Pacific & Western Bank of Canada Announces Results for Its First Quarter Ended January 31, 2014

First Quarter Report
January 31, 2014

LONDON, Ontario--()--Pacific & Western Bank of Canada (TSX:PWB):

FIRST QUARTER HIGHLIGHTS (1)
(three months ended January 31, 2014, compared to three months ended January 31, 2013, unless otherwise noted)

  • Net interest margin or spread for the current quarter increased 23% to 1.95% from 1.59%.
  • Net interest income of the Bank for the three months ended January 31, 2014 increased $1.0 million to $6.9 million.
  • Non-interest expenses for the three months ended January 31, 2014, decreased to $5.5 million from $5.7 million for the same period a year ago.
  • Net income for the quarter was $975,000 or $0.05 per share (basic and diluted) compared to $1.1 million or $0.08 per share (basic and diluted) a year ago. Adjusted net income, which excludes restructuring charges of the Bank, was $1.3 million. Restructuring charges relate to unamortized note issue costs resulting from the early retirement of subordinated notes payable.
  • Credit quality remains strong with negligible gross impaired loans at January 31, 2014 of $6,000 compared to $1.7 million a year ago.
  • At January 31, 2014, the Bank’s Common Equity Tier 1 (CET1) ratio compared favourably to the industry with a ratio of 11.54% compared to 7.82% a year ago.

(1) Certain first quarter highlights include non-GAAP measures. See definition under ‘Basis of Presentation’ in the attached Management’s Discussion and Analysis.

PRESIDENT’S COMMENTS

Results for our Bank continue to steadily improve despite a 2% decline in loan balances this past quarter to $1.14 billion. This decline resulted from the repayment of some large Toronto condominium loans, and a slowdown in construction draws due to the holiday season and the unusually cold winter in Southwestern Ontario. I expect that construction draws will rebound in the spring, increasing loan balances. Our bulk loan and lease purchase program, however, continued to grow, increasing by 22% to $229 million at the end of the quarter. We purchase loans and leases from an increasing number of financiers who operate throughout Canada and in a variety of industries. I am very pleased with the steady progress we are making with this initiative.

Our Net Interest Margin (NIM) remained constant over the previous quarter at a reasonable 1.95%, giving rise to total revenue of $ 7.3 million, virtually the same amount that was achieved in the previous quarter. Non-interest expenses continued to decrease, reducing to $5.5 million, a 9% reduction from the previous quarter’s figure. These factors contributed to a 73% increase in profit before taxes and restructuring charges of $1.8 million, versus $1.0 million earned before taxes and restructuring charges in the previous quarter. Towards the end of the quarter we repaid some of the Bank’s high priced subordinate debt, and expensed the unamortized issue costs of approximately $434,000 associated with this debt. The benefit of retiring this expensive debt will be reflected in increased NIM and earnings in future quarters.

Our custom banking solution for trustees in the bankruptcy industry continued to be enthusiastically adopted and we now have approximately 500 accounts with balances totaling over $50 million. This new economical source of deposits will reduce our cost of funds and serve to further increase our NIM. Now that we have successfully developed the technology and systems to provide internet banking with chequing capabilities, we are seeking other niche markets that may benefit from a custom banking service.

Alvin Toffler, in his book “Future Shock”, predicted many years ago that in the future technology would change at an ever increasing pace. With our dedicated team of software engineers that have proven over and over again that they are capable of rapidly developing and bringing to market ideally suited new banking solutions, we at Pacific & Western Bank of Canada feel that we are uniquely suited to take advantage of these changes as they appear. What might be “shock” for others is “opportunity” for Pacific & Western. We are excited about what the future holds for the Bank.



 
FINANCIAL HIGHLIGHTS            
(unaudited)     as at
January 31 October 31 January 31
($CDN thousands except per share amounts )     2014     2013     2013
Balance Sheet Summary
Cash and securities $ 271,713 $ 216,214 $ 231,809
Total loans 1,136,132 1,158,933 1,173,287
Average loans 1,147,533 1,176,247 1,191,799
Total assets 1,437,288 1,404,608 1,433,585
Average assets 1,420,948 1,405,975 1,483,877
Deposits 1,221,247 1,187,404 1,233,453
Subordinated notes payable 13,796 20,332 49,856
Shareholders' equity 134,169 133,133 94,234
Capital ratios
Assets-to-capital ratio 10.06 9.33 10.37
Risk-weighted assets 1,089,269 1,101,190 1,091,513
Common Equity Tier 1 capital 125,722 124,278 85,335
Common Equity Tier 1 ratio 11.54% 11.29% 7.82%
Tier 1 risk-based capital ratio 11.54% 11.29% 7.82%
Total risk-based capital ratio     12.64%     12.99%     11.45%
      for the three months ended
Results of operations
Net interest income $ 6,935 $ 6,896 $ 5,929
Net interest margin 1.95% 1.95% 1.59%
Other income 337 325 1,280
Total revenue 7,272 7,221 7,209
Provision for (recovery of) credit losses (51) 125 (21)
Non-interest expenses 5,534 6,060 5,680
Restructuring charges 434 1,275 -
Net income (loss) 975 (190) 1,115
Adjusted net income * 1,292 741 1,115
Income (loss) per common share:
Basic $ 0.05 $ (0.01) $ 0.08
Diluted     $ 0.05     $ (0.01)     $ 0.08
Return on average total assets 0.27% -0.05% 0.30%
Book value per common share* $ 6.90 $ 6.85 $ 6.71
Gross impaired loans to total loans 0.00% 0.00% 0.14%
Provision for credit losses as a % of average loans     0.00%     0.01%     0.00%
* This is a non-GAAP measure. See definition under 'Basis of Presentation' in the attached Management's Discussion
and Analysis
 

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 first quarter of fiscal 2014, dated March 4, 2014, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended January 31, 2014, 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, 2013, which are available on SEDAR at www.sedar.com. Except as discussed below, all other factors discussed and referred to in the MD&A for the year ended October 31, 2013, 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) 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.

Book Value Per Common Share

Book value per common share is defined as Shareholders’ Equity divided by the number of common shares outstanding.

Adjusted Net Income (Loss)

Adjusted net income (loss) is defined as net income (loss) for the period prior to deducting restructuring charges on an after-tax basis.

 

(thousands of Canadian dollars)

    for the three months ended
    January 31     January 31
        2014       2013
 
Net income $ 975 $ 1,115
 
Restructuring charges, net of tax 317 -
             
Adjusted net income     $ 1,292     $ 1,115
 

Segment Reporting

Commencing this quarter, the operating results are presented as one segment – Commercial Banking Services and operating in one geographic region which is Canada.

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. On August 27, 2013, the Bank commenced trading on the Toronto Stock Exchange. The Bank is the principal subsidiary of Pacific & Western Credit Corp. operating as PWC Capital (the “Corporation” or “PWC”) whose securities are also listed and trade on the Toronto Stock Exchange.

Net income (loss) of the Bank for the three months ending January 31, 2014, was $975,000 or $0.05 per share (basic and diluted) compared to ($190,000) or ($0.01) per share (basic and diluted) for the previous quarter and $1.1 million or $0.08 per share (basic and diluted) for the same period a year ago. Before deducting restructuring charges which totalled $317,000 on an after-tax basis, adjusted net income was $1.3 million for the quarter. These restructuring charges consist of costs related to the retirement of subordinated notes which took place in December 2013. Included in net income for the same period a year ago were pre-tax gains of $1.0 million on the sale of loans. There were no gains realized on the sale of loans in the current quarter or previous quarter.

Net interest income and net interest margin for the three months ended January 31, 2014 were $6.9 million and 1.95% respectively compared to $6.9 million and 1.95% for the previous quarter and $5.9 million and 1.59% for the same period a year ago. Net interest income and net interest margin increased from a year ago due to lower interest expense as a result of the repayment of subordinated notes over the past year, a decrease in the amount of deposits outstanding and the booking of new loans with larger spreads.

At January 31, 2014, total assets of the Bank were $1.44 billion compared to $1.40 billion at the end of the previous quarter and $1.43 billion a year ago. Lending assets at the end of the current quarter totalled $1.14 billion compared to $1.16 billion at the end of the previous quarter and $1.17 billion a year ago with the decrease from the previous quarter due to several large repayments that occurred in the commercial loan and government financing portfolios. The level of cash and securities increased from the previous quarter and a year ago due to the holding of cash and securities to fund a large amount of deposits maturing in the coming two quarters and proceeds received from the recent repayment of several large loans.

Credit quality remains strong, with gross impaired loans totalling $6,000 at January 31, 2014, compared to $7,000 at the end of the previous quarter and $1.7 million a year ago.

At January 31, 2014, the Bank continued to significantly exceed the CET1 capital requirement of 7.0% with a ratio of 11.54% compared to 11.29% at the end of the previous quarter and 7.82% a year ago. In addition, at January 31, 2014, the Bank’s Tier 1 capital ratio was 11.54% and its total capital ratio was 12.64%. Required minimum regulatory capital ratios are a Common Equity Tier 1 (CET1) capital ratio of 7.0%, a Tier 1 capital ratio of 8.5% and a total capital ratio of 10.5%, all of which include a 2.50% capital conservation buffer.

Total Revenue

Total revenue consists of net interest income and other income. For the three months ended January 31, 2014, total revenue of the Bank was $7.3 million compared to $7.2 million for the previous quarter and $7.2 million for the same period last year. Total revenue for the same period a year ago included gains of $1.0 million from the sale of loans compared to $nil in subsequent quarters.

Net Interest Income and Net Interest Margin

Net interest income of the Bank for the three months ended January 31, 2014 was $6.9 million compared to $6.9 million for the previous quarter and $5.9 million for the same period last year. The increase in net interest income from a year ago was due primarily to a decrease in interest expense as a result of the repayment of subordinated notes payable, a decrease in the amount of deposits outstanding and loans that matured over the past year being replaced with loans with larger spreads. Net interest margin for the three months ended January 31, 2014 was 1.95%, unchanged from the previous quarter, and 1.59% for the same period last year with the increase due to the factors noted above.

Other Income

Other income for the three months ended January 31, 2014 was $337,000 compared to $325,000 for the previous quarter and $1.3 million for the same period a year ago. Other income in the current and previous quarters consists primarily of fees from credit cards. Other income for the same period a year ago includes gains of $1.0 million from the sale of loans. There were no loans sold in subsequent quarters.

Non-Interest Expenses

Non-interest expenses of the Bank, excluding restructuring charges, totalled $5.5 million for the current quarter compared to $6.1 million for the previous quarter and $5.7 million for the same period a year ago. The decrease in non-interest expenses from the previous quarter was due primarily to timing of expenses.

For the three months ending January 31, 2014, the Bank incurred restructuring charges totalling $434,000 which relate to the repayment of subordinated notes which took place in December 2013.

Income Taxes

The Bank’s statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The effective rate is impacted by certain items not being taxable or deductible for income tax purposes.

For the current quarter, the provision for income taxes was $380,000 compared to $435,000 for the same period a year ago with the decrease due to lower taxable income.

At January 31, 2014, the Bank has a deferred income tax asset of $8.3 million compared to $8.7 million a year ago with the decrease due to the tax effect of operating results in the Bank over the past year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $41 million from previous periods. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

Comprehensive Income

Comprehensive income is comprised of the net income for the period and other comprehensive income which consists primarily of unrealized gains and losses on available-for-sale securities. Comprehensive income for the three months ended January 31, 2014 was $1.0 million compared to $1.1 million a year ago. The change from a year ago is due to the net income in the current period being less than that last year.

Consolidated Balance Sheet

Total assets of the Bank at January 31, 2014, were $1.44 billion compared to $1.40 billion at the end of the previous quarter and $1.43 billion a year ago. Cash and securities increased from the previous periods in order to fund a large amount of deposits coming due in the next two quarters. Lending assets decreased from previous periods due to several large loan repayments which took place during the current quarter.

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, term deposits and debt of other financial institutions. Cash and securities, which are held primarily for liquidity purposes, totalled $271.7 million or 18.9% of total assets compared to $216.2 million or 15.4% of total assets at the end of the previous quarter and $231.8 million or 16.2% of total assets a year ago. The increase in cash and securities from the end of the previous quarter and from a year ago was a result of the Bank carrying higher levels of cash and securities to fund higher amounts of deposits maturing in the coming two quarters and proceeds from the recent repayment of several large loans.

At January 31, 2014, unrealized gains in the Bank’s available-for-sale securities portfolio were $92,000 compared to unrealized gains of $33,000 at the end of the previous quarter and $119,000 a year ago. In addition, there was an unrealized loss of $291,000 at January 31, 2014 relating to a security the Bank classifies as held-to-maturity, compared to an unrealized loss of $435,000 at the end of the previous quarter and $806,000 a year ago. This unrealized loss is 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.

The Basel III Committee on Banking Supervision (the Basel Committee) has issued a framework outlining new liquidity standards. The framework prescribes two new standards being the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) as minimum regulatory standards beginning in 2015 and 2018 respectively. The LCR establishes a common measure of liquidity risk and requires financial institutions to maintain sufficient liquid assets to cover a minimum of 30 days of cash flow in a stressed scenario. The NSFR describes a second common measure of liquidity establishing a minimum acceptable amount of stable funding based on the liquidity characteristics of an institution’s assets and activities over a one year time horizon. Although the Basel Committee has introduced a phase-in period for compliance with the LCR guidelines, banks in Canada will be required to fully comply with the LCR in 2015 with no phase-in. Based on its review of these new liquidity standards, the Bank is of the view that it is well positioned to comply with the new requirements.

Loans

Loans totalled $1.14 billion at January 31, 2014, compared to $1.16 billion at the end of the previous quarter and $1.17 billion a year ago with the decrease from the previous quarter and a year ago due primarily to several large loan repayments which took place in the current quarter, net of loan advances.

At January 31, 2014, the balances of individual loan categories remained comparable with those from the previous quarter with the exception of decreases in government financings and commercial loans offset slightly by increases in commercial leases. The decrease in government financings from a year ago was due to market conditions and the Bank shifting its focus to commercial and consumer lending opportunities. The decrease in commercial loans was due primarily to several large repayments in the current quarter. The increase in commercial and consumer leases was due to fundings sourced through the bulk purchase program exceeding repayments.

Commercial and consumer loans and leases which were sourced through the bulk purchase program showed significant growth, totalling $228.9 million at January 31, 2014 compared to $187.8 million at the end of the previous quarter and $121.1 million a year ago. The bulk purchase program which is diversified, includes individual loans and leases and is well collateralized, continues to be a key initiative for the Bank and is expected to be the primary driver for growth of the Bank’s lending portfolio in the coming year.

Overall, new lending for the quarter totalled $138.8 million compared to $153.0 million for the previous quarter and $136.0 million a year ago. Loan repayments for the quarter totalled $161.6 million compared to $187.5 million for the previous quarter and $175.0 million, including loan sales, a year ago.

Residential mortgage exposure

In accordance with OSFI Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures, additional information is provided regarding the Bank’s residential mortgage exposure. For the purposes of the Guideline, a residential mortgage is defined as a loan to an individual that is secured by residential property (one to four unit dwellings), which differs from the Bank’s definition of a residential mortgage. This includes home equity lines of credit (HELOC’s).

Under OSFI’s definition, the Bank’s exposure to residential mortgages is not significant and at January 31, 2014 totalled $1.2 million, unchanged from the end of the previous quarter and compared to $1.6 million a year ago. The Bank did not have any HELOC’s outstanding at January 31, 2014 or a year ago.

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 January 31, 2014, totalled $6,000 compared to $7,000 at the end of the previous quarter and $1.7 million a year ago. The provision for (recovery of) credit losses in the current quarter was ($51,000) compared to $125,000 for the previous quarter and ($21,000) a year ago. The recovery of credit losses in the current quarter was a result of the decrease in lending assets in the quarter, specifically repayments of several large commercial loans which tend to attract a higher level of collective allowance.

At January 31, 2014, the Bank’s collective allowance totalled $2.9 million compared to $3.3 million at the end of the previous quarter and $3.2 million a year ago. Included in the Bank’s collective allowance at January 31, 2014 was $858,000 relating to credit card receivables compared to $809,000 at the end of the previous quarter and $425,000 a year ago with the increase due to the growth and maturation of credit card receivables. Net impaired loans at January 31, 2014, totalled $6,000 compared to $7,000 at the end of the previous quarter and $104,000 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 $29.4 million at January 31, 2014, compared to $29.5 million at the end of the previous quarter and $28.5 million a year ago. Included in other assets is the deferred income tax asset of $8.3 million compared to $8.7 million at the end of the previous quarter and $8.7 million a year ago. Also included in other assets are capital assets and prepaid expenses of $16.4 million at January 31, 2014 compared to $16.7 million at the end of the previous quarter and $15.9 million a year ago.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at January 31, 2014 totalled $1.22 billion compared to $1.19 billion at the end of the previous quarter and $1.23 billion a year ago, and consist primarily of guaranteed investment certificates. Of the total amount of deposits, $21.6 million or approximately 1.8% of total deposits at the end of the current quarter were in the form of demand deposits compared to $22.7 million or 1.9% of total deposits at the end of the previous quarter and $25.5 million or approximately 2.1% of total deposits a year ago. In addition, the Bank has chequing accounts related to trustees in the bankruptcy industry as discussed below.

In order to diversify its sources of deposits and reduce its cost of new deposits, the Bank identified another source, that being chequing accounts of trustees in the bankruptcy industry. The Bank developed banking software to enable this market to efficiently administer its chequing accounts and launched this product in April 2012. These services are being offered to trustees in the bankruptcy industry across Canada and at January 31, 2014, outstanding chequing accounts from this source totalled $51.6 million compared to $35.4 million at the end of the previous quarter and $4.1 million a year ago.

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 January 31, 2014, the Bank did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding over the past year.

Other liabilities consist primarily of accounts payable and accruals. At January 31, 2014, other liabilities totalled $24.5 million compared to $20.3 million at the end of the previous quarter and $12.6 million a year ago with the increase due to larger amounts of cash being held as collateral and in escrow relating to security for loans and leases sourced through the Bank’s bulk financing program which showed significant growth over the past year.

Securitization Liabilities

The Bank has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At January 31, 2014, securitization liabilities totalled $43.5 million compared to $43.4 million at the end of the previous quarter and $43.5 million a year ago. The Bank has not entered into any securitization transactions in the past 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 $40.6 million are pledged as collateral for these liabilities.

Subordinated Notes Payable

Subordinated notes payable, net of issue costs, totalled $13.8 million at January 31, 2014 compared to $20.3 million at October 31, 2013. The decrease in subordinated notes payable was a result of the Bank repaying $7.0 million of subordinated notes that were due to an unrelated party in December, 2013. These subordinated notes payable had a carrying value of $6.6 million. The difference of $434,000 relating to unamortized note issue costs was recorded as restructuring charges. Excluding issue costs, subordinated notes payable consist of $14.5 million issued by the Bank to an unrelated party. These subordinated notes, of which $4.5 million are currently callable and $10 million are callable beginning in 2016, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.

Shareholders’ Equity

At January 31, 2014, shareholders’ equity was $134.2 million compared to $133.1 million at the end of the previous quarter with the increase due to earnings.

Common shares outstanding at January 31, 2014 totalled 19,437,171 unchanged from October 31, 2013. Common share options totalled 40,000 at January 31, 2014, also unchanged from October 31, 2013.

The Bank’s book value per common share at January 31, 2014 was $6.90 compared to $6.71 a year ago after adjusting for the share consolidation that took place on December 31, 2012.

Updated Share Information

As at March 4, 2014, there were no changes since January 31, 2014 in the number of outstanding common shares and common share options.

Off-Balance Sheet Arrangements

As at January 31, 2014, 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 10 to the unaudited interim consolidated financial statements for more information.

Related Party Transactions

During the three months ended January 31, 2014, the Bank incurred interest expense of $nil (January 31, 2013 - $807,000) on subordinated notes held by PWC. During the three months ended January 31, 2014, the Bank incurred management and other fees totalling $300,000 (January 31, 2013 - $300,000) paid to PWC and a subsidiary of PWC.

The Bank’s and PWC’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 11 to the unaudited interim consolidated financial statements for additional information on related party transactions and balances.

Risk Management

The risk management policies and procedures of the Bank are provided in its annual MD&A for the year ended October 31, 2013, and are found on pages 40 to 46 of the Bank’s 2013 Annual Report.

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 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 $137.6 million at January 31, 2014 compared to $143.0 million at the end of the previous quarter and $125.0 million a year ago. The decrease in total capital from the previous quarter was due to the repayment in December 2013 of $7 million of subordinated notes by the Bank. At January 31, 2014, the Bank exceeded the current regulatory capital requirements with a CET1 ratio of 11.54% compared to 11.29% at the end of the previous quarter and 7.82% a year ago. In addition, the Bank’s total capital ratio was 12.64% at January 31, 2014 compared to 12.99% at the end of the previous quarter, which exceed the capital requirements that became effective January 1, 2014. The Bank’s assets-to-capital ratio at January 31, 2014 was 10.06 compared to 9.33 at the end of the previous quarter and 10.37 a year ago. The change from the previous quarter was due to a regulatory phase-in adjustment that began January 1, 2014 and the decrease in total capital of the Bank.

See note 12 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 net interest margin, 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.

 
      January 31, 2014     January 31, 2013
     

Increase 100
bps

   

Decrease 100
bps

   

Increase 100
bps

   

Decrease 100
bps

               
Impact on projected net interest
income during a 12 month period $ 3,550 $ (3,509 ) $ 4,436 $ (4,503 )
Impact on reported equity
during a 60 month period $ (80 ) $ 206 $ 1,824 $ (2,175 )
                         
Duration difference between assets and
liabilities (months)       0.4               1.3      
 

The change in exposure to a 100 basis point shift in interest rates in a 60 month period and the change in the duration difference between assets and liabilities from a year ago was due primarily to the decrease in securities and increase in cash and cash equivalents as well as longer term loans being replaced by shorter term loans, both of which resulted in a decrease in the duration of assets at the end of the current quarter.

Liquidity

The unaudited Consolidated Statement of Cash Flows for the Bank for the three months ended January 31, 2014 shows cash provided by (used in) operations of $62.4 million compared to ($64.9 million) for the same period last year. 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.

Contractual Obligations

Contractual obligations of the Bank as disclosed in its MD&A and audited consolidated financial statements for the year ended October 31, 2013, have not changed significantly as at January 31, 2014.

 

Summary of Quarterly Results

                               
 
($CDN thousands except per share amounts) 2014 2013 2012 *
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Results of operations:
Total interest income $ 14,949 $ 15,210 $ 15,242 $ 14,776 $ 15,695 $ 15,620 $ 15,350 $ 14,924
Yield on assets (%) 4.21% 4.30% 4.32% 4.29% 4.20% 4.04% 3.78% 3.73%
Interest expense 8,014 8,314 8,509 8,679 9,766 10,117 10,291 10,650
Cost of funds (%) 2.26% 2.35% 2.41% 2.52% 2.61% 2.62% 2.54% 2.66%
Net interest income 6,935 6,896 6,733 6,097 5,929 5,503 5,059 4,274
Net interest margin (%) 1.95% 1.95% 1.91% 1.77% 1.59% 1.42% 1.25% 1.07%
Other income 337 325 315 400 1,280 2,370 3,573 3,939
Total revenue 7,272 7,221 7,048 6,497 7,209 7,873 8,632 8,213
Provision for (recovery of) credit losses (51) 125 154 266 (21) 28 249 -
Non-interest expenses 5,534 6,060 5,381 5,761 5,680 6,819 6,166 6,063
Restructuring charges (434) (1,275) (287) (502) - - - -
Income (loss) before income taxes 1,355 (239) 1,226 (32) 1,550 1,026 2,217 2,150
Income tax provision (recovery) 380 (49) 348 7 435 1,933 434 1,040
Net income (loss) $ 975 $ (190) $ 878 $ (39) $ 1,115 $ (907) $ 1,783 $ 1,110
Income (loss) per share *
-basic $ 0.05 $ (0.01) $ 0.05 $ 0.00 $ 0.08 $ (0.06) $ 0.13 $ 0.08
-diluted $ 0.05 $ (0.01) $ 0.05 $ 0.00 $ 0.08 $ (0.06) $ 0.13 $ 0.08
 
* EPS for all periods have been adjusted to reflect the 8:1 share consolidation which took place on December 31, 2012.
 

The financial results of the Bank 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 some seasonality occurring in residential construction lending. Total interest income and yield decreased in the first quarter of 2014 due primarily to several large loan repayments which took place during the quarter. Interest expense decreased in the first quarter of 2014 as a result of the repayment of $7 million in subordinated notes in the quarter and decreased over the past year as a result of the repayment of $30 million in subordinated notes in March, 2013.

Other income during the quarters shows variability due to the level of gains realized in previous periods on the sale of securities and in the fourth quarter of 2012 and first quarter of 2013 from the sale of loans. The level of other income since the first quarter of 2013 has been comparable and relates primarily to credit card fees.

Non-interest expenses reflect a strategy to reduce overhead expenses, primarily with respect to the credit card program and the timing of expenses. Restructuring charges in the first quarter of 2014 resulted from the write off of unamortized issue costs related to the repayment of subordinated notes and in the fourth quarter of 2013, relate to expenses incurred from the IPO as well as other restructuring costs.

The provision for income taxes in each of the quarters reflects the effective statutory income tax rate applied to earnings (losses). 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.

Significant Accounting Policies and Use of Estimates and Judgments

Significant accounting policies are detailed in Note 3 of the Bank’s 2013 Audited Consolidated Financial Statements. There has been no change in accounting policies except that segment disclosure is no longer provided as the Bank determined that credit card operations are not a significant part of its business. The impact of new standards adopted during the current period was not material.

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, or available-for-sale. All financial liabilities are classified as other liabilities. Financial assets held-to-maturity, loans and receivables and financial liabilities 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 include Canadian municipal bonds. For Canadian municipal 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 the own credit requirement of 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 future results, please see page 47 of our 2013 Annual Report.

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

 

PACIFIC & WESTERN BANK OF CANADA

Consolidated Balance Sheets

(Unaudited)

           
(thousands of Canadian dollars)                  
January 31 October 31 January 31
As at         2014       2013       2013
 
Assets
 
Cash and cash equivalents $ 209,210 $ 176,323 $ 95,846
Securities (note 4) 62,503 39,891 135,963
Loans, net of allowance for credit losses (note 5) 1,136,132 1,158,933 1,173,287
Other assets 29,443 29,461 28,489
                     
        $ 1,437,288       $ 1,404,608       $ 1,433,585  
 
Liabilities and Shareholders' Equity
 
Deposits $ 1,221,247 $ 1,187,404 $ 1,233,453
Subordinated notes payable (note 6) 13,796 20,332 49,856
Securitization liabilities (note 7) 43,539 43,410 43,484
Other liabilities       24,537         20,329         12,558  
1,303,119 1,271,475 1,339,351
 
Shareholders' equity:
Share capital (note 8) 142,296 142,278 103,965
Retained earnings (deficit) (8,194 ) (9,169 ) (9,818 )
Accumulated other comprehensive income       67         24         87  
134,169 133,133 94,234
                     
        $ 1,437,288       $ 1,404,608       $ 1,433,585  
 

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
    January 31     January 31
          2014       2013
 
Interest income:
Loans $ 13,049 $ 13,613
Securities 769 814
Loan fees     1,131         1,268  
14,949 15,695
 
Interest expense:
Deposits and other 7,529 8,375
Subordinated notes     485         1,391  
8,014 9,766
               
Net interest income 6,935 5,929
 
Other income (note 9)     337         1,280  
Total revenue 7,272 7,209
 
Recovery of credit losses (note 5b)     (51 )       (21 )
7,323 7,230
 
Non-interest expenses:
Salaries and benefits 2,682 2,572
General and administrative 2,301 2,540
Premises and equipment     551         568  
5,534 5,680
Restructuring charges (note 6)     434         -  
5,968 5,680
               
Income before income taxes 1,355 1,550
 
Income tax provision 380 435
               
Net income   $ 975       $ 1,115  
 
Basic income per share $ 0.05 $ 0.08
 
Diluted income per share $ 0.05 $ 0.08
 
Weighted average number of

common shares outstanding (note 8)

19,437,000 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

(Unaudited)

 
(thousands of Canadian dollars)          
                for the three months ended
            January 31 January 31
                  2014       2013
 
Net income $ 975 $ 1,115
 
Other comprehensive income, net of tax
 
Net unrealized gains on assets held as available-for-sale (1)     43       15
43 15
                       
Comprehensive income   $ 1,018     $ 1,130
 

(1)  Net of income tax expense of $16 (2013 – $6)

 

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

       

PACIFIC & WESTERN BANK OF CANADA

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 
(thousands of Canadian dollars)            
      for the three months ended
January 31 January 31
        2014       2013
 
Common shares (note 8):
             
Balance, beginning and end of the period     $ 142,224       $ 103,965  
 
Contributed surplus (note 8):
 
Balance, beginning of the period $ 54 $ -
Fair value of stock options granted 18 -
             
Balance, end of the period     $ 72       $ -  
             
Total share capital     $ 142,296       $ 103,965  
 
Retained earnings (deficit):
 
Balance, beginning of the period $ (9,169 ) $ (10,933 )
Net income 975 1,115
             
Balance, end of the period     $ (8,194 )     $ (9,818 )
 

Accumulated other comprehensive income, net of taxes:

 
Balance, beginning of the period $ 24 $ 72
Other comprehensive income 43 15
             
Balance, end of the period     $ 67       $ 87  
             
Total shareholders' equity     $ 134,169       $ 94,234  
 

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)            
      January 31 January 31
For the three months ended       2014       2013
 
Cash provided (used in):
 
Operations:
Net income $ 975 $ 1,115
Items not involving cash:
Recovery of credit losses (51 ) (21 )
Stock-based compensation 18 -
Income taxes 380 435
Gain on sale of lending assets - (1,011 )
Interest income (14,949 ) (15,695 )
Interest expense 8,014 9,766
Restructuring charges 434 -
Interest received 14,862 14,435
Interest paid (7,688 ) (11,045 )
Mortgages and loans 23,114 38,824
Deposits 33,785 (83,845 )
Change in other assets and liabilities     3,505         (17,863 )
62,399 (64,905 )
Investing:
Purchase of securities (34,877 ) (21,585 )
Proceeds from sale and maturity of securities     12,365         52,870  
(22,512 ) 31,285
Financing:
Repayment of subordinated notes     (7,000 )       -  
(7,000 ) -
                     
Increase (decrease) in cash and cash equivalents 32,887 (33,620 )
 
Cash and cash equivalents, beginning of the period 176,323 129,466
                     
Cash and cash equivalents, end of the period   $ 209,210       $ 95,846  
 
Cash and cash equivalents is represented by:
Cash $ 209,210 $ 56,571
Cash equivalents - 39,275
                     
Cash and cash equivalents, end of the period   $ 209,210       $ 95,846  
 

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 month periods ended January 31, 2014 and 2013

1. Reporting entity:

Pacific & Western Bank of Canada (the “Bank”) operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank, whose shares commenced trading on the Toronto Stock Exchange on August 27, 2013, is involved in the business of providing commercial lending services to selected niche markets.

The Bank is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2. It is the principal subsidiary of Pacific & Western Credit Corp. (“PWC”) whose shares also trade on the Toronto Stock Exchange. At January 31, 2014 PWC owned approximately 91% of the Bank.

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, 2013.

The interim Consolidated Financial Statements for the three months ended January 31, 2014 and 2013 were approved by the Board of Directors on March 4, 2014.

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 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 judgments:

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, 2013 and are detailed in Note 3 of the Bank’s 2013 Audited Consolidated Financial Statements. There have been no changes in accounting policies except that segment disclosure is no longer provided as the Bank determined that credit card operations are not a significant part of its business. The impact of new standards adopted during the current period was not material.

4. Securities:

Portfolio analysis:

 
    January 31     October 31     January 31
        2014       2013       2013
 
Available-for-sale securities
Securities issued or guaranteed by:
Canadian federal government $ 5,050 $ 5,025 $ 61,740
Canadian provincial governments 15,670 18,724 32,899
Canadian municipal governments 877 892 948
Term deposits       25,723       50       25,126
Total available-for-sale securities     $ 47,320     $ 24,691     $ 120,713
 
Held-to-maturity security
Debt of other financial institutions     $ 15,183     $ 15,200     $ 15,250
Total securities     $ 62,503     $ 39,891     $ 135,963
 

All available-for-sale securities are carried at fair value based on quoted market prices (Level 1) except for Canadian municipal bonds which fall into Level 2 of the fair value hierarchy. See Note 3 (c) of the October 31, 2013 consolidated financial statements for more information.

5. Loans:

a) Portfolio analysis:

 
  January 31     October 31     January 31
      2014       2013       2013
 
Residential mortgages
Insured $ 23,725 $ 24,094 $ 27,458
Uninsured 264,554 273,436 248,903
Securitized mortgages 40,808 41,028 41,685
Government financing 114,877 129,782 155,351
Commercial and consumer loans 533,979 564,382 603,165
Commercial and consumer leases 124,856 92,234 67,325
Other loans 3,884 3,948 4,958
Credit card receivables     28,344         28,934         24,908  
1,135,027 1,157,838 1,173,753
 
Allowance for credit losses:
Collective (2,923 ) (3,275 ) (3,166 )
Individual     -         -         (1,583 )
(2,923 ) (3,275 ) (4,749 )
                 
1,132,104 1,154,563 1,169,004
 
Accrued interest 4,028 4,370 4,283
                 
Total loans, net of allowance for credit losses   $ 1,136,132       $ 1,158,933       $ 1,173,287  
 

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

 
    January 31     October 31     January 31
        2014       2013       2013
 
Residential mortgages $ 663 $ 575 $ 598
Commercial, consumer and government loans 1,379 1,879 2,116
Other loans 23 12 27
Credit card receivables       858       809       425
      $ 2,923     $ 3,275     $ 3,166
 

The Bank holds collateral against the majority of its loans in the form of mortgage interests over property, other registered securities over assets, cash held as collateral for the bulk finance program and guarantees.

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                         
            January 31     January 31
2014 2013

For the three months ended

    Collective     Individual    

Total
Allowance

   

Total
Allowance

 
Balance, beginning of the period $ 3,275 $ - $ 3,275 $ 4,862
Recovery of credit losses (51 ) - (51 ) (21 )
Write-offs (301 ) - (301 ) (92 )
                         
Balance, end of the period     $ 2,923       $ -     $ 2,923       $ 4,749  
 

c) Impaired loans:

 
    January 31, 2014
     

Gross
impaired

   

Individual
allowance

    Net impaired
       
Residential mortgages $ - $ - $ -
Other loans       6       -       6
      $ 6     $ -     $ 6
                   
                   
January 31, 2013
     

Gross
impaired

   

Individual
allowance

    Net impaired
 
Residential mortgages $ 1,670 $ 1,583 $ 87
Other loans       17       -       17
      $ 1,687     $ 1,583     $ 104
 

Interest income recognized on impaired loans for the three months ended January 31, 2014 was $nil (January 31, 2013 - $38,000).

At January 31, 2014, loans, other than credit card receivables, past due but not impaired totalled $nil (January 31, 2013 - $nil). At January 31, 2014, credit card receivables overdue by one day or more but not impaired totalled $2,624,000 (January 31, 2013 - $1,362,000).

6. Subordinated notes payable:

                   
    January 31     October 31     January 31
        2014       2013       2013
 
Ten year term, unsecured subordinated notes payable to PWC $ - $ - $ 29,627
 
Ten year term, unsecured, callable, subordinated notes payable by the Bank to an unrelated party, maturing between 2019 and 2021, net of issue costs of $704 (October 31, 2013 - $1,168, January 31, 2013 - $1,271) effective interest of 10.06% 13,796 20,332 20,229
 
                   
      $ 13,796     $ 20,332     $ 49,856
 

During the three months ended January 31, 2014, the Bank repaid $7,000,000 in subordinated notes which had a carrying value of $6,566,000. The difference of $434,000 relating to unamortized note issue costs was recorded as restructuring charges.

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 $40,626,000 (October 31, 2013 - $40,832,000) are pledged as collateral for these liabilities.

8. Share capital:

At January 31, 2014, there were 19,437,171 (October 31, 2013 – 19,437,171) common shares outstanding. During the three months ended January 31, 2014 and 2013 there were no common shares issued.

During the three month period ended January 31, 2014 the Bank recognized compensation expense of $18,000 (January 31, 2013 - $nil) relating to the estimated fair value of stock options granted in prior periods. No stock options were granted during the current period.

9. Other income:

 
      for the three months ended
    January 31     January 31
        2014       2013
 
Gain on sale of loans $ - $ 1,011
Credit card non-interest revenue 327 257
Other income 10 12
             
      $ 337     $ 1,280
 

10. 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 amounts 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.

 
    January 31     October 31     January 31
        2014       2013       2013
 
Loan commitments $ 126,694 $ 141,251 $ 170,421
Undrawn credit card lines 155,221 147,990 121,453
Letters of credit 38,434 38,565 24,098
                   
      $ 320,349     $ 327,806     $ 315,972
 

Cash totalling $9,969,000 (October 31, 2013 - $10,380,000) is pledged as collateral against liabilities and off-balance sheet items.

11. Related party transactions:

During the three months ended January 31, 2014, the Bank incurred interest expense of $nil (January 31, 2013 - $807,000) on subordinated notes held by PWC. During the three months ended January 31, 2014, the Bank incurred management and other fees totalling $300,000 (January 31, 2013 - $300,000) to PWC and a subsidiary of PWC.

The Bank’s and PWC’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 balances outstanding during the period.

The Bank issues both mortgages and personal loans to employees and key management personnel. At January 31, 2014 amounts due from key management personnel totalled $2,030,000 (October 31, 2013 - $2,322,000) 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 months ended January 31, 2014 was $22,000 (January 31, 2013 - $10,000). There was no provision for credit losses related to loans issued to key management personnel for the three months ended January 31, 2014 and 2013.

12. 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 (deficit) 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 January 31, 2014 there were no material changes in the Bank’s management of capital.

b) Risk-Based Capital Ratios:

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:

 
      January 31, 2014     January 31, 2013
      "All-in"     "Transitional"     "All-in"     "Transitional"
               
Common Equity Tier 1 (CET1) capital
Directly issued qualifying common share capital $ 142,296 $ 142,296 $ 103,965 $ 103,965
Retained earnings (deficit) (8,194 ) (8,194 ) (9,818 ) (9,818 )
Accumulated other comprehensive income       67         67         87         87  
CET1 before regulatory adjustments 134,169 134,169 94,234 94,234
Regulatory adjustments applied to CET1       (8,447 )       (1,689 )       (8,899 )       -  
Total Common Equity Tier 1 capital     $ 125,722       $ 132,480       $ 85,335       $ 94,234  
 
Additional Tier 1 capital
Directly issued qualifying Additional Tier 1 instruments       -         -         -         -  
Total Tier 1 capital     $ 125,722       $ 132,480       $ 85,335       $ 94,234  
 
Tier 2 capital
Directly issued capital instruments subject to
phase out from Tier 2     $ 14,500       $ 14,500       $ 51,500       $ 51,500  
Tier 2 capital before regulatory adjustments 14,500 14,500 51,500 51,500
Regulatory adjustments applied to Tier 2       (2,588 )       (518 )       (11,844 )       (5,150 )
Total Tier 2 capital     $ 11,912       $ 13,982       $ 39,656       $ 46,350  
Total capital     $ 137,634       $ 146,462       $ 124,991       $ 140,584  
Total risk-weighted assets     $ 1,089,269       $ 1,098,096       $ 1,091,513       $ 1,107,106  
Capital ratios
CET1 Ratio 11.54 % 12.06 % 7.82 % 8.51 %
Tier 1 Capital Ratio 11.54 % 12.06 % 7.82 % 8.51 %
Total Capital Ratio       12.64 %       13.34 %       11.45 %       12.70 %
 

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:

 
    January 31     January 31
        2014       2013
 
Total assets (on and off-balance sheet)     $ 1,473,515       $ 1,457,683  
Capital
Common shares $ 142,296 $ 103,965
Retained earnings (deficit) (8,194 ) (9,818 )
Accumulated other comprehensive income 67 87
Subordinated notes 14,500 46,350
Regulatory adjustments       (2,207 )       -  
Total regulatory capital     $ 146,462       $ 140,584  
 
Assets-to-capital ratio       10.06         10.37  
 

The Bank was in compliance with the assets-to-capital multiple prescribed by OSFI throughout the periods presented.

13. Interest rate position:

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact net interest margin, 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.

 
      January 31, 2014     January 31, 2013
     

Increase 100
bps

   

Decrease 100
bps

   

Increase 100
bps

   

Decrease 100
bps

               
Impact on projected net interest
income during a 12 month period $ 3,550 $ (3,509 ) $ 4,436 $ (4,503 )
Impact on reported equity
during a 60 month period $ (80 ) $ 206 $ 1,824 $ (2,175 )
                         
Duration difference between assets and
liabilities (months)       0.4               1.3      
 

14. Fair Value of Financial Instruments:

Fair values are based on management’s best estimates of market conditions and valuation policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgment and as such, may not be reflective of future fair values. The Bank’s loans and deposits lack an available market as they are not typically exchanged. Therefore, they are not necessarily representative of amounts realizable upon immediate settlement. See Note 23 to the October 31, 2013 consolidated financial statements for more information on fair values.

 
      January 31, 2014     October 31, 2013
        Fair value     Fair value         Fair value     Fair value
Book of assets over (under) Book of assets over (under)
      Value     and liabilities     book value     Value     and liabilities     book value
 
Assets
 
Cash and cash equivalents $ 209,210 $ 209,210 $ - $ 176,323 $ 176,323 $ -
Securities 62,503 62,212 (291 ) 39,891 39,456 (435 )
Loans 1,136,132 1,138,453 2,321 1,158,933 1,157,047 (1,886 )
Other financial assets 4,416 4,416 - 4,134 4,134 -
                                     
      $ 1,412,261     $ 1,414,291     $ 2,030       $ 1,379,281     $ 1,376,960     $ (2,321 )
 
Liabilities
 
Deposits $ 1,221,247 $ 1,228,785 $ 7,538 $ 1,187,404 $ 1,190,127 $ 2,723
Subordinated notes payable 13,796 14,500 704 20,332 21,500 1,168
Securitization liabilities 43,539 46,843 3,304 43,410 46,325 2,915
Other financial liabilities 24,537 24,537 - 20,329 20,329 -
                                     
      $ 1,303,119     $ 1,314,665     $ 11,546       $ 1,271,475     $ 1,278,281     $ 6,806  
 

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 wadem@pwbank.com (519) 675-4201

Contacts

Pacific & Western Bank of Canada
Investor Relations:
800-244-1509
wadem@pwbank.com
or
Public Relations & Media:
Tel Matrundola, 416-203-0882
Vice-President
telm@pwbank.com
Visit our website at: http://www.pwbank.com

Release Summary

PACIFIC & WESTERN BANK OF CANADA ANNOUNCES RESULTS FOR ITS FIRST QUARTER ENDED JANUARY 31, 2014

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Contacts

Pacific & Western Bank of Canada
Investor Relations:
800-244-1509
wadem@pwbank.com
or
Public Relations & Media:
Tel Matrundola, 416-203-0882
Vice-President
telm@pwbank.com
Visit our website at: http://www.pwbank.com