LONDON, Ontario--(BUSINESS WIRE)--Pacific & Western Bank of Canada (TSX:PWB):
THIRD QUARTER HIGHLIGHTS (1)
(compared to the same periods in the prior year unless otherwise noted)
- Income before income taxes for the current quarter for Pacific & Western Bank of Canada “the Bank” increased 68% to $2.4 million from $1.4 million for the same period a year ago and increased 27% from the previous quarter.
- Net income for the current quarter also increased 68% to $1.7 million or $0.05 per common share (basic and diluted) from $1.0 million or $0.05 per common share (basic and diluted) for the same period a year ago. Earnings per share amounts are after the deduction for dividends on preferred shares in the current period
- Income before income taxes for the nine months ended July 31, 2015 increased 48% to $6.6 million from $4.5 million for the same period a year ago.
- Net income for the nine months ended July 31, 2015 increased 70% to $5.5 million or $0.21 per common share (basic and diluted) compared to $3.2 million or $0.16 per common share (basic and diluted) for the same period a year ago.
- Net interest margin or spread for the current quarter increased to 2.24% from 2.22% for the previous quarter and from 1.94% for the same period a year ago. For the nine months ended July 31, 2015, net interest margin increased to 2.22% from 1.96% for the same period a year ago.
- Lending assets grew 17% to $1.38 billion from $1.18 billion a year ago. The growth in loans was a result of increases in loans and lease receivables sourced through the bulk purchase program.
- Credit quality remains exceptional with no gross impaired loans at July 31, 2015 or a year ago.
- The Bank has maintained its strong capital ratios. At July 31, 2015, the Common Equity Tier 1 (CET1) ratio was 10.68% compared to 10.76% at the end of the previous quarter and 11.93% a year ago. The total capital ratio was 14.01% at the end of the current quarter compared to 14.15% at the end of the previous quarter and 13.27% last year.
(1) Certain highlights include non-GAAP measures. See definition under ‘Basis of Presentation’ in the attached Management’s Discussion and Analysis.
PRESIDENT’S COMMENTS
Record high earnings were achieved in the 3rd quarter. During the quarter total loans and leases increased from $1.34 billion to $1.38 billion, and income before income taxes increased by 27% over the previous quarter’s figure and more than 68% over the same quarter last year.
Our bulk purchase program’s assets grew to $564 million during the quarter representing a 60% increase over last year’s figure. This wonderful business is now making a substantial contribution to our Bank’s revenues.
Our loan portfolio remained very strong and as usual we had no impaired loans.
On the deposit gathering front, our nationwide, well established deposit broker network continued to supply the Bank with the majority of its deposits. However, our new deposit gathering initiatives began to make a meaningful contribution to the Bank’s fundings and are serving to reduce the Bank’s overall cost of funds which reduced by 7% over last year’s figure to 2.00% for the quarter.
Despite the two reductions in the Bank of Canada interest rate, the Bank’s overall net interest margin improved to 2.24% and this together with the growth in our loan portfolio resulted in total revenue reaching a record high figure of $9.1 million for the quarter, a 6% increase over the previous quarter and 24% over the same quarter last year. This gave rise to record high earnings before income taxes of $2.4 million (a 27% increase over the previous quarter). After-tax earnings of $1.7 million were less than the previous quarter’s figure of $2.1 million as the previous quarter’s figure included a positive tax adjustment.
We have designed a state of the art bank with a huge capacity for growth that through utilization of specialized software and well-experienced staff is rapidly acquiring loans, leases and deposits with minimal marginal cost. By serving niche markets that are not well served by the larger banks our Bank is able to earn excellent margins without accepting much risk. This is all resulting in significant increases in profits.
FINANCIAL HIGHLIGHTS
| (unaudited) | for the three months ended | for the nine months ended | |||||||||||||||
| July 31 | July 31 | July 31 | July 31 | ||||||||||||||
| ($CDN thousands except per share amounts ) | 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Results of operations | |||||||||||||||||
| Net interest income | 8,727 | $ | 6,687 | $ | 25,013 | $ | 20,265 | ||||||||||
| Net interest margin* | 2.24% | 1.94% | 2.22% | 1.96% | |||||||||||||
| Other income | 368 | 619 | 1,010 | 1,842 | |||||||||||||
| Total revenue | 9,095 | 7,306 | 26,023 | 22,107 | |||||||||||||
| Provision for credit losses | 297 | 303 | 1,226 | 519 | |||||||||||||
| Non-interest expenses | 6,421 | 5,588 | 18,222 | 16,704 | |||||||||||||
| Restructuring charges | - | - | - | 434 | |||||||||||||
| Income before income taxes | 2,377 | 1,415 | 6,575 | 4,450 | |||||||||||||
| Net income | 1,707 | 1,017 | 5,448 | 3,200 | |||||||||||||
| Income per common share: | |||||||||||||||||
| Basic | $ | 0.05 | $ | 0.05 | $ | 0.21 | $ | 0.16 | |||||||||
| Diluted | $ | 0.05 | $ | 0.05 | $ | 0.21 | $ | 0.16 | |||||||||
| Return on average common equity* | 2.64% | 2.97% | 3.96% | 3.17% | |||||||||||||
| Book value per common share* | $ | 7.36 | $ | 7.02 | $ | 7.36 | $ | 7.02 | |||||||||
| Gross impaired loans to total loans | 0.00% | 0.00% | 0.00% | 0.00% | |||||||||||||
| Provision for credit losses as a % of average loans | 0.02% | 0.03% | 0.09% | 0.04% | |||||||||||||
| as at | |||||||||||||||||
| Balance Sheet Summary | |||||||||||||||||
| Cash and securities | $ | 157,357 | $ | 145,659 | $ | 157,357 | $ | 145,659 | |||||||||
| Total loans | 1,376,237 | 1,181,379 | 1,376,237 | 1,181,379 | |||||||||||||
| Average loans | 1,360,209 | 1,144,364 | 1,300,242 | 1,170,156 | |||||||||||||
| Total assets | 1,563,102 | 1,355,087 | 1,563,102 | 1,355,087 | |||||||||||||
| Average assets | 1,544,361 | 1,370,563 | 1,504,481 | 1,379,848 | |||||||||||||
| Deposits | 1,275,523 | 1,124,602 | 1,275,523 | 1,124,602 | |||||||||||||
| Subordinated notes payable | 13,934 | 13,840 | 13,934 | 13,840 | |||||||||||||
| Shareholders' equity | 172,410 | 136,382 | 172,410 | 136,382 | |||||||||||||
| Capital ratios | |||||||||||||||||
| Common Equity Tier 1 (CET1) ratio | 10.68% | 11.93% | 10.68% | 11.93% | |||||||||||||
| Tier 1 capital ratio | 13.01% | 11.93% | 13.01% | 11.93% | |||||||||||||
| Total capital ratio | 14.01% | 13.27% | 14.01% | 13.27% | |||||||||||||
| * 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 third quarter of fiscal 2015, dated August 25, 2015, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2015, 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, 2014, 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, 2014, 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.
Basel III Common Equity Tier 1, Tier 1 and Total Capital Adequacy Ratios
Basel III Common Equity Tier 1, Tier 1 and total capital adequacy ratios are determined in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
Book Value Per Common Share
Book value per common share is defined as Shareholders’ Equity less amounts relating to preferred shares recorded in equity, divided by the number of common shares outstanding.
Return on Average Common Equity
Return on average common equity is defined as annualized net income less amounts relating to preferred share dividends, divided by common shareholders’ equity which is shareholders’ equity less amounts relating to preferred shares recorded in equity.
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 and from chequing accounts of trustees in the Canadian bankruptcy industry. The Bank has operated as a Schedule I bank under the Bank Act (Canada) since August 1, 2002. Prior to that, the Bank operated as a provincially licensed trust company since 1979. The Bank’s shares trade on the Toronto Stock Exchange and the Bank is the principal subsidiary of PWC Capital Inc. (the “Corporation” or “PWC”) whose securities are also listed and trade on the Toronto Stock Exchange.
Income before income taxes for the current quarter increased to $2.4 million from $1.9 million for the previous quarter and from $1.4 million for the same period a year ago. Net income for the current quarter was $1.7 million or $0.05 per common share (basic and diluted) and increased from $1.0 million or $0.05 per common share (basic and diluted) for the same period a year ago. Earnings per share amounts are after the deduction for dividends on preferred shares in the current period.
Income before income taxes for the nine months ended July 31, 2015 increased to $6.6 million from $4.5 million for the same period a year ago. Income before income taxes for the current periods increased primarily as a result of increases in net interest income due to growth in lending assets. Net income for the nine months ended July 31, 2015 was $5.5 million or $0.21 per common share (basic and diluted) compared to $3.2 million or $0.16 per common share (basic and diluted) for the same period a year ago.
For the nine months ended July 31, 2015, total revenue increased to $26.0 million from $22.1 million a year ago, an increase of 18%. Total revenue increased from previous periods as a result of an increase in net interest income in the current periods which was due to growth in loans, primarily in loans and lease receivables sourced through the bulk purchase program. Total revenue for the nine month period a year ago included gains of $807,000 from the sale of loans. There have been no loan sales in the current year.
Net interest income and net interest margin for the three months ended July 31, 2015 increased to $8.7 million and 2.24% respectively, from $6.7 million and 1.94% for the same period a year ago. For the nine months ended July 31, 2015 net interest income and net interest margin increased to $25.0 million and 2.22% respectively, from $20.3 million and 1.96% for the same period a year ago. The increases in net interest income from previous periods were due to increased interest income in the current period as a result of growth in lending assets. Net interest margin increased from a year ago as a result of growth in lending assets and a more optimal asset mix. The net interest margin has not been impacted significantly by recent reductions in the interest rate by the Bank of Canada.
At July 31, 2015, total assets were $1.56 billion compared to $1.36 billion a year ago. Total loans at the end of the current quarter increased to $1.38 billion from $1.18 billion a year ago with the increase due primarily to growth in commercial and consumer loans and leases sourced through the bulk purchase program. Cash and securities, which are held primarily for liquidity purposes, totalled $157 million at the end of the current quarter compared to $146 million a year ago.
The Bank has maintained its strong underwriting standards and credit quality remains exceptional with no impaired loans at the end of the current quarter, the previous quarter and a year ago.
At July 31, 2015, the Bank continued to exceed the Common Equity Tier 1 (CET1) capital requirement of 7.0% with a CET1 ratio of 10.68% compared to 10.76% at the end of the previous quarter and 11.93% a year ago. The decrease in the CET1 ratio from previous periods was due to the growth in lending assets. At July 31, 2015, the Tier 1 capital ratio was 13.01% compared to 13.12% at the end of the previous quarter and 11.93% a year ago. At July 31, 2015, the total capital ratio was 14.01% compared to 14.15% at the end of the previous quarter and 13.27% a year ago.
Total Revenue
Total revenue consists of net interest income and other income. For the three months ended July 31, 2015, total revenue increased to $9.1 million from $8.6 million for the previous quarter and from $7.3 million for the same period last year. For the nine months ended July 31, 2015, total revenue increased to $26.0 million from $22.1 million a year ago, an increase of 18%. Total revenue increased from previous periods as a result of an increase in net interest income in the current periods which was due to growth in loans, primarily in loans and lease receivables sourced through the bulk purchase program. Total revenue for the nine month period a year ago included gains of $807,000 from the sale of loans. There have been no loan sales in the current year.
Net Interest Income and Net Interest Margin
Net interest income and net interest margin for the three months ended July 31, 2015 increased to $8.7 million and 2.24% respectively, from $8.3 million and 2.22% for the previous quarter and $6.7 million and 1.94% for the same period a year ago. For the nine months ended July 31, 2015 net interest income and net interest margin increased to $25.0 million and 2.22% respectively, from $20.3 million and 1.96% for the same period a year ago. The increases in net interest income from previous periods were due to increased interest income in the current period as a result of growth in lending assets. Net interest margin increased from a year ago as a result of growth in lending assets and a more optimal asset mix. The net interest margin has not been impacted significantly by recent reductions in the Bank Rate by the Bank of Canada.
Other Income
Other income for the three months ended July 31, 2015, totalled $368,000 compared to $304,000 for the previous quarter and $619,000 for the same period a year ago with the change from the same quarter last year due to a gain of $225,000 from the sale of a loan. Other income for the nine months ended July 31, 2015, was $1.0 million compared to $1.8 million for the same period a year ago with the change from a year ago due to gains of $807,000 from the sale of loans. Other income in the current period consists primarily of fees from credit cards.
Non-Interest Expenses
Non-interest expenses totalled $6.4 million for the current quarter compared to $6.3 million for the previous quarter and $5.6 million for the same period a year ago. For the nine months ended July 31, 2015, non-interest expenses, excluding restructuring charges, totalled $18.2 million compared to $16.7 million for the same period a year ago. Restructuring charges in the previous year totalling $434,000 related to the repayment in December 2013 of subordinated debt. Non-interest expenses were higher than a year ago due to increases in professional and consulting fees, employee compensation and costs relating to the issue of preferred shares.
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 as well as a positive adjustment in the previous quarter in the deferred tax asset relating to the recognition of previously unrecognized loss carryforwards discussed below.
For the three months ended July 31, 2015, the provision for income taxes was $670,000 compared to $398,000 for the same period a year ago with the change due to increased taxable income. For the nine months ended July 31, 2015, the provision for income taxes was $1.1 million compared to $1.2 million for the same period a year ago with the change due to increased taxable income and a tax recovery of $724,000 in the previous quarter relating to the recognition of previously unrecognized deferred income tax assets.
At July 31, 2015, the Bank has a deferred income tax asset of $8.3 million compared to $8.7 million at the end of the previous quarter and $7.4 million a year ago with the change as a result of the drawdown of loss carryforwards due to the positive operating results over the past year, offset by the recognition of previously unrecognized deferred income assets as discussed above. The deferred income tax asset is primarily a result of income tax losses totalling approximately $31.0 million from previous periods. The income tax loss carry-forwards are not scheduled to begin expiring until 2027 if unutilized.
Comprehensive Income
Comprehensive income is comprised of net income for the period and other comprehensive income (loss) which consists of unrealized gains and losses on available-for-sale securities. Comprehensive income for the three months ended July 31, 2015 was $1.7 million compared to $2.0 million for the previous quarter and $963,000 a year ago. Comprehensive income for the nine months ended July 31, 2015 was $5.5 million compared to $3.2 million a year ago. Due to the current composition of the treasury portfolio, which consists primarily of liquid securities, unrealized gains or losses in the portfolio are not significant and as a result, comprehensive income does not differ materially from net income.
Consolidated Balance Sheet
At July 31, 2015, total assets were $1.56 billion compared to $1.53 billion at the end of the previous quarter and $1.36 billion a year ago. Total loans at the end of the current quarter increased to $1.38 billion from $1.34 billion at the end of the previous quarter and from $1.18 billion a year ago with the increase due primarily to growth in commercial and consumer loans and leases sourced through the bulk purchase program as discussed below.
Cash and Securities
Cash and cash equivalents consist of deposits with Canadian financial institutions and government treasury bills with less than ninety days to maturity from the date of acquisition. Securities in the treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, term deposits and debt of other financial institutions. Amounts invested in each of these securities are determined based on liquidity needs, investment yield and capital management considerations. Cash and securities, which are held primarily for liquidity purposes, totalled $157 million or 10% of total assets compared to $152 million or 10% of total assets at the end of the previous quarter and $146 million or 11% of total assets a year ago. The current level of cash and securities as a percentage of total assets is expected to be maintained in the coming months.
At July 31, 2015, unrealized gains in the available-for-sale securities portfolio were $35,000 compared to unrealized gains of $46,000 at the end of the previous quarter and $27,000 a year ago. In addition, there was an unrealized loss of $52,000 at July 31, 2015 relating to a security that is classified as held-to-maturity, compared to an unrealized loss of $65,000 at the end of the previous quarter. This unrealized loss is due to factors other than 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 were required to fully comply with the LCR in January 2015 with no phase-in. The Bank is in compliance with the new LCR requirements and is well positioned to comply with the new NSFR requirements.
Loans
At July 31, 2015, loans increased to $1.38 billion from $1.34 billion at the end of the previous quarter and from $1.18 billion a year ago. The increase from the previous quarter and from the previous year was due primarily to growth in commercial and consumer loans and lease receivables sourced through the bulk purchase program.
At July 31, 2015, the balances of individual loan categories compared to the end of the previous quarter and a year ago reflects a change in lending strategy where focus on government financings has been reduced due to market conditions, and has been replaced by commercial and consumer lending opportunities, particularly those sourced through the bulk purchase program. At July 31, 2015, there was a decrease from previous periods in residential multi-family mortgages and commercial mortgages which was due primarily to the timing of loan transactions.
Commercial and consumer loans and lease receivables sourced through the bulk purchase program continues to show strong growth increasing to $564 million at July 31, 2015 from $511 million at the end of the previous quarter, an increase of $53 million or 10%, and from $351 million last year, an increase of $213 million, or 61%. The bulk purchase program, which consists of the purchase of individual loans and lease receivables, continues to be a key initiative and the primary driver for growth of the lending portfolio in the coming years. These loans and lease receivables normally attract a lower collective allowance due to the level of cash holdbacks that are retained.
Total new lending for the quarter was $277 million compared to $255 million for the previous quarter and $209 million a year ago. Loan repayments for the quarter totalled $246 million compared to $206 million for the previous quarter and $124 million a year ago. On a year-to-date basis, new lending totalled $750 million compared to $518 million for the same period a year ago and loan repayments totalled $591 million for the current period compared to $493 million last year. At July 31, 2015, loan commitments representing loans in the Bank’s pipeline totalled $210 million compared to $189 million at the end of the previous quarter and $161 million a year ago.
Residential mortgage exposures
In accordance with the Office of the Superintendent of Financial Institutions (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) and includes home equity lines of credit (HELOC’s). This differs from the classification of residential mortgages used by the Bank which also includes multi-family mortgages.
Under OSFI’s definition, the Bank’s exposure to residential mortgages at July 31, 2015 totalled $816,000 compared to $837,000 at the end of the previous quarter and $1.1 million a year ago. The Bank did not have any HELOC’s outstanding at July 31, 2015, or at the end of the previous quarter or a year ago.
Credit Quality
Despite the strong loan growth, the Bank has maintained its high credit quality and strong underwriting standards and as a result traditionally requires minimal provisions for credit losses. Gross impaired loans at July 31, 2015, were $nil, unchanged from the end of the previous quarter and a year ago. The provision for credit losses in the current quarter was $297,000 compared to $427,000 for the previous quarter and $303,000 a year ago. For the nine months ended July 31, 2015, the provision for credit losses totalled $1.2 million compared to $519,000 for the same period a year ago. The provision for credit losses increased from a year ago due to a higher level of write-offs relating to the credit card program and an increase in the collective allowance as a result of the growth in loans.
At July 31, 2015, the collective allowance totalled $3.1 million compared to $3.1 million at the end of previous quarter and $2.8 million a year ago. Included in the collective allowance at July 31, 2015 was $1.0 million relating to credit card receivables, compared to $1.0 million at the end of the previous quarter and $941,000 a year ago. The increase in the collective allowance relating to credit cards from a year ago was due to the maturation of credit card balances.
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. The Bank’s loan exposure to the province of Alberta and to the oil and gas industry is not significant.
Other Assets
Other assets totalled $29.5 million at July 31, 2015, compared to $29.6 million at the end of the previous quarter and $28.0 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 $7.4 million a year ago. Also included in other assets are capital assets and prepaid expenses of $15.1 million compared to $15.1 million at the end of the previous quarter and $15.3 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 July 31, 2015, totalled $1.28 billion compared to $1.25 billion at the end of the previous quarter and $1.12 billion a year ago, and consist primarily of guaranteed investment certificates. Of the total amount of deposits outstanding, $17.7 million or approximately 1.4% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $18.8 million or 1.5% of total deposits at the end of the previous quarter and $20.0 million or approximately 1.8% of total deposits a year ago. In addition, the Bank has chequing accounts related to trustees in the Canadian bankruptcy industry as discussed below.
The Bank continues to grow and expand its deposit broker network across Canada. In addition, in order to further 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 Canadian bankruptcy industry. The Bank has developed banking software to enable this market to efficiently administer its chequing accounts. These services are provided to trustees in the bankruptcy industry across Canada and at July 31, 2015, balances from this source totalled $108.7 million compared to $82.5 million at the end of the previous quarter and $76.3 million a year ago.
Other liabilities consist of accounts payable, accruals, holdbacks payable related to the bulk purchase program and securities sold under repurchase agreements. At July 31, 2015, other liabilities totalled $57.6 million compared to $51.5 million at the end of the previous quarter and $36.7 million a year ago with the increase from a year ago due to increased holdbacks associated with loans and leases sourced through the bulk purchase program which have shown significant growth over the past year.
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. At July 31, 2015, there were no amounts outstanding from these sources compared to none outstanding at the end of the previous quarter and none outstanding a year ago.
Securitization Liabilities
Securitization liabilities relate to amounts payable to counterparties for cash received upon initiation of securitization transactions in previous years. At July 31, 2015, securitization liabilities totalled $43.6 million compared to $43.5 million at the end of the previous quarter and $43.6 million a year ago. There have been no 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 and other assets are pledged as collateral for these liabilities.
Subordinated Notes Payable
Subordinated notes payable, net of issue costs, totalled $13.9 million at July 31, 2015 compared to $13.9 at the end of the previous quarter and $13.8 million a year ago. Excluding issue costs, subordinated notes payable consist of $14.5 million issued 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 July 31, 2015, shareholders’ equity was $172.4 million compared to $171.5 million at the end of the previous quarter and $136.4 million a year ago. The increase from from a year ago was due to earnings and proceeds received from the issue of Series 1 and Series 3 Preferred Shares as discussed below.
Common shares outstanding at July 31, 2015 totalled 19,437,171, unchanged from the previous quarter and a year ago. Common share options totalled 40,000 at July 31, 2015, also unchanged from the previous quarter and a year ago.
On February 26, 2015, the Bank issued 1,681,320 Non-Cumulative 6-Year Rate Reset Series 3 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $15.7 million. For the initial 6-year period ending April 30, 2021, these Series 3 Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors. These preferred shares qualify as Additional Tier 1 Capital. Issue costs of $1,538,000, net of income taxes of $415,000, were allocated directly to share capital. At July 31, 2015, there were 1,681,320 (October 31, 2014 – nil) Series 3 preferred shares outstanding.
On October 30, 2014 the Bank issued 1,461,460 Series 1 preferred shares for net proceeds of $13,647,000. Issue costs of $1,325,000, net of income taxes of $358,000, were allocated directly to share capital. At July 31, 2015, there were 1,461,460 (October 31, 2014 – 1,461,460) Series 1 preferred shares outstanding.
The Bank’s book value per common share at July 31, 2015 was $7.36 compared to $7.31 at the end of the previous quarter and $7.02 a year ago.
See Note 9 (b) to the unaudited interim consolidated financial statements for additional information relating to share capital.
Updated Share Information
As at August 25, 2015, there were no changes since July 31, 2015 in the number of outstanding common shares, Series 1 and Series 3 Preferred Shares and common share options.
Off-Balance Sheet Arrangements
As at July 31, 2015, 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 13 to the unaudited interim consolidated financial statements for more information.
Related Party Transactions
During the three and nine months ended July 31, 2015, the Bank incurred management and other fees totalling $150,000 (July 31, 2014 - $300,000) and $450,000 (July 31, 2014 - $900,000) respectively to PWC and a subsidiary of PWC.
The Bank’s and PWC’s Board of Directors and Senior Executive Officers represent key management personnel. See Note 14 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, 2014, and are found on pages 37 to 43 of the Bank’s 2014 Annual Report.
Capital Management and Capital Resources
The Basel Committee on Banking Supervision has published 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.
Under the Basel III standards, total regulatory capital was $176.6 million at July 31, 2015 compared to $175.3 million at the end of the previous quarter and $143.3 million a year ago. The increase in total regulatory capital from the previous periods was due primarily to earnings during the periods, the issue of Series 1 Preferred Shares during the fourth quarter of 2014 and the issue of Series 3 Preferred Shares in the previous quarter.
At July 31, 2015, the Bank exceeded the current regulatory capital requirements with a CET1 ratio of 10.68% compared to 10.76% at the end of the previous quarter and 11.93% a year ago. The decrease in the CET1 ratio from previous periods was due primarily to the growth in lending assets. At July 31, 2015, the Tier 1 capital ratio was 13.01% compared to 13.12% at the end of the previous quarter and 11.93% a year ago. In addition, the total capital ratio was 14.01% at July 31, 2015, compared to 14.15% at the end of the previous quarter and 13.27% a year ago. At July 31, 2015, the leverage ratio was 9.84% compared to 10.01% at the end of the previous quarter. On January 1, 2015 the previous Assets–to-Capital Ratio was replaced by the Leverage Ratio which is prescribed under the Basel III Accord.
See Note 15 to the interim consolidated financial statements for more information regarding capital management.
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 shareholders’ equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s shareholders’ equity over a 60 month period if no remedial actions are taken.
| July 31, 2015 | October 31, 2014 | ||||||||||||||||
| Increase 100 bps | Decrease 100 bps | Increase 100 bps | Decrease 100 bps | ||||||||||||||
| Impact on projected net interest | |||||||||||||||||
| income during a 12 month period | $ | 3,371 | $ | (2,959) | $ | 3,543 | $ | (3,493) | |||||||||
| Impact on reported equity | |||||||||||||||||
| during a 60 month period | $ | 49 | $ | 473 | $ | (319) | $ | 484 | |||||||||
| Duration difference between assets and | |||||||||||||||||
| liabilities (months) | 0.6 | 0.2 | |||||||||||||||
The Bank’s sensitivity to changes in interest rates and its duration difference between assets and liabilities at July 31, 2015 has not changed significantly since October 31, 2014. As indicated by the above, at July 31, 2015, the impact on net interest income during a 12 month period of a 100 basis point increase would be approximately $3.4 million and the impact on net interest income of a 100 basis point decrease would be approximately ($3.0 million). Similarly at July 31, 2015, the impact on equity during a 60 month period of a 100 basis point increase would be approximately $49,000 and the impact on equity of a 100 basis point decrease would be approximately $473,000. As indicated by the above, the duration difference between assets and liabilities has not changed significantly from October 31, 2014 and shows that the Bank’s assets and liabilities would reprice at approximately the same time in the event of a change in interest rates.
Liquidity and Liquidity Management
The unaudited Consolidated Statement of Cash Flows for the nine months ended July 31, 2015 shows cash provided by (used in) operations of ($50.6 million) compared to ($63.8 million) for the same period last year. The 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.
The Bank has established policies to ensure that its cash outflows and inflows are closely matched and that its sources of deposits are diversified between funding sources and over a wide geographic area. The Bank maintains a conservative investment profile by ensuring:
- all Bank investments are high quality and include government debt securities, bankers acceptances and Canadian bank debt;
- specific investment criteria and procedures are in place to manage the securities portfolio;
- regular review, monitoring and approval of the investment policies by the Risk Oversight Committee of the Board of Directors; and
- quarterly reporting to the Risk Oversight Committee on the composition of the securities portfolio.
Liquidity management is further supported by processes, which include but are not limited to:
- monitoring of liquidity levels;
- monitoring of liquidity trends and key risk indicators;
- scenario stress testing;
- monitoring the credit profile of the liquidity portfolio; and
- monitoring deposit concentration.
In order to manage its liquidity needs, the Bank has a liquidity risk management program that is comprised specifically of the following policies and procedures:
- Holding sufficient liquid assets which results in positive cumulative cash flow for a period of 31 to 60 days.
- Holding of high quality liquid securities at levels that represent no less than 8% of total assets. High quality liquid securities include Canadian federal, provincial and municipal debt, debt of federally regulated Canadian financial institutions, widely distributed debt instruments, all of which are to be rated investment grade, cash on deposit and banker’s acceptances.
- Maintaining liquid assets at no less than 65% of obligations payable within 90 days.
- On a weekly basis, monitoring its cash flow requirements using a liquidity forecasting template under a highly stressed scenario.
- On a monthly basis, testing liquidity using three specific disruption scenarios; specifically, industry specific disruption scenario, company specific liquidity disruption scenario and a systematic disruption scenario.
- Managing liquidity in accordance with guidelines specified by OSFI.
Contractual Obligations
Contractual obligations as disclosed in its MD&A and audited consolidated financial statements for the year ended October 31, 2014, have not changed significantly as at July 31, 2015.
Capital Assets
The operations 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.
Summary of Quarterly Results
| ($CDN thousands except per share amounts) |
2015 |
2014 |
2013 | |||||||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | |||||||||||||||||||||||||||
| Results of operations: | ||||||||||||||||||||||||||||||||||
| Total interest income | $ | 16,513 | $ | 15,630 | $ | 15,629 | $ | 15,078 | $ | 14,156 | $ | 13,978 | $ | 14,949 | $ | 15,210 | ||||||||||||||||||
| Yield on assets (%) | 4.24% | 4.21% | 4.18% | 4.27% | 4.10% | 4.06% | 4.21% | 4.30% | ||||||||||||||||||||||||||
| Interest expense | 7,786 | 7,375 | 7,598 | 7,469 | 7,469 | 7,335 | 8,014 | 8,314 | ||||||||||||||||||||||||||
| Cost of funds (%) | 2.00% | 1.99% | 2.03% | 2.11% | 2.16% | 2.13% | 2.26% | 2.35% | ||||||||||||||||||||||||||
| Net interest income | 8,727 | 8,255 | 8,031 | 7,609 | 6,687 | 6,643 | 6,935 | 6,896 | ||||||||||||||||||||||||||
| Net interest margin (%) | 2.24% | 2.22% | 2.15% | 2.16% | 1.94% | 1.93% | 1.95% | 1.95% | ||||||||||||||||||||||||||
| Other income | 368 | 304 | 338 | 791 | 619 | 886 | 337 | 325 | ||||||||||||||||||||||||||
| Total revenue | 9,095 | 8,559 | 8,369 | 8,400 | 7,306 | 7,529 | 7,272 | 7,221 | ||||||||||||||||||||||||||
| Provision for (recovery of) credit losses | 297 | 427 | 502 | 400 | 303 | 267 | (51) | 125 | ||||||||||||||||||||||||||
| Non-interest expenses | 6,421 | 6,264 | 5,537 | 6,243 | 5,588 | 5,582 | 5,534 | 6,060 | ||||||||||||||||||||||||||
| Restructuring charges | - | - | - | - | - | - | 434 | 1,275 | ||||||||||||||||||||||||||
| Income (loss) before income taxes | 2,377 | 1,868 | 2,330 | 1,757 | 1,415 | 1,680 | 1,355 | (239) | ||||||||||||||||||||||||||
| Income tax provision (recovery) | 670 | (194) | 651 | (719) | 398 | 472 | 380 | (49) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 1,707 | $ | 2,062 | $ | 1,679 | $ | 2,476 | $ | 1,017 | $ | 1,208 | $ | 975 | $ | (190) | ||||||||||||||||||
| Income (loss) per common share | ||||||||||||||||||||||||||||||||||
| Basic | $ | 0.05 | $ | 0.09 | $ | 0.07 | $ | 0.13 | $ | 0.05 | $ | 0.06 | $ | 0.05 | $ | (0.01) | ||||||||||||||||||
| Diluted | $ | 0.05 | $ | 0.09 | $ | 0.07 | $ | 0.13 | $ | 0.05 | $ | 0.06 | $ | 0.05 | $ | (0.01) | ||||||||||||||||||
The financial results for each of the last eight quarters are summarized above. The results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect seasonality occurring primarily in residential construction lending. Total interest income increased in the first three quarters of 2015 as a result of growth in total assets, specifically loan and leases sourced through the bulk purchase program.
Other income during the quarters shows variability due to the level of gains realized on the sale of loans in previous quarters. There were no loans sales in the first three quarters of 2015. The other component of other income consists primarily of credit card fees which have been comparable over the quarters.
Non-interest expenses increased since the first quarter of 2015 due primarily to timing of expenses and increases in professional and consulting fees, employee compensation and costs relating to the issue of NVCC Preferred Shares. 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.
The provision for income taxes in each of the quarters reflects the effective statutory income tax rate applied to earnings The provision for income taxes in the second quarter of 2015 and the fourth quarter of 2014 includes positive income tax adjustments of $724,000 and $1.2 million respectively relating to a change in the estimate of previously unrecognized deferred income tax asset.
Significant Accounting Policies and Use of Estimates and Judgments
Significant accounting policies are detailed in Note 3 of the Bank’s 2014 Audited Consolidated Financial Statements. There have been no material changes in accounting policies since October 31, 2014.
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 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.
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 included in loans on the 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.
The collective allowance is determined by separating loans into categories that are considered to have common risk elements and reviewing factors such as current portfolio credit quality trends, exposure at default, probability of default and loss given default rates and business and economic conditions. The collective 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 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 July, 2014, the International Accounting Standards Board (IASB) issued the final revised IFRS 9 standard which addresses classification, measurement and impairment of financial instruments and hedge accounting. IFRS 9 specifies that financial assets be classified into one of three categories: financial assets measured at amortized cost, financial assets measured at fair value through profit or loss or financial assets measured at fair value through other comprehensive income. The standard also includes an expected credit loss model and a general hedging model.
IFRS 9 will be mandatorily effective for the Bank’s fiscal year beginning on November 1, 2018, although early adoption is permitted. In January 2015, OSFI determined that Domestic Systematically Important Banks (D-SIBs) should adopt IFRS 9 for their annual periods beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year ends such as the Bank. The Bank has not yet determined if it will 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.
At July 31, 2015, an evaluation was carried out by management of the effectiveness of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and financial statement compliance with International Financial Reporting Standards. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer will file a certificate that the design and operating effectiveness of internal control over financial reporting were effective. These evaluations were conducted in accordance with the standards of the 2013 Internal Control - Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a recognized control model, and the requirements of National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators.
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; commodity prices; 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 pages 44 to 45 of our 2014 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) | ||||||||||||||
|
July 31
|
October 31
|
July 31
|
||||||||||||
| As at | 2015 | 2014 | 2014 | |||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 134,883 | $ | 145,140 | $ | 97,017 | ||||||||
| Securities (note 4) | 22,474 | 48,800 | 48,642 | |||||||||||
| Loans, net of allowance for credit losses (note 5) | 1,376,237 | 1,224,247 | 1,181,379 | |||||||||||
| Other assets | 29,508 | 27,673 | 28,049 | |||||||||||
| $ | 1,563,102 | $ | 1,445,860 | $ | 1,355,087 | |||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||
| Deposits | $ | 1,275,523 | $ | 1,193,797 | $ | 1,124,602 | ||||||||
| Subordinated notes payable (note 6) | 13,934 | 13,863 | 13,840 | |||||||||||
| Securitization liabilities (note 7) | 43,625 | 43,466 | 43,567 | |||||||||||
| Other liabilities (note 8) | 57,610 | 42,215 | 36,696 | |||||||||||
| 1,390,692 | 1,293,341 | 1,218,705 | ||||||||||||
| Shareholders' equity: | ||||||||||||||
| Share capital (note 9) | 171,702 | 155,993 | 142,332 | |||||||||||
| Retained earnings (deficit) | 683 | (3,493) | (5,969) | |||||||||||
| Accumulated other comprehensive income | 25 | 19 | 19 | |||||||||||
| 172,410 | 152,519 | 136,382 | ||||||||||||
| $ | 1,563,102 | $ | 1,445,860 | $ | 1,355,087 | |||||||||
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 | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Interest income: | ||||||||||||||||
| Loans | $ | 14,928 | $ | 12,624 | $ | 43,624 | $ | 38,095 | ||||||||
| Securities | 383 | 777 | 1,208 | 2,322 | ||||||||||||
| Loan fees | 1,202 | 755 | 2,940 | 2,666 | ||||||||||||
| 16,513 | 14,156 | 47,772 | 43,083 | |||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits and other | 7,435 | 7,121 | 21,719 | 21,647 | ||||||||||||
| Subordinated notes | 351 | 348 | 1,040 | 1,171 | ||||||||||||
| 7,786 | 7,469 | 22,759 | 22,818 | |||||||||||||
| Net interest income | 8,727 | 6,687 | 25,013 | 20,265 | ||||||||||||
| Other income (note 10) | 368 | 619 | 1,010 | 1,842 | ||||||||||||
| Total revenue | 9,095 | 7,306 | 26,023 | 22,107 | ||||||||||||
| Provision for credit losses (note 5b) | 297 | 303 | 1,226 | 519 | ||||||||||||
| 8,798 | 7,003 | 24,797 | 21,588 | |||||||||||||
| Non-interest expenses: | ||||||||||||||||
| Salaries and benefits | 3,568 | 2,791 | 9,404 | 8,246 | ||||||||||||
| General and administrative | 2,327 | 2,293 | 7,244 | 6,931 | ||||||||||||
| Premises and equipment | 526 | 504 | 1,574 | 1,527 | ||||||||||||
| 6,421 | 5,588 | 18,222 | 16,704 | |||||||||||||
| Restructuring charges (note 6) | - | - | - | 434 | ||||||||||||
| 6,421 | 5,588 | 18,222 | 17,138 | |||||||||||||
| Income before income taxes | 2,377 | 1,415 | 6,575 | 4,450 | ||||||||||||
| Income tax provision (note 11) | 670 | 398 | 1,127 | 1,250 | ||||||||||||
| Net income | $ | 1,707 | $ | 1,017 | $ | 5,448 | $ | 3,200 | ||||||||
| Basic income per common share (note 12) | $ | 0.05 | $ | 0.05 | $ | 0.21 | $ | 0.16 | ||||||||
| Diluted income per common share | $ | 0.05 | $ | 0.05 | $ | 0.21 | $ | 0.16 | ||||||||
| Weighted average number of | ||||||||||||||||
| common shares outstanding | 19,437,000 | 19,437,000 | 19,437,000 | 19,437,000 | ||||||||||||
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 | for the nine months ended | |||||||||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||||||||
| 2015 | 2014 | 2015 |
2014 |
|||||||||||||
| Net income | $ | 1,707 | $ | 1,017 | $ | 5,448 | $ | 3,200 | ||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Net unrealized gains (losses) on assets held as available-for-sale (1) | (8) | (54) | 6 | (5) | ||||||||||||
| Comprehensive income | $ | 1,699 | $ | 963 | $ | 5,454 | $ | 3,195 | ||||||||
(1) Net of income tax benefit for the three months of $3 (2014 – $20) and income tax expense for the nine months of $2 (2014 – $2 benefit)
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 | for the nine months ended | |||||||||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Common shares (note 9): | ||||||||||||||||
| Balance, beginning and end of the period | $ | 142,224 | $ | 142,224 | $ | 142,224 | $ | 142,224 | ||||||||
| Preferred shares (note 9): | ||||||||||||||||
| Series 1 preferred shares | ||||||||||||||||
| Balance, beginning and end of the period | $ | 13,647 | $ | - | $ | 13,647 | $ | - | ||||||||
| Series 3 preferred shares | ||||||||||||||||
| Balance, beginning of the period | $ | 15,690 | $ | - | $ | - | $ | - | ||||||||
| Issued during the period, net of issue costs and income taxes | - | - | 15,690 | - | ||||||||||||
| Balance, beginning and end of the period | $ | 15,690 | $ | - | $ | 15,690 | $ | - | ||||||||
| Contributed surplus (note 9): | ||||||||||||||||
| Balance, beginning of the period | $ | 134 | $ | 90 | $ | 122 | $ | 54 | ||||||||
| Fair value of stock options granted | 7 | 18 | 19 | 54 | ||||||||||||
| Balance, end of the period | $ | 141 | $ | 108 | $ | 141 | $ | 108 | ||||||||
| Total share capital | $ | 171,702 | $ | 142,332 | $ | 171,702 | $ | 142,332 | ||||||||
| Retained earnings (deficit): | ||||||||||||||||
| Balance, beginning of the period | $ | (265) | $ | (6,986) | $ | (3,493) | $ | (9,169) | ||||||||
| Net income | 1,707 | 1,017 | 5,448 | 3,200 | ||||||||||||
| Dividends paid on preferred shares | (759) | - | (1,272) | - | ||||||||||||
| Balance, end of the period | $ | 683 | $ | (5,969) | $ | 683 | $ | (5,969) | ||||||||
| Accumulated other comprehensive income, net of taxes: | ||||||||||||||||
| Balance, beginning of the period | $ | 33 | $ | 73 | $ | 19 | $ | 24 | ||||||||
| Other comprehensive income (loss) | (8) | (54) | 6 | (5) | ||||||||||||
| Balance, end of the period | $ | 25 | $ | 19 | $ | 25 | $ | 19 | ||||||||
| Total shareholders' equity | $ | 172,410 | $ | 136,382 | $ | 172,410 | $ | 136,382 | ||||||||
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 | 2015 | 2014 | ||||||||
| Cash provided by (used in): | ||||||||||
| Operations: | ||||||||||
| Net income | $ | 5,448 | $ | 3,200 | ||||||
| Adjustments to determine net cash flows: | ||||||||||
| Items not involving cash: | ||||||||||
| Provision for credit losses | 1,226 | 519 | ||||||||
| Stock-based compensation | 19 | 54 | ||||||||
| Income tax provision | 1,127 | 1,250 | ||||||||
| Gain on sale of loans | - | (807) | ||||||||
| Interest income | (47,772) | (43,083) | ||||||||
| Interest expense | 22,759 | 22,818 | ||||||||
| Restructuring charges | - | 434 | ||||||||
| Interest received | 47,255 | 42,563 | ||||||||
| Interest paid | (23,251) | (25,563) | ||||||||
| Change in operating assets and liabilities: | ||||||||||
| Mortgages and loans | (152,229) | (21,778) | ||||||||
| Deposits | 82,448 | (59,715) | ||||||||
| Change in other assets and liabilities | 12,390 | 16,324 | ||||||||
| (50,580) | (63,784) | |||||||||
| Investing: | ||||||||||
| Purchase of securities | - | (34,894) | ||||||||
| Proceeds from sale and maturity of securities | 25,905 | 26,372 | ||||||||
| 25,905 | (8,522) | |||||||||
| Financing: | ||||||||||
| Repayment of subordinated notes | - | (7,000) | ||||||||
| Proceeds from shares issued, net of costs | 15,690 | - | ||||||||
| Dividends paid | (1,272) | - | ||||||||
| 14,418 | (7,000) | |||||||||
| Decrease in cash and cash equivalents | (10,257) | (79,306) | ||||||||
| Cash and cash equivalents, beginning of the period | 145,140 | 176,323 | ||||||||
| Cash and cash equivalents, end of the period | $ | 134,883 | $ | 97,017 | ||||||
| Cash and cash equivalents is represented by: | ||||||||||
| Cash | $ | 44,894 | $ | 37,258 | ||||||
| Cash equivalents | 89,989 | 59,759 | ||||||||
| Cash and cash equivalents, end of the period | $ | 134,883 | $ | 97,017 | ||||||
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, 2015 and 2014
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 trade on the Toronto Stock Exchange, 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 PWC Capital Inc. (“PWC”) whose shares also trade on the Toronto Stock Exchange. At July 31, 2015 PWC owned approximately 68% of the common shares 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, 2014.
The interim Consolidated Financial Statements for the three and nine months ended July 31, 2015, and 2014 were approved by the Audit Committee of the Board of Directors on August 25, 2015.
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 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, 2014 and are detailed in Note 3 of the Bank’s 2014 Audited Consolidated Financial Statements. There have been no material changes in accounting policies.
4. Securities:
Portfolio analysis:
| July 31 | October 31 | July 31 | ||||||||
| 2015 | 2014 | 2014 | ||||||||
| Available-for-sale securities | ||||||||||
| Securities issued or guaranteed by: | ||||||||||
| Canadian provincial governments | $ | 9,634 | $ | 9,581 | 9,486 | |||||
| Canadian municipal governments | 276 | 554 | 606 | |||||||
| Term deposits | - | 26,055 | 25,926 | |||||||
| Total available-for-sale securities | $ | 9,910 | $ | 36,190 | $ | 36,018 | ||||
| Held-to-maturity security | ||||||||||
| Debt of other financial institutions | $ | 12,564 | $ | 12,610 | $ | 12,624 | ||||
| Total securities | $ | 22,474 | $ | 48,800 | $ | 48,642 | ||||
Canadian provincial government securities are carried at fair value based on quoted market prices (Level 1) and term deposits and Canadian municipal debt fall into Level 2 of the fair value hierarchy. See Note 3 (c) of the October 31, 2014 consolidated financial statements for more information.
5. Loans:
a) Portfolio analysis:
|
July 31 |
October 31 |
July 31
|
||||||||
|
2015
|
2014
|
2014 | ||||||||
| Government financing | $ | 77,246 | $ | 87,332 | $ | 103,726 | ||||
| Residential multi-family mortgages | 106,432 | 122,686 | 118,348 | |||||||
| Commercial and consumer loans and leases | 732,569 | 548,240 | 489,447 | |||||||
| Commercial mortgages | 429,099 | 432,567 | 437,919 | |||||||
| Credit card receivables | 25,390 | 27,972 | 26,635 | |||||||
| Other loans | 3,795 | 3,967 | 3,992 | |||||||
| 1,374,531 | 1,222,764 | 1,180,067 | ||||||||
| Collective allowance | (3,118) | (2,905) | (2,807) | |||||||
| Accrued interest | 4,824 | 4,388 | 4,119 | |||||||
| Total loans, net of allowance for credit losses | $ | 1,376,237 | $ | 1,224,247 | $ | 1,181,379 | ||||
The collective allowance for credit losses relates to the following loan portfolios:
| July 31 | October 31 | July 31 | ||||||||
| 2015 | 2014 | 2014 | ||||||||
| Government financing | $ | 20 | $ | 13 | $ | 15 | ||||
| Residential multi-family mortgages | 26 | 66 | 35 | |||||||
| Commercial and consumer loans and leases | 576 | 507 | 444 | |||||||
| Commercial mortgages | 1,430 | 1,332 | 1,347 | |||||||
| Credit card receivables | 1,044 | 962 | 941 | |||||||
| Other loans | 22 | 25 | 25 | |||||||
| $ | 3,118 | $ | 2,905 | $ | 2,807 | |||||
The Bank holds security against the majority of its loans in the form of either mortgage interests over property, other registered securities over assets, guarantees and cash held as holdbacks on commercial and consumer loans and leases.
b) Allowance for credit losses:
The allowance for credit losses results from the following:
| July 31 | July 31 | |||||||||||||
| 2015 | 2014 | |||||||||||||
| For the three months ended | Collective | Individual | Total Allowance | Total Allowance | ||||||||||
| Balance, beginning of the period | $ | 3,086 | $ | - | $ | 3,086 | $ | 2,862 | ||||||
| Provision for credit losses | 297 | - | 297 | 303 | ||||||||||
| Write-offs | (265) | - | (265) | (358) | ||||||||||
| Balance, end of the period | $ | 3,118 | $ | - | $ | 3,118 | $ | 2,807 | ||||||
| July 31 | July 31 | |||||||||||||
| 2015 | 2014 | |||||||||||||
| For the nine months ended | Collective | Individual | Total Allowance | Total Allowance | ||||||||||
| Balance, beginning of the period | $ | 2,905 | $ | - | $ | 2,905 | $ | 3,275 | ||||||
| Provision for credit losses | 1,226 | - | 1,226 | 519 | ||||||||||
| Write-offs | (1,013) | - | (1,013) | (987) | ||||||||||
| Balance, end of the period | $ | 3,118 | $ | - | $ | 3,118 | $ | 2,807 | ||||||
c) Impaired loans:
At July 31, 2015, there were no impaired loans (October 31, 2014 - $nil). At July 31, 2015, loans, other than credit card receivables, past due but not impaired totalled $nil (October 31, 2014 - $nil). At July 31, 2015, credit card receivables overdue by one day or more but not impaired totalled $2,739,000 (October 31, 2014 - $2,999,000).
6. Subordinated notes payable:
| July 31 | October 31 | July 31 | ||||||||||||
| 2015 | 2014 | 2014 | ||||||||||||
| 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 $566 (October 31, 2014 - $637) effective interest of 10.06% | ||||||||||||||
| $ | 13,934 | $ | 13,863 | $ | 13,840 | |||||||||
| $ | 13,934 | $ | 13,863 | $ | 13,840 | |||||||||
During the nine months ended July 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 included in restructuring charges in the Consolidated Statements of Income.
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 and other assets are pledged as collateral for these liabilities.
8. Other liabilities:
| July 31 | October 31 | July 31 | |||||||||||||
| 2015 | 2014 | 2014 | |||||||||||||
| Accounts payable and other | $ | 5,266 | $ | 5,379 | $ | 4,299 | |||||||||
| Holdbacks payable on commercial and consumer loans and leases | 52,344 | 36,836 | 32,397 | ||||||||||||
| $ | 57,610 | $ | 42,215 | $ | 36,696 | ||||||||||
9. Share capital:
a) Common shares and contributed surplus:
At July 31, 2015, there were 19,437,171 (October 31, 2014 – 19,437,171) common shares outstanding.
During the three and nine months ended July 31, 2015, the Bank recognized compensation expense of $7,000 (July 31, 2014 - $18,000) and $19,000 (July 31, 2014 - $54,000) respectively, relating to the estimated fair value of stock options granted in prior periods. No stock options were granted during the current periods.
b) Preferred shares:
On February 26, 2015, the Bank issued 1,681,320 Non-Cumulative 6-Year Rate Reset Series 3 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $15,690,000. For the initial 6-year period ending April 30, 2021, these Series 3 Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors. Issue costs of $1,538,000, net of income taxes of $415,000, were allocated directly to share capital. At July 31, 2015, there were 1,681,320 (October 31, 2014 – nil) Series 3 preferred shares outstanding.
On October 30, 2014 the Bank issued 1,461,460 Series 1 preferred shares for net proceeds of $13,647,000. Issue costs of $1,325,000, net of income taxes of $358,000, were allocated directly to share capital. At July 31, 2015, there were 1,461,460 (October 31, 2014 – 1,461,460) Series 1 preferred shares outstanding.
10. Other income:
| for the three months ended | for the nine months ended | |||||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| Credit card non-interest revenue | $ | 360 | $ | 378 | $ | 978 | $ | 991 | ||||
| Other income | 8 | 16 | 32 | 44 | ||||||||
| Gain on sale of loans | - | 225 | - | 807 | ||||||||
| $ | 368 | $ | 619 | $ | 1,010 | $ | 1,842 | |||||
11. Income taxes:
| for the three months ended | for the nine months ended | ||||||||||||||
| July 31 | July 31 | July 31 | July 31 | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||||
| Income tax on earnings | $ | 670 | $ | 398 | $ | 1,851 | $ | 1,250 | |||||||
| Recognition of previously unrecognized deferred income tax asset | - | - | (724) | - | |||||||||||
| $ | 670 | $ | 398 | $ | 1,127 | $ | 1,250 | ||||||||
12. Basic income per share:
| for the three months ended | for the nine months ended | |||||||||||||||
| July 31 | July 31 | July 31 | July 31 | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Net income | $ | 1,707 | $ | 1,017 | $ | 5,448 | $ | 3,200 | ||||||||
| Less dividends on Series 1 and Series 3 preferred shares | (759) | - | (1,272) | - | ||||||||||||
| 948 | 1,017 | 4,176 | 3,200 | |||||||||||||
| Average number of common shares outstanding | 19,437 | 19,437 | 19,437 | 19,437 | ||||||||||||
| Basic income per share: | $ | 0.05 | $ | 0.05 | $ | 0.21 | $ | 0.16 | ||||||||
13. 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.
| July 31 | October 31 | July 31 | |||||||
| 2015 | 2014 | 2014 | |||||||
| Loan commitments | $ | 210,108 | $ | 195,148 | $ | 160,997 | |||
| Undrawn credit card lines | 142,783 | 159,306 | 159,614 | ||||||
| Letters of credit | 36,940 | 43,926 | 42,143 | ||||||
| $ | 389,831 | $ | 398,380 | $ | 362,754 | ||||
14. Related party transactions:
During the three and nine months ended July 31, 2015, the Bank incurred management and other fees totalling $150,000 (July 31, 2014 - $300,000) and $450,000 (July 31, 2014 - $900,000) respectively to PWC and a subsidiary of PWC.
The Bank’s and PWC’s Board of Directors and Senior Executive Officers represent key management personnel.
The Bank has loans to employees and key management personnel. At July 31, 2015, amounts due from key management personnel totalled $2,292,000 (October 31, 2014 - $2,298,000) 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, 2015 was $18,000 (July 31, 2014 - $20,000) and $56,000 (July 31, 2014 - $60,000) respectively. There were no provisions for credit losses related to loans issued to key management personnel for the three and nine months ended July 31, 2015 and 2014.
15. 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), preferred shares (Additional Tier 1 capital) and the qualifying amount 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 leverage ratio and the risk-based capital ratios.
During the period ended July 31, 2015, 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.
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 ratios.
The Bank’s risk-based capital ratios are calculated as follows:
| July 31, 2015 | July 31, 2014 | |||||||||||||||
| "All-in" | "Transitional" | "All-in" | "Transitional" | |||||||||||||
| Common Equity Tier 1 (CET1) capital | ||||||||||||||||
| Directly issued qualifying common share capital | $ | 142,365 | $ | 142,365 | $ | 142,332 | $ | 142,332 | ||||||||
| Retained earnings (deficit) | 683 | 683 | (5,969) | (5,969) | ||||||||||||
| Accumulated other comprehensive income | 25 | 25 | 19 | 19 | ||||||||||||
| CET1 capital before regulatory adjustments | 143,073 | 143,073 | 136,382 | 136,382 | ||||||||||||
| Total regulatory adjustments to CET1 | (8,508) | (3,403) | (7,627) | (1,526) | ||||||||||||
| Common Equity Tier 1 capital | $ | 134,565 | $ | 139,670 | $ | 128,755 | $ | 134,856 | ||||||||
| Additional Tier 1 (AT1) capital | ||||||||||||||||
| Directly issued qualifying AT1 instruments | $ | 29,337 | $ | 29,337 | $ | - | $ | - | ||||||||
| Tier 1 capital | $ | 163,902 | $ | 169,007 | $ | 128,755 | $ | 134,856 | ||||||||
| Tier 2 capital | ||||||||||||||||
| Directly issued capital instruments subject to | ||||||||||||||||
| phase out from Tier 2 | $ | 12,700 | $ | 12,700 | $ | 14,500 | $ | 14,500 | ||||||||
| Tier 2 capital before regulatory adjustments | 12,700 | 12,700 | 14,500 | 14,500 | ||||||||||||
| Total regulatory adjustments to Tier 2 capital | - | - | - | - | ||||||||||||
| Tier 2 capital | $ | 12,700 | $ | 12,700 | $ | 14,500 | $ | 14,500 | ||||||||
| Total capital | $ | 176,602 | $ | 181,707 | $ | 143,255 | $ | 149,356 | ||||||||
| Total risk-weighted assets | $ | 1,260,199 | $ | 1,265,303 | $ | 1,079,231 | $ | 1,085,333 | ||||||||
| Capital ratios | ||||||||||||||||
| CET1 Ratio | 10.68% | 11.04% | 11.93% | 12.43% | ||||||||||||
| Tier 1 Capital Ratio | 13.01% | 13.36% | 11.93% | 12.43% | ||||||||||||
| Total Capital Ratio | 14.01% | 14.36% | 13.27% | 13.76% | ||||||||||||
c) Leverage Ratio:
On January 1, 2015, the assets-to-capital multiple was replaced by the leverage ratio that is prescribed under the Basel III Accord. The leverage ratio is a supplementary measure to the risk-based capital requirements and is defined as the ratio of Tier 1 capital to its exposure measure. The Bank’s leverage ratio is calculated as follows:
| July 31 | ||||
| 2015 | ||||
| On-balance sheet assets | $1,563,102 | |||
| Asset amounts deducted in determining Basel III "all in" Tier 1 Capital | (8,508) | |||
| Total on-balance sheet exposures | 1,554,594 | |||
| Off-balance sheet exposure at gross notional amount | $ 389,831 | |||
| Adjustments for conversion to credit equivalent amount | (279,020) | |||
| Off-balance sheet items | 110,811 | |||
| Tier 1 Capital | 163,902 | |||
| Total Exposures | 1,665,405 | |||
| Basel III Leverage Ratio | 9.84% | |||
The Bank was in compliance with the leverage ratio prescribed by OSFI throughout the period presented.
16. Interest rate position:
The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact net interest margin, net interest income and the economic value of assets, liabilities and shareholders’ equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s shareholders’ equity over a 60 month period if no remedial actions are taken.
| July 31, 2015 | October 31, 2014 | |||||||||||||
| Increase 100 bps | Decrease 100 bps | Increase 100 bps | Decrease 100 bps | |||||||||||
| Impact on projected net interest | ||||||||||||||
| income during a 12 month period | $ | 3,371 | $ | (2,959) | $ | 3,543 | $ | (3,493) | ||||||
| Impact on reported equity | ||||||||||||||
| during a 60 month period | $ | 49 | $ | 473 | $ | (319) | $ | 484 | ||||||
| Duration difference between assets and | ||||||||||||||
| liabilities (months) | 0.6 | 0.2 | ||||||||||||
17. 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 22 to the October 31, 2014 consolidated financial statements for more information on fair values.
| July 31, 2015 | October 31, 2014 | |||||||||||
| Fair value | Fair value | |||||||||||
| Book | of assets | Book | of assets | |||||||||
| Value | and liabilities | Value | and liabilities | |||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 134,883 | $ | 134,883 | $ | 145,140 | $ | 145,140 | ||||
| Securities | 22,474 | 22,422 | 48,800 | 48,671 | ||||||||
| Loans | 1,376,237 | 1,380,859 | 1,224,247 | 1,224,730 | ||||||||
| Other financial assets | 5,776 | 5,776 | 5,057 | 5,057 | ||||||||
| $ | 1,539,370 | $ | 1,543,940 | $ | 1,423,244 | $ | 1,423,598 | |||||
| Liabilities | ||||||||||||
| Deposits | $ | 1,275,523 | $ | 1,290,949 | $ | 1,193,797 | $ | 1,198,530 | ||||
| Subordinated notes payable | 13,934 | 14,500 | 13,863 | 14,500 | ||||||||
| Securitization liabilities | 43,625 | 47,983 | 43,466 | 46,732 | ||||||||
| Other financial liabilities | 57,610 | 57,610 | 42,215 | 42,215 | ||||||||
| $ | 1,390,692 | $ | 1,411,042 | $ | 1,293,341 | $ | 1,301,977 | |||||
Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.5 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
Visit our website at: http://www.pwbank.com
