead expenses, a reduction in staff complement and the timing of expenses. Non-interest expenses increased in the fourth quarter of 2012 as a result of expenses being incurred relating to professional and consulting fees and increased costs relating to credit card operations.
The provision for income taxes in the first two quarters of 2013 reflects the effective statutory income tax rate of the Bank. The provision for income taxes in the fourth quarter of 2012 included an income tax adjustment of $1.9 million relating to a change in the estimate of previously recognized deferred income tax assets. The income tax provision in the third quarter of 2012 decreased from previous quarters as a result of a recovery for income taxes relating to a change in corporate income tax rates substantively enacted during the quarter.
Selected Annual Financial Information
The following table, which has not been audited, sets out selected financial information derived from the Bank's audited annual consolidated financial statements for Fiscal 2012, Fiscal 2011 and Fiscal 2010.
| IFRS | CGAAP | ||||||||||
| for the year ended | |||||||||||
| October 31 | October 31 | October 31 | |||||||||
| (thousands of Canadian dollars except per share amounts) | 2012 | 2011 | 2010 | ||||||||
| Net interest income | $ | 19,608 | $ | 16,927 | $ | 15,687 | |||||
| Spread (%) * | 1.30% | 1.21% | 1.15% | ||||||||
| Provision for (recovery of) credit losses | 461 | 309 | (1,163) | ||||||||
| Other income | 13,287 | 12,306 | 286 | ||||||||
| Total revenue * | 32,434 | 28,924 | 17,136 | ||||||||
| Non-interest expenses | 24,343 | 17,734 | 16,850 | ||||||||
| Net income | $ | 3,824 | $ | 7,570 | $ | 467 | |||||
| Earnings per share** | |||||||||||
| - basic | $ | 0.27 | $ | 0.56 | $ | 0.04 | |||||
| - diluted | $ | 0.27 | $ | 0.56 | $ | 0.04 | |||||
| Financial Position: | |||||||||||
| Total assets | 1,534,168 | 1,485,734 | 1,315,888 | ||||||||
| Average assets | 1,509,951 | 1,411,866 | 1,361,872 | ||||||||
| Deposits | 1,317,298 | 1,269,730 | 1,150,903 | ||||||||
| Subordinated notes payable | 49,815 | 49,651 | 40,025 | ||||||||
| Shareholder's equity | 93,104 | 96,576 | 88,092 | ||||||||
| * Spread and Total revenue are Non-GAAP and Additional GAAP measures-See Basis of Presentation | ||||
| ** EPS for all periods have been adjusted to reflect the 8:1 share consolidation that took place on | ||||
| December 31, 2012. | ||||
| IFRS-International Financial Reporting Standards | ||||
| CGAAP-Canadian Generally Accepted Accounting Principles | ||||
Significant Accounting Policies and Use of Estimates and Judgments
Significant accounting policies are detailed in Note 3 of the Bank's 2012 Audited Consolidated Financial Statements that is included in the Prospectus dated August 19, 2013 and filed on SEDAR. There has been no change in accounting policies nor any significant new policies adopted during the current period.
In preparing the consolidated financial statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting periods. Areas where significant judgment was applied or estimates were developed include assessments of fair value and impairments of financial instruments, the calculation of the allowance for credit losses, and the measurement of deferred income taxes.
It is reasonably possible, on the basis of existing knowledge, that actual results may vary from that expected in the generation of these estimates. This could result in material adjustments to the carrying amounts of assets and/or liabilities affected in the future.
Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are applied prospectively once they are recognized.
The policies discussed below are considered particularly significant as they require management to make estimates or judgements, some of which may relate to matters that are inherently uncertain.
Financial Instruments
All financial assets are classified as one of the following: held-to-maturity, loans and receivables, financial assets recorded at fair value through profit or loss or available-for-sale. All financial liabilities are classified as fair value through profit or loss or other liabilities. Financial assets and liabilities recorded at fair value through profit or loss are measured at fair value with gains and losses recognized in net income. 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.
Estimates of fair value are developed using a variety of valuation methods and assumptions. The Bank follows a fair value hierarchy to categorize the inputs used to measure fair value for its financial instruments. The fair value hierarchy is based on quoted prices in active markets (Level 1), valuation techniques using inputs other than quoted prices but with observable market data (Level 2), or valuation techniques using inputs that are not based on observable market data (Level 3). Valuation techniques may require the use of inputs, transaction values derived from models and input assumptions sourced from pricing services. Valuation inputs are either observable or unobservable. The Bank looks to external readily observable market inputs when available and may include certain prices and rates for shorter-dated Canadian yield curves and bankers acceptances. Unobservable inputs may include credit spreads, probability of default and recovery rates.
Fair value measurements that fall into Level 2 of the fair value hierarchy comprise derivatives and Canadian municipal and corporate bonds that are classified as available-for-sale. Fair value of derivatives is estimated using a discounted cash flow valuation technique based on observable market data including interest rates, the Bank's and the counterparty's credit spreads, corresponding market interest rate volatility levels and other market-based pricing factors. For Canadian municipal and corporate bonds, fair value measurement is primarily based on quotes received from brokers that represent transaction prices in markets for identical instruments.
Securities
The Bank holds securities primarily for liquidity purposes with the intention of holding the securities to maturity or until market conditions render alternative investments more attractive. Settlement date accounting is used for all securities transactions.
At the end of each reporting period, the Bank assesses whether or not there is any objective evidence to suggest that a security may be impaired. Objective evidence of impairment results from one or more events that occur after the initial recognition of the security which has an impact that can be reliably estimated on the estimated future cash flows of the security such as financial difficulty of the issuer. An impairment loss is recognized for an equity instrument if the decline in fair value is significant or prolonged, as such circumstances provide objective evidence of impairment.
Impairment losses on a held-to-maturity security are recognized in income and loss in the period they are identified. When there is objective evidence of impairment of an available-for-sale security, the cumulative loss that has been recorded in accumulated other comprehensive income is reclassified to income or loss. For available-for-sale debt securities, if in a subsequent period the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was first recognized, then the previously recognized impairment loss is adjusted through income or loss to reflect the net recoverable amount of the impaired security. No adjustments of impairment losses are recognized for available-for-sale equity securities.
Loans
Loans are initially measured at fair value plus incremental direct transaction costs. Loans are subsequently measured at amortized cost, net of allowance for credit losses, using the effective interest method. On a monthly basis, the Bank assesses whether or not there is any objective evidence to suggest that the carrying value of the loans may be impaired. Impairment assessments are facilitated through the identification of loss events and assessments of their impact on the estimated future cash flows of the loans.
A loan is classified as impaired when, in management's opinion, there has been deterioration in credit quality to the extent that there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. Loans, except credit cards, where interest or principal is contractually past due 90 days are automatically recognized as impaired, unless management determines that the loan is fully secured, in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to current status. All loans, except credit cards, are classified as impaired when interest or principal is past due 180 days, except for loans guaranteed or insured by the Canadian government, provinces, territories, or a Canadian government agency, which are classified as impaired when interest or principal is contractually 365 days in arrears. Credit card receivables are written off when payments are 180 days past due, or upon receipt of a bankruptcy notification.
As loans are classified as loans and receivables and measured at amortized cost, an impairment loss is measured as the difference between the carrying amount and the present value of future cash flows discounted using the effective interest rate computed at initial recognition, if future cash flows can be reasonably estimated. When the amounts and timing of cash flows cannot be reasonably estimated, the carrying amount of the loan is reduced to its estimated net realizable value based on either:
(i) the fair value of any security underlying the loan, net of expected costs of realization,
or,
(ii) observable market prices for the loan.
Impairment losses are recognized in income or loss. If, in a subsequent period, the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was first recognized, then a recovery of a portion or all of the previously recognized impairment loss is adjusted through income or loss to reflect the net recoverable amount of the impaired loan.
Real estate held for resale is recorded at the lower of cost and fair value, less costs to sell.
Allowance for Credit Losses
The Bank maintains an allowance for credit losses which, in management's opinion, is adequate to absorb all credit related losses in its loan portfolio. The allowance for credit losses consists of both individual and collective allowances and is reviewed on a monthly basis. The allowance is presented as a component of loans on the Bank's consolidated balance sheets.
The Bank considers evidence of impairment for loans at both an individual asset and collective level. All individually significant loans are assessed for impairment first. All individually significant loans found not to be specifically impaired and all loans which are not individually significant are then collectively assessed for impairment by aggregating them into groups with similar credit risk characteristics.
The collective impairment allowance is determined by reviewing factors including historical loss experience in portfolios of similar credit risk characteristics, current portfolio credit quality trends, probability of default and recovery rates, and business and economic conditions. Historical loss experience is adjusted based on current observable data to reflect effects of current conditions that did not affect the period in which the historical loss experience is based. The collective impairment allowance may also be adjusted by management using its judgment taking into account other observable and unobservable factors.
Corporate Income Taxes
Current income taxes are calculated based on taxable income at the reporting period end. Taxable income differs from accounting income because of differences in the inclusion and deductibility of certain components of income which are established by Canadian taxation authorities. Current income taxes are measured at the amount expected to be recovered or paid using statutory tax rates at the reporting period end.
The Bank follows the asset and liability method of accounting for deferred income taxes. Deferred income tax assets and liabilities arise from temporary differences between financial statement carrying values and the respective tax base of those assets and liabilities. Deferred income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years when temporary differences are expected to be recovered or settled.
Deferred income tax assets are recognized in the Bank's consolidated financial statements to the extent that it is probable that the Bank will have sufficient taxable income to enable the benefit of the deferred income tax asset to be realized. Unrecognized deferred income tax assets are reassessed for recoverability at each reporting period end
The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income during the carry-forward period sufficient to offset the income tax losses and deductible temporary timing differences. While management is of the opinion that it is probable that the Bank will be able to realize the deferred income tax asset, there is no guarantee the Bank will be able to generate sufficient taxable income during the carry-forward period. The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income in future years sufficient to offset the income tax losses.
Future Change in Accounting Policies
IFRS 9: Financial instruments (IFRS 9)
In November 2009, the IASB issued IFRS 9 as the first phase of an ongoing project to replace IAS 39. This first issuance of IFRS 9 introduced new requirements for classifying and measuring financial assets. IFRS 9 was then re-issued in October 2010, incorporating new requirements for the accounting of financial liabilities, and carrying over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. The mandatory effective date for the adoption of IFRS 9 was set for annual periods beginning on or after January 1, 2015, with earlier application permitted. In July 2013, the IASB deferred the mandatory effective date for the adoption of IFRS 9 to a date yet to be determined and to allow entities to early adopt only the own credit requirement in IFRS 9. The IASB continues to deliberate on the content of IFRS 9 and intends to expand the existing standard by adding new requirements for the impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various projects, IFRS 9 will represent a complete replacement of IAS 39.
The most significant changes expected under IFRS 9 relate to decreases in the classification categories available for financial instruments, a requirement that debt instruments meet a business model and cash flow characteristic test before being eligible for measurement at amortized cost, and a requirement that changes in the fair value of equity instruments be reported in profit or loss (unless an irrevocable election is made at initial recognition to recognize such changes in other comprehensive income). Management has performed preliminary evaluations of the impact of IFRS 9, however the impact on the Bank's Consolidated Financial Statements is not determinable at this time as it is dependent upon the nature of financial instruments held by the Bank when IFRS 9 becomes effective. The Bank is choosing not to early adopt IFRS 9.
Controls and Procedures
During the most recent interim period, there have been no changes in the Bank'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 Bank's internal control over financial reporting.
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 102-110 of our Prospectus.
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 Bank or on its behalf.
PACIFIC & WESTERN BANK OF CANADA
Consolidated Balance Sheets
(Unaudited)
| (thousands of Canadian dollars) | |||||||||||||
| July 31 | October 31 | July 31 | |||||||||||
| As at | 2013 | 2012 | 2012 | ||||||||||
| Assets | |||||||||||||
| Cash and cash equivalents | $ | 94,370 | $ | 129,466 | $ | 193,800 | |||||||
| Securities (note 4) | 88,479 | 167,227 | 57,727 | ||||||||||
| Loans, net of allowance for credit losses (note 5) | 1,193,561 | 1,210,311 | 1,255,595 | ||||||||||
| Other assets | 30,932 | 27,164 | 31,647 | ||||||||||
| $ | 1,407,342 | $ | 1,534,168 | $ | 1,538,769 | ||||||||
| Liabilities and Shareholder's Equity | |||||||||||||
| Deposits | $ | 1,201,593 | $ | 1,317,298 | $ | 1,323,494 | |||||||
| Subordinated notes payable (note 6) | 20,297 | 49,815 | 49,773 | ||||||||||
| Securitization liabilities (note 7) | 43,511 | 43,356 | 43,458 | ||||||||||
| Other liabilities | 16,927 | 30,595 | 28,055 | ||||||||||
| 1,282,328 | 1,441,064 | 1,444,780 | |||||||||||
| Shareholder's equity: | |||||||||||||
| Share capital (note 8) | 133,965 | 103,965 | 103,965 | ||||||||||
| Retained earnings (deficit) | (8,979) | (10,933) | (10,027) | ||||||||||
| Accumulated other comprehensive income | 28 | 72 | 51 | ||||||||||
| 125,014 | 93,104 | 93,989 | |||||||||||
| $ | 1,407,342 | $ | 1,534,168 | $ | 1,538,769 | ||||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Income
(Unaudited)
| (thousands of Canadian dollars, except per share amounts) | |||||||||||||||||
| for the three months ended | for the nine months ended | ||||||||||||||||
| July 31 | July 31 | July 31 | July 31 | ||||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||||||
| Interest income: | |||||||||||||||||
| Loans | $ | 13,366 | $ | 13,762 | $ | 40,125 | $ | 39,478 | |||||||||
| Securities | 662 | 640 | 2,136 | 3,030 | |||||||||||||
| Loan fees | 1,214 | 948 | 3,452 | 2,774 | |||||||||||||
| 15,242 | 15,350 | 45,713 | 45,282 | ||||||||||||||
| Interest expense: | |||||||||||||||||
| Deposits and other | 7,954 | 8,901 | 24,165 | 27,035 | |||||||||||||
| Subordinated notes | 555 | 1,390 | 2,789 | 4,142 | |||||||||||||
| 8,509 | 10,291 | 26,954 | 31,177 | ||||||||||||||
| Net interest income | 6,733 | 5,059 | 18,759 | 14,105 | |||||||||||||
| Other income (note 9) | 315 | 3,573 | 1,995 | 10,917 | |||||||||||||
| Debt and other restructuring charges | (287) | - | (789) | - | |||||||||||||
| Net interest and other income | 6,761 | 8,632 | 19,965 | 25,022 | |||||||||||||
| Provision for credit losses (note 5b) | 154 | 249 | 399 | 433 | |||||||||||||
| Net interest and other income after provision for credit losses | 6,607 | 8,383 | 19,566 | 24,589 | |||||||||||||
| Non-interest expenses: | |||||||||||||||||
| Salaries and benefits | 2,595 | 2,758 | 7,786 | 7,857 | |||||||||||||
| General and administrative | 2,217 | 2,825 | 7,370 | 7,881 | |||||||||||||
| Premises and equipment | 569 | 583 | 1,666 | 1,786 | |||||||||||||
| 5,381 | 6,166 | 16,822 | 17,524 | ||||||||||||||
| Income before income taxes | 1,226 | 2,217 | 2,744 | 7,065 | |||||||||||||
| Income tax provision (note 10) | 348 | 434 | 790 | 2,334 | |||||||||||||
| Net income | $ | 878 | $ | 1,783 | $ | 1,954 | $ | 4,731 | |||||||||
| Basic earnings per share | $ | 0.05 | $ | 0.13 | $ | 0.12 | $ | 0.34 | |||||||||
| Diluted earnings per share | $ | 0.05 | $ | 0.13 | $ | 0.12 | $ | 0.34 | |||||||||
| Weighted average number of common shares outstanding (note 8) | 17,387,000 | 14,055,000 | 15,825,000 | 14,055,000 | |||||||||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| (thousands of Canadian dollars) | |||||||||||||||||
| for the three months ended | for the nine months ended | ||||||||||||||||
| July 31 | July 31 | July 31 | July 31 | ||||||||||||||
| 2013 | 2012 | 2013 | 2012 | ||||||||||||||
| Net income | $ | 878 | $ | 1,783 | $ | 1,954 | $ | 4,731 | |||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||
| Net unrealized gains (losses) on assets held as available-for-sale (1) |
(1) | (887) | (18) | (238) | |||||||||||||
| Amount transferred to income or loss on disposal of available-for-sale assets (2) |
(1) | (1,998) | (26) | (7,079) | |||||||||||||
| (2) | (2,885) | (44) | (7,317) | ||||||||||||||
| Comprehensive income (loss) | $ | 876 | $ | (1,102) | $ | 1,910 | $ | (2,586) | |||||||||
(1) Net of income tax benefit (expense) for the three months of $nil (2012 - $328) and nine months of $7 (2012-$88)
(2) Net of income tax benefit (expense) for the three months of $nil (2012 - $739) and nine months of $10 (2012-$2,618)
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Changes in Shareholder's Equity
(Unaudited)
| (thousands of Canadian dollars) | ||||||||||||||||
| for the three months ended | for the nine months ended | |||||||||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Common shares (note 8): | ||||||||||||||||
| Balance, beginning of the period | $ | 133,965 | $ | 103,965 | $ | 103,965 | $ | 103,965 | ||||||||
| Issued during the period, net of issue costs | - | - | 30,000 | - | ||||||||||||
| Balance, end of the period | $ | 133,965 | $ | 103,965 | $ | 133,965 | $ | 103,965 | ||||||||
| Retained earnings (deficit): | ||||||||||||||||
| Balance, beginning of the period | $ | (9,857) | $ | (11,810) | $ | (10,933) | $ | (14,758) | ||||||||
| Net income | 878 | 1,783 | 1,954 | 4,731 | ||||||||||||
| Balance, end of the period | $ | (8,979) | $ | (10,027) | $ | (8,979) | $ | (10,027) | ||||||||
| Accumulated other comprehensive income, net of taxes: | ||||||||||||||||
| Balance, beginning of the period | $ | 30 | $ | 2,936 | $ | 72 | $ | 7,368 | ||||||||
| Other comprehensive income (loss) | (2) | (2,885) | (44) | (7,317) | ||||||||||||
| Balance, end of the period | $ | 28 | $ | 51 | $ | 28 | $ | 51 | ||||||||
| Total shareholder's equity | $ | 125,014 | $ | 93,989 | $ | 125,014 | $ | 93,989 | ||||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Cash Flows
(Unaudited)
| (thousands of Canadian dollars) | ||||||||
| July 31 | July 31 | |||||||
| For the nine months ended | 2013 | 2012 | ||||||
| Cash provided (used in): | ||||||||
| Operations: | ||||||||
| Net income | $ | 1,954 | $ | 4,731 | ||||
| Items not involving cash: | ||||||||
| Provision for credit losses | 399 | 433 | ||||||
| Change in derivative financial instruments | - | (96) | ||||||
| Deferred income taxes | 790 | 2,334 | ||||||
| Gain on disposal of securities | - | (10,141) | ||||||
| Interest income | (45,713) | (45,282) | ||||||
| Interest expense | 26,954 | 31,177 | ||||||
| Gain on sale of lending assets | (1,009) | - | ||||||
| Interest received | 44,175 | 43,595 | ||||||
| Interest paid | (31,228) | (30,714) | ||||||
| Mortgages and loans | 17,557 | (108,657) | ||||||
| Deposits | (115,705) | 53,764 | ||||||
| Change in other assets and liabilities | (12,099) | 3,593 | ||||||
| (113,925) | (55,263) | |||||||
| Investing: | ||||||||
| Purchase of securities | (27,985) | (39,218) | ||||||
| Proceeds from sale and maturity of securities | 106,814 | 99,287 | ||||||
| 78,829 | 60,069 | |||||||
| Financing: | ||||||||
| Repayment of subordinated notes payable | (30,000) | - | ||||||
| Proceeds from shares issued | 30,000 | - | ||||||
| - | - | |||||||
| Increase (decrease) in cash and cash equivalents | (35,096) | 4,806 | ||||||
| Cash and cash equivalents, beginning of the period | 129,466 | 188,994 | ||||||
| Cash and cash equivalents, end of the period | $ | 94,370 | $ | 193,800 | ||||
| Cash and cash equivalents is represented by: | ||||||||
| Cash | $ | 94,370 | $ | 95,211 | ||||
| Cash equivalents | - | 98,589 | ||||||
| Cash and cash equivalents, end of the period | $ | 94,370 | $ | 193,800 | ||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
Pacific & Western Bank of Canada
Notes to Interim Consolidated Financial Statements
(Unaudited)
Three and nine month periods ended July 31, 2013 and 2012
1. Reporting entity:
Pacific & Western Bank of Canada (the "Bank") has operated as a Schedule I bank under the Bank Act (Canada). The Bank is a wholly-owned subsidiary of Pacific & Western Credit Corp. (the "Corporation") whose securities are listed and trade on the Toronto Stock Exchange.
The Bank is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2.
2. Basis of preparation:
a) Statement of compliance
These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Bank's audited Consolidated Financial Statements for the year ended October 31, 2012.
The interim Consolidated Financial Statements for the three and nine months ended July 31, 2013 and 2012 were approved by the Board of Directors on August 28, 2013.
b) Basis of measurement:
These interim Consolidated Financial Statements have been prepared on the historical cost basis except for securities designated as available-for-sale, loans in a hedging relationship and derivative liabilities that are measured at fair value in the Consolidated Balance Sheets.
c) Functional and presentation currency
These interim Consolidated Financial Statements are presented in Canadian dollars which is the Bank's functional currency. Except as indicated, the financial information presented has been rounded to the nearest thousand.
d) Use of estimates and judgements
In preparing these interim Consolidated Financial Statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Areas where significant judgment was applied or estimates were developed include the calculation of the allowance for credit losses, assessments of fair value and impairments of financial instruments and the measurement of deferred income taxes.
It is reasonably possible, on the basis of existing knowledge, that actual results may vary from that expected in the generation of these estimates. This could result in material adjustments to the carrying amounts of assets and/or liabilities affected in the future.
Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are applied prospectively once they are recognized.
3. Significant accounting policies:
The accounting policies applied by the Bank in these interim Consolidated Financial Statements are the same as those applied by the Bank as at and for the year ended October 31, 2012. There have been no changes in accounting policies nor any significant new policies adopted during the current period.
4. Securities:
Portfolio analysis:
| July 31 | October 31 | July 31 | |||||||||
| 2013 | 2012 | 2012 | |||||||||
| Available-for-sale securities | |||||||||||
| Securities issued or guaranteed by: | |||||||||||
| Canadian federal government | $ | 28,360 | $ | 76,841 | $ | 30,003 | |||||
| Canadian provincial governments | 18,609 | 48,526 | 9,939 | ||||||||
| Canadian municipal governments | 965 | 1,581 | 1,648 | ||||||||
| Corporate debt | 25,329 | 25,012 | 853 | ||||||||
| Total available-for-sale securities | $ | 73,263 | $ | 151,960 | $ | 42,443 | |||||
| Held-to-maturity security | |||||||||||
| Corporate debt | $ | 15,216 | $ | 15,267 | $ | 15,284 | |||||
| Total securities | $ | 88,479 | $ | 167,227 | $ | 57,727 | |||||
5. Loans:
a) Portfolio analysis:
| July 31 | October 31 | July 31 | |||||||||
| 2013 | 2012 | 2012 | |||||||||
| Residential mortgages | |||||||||||
| Insured | $ | 24,921 | $ | 35,966 | $ | 36,451 | |||||
| Uninsured | 247,403 | 230,129 | 235,329 | ||||||||
| Securitized mortgages | 41,245 | 41,894 | 42,100 | ||||||||
| Government financing | 143,419 | 172,326 | 185,968 | ||||||||
| Corporate loans | 616,553 | 630,738 | 644,970 | ||||||||
| Corporate leases | 90,433 | 71,131 | 87,958 | ||||||||
| Other loans | 3,869 | 5,080 | 5,097 | ||||||||
| Credit card receivables | 26,226 | 23,397 | 17,820 | ||||||||
| 1,194,069 | 1,210,661 | 1,255,693 | |||||||||
| Allowance for credit losses: | |||||||||||
| Collective | (3,235) | (3,283) | (3,182) | ||||||||
| Individual | (1,662) | (1,579) | (1,672) | ||||||||
| (4,897) | (4,862) | (4,854) | |||||||||
| 1,189,172 | 1,205,799 | 1,250,839 | |||||||||
| Accrued interest | 4,389 | 4,512 | 4,756 | ||||||||
| Total loans, net of allowance for credit losses | $ | 1,193,561 | $ | 1,210,311 | $ | 1,255,595 | |||||
The collective allowance for credit losses relates to the following loan portfolios:
| July 31 | October 31 | July 31 | ||||||||
| 2013 | 2012 | 2012 | ||||||||
| Residential mortgages | $ | 564 | $ | 600 | $ | 530 | ||||
| Corporate and government loans | 1,919 | 2,307 | 2,372 | |||||||
| Other loans | 8 | 24 | 30 | |||||||
| Credit card receivables | 744 | 352 | 250 | |||||||
| $ | 3,235 | $ | 3,283 | $ | 3,182 |
The Bank holds collateral against loans in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the nature of the underlying collateral. For mortgages secured by real estate, the value of collateral is determined at the time of borrowing by an appraisal. For loans secured by equipment, the value of collateral is assigned by the nature of the underlying equipment held.
b) Allowance for credit losses:
The allowance for credit losses results from the following:
| |
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|
|
|
|
|
|
|
July 31 2013 |
|
July 31 2012 |
| For the three months ended | Collective | Individual | Total Allowance |
Total Allowance |
|||||||
| Balance, beginning of the period | $ | 3,302 | $ | 1,622 | $ | 4,924 | $ | 4,612 | |||
| Provision for credit losses | 114 | 40 | 154 | 249 | |||||||
| Recoveries (write-offs) | (181) | - | (181) | (7) | |||||||
| Balance, end of the period | $ | 3,235 | $ | 1,662 | $ | 4,897 | $ | 4,854 | |||
| |
|
|
|
|
|
|
|
|
July 31 2013 |
|
July 31 2012 |
| For the nine months ended | Collective | Individual | Total Allowance |
Total Allowance |
|||||||
| Balance, beginning of the period | $ | 3,283 | $ | 1,579 | $ | 4,862 | $ | 4,387 | |||
| Provision for credit losses | 282 | 117 | 399 | 433 | |||||||
| Recoveries (write-offs) | (330) | (34) | (364) | 34 | |||||||
| Balance, end of the period | $ | 3,235 | $ | 1,662 | $ | 4,897 | $ | 4,854 | |||
c) Impaired loans:
| July 31, 2013 | ||||||||
| Gross impaired |
Individual allowance |
Net impaired | ||||||
| Residential mortgages | $ | 1,749 | $ | 1,662 | $ | 87 | ||
| Other loans | 6 | - | 6 | |||||
| $ | 1,755 | $ | 1,662 | $ | 93 | |||
| July 31, 2012 | ||||||||
| Gross impaired |
Individual allowance |
Net impaired | ||||||
| Residential mortgages | $ | 1,695 | $ | 1,672 | $ | 23 | ||
| Other loans | 28 | - | 28 | |||||
| $ | 1,723 | $ | 1,672 | $ | 51 | |||
Impaired loans at July 31, 2013 include foreclosed real estate held for sale with a gross carrying value of $111,000 (2012 - $159,000) and a related allowance of $111,000 (2012 - $120,000). Real estate held for sale is measured at the lower of cost and fair value less costs to sell.
Interest income recognized on impaired loans for the three and nine months ended July 31, 2013 was $40,000 (2012 - $38,000) and $117,000 (2012 - $111,000) respectively. An individual allowance has been recognized on the impaired loans to reflect the estimated recoverable amounts for impaired loans.
At July 31, 2013, loans, other than credit card receivables, past due but not impaired totalled $nil (2012 - $nil). At July 31, 2013, credit card receivables overdue by one day or more but not impaired totalled $2,080,000 (2012 - $849,000).
6. Subordinated notes payable:
| July 31 | October 31 | July 31 | |||||||||
| 2013 | 2012 | 2012 | |||||||||
| Ten year term, unsecured subordinated notes payable to Pacific & Western Credit Corp., maturing in 2022, net of note issue costs of $nil (October 31, 2012 - $383, July 31, 2012 - $394) effective interest of 11.29% |
$ | - | $ | 27,617 | $ | 27,606 | |||||
| Ten year term, unsecured, $11.5 million callable, subordinated notes payable by the Bank to a third party, maturing between 2019 and 2021, net of issue costs of $1,203 (October 31, 2012 - $1,302, July 31, 2012 - $1,333) effective interest of 10.92% |
20,297 | 22,198 | 22,167 | ||||||||
| $ | 20,297 | $ | 49,815 | $ | 49,773 | ||||||
7. Securitization liabilities:
Securitization liabilities include amounts payable to counterparties for cash received upon initiation of securitization transactions, accrued interest on amounts payable to counterparties, and the unamortized balance of deferred costs and discounts which arose upon initiation of the securitization transactions.
The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $41,035,000 (2012 - $41,837,000) are pledged as collateral for these liabilities.
8. Share capital:
During the nine months ended July 31, 2013, 3,333,334 (2012 - nil) common shares were issued for cash proceeds of $30,000,006 (2012 - $nil) to the Bank's parent company. The total number of common shares to be received by the parent company for this transaction is subject to adjustment once the offering price of the Initial Public Offering (IPO) of the Bank is determined. See Note 15 Subsequent Event. No common shares were issued during the three months ended July 31, 2013.
At July 31, 2013, there were 17,387,368 (2012 - 14,054,034) common shares outstanding. The number of shares outstanding and earnings per share for the three and nine months ended July 31, 2012 have been adjusted to reflect the 8:1 share consolidation which took place on December 31, 2012.
In August, subsequent to the end of the period, 804,597 additional common shares were issued as an adjustment to the shares issued to the parent company above based on the offering price of the IPO.
9. Other income:
| for the three months ended | for the nine months ended | |||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||
| 2013 | 2012 | 2013 | 2012 | |||||||
| Gain on sale of securities | $ | - | $ | 2,998 | $ | - | $ | 10,141 | ||
| Gain on sale of loans | - | - | 1,009 | - | ||||||
| Credit card non-interest revenue | 306 | 259 | 823 | 375 | ||||||
| Other income | 9 | 316 | 163 | 305 | ||||||
| Mark-to-market adjustment for derivatives | - | - | - | 96 | ||||||
| $ | 315 | $ | 3,573 | $ | 1,995 | $ | 10,917 | |||
10. Income taxes:
The Bank's statutory federal and provincial income tax rate is approximately 27% compared to 29% for the previous periods. The effective rate is impacted by certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:
| (thousands of Canadian dollars) | for the three months ended | for the nine months ended | ||||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||
| Income tax on earnings | $ | 348 | $ | - | $ | 790 | $ | - | ||||
| Tax on gain on sale of securities | - | 810 | - | 2,710 | ||||||||
| Other | - | - | - | - | ||||||||
| Substantively enacted rate changes | - | (376) | - | (376) | ||||||||
| $ | 348 | $ | 434 | $ | 790 | $ | 2,334 | |||||
11. Commitments and contingencies:
The amount of credit related commitments represents the maximum amount of additional credit that the Bank could be obligated to extend. Under certain circumstances, the Bank 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.
| July 31 | July 31 | |||||
| 2013 | 2012 | |||||
| Loan commitments | $ | 129,009 | $ | 216,184 | ||
| Undrawn credit card lines | 139,481 | 92,845 | ||||
| Letters of credit | 20,529 | 26,434 | ||||
| $ | 289,019 | $ | 335,463 | |||
In the ordinary course of business, cash and securities are pledged against liabilities and off-balance sheet items. Details of assets pledged are as follows:
| July 31 | July 31 | |||||
| 2013 | 2012 | |||||
| Collateral related to derivative transactions | $ | 3,964 | $ | 16,213 | ||
| Collateral related to letters of credit | 9,298 | 9,245 | ||||
| $ | 13,262 | $ | 25,458 | |||
12. Related party transactions:
During the three and nine months ended July 31, 2013, the Bank incurred interest expense of $nil (2012 - $783,000) and $1,124,000 (2012 - $2,425,000) respectively on subordinated notes held by its parent company, Pacific & Western Credit Corp. of which $nil (2012 - $263,000) in accrued interest was outstanding at July 31, 2013. During the three and nine months ended July 31, 2013, the Bank incurred management and other fees totalling $300,000 (2012 - $300,000) and $900,000 (2012 - $885,000) respectively to its parent company and a subsidiary of the parent.
The Bank's Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Bank has no other related parties for which there were transactions or outstanding balances during the period.
The Bank issues both mortgages and personal loans to employees and Senior Executive Officers. At July 31, 2013 amounts due from Senior Executive Officers totalled $725,000 (2012 - $961,000) and are unsecured.
The interest rates charged on these loans are similar to those charged in an arms-length transaction. Interest income earned on the above loans for the three and nine months ended July 31, 2013 was $9,000 (2012 - $10,000) and $28,000 (2012 - $30,000) respectively. There was no provision for credit losses related to loans issued to key management personnel for the three and nine months ended July 31, 2013 and 2012.
13. Capital management:
a) Overview:
The Bank'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 Bank 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 Bank operates as a bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI). OSFI sets and monitors capital requirements for the Bank.
Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and conditions in financial markets.
The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders. The Bank's regulatory capital is comprised of share capital, retained earnings and unrealized gains and losses on available-for-sale securities (Common Equity Tier 1 capital) and the face value of subordinated notes (Tier 2 capital).
The Bank monitors its capital adequacy and related capital ratios on a daily basis and has policies setting internal maximum and minimum amounts for its capital ratios. These capital ratios consist of the assets-to-capital multiple and the risk-based capital ratios.
During the period ended July 31, 2013 there were no material changes in the Bank's management of capital.
b) Risk-Based Capital Ratio:
The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III).
OSFI requires that all Canadian banks must comply with the Basel III standards on an "all-in" basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.50% capital conservation buffer. The Basel III rules provide for "transitional" adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.
OSFI also 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 as specified in the Basel III regulations. Based on the deemed credit risk for each type of asset, assets held by the Bank are assigned a weighting of 0% to 150% to determine the risk-based capital ratio.
The Bank's risk-based capital ratios are calculated as follows:
| July 31, 2013 | ||||||||
| "All-in" | "Transitional" | |||||||
| Common Equity Tier 1 (CET1) capital | ||||||||
| Directly issued qualifying common share capital | $ | 133,965 | $ | 133,965 | ||||
| Retained earnings (deficit) | (8,979) | (8,979) | ||||||
| Accumulated other comprehensive income | 28 | 28 | ||||||
| CET1 before regulatory adjustments | 125,014 | 125,014 | ||||||
| Regulatory adjustments applied to CET1 | (8,523) | - | ||||||
| Total Common Equity Tier 1 capital | $ | 116,491 | $ | 125,014 | ||||
| Additional Tier 1 capital | ||||||||
| Directly issued qualifying Additional Tier 1 instruments | - | - | ||||||
| Total Tier 1 capital | $ | 116,491 | $ | 125,014 | ||||
| Tier 2 capital | ||||||||
| Directly issued capital instruments subject to phase out from Tier 2 | $ | 21,500 | $ | 21,500 | ||||
| Tier 2 capital before regulatory adjustments | 21,500 | 21,500 | ||||||
| Regulatory adjustments applied to Tier 2 | (3,545) | - | ||||||
| Total Tier 2 capital | $ | 17,955 | $ | 21,500 | ||||
| Total capital | $ | 134,446 | $ | 146,514 | ||||
| Total risk-weighted assets | $ | 1,107,029 | $ | 1,119,096 | ||||
| Capital ratios | ||||||||
| CET1 Ratio | 10.52% | 11.17% | ||||||
| Tier 1 Capital Ratio | 10.52% | 11.17% | ||||||
| Total Capital Ratio | 12.14% | 13.09% | ||||||
c) Assets-to-Capital Multiple:
The Bank's growth in total assets is governed by a permitted assets-to-capital multiple which is prescribed by OSFI and is defined as the ratio of the total assets of the Bank to its regulatory capital. The Bank's assets-to-capital multiple is calculated as follows:
| July 31 | |||||||
| 2013 | |||||||
| Total assets (on and off-balance sheet) | $ | 1,427,871 | |||||
| Capital | |||||||
| Common shares | $ | 133,965 | |||||
| Retained earnings (deficit) | (8,979) | ||||||
| Accumulated other comprehensive income | 28 | ||||||
| Subordinated notes (leverageable amount) | 21,500 | ||||||
| Total regulatory capital | $ | 146,514 | |||||
| Assets-to-capital ratio | 9.75 | ||||||
The Bank was in compliance with the assets-to-capital multiple prescribed by OSFI throughout the period presented.
14. Interest rate position:
The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholder's equity. The following table provides the duration difference between the Bank's assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank's shareholder's equity over a 60 month period if no remedial actions are taken.
| July 31, 2013 | July 31, 2012 | ||||||||||
| Increase 100 bps |
Decrease 100 bps |
Increase 100 bps |
Decrease 100 bps |
||||||||
| Sensitivity of projected net interest | |||||||||||
| income during a 12 month period | $ | 5,049 | $ | (4,997) | $ | 5,975 | $ | (5,919) | |||
| Sensitivity of projected net interest | |||||||||||
| income during a 60 month period | $ | 2,906 | $ | (2,890) | $ | 9,364 | $ | (9,983) | |||
| Duration difference between assets and | |||||||||||
| liabilities (months) | 2.9 | 3.7 | |||||||||
15. Segmented information:
The Bank determines its operating segments based on the different business activities of its component operations. The Bank has identified two distinct operating segments: commercial lending and credit card lending.
The commercial lending segment consists of the operations of the Bank related to issuing loans and leases and participating in securitization arrangements. The commercial lending segment is supported by deposit taking, treasury and administrative activities. The credit card lending segment consists of the operations of the Bank related to its private label credit card program.
Operating segment financial results are based on internal financial reporting documents which are provided to the Bank's chief decision makers. The financial results for all segments are presented on a consolidated basis. Transactions between segments have been eliminated.
The following table details financial results for the Bank by operating segment:
| For the three months ended | July 31, 2013 | |||||||||
| Commercial lending |
Credit card lending |
Total | ||||||||
| Net interest income | $ | 6,363 | $ | 370 | $ | 6,733 | ||||
| Other income (charges) | (278) | 306 | 28 | |||||||
| Net interest income and other income | 6,085 | 676 | 6,761 | |||||||
| Provision for (recovery of) credit losses | (215) | 369 | 154 | |||||||
| Net interest and other income after provision for credit losses | 6,300 | 307 | 6,607 | |||||||
| Non-interest expense | 4,887 | 494 | 5,381 | |||||||
| Income (loss) before income taxes | 1,413 | (187) | 1,226 | |||||||
| Income tax expense | 348 | - | 348 | |||||||
| Net income (loss) | $ | 1,065 | $ | (187) | $ | 878 | ||||
| For the three months ended | July 31, 2012 | |||||||||
| Commercial lending |
Credit card lending |
Total | ||||||||
| Net interest income | $ | 4,990 | $ | 69 | $ | 5,059 | ||||
| Other income | 3,314 | 259 | 3,573 | |||||||
| Net interest income and other income | 8,304 | 328 | 8,632 | |||||||
| Provision for (recovery of) credit losses | 112 | 137 | 249 | |||||||
| Net interest and other income after provision for credit losses | 8,192 | 191 | 8,383 | |||||||
| Non-interest expense | 5,177 | 989 | 6,166 | |||||||
| Income (loss) before income taxes | 3,015 | (798) | 2,217 | |||||||
| Income tax expense | 434 | - | 434 | |||||||
| Net income (loss) | $ | 2,581 | $ | (798) | $ | 1,783 | ||||
| For the nine months ended | July 31, 2013 | |||||||||
| Commercial lending |
Credit card lending |
Total | ||||||||
| Net interest income | $ | 17,901 | $ | 858 | $ | 18,759 | ||||
| Other income | 383 | 823 | 1,206 | |||||||
| Net interest income and other income | 18,284 | 1,681 | 19,965 | |||||||
| Provision for (recovery of) credit losses | (365) | 764 | 399 | |||||||
| Net interest and other income after provision for credit losses | 18,649 | 917 | 19,566 | |||||||
| Non-interest expense | 14,647 | 2,175 | 16,822 | |||||||
| Income (loss) before income taxes | 4,002 | (1,258) | 2,744 | |||||||
| Income tax expense | 790 | - | 790 | |||||||
| Net income (loss) | $ | 3,212 | $ | (1,258) | $ | 1,954 | ||||
| Total assets | $ | 1,381,116 | $ | 26,226 | $ | 1,407,342 | ||||
| Total liabilities | $ | 1,282,328 | $ | - | $ | 1,282,328 | ||||
| For the nine months ended | July 31, 2012 | |||||||||
| Commercial lending |
Credit card lending (1) |
Total | ||||||||
| Net interest income | $ | 14,042 | $ | 63 | $ | 14,105 | ||||
| Other income | 10,542 | 375 | 10,917 | |||||||
| Net interest income and other income | 24,584 | 438 | 25,022 | |||||||
| Provision for credit losses | 176 | 257 | 433 | |||||||
| Net interest and other income (loss) after provision for credit losses | 24,408 | 181 | 24,589 | |||||||
| Non-interest expense | 15,124 | 2,400 | 17,524 | |||||||
| Income (loss) before income taxes | 9,284 | (2,219) | 7,065 | |||||||
| Income tax expense | 2,334 | - | 2,334 | |||||||
| Net income (loss) | $ | 6,950 | $ | (2,219) | $ | 4,731 | ||||
| Total assets | $ | 1,520,949 | $ | 17,820 | $ | 1,538,769 | ||||
| Total liabilities | $ | 1,444,780 | $ | - | $ | 1,444,780 | ||||
| Note 1: The Credit card lending segment began operations on January 2, 2012 |
16. Subsequent event:
On August 20, 2013, the Bank filed its final prospectus and on August 27, 2013 its common shares began trading on the Toronto Stock Exchange. Under the terms of the IPO, 400,000 common shares of the Bank were issued at a price of $7.25 per share before commissions and other expenses of the offering. In addition, under a secondary offering of the IPO, the parent company sold 1,100,000 of its common shares of the Bank at $7.25 per share before commissions. From the net proceeds the parent company purchased an additional 620,206 shares of the Bank for $4,496,494. As a result of these transactions, the Corporation's ownership interest in the Bank decreased from 100% to approximately 92%.
As part of the IPO, the syndicate of agents have been granted an Over-Allotment Option exercisable in whole or in part for a period of 30 days following the closing of the IPO, to purchase up to an additional 225,000 Common Shares from the Bank at a price of $7.25 per Common Share.
Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.4 billion in assets. PWBank specializes in providing commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.
Pacific & Western Bank of Canada shares trade on the TSX under the symbol PWB.
On behalf of the Board of Directors: David R. Taylor, President & C.E.O.
To receive company news releases, please contact:
Wade MacBain at [email protected] (519) 675-4201
FOR FURTHER INFORMATION PLEASE CONTACT:
Investor Relations: (800) 244-1509, [email protected]
Public Relations & Media: Tel Matrundola, Vice-President, (416) 203-0882, [email protected]
Visit our website at: http://www.pwbank.com
SOURCE: Pacific & Western Bank of Canada
Visit our website at: http://www.pwbank.com.
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