LONDON, Ontario--(BUSINESS WIRE)--PWC Capital Inc (TSX:PWC):
PWC Capital Inc.
- Net income (loss) of PWC Capital Inc. (the “Corporation”) for the three months ended April 30, 2016, was ($919,000) or ($0.04) per common share (basic and diluted) compared to ($226,000) or ($0.03) per common share (basic and diluted) for the previous quarter and ($1.2 million) or ($0.04) per common share (basic and diluted) for the same period a year ago. The change in net income (loss) from the previous quarter was due primarily to a decrease in the net income of the Corporation’s principal subsidiary, Pacific & Western Bank of Canada (the “Bank”).
- Net income (loss) of the Corporation for the six months ended April 30, 2016, was ($1.2 million) or ($0.07) per common share (basic and diluted) compared to ($2.7 million) or ($0.09) per common share (basic and diluted) for the same period a year ago. Net income (loss) improved from the same period a year ago due primarily to reduced interest expense related to the Class B Preferred Shares of the Corporation.
Pacific & Western Bank of Canada
- Income before restructuring charges and income taxes of the Bank for the three months ended April 30, 2016 was $3.0 million compared to $3.2 million for the previous quarter and $1.9 million for the same period a year ago. The decrease from the previous quarter was due primarily to a higher level of non-interest expenses in the current quarter and the increase from a year ago was due primarily to growth in net interest income. During the current quarter the Bank incurred restructuring charges related to rebranding of the Bank and costs related to a review of strategic alternatives commenced by the Bank in the quarter.
- Income before restructuring charges and income taxes of the Bank for the six months ended April 30, 2016 was $6.2 million compared to $4.2 million for the same period a year ago with the increase due primarily to growth in net interest income.
- Net income of the Bank for the current quarter was $1.8 million or $0.06 per common share (basic and diluted) compared to $2.3 million or $0.09 per common share (basic and diluted) for the previous quarter and $2.1 million or $0.09 per common share (basic and diluted) a year ago. Net income for the current quarter was less than that of the previous periods due to restructuring charges totalling $445,000. In addition net income for the same period a year ago included an income tax recovery of $724,000 related to previously unrecognized deferred income tax assets.
- Net income of the Bank for the six months ended April 30, 2016 was $4.1 million or $0.15 per common share (basic and diluted) compared to $3.7 million or $0.17 per common share (basic and diluted) for the same period a year ago with the increase due primarily to higher net interest income reduced by restructuring charges. Net income for the same period a year ago included an income tax recovery of $724,000 related to previously unrecognized deferred income tax assets as noted above.
- Net interest margin or spread for the current quarter increased to 2.23% compared to 2.18% for the previous quarter and 2.22% for the same period a year ago. For the first six months net interest margin or spread was 2.23% compared to 2.21% for the same period a year ago.
- Lending assets increased to $1.52 billion from $1.50 billion at the end of the previous quarter and from $1.34 billion a year ago. The growth in loans was a result of increases in loan and lease receivables sourced through the Bank’s bulk purchase program.
- Credit quality remains exceptional with no gross impaired loans at April 30, 2016 or at January 31, 2016, or a year ago.
- Subsequent to the end of the quarter the Bank announced that it received regulatory approval to change its name from Pacific & Western Bank of Canada to VersaBank.
(1) Certain highlights include non-GAAP measures. See definition under ‘Basis of Presentation’ in the attached Management’s Discussion and Analysis.
PRESIDENT’S COMMENTS
PWC Capital owns approximately 12.6 million common shares (63%) of Pacific & Western Bank of Canada and 100% of the common shares of our software company, AMSDMS Software Inc. The Bank is by far our largest and most important investment and the value of PWC is highly dependent on the Bank’s value.
I am pleased to report that our Bank has completed another successful quarter. The considerable investment we have made in technology is continuing to pay off. We have built a highly scalable financial institution whose products and services are in very high demand, however, access to additional capital to allow our Bank to realize its growth potential presents a significant challenge. In order to address this challenge we have commenced a strategic review with the assistance of RBC Capital Markets.
Loans and lease receivables acquired through our Bulk Purchase Program amounted to $110 million during the quarter giving rise to a net increase of more than 5% in our portfolio over the previous quarter bringing the quarter-end balance to over $706 million. We purchase loans and lease receivables from an increasing number of non-bank and fintech financiers who operate throughout Canada in a variety of industries, many of which are taking advantage of new technologies to reach their customers. Our program enables this type of financing and indirectly provides the much needed financing for small businesses and greater choice for consumers across Canada. We have developed state of the art high capacity systems that allow us to process large numbers of these small ticket transactions. Credit risk is reduced to acceptable levels by substantial cash deposits made by our partners to be available to offset credit losses. Our Bank is at the leading edge of this new method of financing and this new business is the driving force behind the Bank’s rapidly increasing profits.
The remainder of the Bank’s lending portfolio is composed of a variety of loans including loans to government entities, credit card receivables and Commercial Real Estate (CRE) loans. The latter class of loans makes up the largest component (75%). A few years ago we made the strategic decision to de-emphasise this type of lending particularly in major urban centres that we thought had the potential to become ‘over heated’. As part of this strategy, in 2013 we closed our Calgary branch. CRE financing still makes a significant contribution to the Bank’s overall earnings. However, we do not expect much growth in this portfolio and CRE loans remained relatively unchanged at $560 million. We primarily lend to well-established real estate developers with projects located in Ontario and occasionally in other markets throughout Canada.
Asset quality remained industry leading with the Bank again reporting no impaired loans. We pride ourselves on maintaining stellar credit adjudication and processes that consistently deliver industry leading results.
Our Bank now has one of the largest and geographically diverse deposit gathering networks in Canada with partners that include many of the larger banks’ brokerage firms. This channel provides a steady, reliable source of low cost deposits. In addition to this channel we created 2 new channels for acquiring deposits. The first involved developing an internet banking solution for niche markets that have unique challenges in dealing with the traditional banks and the second involved receiving deposits from our Bulk Purchase vendors. These 2 low cost channels now contribute approximately 32% of the Bank’s total funding requirements and are serving to reduce the Bank’s overall cost of funds and increase its NIM which increased to an industry leading 2.23% this quarter.
Total revenue for the quarter increased by 13% to $9.6 million compared to the same quarter last year and on a year to date basis increased by 13% to $19.1 million. Net income for the quarter was $1.8 million ($.06 per common share) versus $2.3 million ($.09 per common share) earned in the previous quarter. The reduction in net income was primarily as a result of additional expenses associated with rebranding our bank and with the strategic review we announced last month. On a year-to-date basis our Bank earned $4.1 million for the six months ended April 30th a 10% increase over the same period last year.
The Bank’s increased earnings, together with the savings associated with the redemption of 800,000 Preference B shares, significantly improved our company’s profit situation. The net loss reduced from $1.2 million incurred for the same quarter last year to $919,000 loss this quarter and on a year-to-date basis the net loss reduced from $2.7 million last year to $1.2 million. I am pleased with this reduction; however, we continue to explore strategies to accelerate and release value to us, the shareholders.
We have designed a state of the art Bank that, through utilization of specialized software and well-experienced staff, is able to rapidly acquire large amounts of loans, leases and deposits with minimal costs. By targeting niche markets that are not well served by the larger financial institutions, our Bank is able to earn excellent margins without accepting much risk. The financial market place is embracing innovative new ideas and your Bank is at the forefront of prudently applying new ideas and technology to provide Canadians with greater choice and more economical financing solutions. On May 13th our Bank’s name changed to VersaBank to better describe what it is, ‘a versatile state of the art bank’.
FINANCIAL HIGHLIGHTS
| (unaudited) | for the three months ended | for the six months ended | |||||||||||||||
| April 30 | April 30 | April 30 | April 30 | ||||||||||||||
| ($CDN thousands except per share amounts ) | 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Pacific & Western Bank of Canada | |||||||||||||||||
| Results of operations | |||||||||||||||||
| Net interest income | $ | 9,360 | $ | 8,255 | $ | 18,502 | $ | 16,286 | |||||||||
| Net interest margin* | 2.23% | 2.22% | 2.23% | 2.21% | |||||||||||||
| Non-interest income | 285 | 304 | 610 | 642 | |||||||||||||
| Total revenue | 9,645 | 8,559 | 19,112 | 16,928 | |||||||||||||
| Provision for credit losses | 213 | 427 | 425 | 929 | |||||||||||||
| Non-interest expenses | 6,472 | 6,264 | 12,523 | 11,801 | |||||||||||||
| Restructuring charges | 445 | - | 445 | - | |||||||||||||
| Income before income taxes | 2,515 | 1,868 | 5,719 | 4,198 | |||||||||||||
| Net income | 1,807 | 2,062 | 4,118 | 3,741 | |||||||||||||
| Return on average common equity* | 3.40% | 5.24% | 4.05% | 4.63% | |||||||||||||
| Gross impaired loans to total loans | 0.00% | 0.00% | 0.00% | 0.00% | |||||||||||||
| Provision for credit losses as a % of average loans | 0.01% | 0.03% | 0.03% | 0.07% | |||||||||||||
| PWC Capital Inc. (consolidated) | |||||||||||||||||
| Results of operations | |||||||||||||||||
| Net income of the Bank | $ | 1,807 | $ | 2,062 | $ | 4,118 | $ | 3,741 | |||||||||
| Additional interest expense of PWC | (1,837) | (1,604) | (3,570) | (3,219) | |||||||||||||
| Interest expense relating to Class B | |||||||||||||||||
| Preferred Share dividends | (616) | (1,205) | (1,231) | (2,350) | |||||||||||||
| Net non-interest and other expenses of PWC | (90) | 24 | (95) | (27) | |||||||||||||
| Provision for income taxes | (183) | (436) | (367) | (873) | |||||||||||||
| Net loss | $ | (919) | $ | (1,159) | $ | (1,145) | $ | (2,728) | |||||||||
| Net income attributable to non-controlling interests | 655 | 287 | 1,421 | 506 | |||||||||||||
| Net loss attributable to shareholders | (1,574) | (1,446) | (2,566) | (3,234) | |||||||||||||
| $ | (919) | $ | (1,159) | $ | (1,145) | $ | (2,728) | ||||||||||
| Loss per common share: | |||||||||||||||||
| Basic | $ | (0.04) | $ | (0.04) | $ | (0.07) | $ | (0.09) | |||||||||
| Diluted | $ | (0.04) | $ | (0.04) | $ | (0.07) | $ | (0.09) | |||||||||
| as at | |||||||||||||||||
| April 30 | April 30 | ||||||||||||||||
| PWC Capital Inc. (consolidated) | 2016 | 2015 | |||||||||||||||
| Balance Sheet Summary | |||||||||||||||||
| Cash and securities | $ | 144,379 | $ | 153,174 | |||||||||||||
| Total loans | 1,522,280 | 1,344,181 | |||||||||||||||
| Total assets | 1,697,258 | 1,522,864 | |||||||||||||||
| Deposits | 1,378,023 | 1,245,271 | |||||||||||||||
| Notes payable and preferred share liabilities | 106,962 | 117,919 | |||||||||||||||
| Shareholders' (deficit) equity | (2,811) | 6,227 | |||||||||||||||
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* This is a non-GAAP measure. See definition under 'Basis of Presentation' in the attached Management's Discussion and Analysis. |
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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 second quarter of fiscal 2016, dated May 31, 2016, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended April 30, 2016, 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 Corporation’s MD&A and the audited consolidated financial statements for the year ended October 31, 2015, all of 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, 2015, remain substantially unchanged.
Basis of Presentation
Non-GAAP and Additional GAAP Measure
Net Interest Income and Net Interest Margin or Spread
Most banks analyze profitability by net interest income (as presented in the Consolidated Statements of Loss) and net interest margin or spread. Net interest margin or spread is defined as net interest income as a percentage of average total assets. Net interest margin or spread does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.
Basel III Common Equity Tier 1, Tier 1 and Total Capital Adequacy Ratios and Leverage Ratio
Basel III Common Equity Tier 1, Tier 1 and total capital adequacy ratios and the leverage ratio are determined in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
Return on Average Common Equity
Return on average common equity for Pacific & Western Bank of Canada (the “Bank”), is defined as annualized net income of the Bank 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.
Non-Interest Expenses to Total Assets Ratio
The ratio of non-interest expenses to total assets is determined by dividing non-interest expenses of the Bank by total assets.
PWC Capital Inc.
PWC Capital Inc. (the `Corporation`) is a holding company whose shares trade on the Toronto Stock Exchange. Its principal subsidiary, the Bank, of which it currently owns approximately 63% of its issued common shares, operates as a Schedule I bank under the Bank Act (Canada). The Bank’s shares also trade on the Toronto Stock Exchange. On May 13, 2016, the Bank received regulatory approval to change its name from Pacific & Western Bank of Canada to VersaBank.
On March 7, 2016, the Corporation and the Bank announced they were undertaking a review of their strategic alternatives which may result in the Corporation disposing all or a portion of its ownership interest in the Bank. At this time, there can be no assurance that the strategic review process of either the Corporation or the Bank will result in a transaction for either entity or, if a transaction is undertaken, as to its nature, terms or timing.
Net income (loss) of the Corporation for the three months ended April 30, 2016, was ($919,000) or ($0.04) per common share (basic and diluted) compared to ($226,000) or ($0.03) per common share (basic and diluted) for the previous quarter and ($1.2 million) or ($0.04) per common share (basic and diluted) for the same period a year ago. The change in net income (loss) from the previous quarter was due primarily to a decrease in the net income of the Bank.
Net income (loss) of the Corporation for the six months ended April 30, 2016, was ($1.2 million) or ($0.07) per common share (basic and diluted) compared to ($2.7 million) or ($0.09) per common share (basic and diluted) for the same period a year ago. Net income (loss) improved from the same period a year ago due primarily to reduced interest expense related to dividends paid on the Class B Preferred Shares of the Corporation. These dividends are recorded as interest expense in the consolidated financial statements of the Corporation as the Preferred Shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet.
For the three months ending April 30, 2016, interest expense of the Corporation on a non-consolidated basis consisted of $1.7 million relating to its notes payable compared to $1.7 million for the previous quarter and $1.6 million for the same period a year ago and dividends totalling $616,000 on its Class B Preferred Shares compared to $615,000 for the previous quarter and $1.2 million for the same period a year ago. Interest expense relating to dividends on Class B Preferred Shares decreased from a year ago as a result of the redemption of 800,000 Class B Preferred Shares in May 2015.
For the six months ending April 30, 2016, interest expense of the Corporation on a non-consolidated basis consisted of $3.5 million relating to its notes payable compared to $3.2 million for the same period a year ago and dividends totalling $1.2 million on its Class B Preferred Shares compared to $2.4 million for the same period a year ago. As noted above, interest expense relating to dividends on Class B Preferred Shares decreased from a year ago as a result of the redemption of 800,000 Class B Preferred Shares.
Non-interest expenses of the Corporation on a non-consolidated basis are not significant and relate primarily to the costs of being a publicly traded company including directors’ fees, listing and annual filing fees and professional fees.
The Corporation on a non-consolidated basis also incurs corporate income tax related to dividends paid on its outstanding Class B Preferred Shares.
Pacific & Western Bank of Canada
Overview
The Bank is a technologically proficient Canadian Schedule I chartered bank which operates using an electronic branchless model. It sources its deposits through a well-established and widely diversified network of deposit brokers and purchases loan and lease receivables electronically. The Bank also makes residential development and commercial loans and mortgages which are sourced through direct contact with its lending staff and a well established network of brokers.
Income before restructuring charges and income taxes of the Bank for the three months ended April 30, 2016 was $3.0 million compared to $3.2 million for the previous quarter and $1.9 million for the same period a year ago. The decrease from the previous quarter was due primarily to a higher level of non-interest expenses in the current quarter and the increase from a year ago was due primarily to growth in net interest income. During the current quarter the Bank incurred restructuring charges related to rebranding of the Bank and costs related to the review of strategic alternatives commenced by the Bank in the quarter.
Income before restructuring charges and income taxes of the Bank for the six months ended April 30, 2016 was $6.2 million compared to $4.2 million for the same period a year ago with the increase due primarily to growth in net interest income.
Net income of the Bank for the current quarter was $1.8 million or $0.06 per common share (basic and diluted) compared to $2.3 million or $0.09 per common share (basic and diluted) for the previous quarter and $2.1 million $0.09 per common share (basic and diluted) a year ago. Net income for the current quarter was less than that of the previous periods due to restructuring charges totalling $445,000. In addition, net income for the same period a year ago included an income tax recovery of $724,000 related to previously unrecognized deferred income tax assets.
Net income of the Bank for the six months ended April 30, 2016 was $4.1 million or $0.15 per common share (basic and diluted) compared to $3.7 million or $0.17 per common share (basic and diluted) for the same period a year ago with the increase due primarily to growth in net interest income reduced by restructuring charges. Net income for the same period a year ago included an income tax recovery of $724,000 related to previously unrecognized deferred income tax assets as noted above.
Total assets of the Bank were $1.70 billion compared to $1.70 billion at the end of the previous quarter and $1.53 billion a year ago. Lending assets increased to $1.52 billion from $1.50 billion at the end of the previous quarter and from $1.34 billion a year ago with the growth due to increases in loan and lease receivables sourced through the Bank’s bulk purchase program. Credit quality remains exceptional with no gross impaired loans at April 30, 2016, or at January 31, 2016 or a year ago.
Total Revenue
Total revenue of the Bank consists of net interest income and non-interest income. Non-interest income consists primarily of fees from credit card operations.
For the three months ended April 30, 2016, total revenue increased to $9.6 million from $9.5 million for the previous quarter and from $8.6 million for the same period a year ago, an increase of 13%, with the increases due to growth in net interest income.
For the six months ended April 30, 2016, total revenue increased by 13% to $19.1 million from $16.9 million a year ago with the increase also due to growth in net interest income.
Net Interest Income
Net interest income for the three months ended April 30, 2016 increased to $9.4 million from $9.1 million for the previous quarter and from $8.3 million for the same period a year ago, an increase of 13%. The increase in net interest income from a year ago was due primarily to growth in lending assets which grew by 13% to $1.52 billion at April 30, 2016 from $1.34 billion last year.
Net interest income for the six months ended April 30, 2016 increased by 14% to $18.5 million from $16.3 million for the same period year ago with the increase due primarily due to growth in lending assets.
Net Interest Margin
Net interest margin or spread for the three months ended April 30, 2016 was 2.23% compared to 2.18% for the previous quarter and 2.22% for the same period a year ago. While net interest margin has increased as a result of the increase in lending assets, this increase has been moderate as a result of a change in the mix of lending assets with loans with higher spreads remaining stable and the growth in lending assets occurring primarily in loan categories with lower spreads. Net interest margin of the Bank has not been impacted significantly by reductions in the interest rate by the Bank of Canada over the past year.
Net interest margin or spread for the six months ended April 30, 2016 increased to 2.23% from 2.21% for the same period a year ago with the increase due to the factors described above.
Provision for Credit Losses
The Bank maintains high credit quality and strong underwriting standards and as a result traditionally requires minimal provisions for credit losses. The provision for credit losses for the current quarter was $213,000 or 1 basis point of average loans compared to $212,000 or 1 basis point of average loans for the previous quarter and $427,000 or 3 basis points of average loans for the same period a year ago. The provision for credit losses decreased from a year ago due to a lower amount of write offs related to credit card receivables as well as a change in Ioan mix over the past year with growth in loan and lease receivables sourced through the bulk finance program which require a lower collective allowance. The provision for credit losses remains well below the Bank’s target of 10 basis points of average loans for the current year.
The provision for credit losses for the six months ended April 30, 2016 was $425,000 or 3 basis points of average loans compared to $929,000 or 7 basis points of average loans for the same period a year ago with the decrease due to the factors noted above.
Non-Interest Expenses
Non-interest expenses totalled $6.5 million for the current quarter compared to $6.1 million for the previous quarter and $6.3 million for the same period a year ago. The increase in non-interest expenses from the previous quarter was due primarily to an increase in employee compensation and a higher level of professional and consulting fees. The increase in non-interest expenses from a year ago was due primarily to an increase in employee compensation and an increase in employee complement.
Non-interest expenses of the Bank for the six months ended April 30, 2016 totalled $12.5 million compared to $11.8 million with the increase due to higher consulting and professional fees and employee compensation as a result of an increase in employee complement. However the Bank continues to see economies of scale as non-interest expenses as a percentage of average assets for the current period decreased to 1.51% from 1.60% for the same period a year ago.
Restructuring Charges
During the three months ended April 30, 2016, the Bank incurred restructuring charges totalling $445,000 relating to rebranding of the Bank and costs associated with the review of strategic alternatives commenced by the Bank in the quarter.
Income Taxes
The statutory federal and provincial income tax rate of the Bank 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 three months ended April 30, 2016, the provision (recovery) for income taxes recorded at an effective tax rate of 28% was $708,000 compared to $893,000 for the previous quarter and ($194,000) for the same period a year ago with the changes due to the level of earnings in the Bank and an income tax recovery of $724,000 recorded last year related to previously unrecognized deferred income tax assets.
For the six months ended April 30, 2016, the provision for income taxes, recorded at an effective tax rate of 28%, was $1.6 million compared to $457,000 for the same period a year ago with the increase due to a higher level of earnings in the Bank and an income tax recovery of $724,000 recorded last year as noted above.
Comprehensive Income
Comprehensive income is comprised of net income for the period and other comprehensive income which consists of unrealized gains and losses on available-for-sale securities. Comprehensive income of the Bank for the three months ended April 30, 2016 was $1.8 million compared to $2.3 million for the previous quarter and $2.0 million a year ago. For the six months ended April 30, 2016, comprehensive income of the Bank was $4.1 million compared to $3.8 million a year ago. Due to the current composition of the Bank’s 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 significantly from net income.
Consolidated Balance Sheet
Substantially all of the Corporation’s consolidated assets relate to the operations of the Bank. Total assets at April 30, 2016 were $1.70 billion compared to $1.70 billion at the end of previous quarter and $1.52 billion a year ago. The increase from a year ago was due to growth in lending assets which grew to $1.52 billion from $1.34 billion a year ago. Growth in lending assets was primarily a result of an increase in loan and lease receivables sourced through the Bank’s 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 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 $144 million or 8.5% of total assets compared to $173 million or 10.2% of total assets at the end of the previous quarter and $153 million or 10.1% of total assets a year ago. The decrease in cash and securities from the previous quarter and from a year ago was due primarily to the Bank reducing its liquid assets to more optimal levels. The current level of cash and securities as a percentage of total assets is expected to continue to decrease in the coming months.
Loans
At April 30, 2016, loans increased to $1.52 billion from $1.50 billion at the end of the previous quarter and increased 13% from $1.34 billion a year ago. The growth in loans from the previous quarter was due primarily to growth in loan and lease receivables purchased through the Bank’s bulk purchase program. The growth in loans from a year ago was due to increases in loan and lease receivables purchased through the Bank’s bulk purchase program as well as increases in residential and commercial mortgages.
At April 30, 2016, the balances of individual loan categories compared to the end of the previous quarter reflects a continuation of the change in lending strategy where focus on government loans has decreased due to market conditions and has been replaced by an emphasis on loan and lease receivables purchased through the bulk purchase program. Compared to a year ago, individual loan categories showed growth in loan and lease receivables and a decrease in government loans as discussed above and a decrease in commercial loans which was due primarily to timing of repayments and advances.
As noted above, loan and lease receivables purchased through the bulk purchase program continued to show strong growth. The balance of loan and lease receivables increased to $706 million at April 30, 2016 from $671 million at the end of the previous quarter, a net increase of $35 million, and from $511 million last year, a net increase of $195 million or 38%. The bulk purchase program, which consists of the purchase of individual loan and lease receivables, continues to be a key initiative and the primary driver for growth of the lending portfolio. The credit quality of these loan and lease receivables is strong and normally attracts a lower collective allowance due to the level of cash holdbacks that are retained.
Total new lending for the quarter was $198 million compared to $231 million for the previous quarter and $255 million a year ago. Loan repayments for the quarter totalled $173 million compared to $177 million for the previous quarter and $206 million a year ago. For the six months ended April 30, 2016, new lending totalled $428 million compared to $473 million for the same period a year ago and loan repayments totalled $351 million compared to $345 million last year. At April 30, 2016, loan commitments representing loans in the Bank’s pipeline totalled $228 million compared to $253 million at the end of the previous quarter and $189 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 April 30, 2016 totalled $658,000 compared to $668,000 at the end of the previous quarter and $837,000 a year ago. The Bank did not have any HELOC’s outstanding at April 30, 2016, or at the end of the previous quarter or a year ago.
Credit Quality
Gross impaired loans at April 30, 2016, were $nil, unchanged from the end of the previous quarter and a year ago. At April 30, 2016, the collective allowance totalled $3.1 million, similar to the amount of $3.2 million at the end of previous quarter and compared to $3.1 million a year ago. Included in the collective allowance at April 30, 2016 was $1.0 million relating to credit card receivables which is virtually unchanged from the end of the previous quarter and 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. The Bank’s exposure to loan losses in Western Canada and to the oil and gas industry is not significant. As well, the Bank is not concentrated in the housing markets in Toronto and Western Canada.
The geographic concentration of the Bank’s lending portfolio at April 30, 2016 has not changed significantly from that at the end of the previous quarter and a year ago where the overall lending portfolio remains concentrated in the province of Ontario.
Other Assets
Other assets of the Corporation totalled $30.6 million at April 30, 2016, compared to $25.7 million at the end of the previous quarter and $25.5 million a year ago with the change from the previous quarter due to an increase in accounts receivable. Also included in other assets are prepaid expenses, capital assets and the deferred income tax asset of the Bank.
The deferred income tax asset of the Bank was $7.6 million at April 30, 2016, compared to $8.1 million at the end of the previous quarter and $8.7 million a year ago. The changes from previous periods were primarily a result of the utilization of loss carryforwards due to taxable income earned by the Bank over the past year. The deferred income tax asset is due to income tax losses of the Bank totalling approximately $23 million incurred in previous years. These income tax loss carry-forwards are not scheduled to begin expiring until 2027 if unutilized.
In addition, the Corporation has income tax loss carry-forwards which total approximately $73.5 million, the benefit of which has not been recorded. These loss carry-forwards are not scheduled to begin expiring until 2026 if unutilized. At the current tax rate of 27% this would result in approximately $19 million ýsavings against future earnings.
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 April 30, 2016, totalled $1.38 billion compared to $1.40 billion at the end of the previous quarter and $1.25 billion a year ago and consist primarily of guaranteed investment certificates. The increase in deposits from a year ago was due to the raising of new deposits to fund the increase in lending assets.
Of the total amount of deposits outstanding, $17.9 million or approximately 1.30% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $17.1 million or 1.20% of total deposits at the end of the previous quarter and $18.8 million or approximately 1.50% 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 has identified another source, that being a specialized chequing facility platform for trustees in the Canadian bankruptcy industry. The Bank has developed banking software to enable this market to efficiently administer its chequing accounts with these services provided to trustees across Canada. At April 30, 2016, balances from this source totalled $141.4 million compared to $119.8 million at the end of the previous quarter and $82.5 million a year ago.
Other liabilities typically consist of accounts payable and accruals and holdbacks payable related to the bulk purchase program. At April 30, 2016, other liabilities totalled $84.1 million compared to $73.7 million at the end of the previous quarter and $56.6 million a year ago with the increase due to holdbacks associated with loan and lease receivables purchased 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 April 30, 2016, there were no amounts outstanding from these sources compared to none outstanding at the end of the previous quarter and a year ago.
Securitization Liabilities
Securitization liabilities relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At April 30, 2016, securitization liabilities totalled $43.6 million compared to $43.7 million at the end of the previous quarter and $43.5 million a year ago. The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Residential mortgages and other assets are pledged as collateral for securitized liabilities. There have been no securitization transactions in the past several years.
Notes Payable
Notes payable, net of issue costs, totalled $81.8 million at April 30, 2016 compared to $80.8 million at the end of the previous quarter and $74.8 million a year ago. Notes payable include Series C Notes with a face value of $61.7 million maturing in 2018 and other notes payable totalling $8.4 million maturing in 2017, and subordinated notes issued by the Bank totalling $14.5 million. The subordinated notes, which are currently callable, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.
The Series C Notes bear interest at 9.00% per annum and allow the Corporation at its option, to pay interest on the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. At the option of the holder, the Series C Notes are convertible into common shares of the Bank held by the Corporation. During the six months ended April 30, 2016, as payment of the interest due on the Series C Notes, the Corporation distributed 493,725 common shares it owned of the Bank which resulted in loss on distribution of $956,000 and which was charged to directly to shareholders’ equity.
Preferred Share Liabilities
At April 30, 2016, the Corporation had 1,094,058 Class B Preferred Shares outstanding with a redemption value of $27.4 million before deducting issue costs and amounts recorded in equity on issuance. As the Class B Preferred Shares must be redeemed by the Corporation in 2019, the preferred share liability is being adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 9.78%.
Shareholders’ Equity (Deficit)
At April 30, 2016, shareholders’ equity (deficit) was ($2.8 million) compared to ($937,000) at the end of the previous quarter and $6.2 million a year ago with the change from the previous periods due to operating losses incurred by the Corporation and charges to shareholders’ equity relating to losses on distribution of subsidiary’s shares and redemption in 2015 of 800,000 Class B Preferred Shares with common shares of the Bank held by the Corporation.
Common Shares outstanding at April 30, 2016 totalled 44,592,260, unchanged from the end of the previous quarter. At April 30, 2016, there were also 314,572 Class A Preferred Shares and 1,094,058 Class B Preferred Shares outstanding, all of which were unchanged from the end of the previous quarter.
The holders of Class B Preferred Shares are entitled to fixed cumulative dividends at the rate of 6.72%, payable in cash. The Class B Preferred Shares also provide each holder, at its option, with the right to convert into Common Shares of the Corporation on the basis of 12.5 Common Shares of the Corporation for each Class B Preferred Share.
Common share options totalled 421,959 at April 30, 2016 compared to 424,159 common shares options outstanding at the end of the previous quarter with the decrease due to the expiry of 2,200 options.
At April 30, 2016, there were 40,000 common share options of the Bank outstanding, unchanged from the end of the previous quarter.
Normal Course Issuer Bids
On March 11, 2016, the Corporation obtained approval from the Toronto Stock Exchange (TSX) to proceed with Normal Course Issuer Bids (NCIBs) for its Common Shares and Class B Preferred Shares.
Pursuant to the Common Shares NCIB, the Corporation may purchase for cancellation up to 2,740,000 of its Common Shares representing 9.98% of the public float. Daily purchases are limited to 25% of the average daily trading volume which is 6,518 common shares, other than block purchase exceptions.
Pursuant to the Class B Preferred Shares NCIB, the Corporation may purchase for cancellation up to 109,000 of its Class B Preferred Shares representing 9.98% of the public float. Daily purchases are limited to 1,000 Class B Preferred Shares, other than block purchase exceptions.
Both NCIBs commenced on March 16, 2016 and will terminate on March 15, 2017, or such earlier date as the Corporation may complete its purchases pursuant to the NCIBs. Purchases made by the Corporation will be made through the facilities of the TSX or alternative trading systems and in accordance with the rules of the TSX, and the prices that the Corporation will pay for any Common Shares and Class B Preferred Shares will be the market price of such shares or notes at the time of acquisition.
During the three months ended April 30, 2016, the Corporation did not purchase and cancel any Common Shares or Class B Preferred Shares through the NCIBs.
Non-Controlling Interests
Non-controlling interests relate to the amount which outside interests own of the common equity of the Bank as well as the amounts of preferred shares issued by the Bank to outside interests. Non-controlling interests totalled $87.4 million at April 30, 2016, compared to $82.0 million at the end of the previous quarter and $53.4 million a year ago. Non-controlling interests increased from the end of the previous quarter and a year ago as a result of the Corporation’s ownership interest in the Bank decreasing from 65% at the end of the previous quarter and 84% a year ago to 63% at April 30, 2016. The decreases in the ownership interest of the Bank were a result of the Bank issuing common shares to outside interests during the three months ended April 30, 2016, and the Corporation transferring 4,116,504 common shares of the Bank it owned to redeem 800,000 Class B Preferred Shares, settle notes payable and pay interest on Series C Notes over the past year.
Updated Share Information
As at May 31, 2016, there were no changes since April 30, 2016 in the number of outstanding Common Shares, common share options and Class A and Class B Preferred Shares.
Off-Balance Sheet Arrangements
As at April 30, 2016, the Corporation 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
The Corporation’s and the Bank’s Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or outstanding balances during the period. See Note 14 to the unaudited interim consolidated financial statements for details on related party transactions and balances.
Risk Management
The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2015, and are found on pages 41 to 48 of the Corporation’s 2015 Annual Report.
Capital Management and Capital Resources
The Basel Committee on Banking Supervision has rules supporting stringent global standards on capital adequacy and liquidity (Basel III). Significant rules 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.
- Requirements for levels of liquidity and new liquidity measurements.
The Bank reports its regulatory capital ratios using the Standardized approach for calculating risk-weighted assets, as defined under Basel III, which requires the Bank to carry significantly more capital for certain credit exposures compared to requirements under the Advanced Internal Ratings Based (AIRB) methodology. As a result, regulatory capital ratios of banks that utilize the Standardized approach are not directly comparable with the large Canadian banks which use the AIRB methodology.
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 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 of the Bank was $184.6 million at April 30, 2016 compared to $180.7 million at the end of the previous quarter and $175.3 million a year ago. The increase in total regulatory capital from the previous periods was due primarily to earnings in the Bank during the periods and a private placement of common shares totalling $5 million by the Bank in March 2016.
At April 30, 2016, the Bank exceeded the current Basel III regulatory capital requirements referred to above with a CET1 ratio of 10.59% compared to 10.11% at the end of the previous quarter and 10.76% a year ago. At April 30, 2016, the Bank’s Tier 1 capital ratio was 12.73% compared to 12.25% at the end of the previous quarter and 13.12% a year ago. In addition, the Bank’s total capital ratio was 13.44% at April 30, 2016, compared to 13.17% at the end of the previous quarter and 14.15% a year ago. At April 30, 2016, the Bank’s leverage ratio was 9.68% compared to 9.23% at the end of the previous quarter and 10.01% a year ago.
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.
| April 30, 2016 | October 31, 2015 | ||||||||||||||
|
Increase 100 |
Decrease 100 |
Increase 100 |
Decrease 100 |
||||||||||||
| Impact on projected net interest | |||||||||||||||
| income during a 12 month period | $ | 3,670 | $ | (3,587) | $ | 3,371 | $ | (3,114) | |||||||
| Impact on reported equity | |||||||||||||||
| during a 60 month period | $ | 1,168 | $ | (1,112) | $ | 295 | $ | (86) | |||||||
| Duration difference between assets and | |||||||||||||||
| liabilities (months) | 1.3 | 0.8 | |||||||||||||
The Bank’s sensitivity to changes in interest rates and its duration difference between assets and liabilities at April 30, 2016 has not changed significantly since October 31, 2015. As indicated by the above, the impact on net interest income during a 12 month period of a 100 basis point increase would be approximately $3.7 million and the impact on net interest income of a 100 basis point decrease would be approximately ($3.6 million). Similarly at April 30, 2016, the impact on equity during a 60 month period of a 100 basis point increase would be approximately $1.2 million and the impact on equity of a 100 basis point decrease would be approximately ($1.1 million). The duration difference between assets and liabilities is approximately 1 month compared to approximately 1 month at October 31, 2015 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 of the Corporation
A large percentage of the amount of cash and securities reflected on the Corporation’s Consolidated Balance Sheets is that of the Bank. As a holding company, PWC Capital Inc., on a non-consolidated basis, has no revenue generating activities and has cash obligations relating primarily to payments of interest on notes payable, dividends on preferred shares and other operational requirements. On a non-consolidated basis, the Corporation does not depend on funding to come from its subsidiary, the Bank, other than normal dividends that may be declared from time to time by the Bank. As a result, the settlement of the obligations described above will be dependent upon cash and proceeds received from the sales of Bank shares, borrowings by the Corporation or equity contributions.
The unaudited Consolidated Statement of Cash Flows for the six months ended April 30, 2016 shows cash provided by (used in) operations of ($13.3 million) compared to ($57.9 million) for the same period last year. Operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the amount of deposits received and loans funded are managed in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Corporation will continue to fund operations and meet contractual obligations as they become due.
Contractual Obligations
Contractual obligations as disclosed in the MD&A and audited consolidated financial statements for the year ended October 31, 2015, have not changed significantly at April 30, 2016.
Capital Assets
Operations are not dependent upon significant amounts of capital assets to generate revenue. Currently, the Corporation does not have any significant commitments for capital expenditures or for significant additions to its level of capital assets.
Summary of Quarterly Results
| ($CDN thousands except per share amounts) | 2016 | 2015 | 2014 | |||||||||||||||||||||||
| Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | |||||||||||||||||||
| Results of operations: | ||||||||||||||||||||||||||
| Total interest income | $ | 17,347 | $ | 17,228 | $ | 16,686 | $ | 16,514 | $ | 15,631 | $ | 15,630 | $ | 15,080 | $ | 14,158 | ||||||||||
| Interest expense | 10,439 | 10,432 | 10,043 | 9,933 | 10,185 | 10,359 | 10,382 | 10,381 | ||||||||||||||||||
| Net interest income | 6,908 | 6,796 | 6,643 | 6,581 | 5,446 | 5,271 | 4,698 | 3,777 | ||||||||||||||||||
| Non-interest income | 285 | 325 | 384 | 2,158 | 304 | 338 | 791 | 619 | ||||||||||||||||||
| Total revenue | 7,193 | 7,121 | 7,027 | 8,739 | 5,750 | 5,609 | 5,489 | 4,396 | ||||||||||||||||||
| Provision for credit losses | 213 | 212 | 319 | 297 | 427 | 502 | 400 | 303 | ||||||||||||||||||
| Non-interest expenses | 6,563 | 6,058 | 6,413 | 6,442 | 6,240 | 5,588 | 6,401 | 5,436 | ||||||||||||||||||
| Restructuring charges | 445 | - | - | - | - | - | - | - | ||||||||||||||||||
| Income (loss) before income taxes | (28) | 851 | 295 | 2,000 | (917) | (481) | (1,312) | (1,343) | ||||||||||||||||||
| Income tax provision (recovery) | 891 | 1,077 | (123) | 770 | 242 | 1,088 | (283) | 1,135 | ||||||||||||||||||
| Net income (loss) | $ | (919) | $ | (226) | $ | 418 | $ | 1,230 | $ | (1,159) | $ | (1,569) | $ | (1,029) | $ | (2,478) | ||||||||||
| Net income attributable to non-controlling interests | 655 | 766 | 897 | 451 | 287 | 219 | 284 | 103 | ||||||||||||||||||
| Net income (loss) attributable to shareholders | (1,574) | (992) | (479) | 779 | (1,446) | (1,788) | (1,313) | (2,581) | ||||||||||||||||||
| Income (loss) per common share | ||||||||||||||||||||||||||
| Basic | $ | (0.04) | $ | (0.03) | $ | (0.02) | $ | 0.01 | $ | (0.04) | $ | (0.05) | $ | (0.04) | $ | (0.08) | ||||||||||
| Diluted | $ | (0.04) | $ | (0.03) | $ | (0.02) | $ | 0.01 | $ | (0.04) | $ | (0.05) | $ | (0.04) | $ | (0.08) | ||||||||||
The financial results for each of the last eight quarters are summarized above. Total interest income and net interest income continued to increase through 2015 and in the first two quarters of 2016 as a result of growth in lending assets, specifically loan and lease receivables purchased through the Bank’s bulk purchase program.
Non-interest income has been comparable over the quarters and increased in the third quarter of 2015 as a result of a net gain on debt settlement in the Corporation. The other component of non-interest income consists primarily of credit card fees and has been consistent through the eight quarters.
The provision for income taxes in each of the quarters reflects the effective statutory income tax rate of 27% applied to earnings in the Bank. The provision for income taxes in the fourth and second quarters of 2015 and the fourth quarter of 2014 includes positive income tax adjustments relating to a change in the estimate of previously unrecognized deferred income tax assets of the Bank.
Significant Accounting Policies and Use of Estimates and Judgments
Significant accounting policies are detailed in Note 3 of the Corporation’s 2015 Audited Consolidated Financial Statements. There have been no material changes in accounting policies since October 31, 2015.
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 were in the assessments of impairment of financial instruments. Estimates were developed in the calculation of the allowance for credit losses and the measurement of deferred income taxes.
When preparing financial statements, management is required to make an assessment of the Corporation’s ability to continue as a going concern. At April 30, 2016, the Corporation had a shareholders’ deficit of $2.81 million which was primarily the result of operating losses and charges against equity of the parent company. The Corporation’s primary investment, Pacific & Western Bank of Canada, on its own has shareholders’ equity of $182.6 million (see Note 18 to the interim consolidated financial statements). In determining whether the Corporation on a non-consolidated basis has the ability to meets its obligations and operate as a going concern, management has made certain assumptions which consist of future operating expenses and other obligations of the Corporation on a non-consolidated basis and an estimate of the net realizable value of the Corporation’s investment in the common shares of the Bank. By their very nature, these judgements made by management involve inherent risks and uncertainties, both general and specific, and risks exist that these judgements and predictions may not be achieved. The estimated net realizable value of the investment in the common shares of the Bank is impacted by current market conditions and market volatility and could impact the Corporation’s ability to declare dividends on its Class B Preferred Shares.
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.
Securities
Securities are held 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, an assessment is made of 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
An allowance for credit losses is maintained 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.
Evidence of impairment of loans is assessed 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 Corporation 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 Corporation’s consolidated financial statements to the extent that it is probable that the Corporation 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.
Future Change in Accounting Policies
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 Corporation’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.
Controls and Procedures
During the quarter ended April 30 2016, there were no changes in the Corporation’s internal controls over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls 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; global 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 our future results, please see page 48 of our 2015 Annual Report.
The foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. The forward-looking information contained in the management’s discussion and analysis is presented to assist our shareholders in understanding our financial position and may not be appropriate for any other purposes. Except as required by securities law, we do not undertake to update any forward-looking statement that is contained in this management’s discussion and analysis or made from time to time by the Corporation or on its behalf.
PWC CAPITAL INC.
Consolidated Balance Sheets
(Unaudited)
| (thousands of Canadian dollars) | ||||||||||||||
| April 30 | October 31 | April 30 | ||||||||||||
| As at | 2016 | 2015 | 2015 | |||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 121,936 | $ | 130,614 | $ | 130,437 | ||||||||
| Securities (note 4) | 22,443 | 22,433 | 22,737 | |||||||||||
| Loans, net of allowance for credit losses (note 5) | 1,522,280 | 1,447,660 | 1,344,181 | |||||||||||
| Other assets | 30,599 | 24,437 | 25,509 | |||||||||||
| $ | 1,697,258 | $ | 1,625,144 | $ | 1,522,864 | |||||||||
| Liabilities and Equity | ||||||||||||||
| Deposits | $ | 1,378,023 | $ | 1,325,828 | $ | 1,245,271 | ||||||||
| Notes payable (note 6) | 81,799 | 80,467 | 74,760 | |||||||||||
| Securitization liabilities (note 7) | 43,555 | 43,525 | 43,495 | |||||||||||
| Other liabilities (note 8) | 84,095 | 71,306 | 56,549 | |||||||||||
| Preferred share liabilities (note 9) | 25,163 | 24,850 | 43,159 | |||||||||||
| 1,612,635 | 1,545,976 | 1,463,234 | ||||||||||||
| Equity (deficit) attributable to shareholders: | ||||||||||||||
| Share capital (note 10) | 29,285 | 29,285 | 31,188 | |||||||||||
| Retained earnings (deficit) | (30,584) | (27,345) | (27,169) | |||||||||||
| Other equity | (1,516) | (560) | 2,180 | |||||||||||
| Accumulated other comprehensive income | 4 | 9 | 28 | |||||||||||
| (2,811) | 1,389 | 6,227 | ||||||||||||
| Non-controlling interests | 87,434 | 77,779 | 53,403 | |||||||||||
| 84,623 | 79,168 | 59,630 | ||||||||||||
| $ | 1,697,258 | $ | 1,625,144 | $ | 1,522,864 | |||||||||
|
The accompanying notes are an integral part of these interim Consolidated Financial Statements. |
||||||||||||||
PWC CAPITAL INC.
Consolidated Statements of Loss
(Unaudited)
| (thousands of Canadian dollars, except per share amounts) | ||||||||||||||||||
| for the three months ended | for the six months ended | |||||||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||||
| Interest income: | ||||||||||||||||||
| Loans | $ | 17,079 | $ | 15,342 | $ | 33,999 | $ | 30,434 | ||||||||||
| Securities | 268 | 289 | 576 | 827 | ||||||||||||||
| 17,347 | 15,631 | 34,575 | 31,261 | |||||||||||||||
| Interest expense: | ||||||||||||||||||
| Deposits and other | 7,751 | 7,035 | 15,484 | 14,284 | ||||||||||||||
| Notes payable | 2,072 | 1,945 | 4,156 | 3,910 | ||||||||||||||
| Preferred share liabilities | 616 | 1,205 | 1,231 | 2,350 | ||||||||||||||
| 10,439 | 10,185 | 20,871 | 20,544 | |||||||||||||||
| Net interest income | 6,908 | 5,446 | 13,704 | 10,717 | ||||||||||||||
| Non-interest income | 285 | 304 | 610 | 642 | ||||||||||||||
| Total revenue | 7,193 | 5,750 | 14,314 | 11,359 | ||||||||||||||
| Provision for credit losses (note 5b) | 213 | 427 | 425 | 929 | ||||||||||||||
| 6,980 | 5,323 | 13,889 | 10,430 | |||||||||||||||
| Non-interest expenses: | ||||||||||||||||||
| Salaries and benefits | 3,545 | 3,120 | 6,926 | 5,813 | ||||||||||||||
| General and administrative | 2,633 | 2,733 | 4,943 | 5,266 | ||||||||||||||
| Premises and equipment | 385 | 387 | 752 | 749 | ||||||||||||||
| 6,563 | 6,240 | 12,621 | 11,828 | |||||||||||||||
| Restructuring charges | 445 | - | 445 | - | ||||||||||||||
| 7,008 | 6,240 | 13,066 | 11,828 | |||||||||||||||
| Income (loss) before income taxes | (28) | (917) | 823 | (1,398) | ||||||||||||||
| Income tax provision (note 11) | 891 | 242 | 1,968 | 1,330 | ||||||||||||||
| Net loss | $ | (919) | $ | (1,159) | $ | (1,145) | $ | (2,728) | ||||||||||
| Net income (loss) attributable to: | ||||||||||||||||||
| Shareholders | $ | (1,574) | $ | (1,446) | $ | (2,566) | $ | (3,234) | ||||||||||
| Non-controlling interests | 655 | 287 | 1,421 | 506 | ||||||||||||||
| Net loss | $ | (919) | $ | (1,159) | $ | (1,145) | $ | (2,728) | ||||||||||
| Basic loss per common share (note 12) | $ | (0.04) | $ | (0.04) | $ | (0.07) | $ | (0.09) | ||||||||||
| Diluted loss per common share | $ | (0.04) | $ | (0.04) | $ | (0.07) | $ | (0.09) | ||||||||||
| Weighted average number of common shares outstanding | 44,592,000 | 42,776,000 | 44,592,000 | 41,731,000 | ||||||||||||||
|
The accompanying notes are an integral part of these interim Consolidated Financial Statements. |
||||||||||||||||||
PWC CAPITAL INC.
Consolidated Statements of Comprehensive Loss
(Unaudited)
| (thousands of Canadian dollars) | ||||||||||||||||||
| for the three months ended | for the six months ended | |||||||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||||
| Net loss | $ | (919) | $ | (1,159) | $ | (1,145) | $ | (2,728) | ||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||||
| Net unrealized gains (losses) on assets held as available-for-sale (1) | 2 | (13) | (7) | 14 | ||||||||||||||
| Comprehensive loss | $ | (917) | $ | (1,172) | $ | (1,152) | $ | (2,714) | ||||||||||
| Total comprehensive income (loss) attributable to: | ||||||||||||||||||
| Shareholders | $ | (1,573) | $ | (1,459) | $ | (2,570) | $ | (3,223) | ||||||||||
| Non-controlling interests | 656 | 287 | 1,418 | 509 | ||||||||||||||
| $ | (917) | $ | (1,172) | $ | (1,152) | $ | (2,714) | |||||||||||
|
(1) Net of income tax expense for three months of $1 (2015 – $5 benefit) and income tax benefit for the six months of $3 (2015 – $5 expense) |
||||||||||||||||||
|
The accompanying notes are an integral part of these interim Consolidated Financial Statements. |
||||||||||||||||||
|
PWC CAPITAL INC.
|
||||||||||||||||||
| (thousands of Canadian dollars) | ||||||||||||||||||
| for the three months ended | for the six months ended | |||||||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||||
| Common shares (note 10(a)): | ||||||||||||||||||
| Balance, beginning of the period | $ | 26,977 | $ | 26,308 | $ | 26,977 | $ | 25,637 | ||||||||||
| Issued on payment of Class B preferred share dividends | - | 669 | - | 1,340 | ||||||||||||||
| Balance, end of the period | $ | 26,977 | $ | 26,977 | $ | 26,977 | $ | 26,977 | ||||||||||
| Preferred shares (note 10(a)): | ||||||||||||||||||
| Class A preferred shares | ||||||||||||||||||
| Balance, beginning and end of the period | $ | 1,061 | $ | 1,061 | $ | 1,061 | $ | 1,061 | ||||||||||
| Class B preferred shares | ||||||||||||||||||
| Balance, beginning of the period | $ | 1,247 | $ | 3,162 | $ | 1,247 | $ | 3,187 | ||||||||||
| Redeemed during the period | - | (12) | - | (37) | ||||||||||||||
| Balance, end of the period | $ | 1,247 | $ | 3,150 | $ | 1,247 | $ | 3,150 | ||||||||||
| Total share capital | $ | 29,285 | $ | 31,188 | $ | 29,285 | $ | 31,188 | ||||||||||
|
The accompanying notes are an integral part of these interim Consolidated Financial Statements. |
||||||||||||||||||
|
PWC CAPITAL INC.
|
||||||||||||||||||
| (thousands of Canadian dollars) | ||||||||||||||||||
| for the three months ended | for the six months ended | |||||||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||||
| Retained earnings (deficit): | ||||||||||||||||||
| Balance, beginning of the period | $ | (28,709) | $ | (24,541) | $ | (27,345) | $ | (22,466) | ||||||||||
| Net loss attributable to shareholders | (1,574) | (1,446) | (2,566) | (3,234) | ||||||||||||||
| Dividends paid | - | - | (66) | (66) | ||||||||||||||
| Dividends paid by subsidiary | (346) | (216) | (704) | (437) | ||||||||||||||
| Other | 45 | (966) | 97 | (966) | ||||||||||||||
| Balance, end of the period | $ | (30,584) | $ | (27,169) | $ | (30,584) | $ | (27,169) | ||||||||||
| Other equity | ||||||||||||||||||
| Balance, beginning of the period | $ | (1,516) | $ | 2,184 | $ | (560) | $ | 2,759 | ||||||||||
| Loss on distribution of subsidiary shares | - | (21) | (956) | (628) | ||||||||||||||
| Other | - | 17 | - | 49 | ||||||||||||||
| Balance, end of the period | $ | (1,516) | $ | 2,180 | $ | (1,516) | $ | 2,180 | ||||||||||
| Accumulated other comprehensive income net of taxes: | ||||||||||||||||||
| Balance, beginning of the period | $ | 2 | $ | 41 | $ | 9 | $ | 17 | ||||||||||
| Other comprehensive income (loss) | 2 | (13) | (8) | 14 | ||||||||||||||
| Change in non-controlling interests | - | - | 3 | (3) | ||||||||||||||
| Balance, end of the period | $ | 4 | $ | 28 | $ | 4 | $ | 28 | ||||||||||
| Total shareholders' equity (deficit) | $ | (2,811) | $ | 6,227 | $ | (2,811) | $ | 6,227 | ||||||||||
| Non-controlling interests: | ||||||||||||||||||
| Balance, beginning of the period | $ | 82,028 | $ | 34,037 | $ | 77,779 | $ | 30,460 | ||||||||||
| Common shares issued by subsidiary | 5,000 | - | 5,000 | - | ||||||||||||||
| Net income attributable to non-controlling interests | 655 | 287 | 1,421 | 506 | ||||||||||||||
| Impact of subsidiary shares distributed | 25 | 2,473 | 3,758 | 5,857 | ||||||||||||||
| Preferred shares, net of issue costs and income tax, | ||||||||||||||||||
| issued by subsidiary | - | 16,657 | - | 16,657 | ||||||||||||||
| Dividends paid by subsidiary | (204) | (40) | (396) | (76) | ||||||||||||||
| Other | (70) | (11) | (128) | (1) | ||||||||||||||
| Balance, end of the period | $ | 87,434 | $ | 53,403 | $ | 87,434 | $ | 53,403 | ||||||||||
| $ | 84,623 | $ | 59,630 | $ | 84,623 | $ | 59,630 | |||||||||||
|
The accompanying notes are an integral part of these interim Consolidated Financial Statements. |
||||||||||||||||||
PWC CAPITAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
| (thousands of Canadian dollars) | |||||||||||||
| April 30 | April 30 | ||||||||||||
| for the six months ended | 2016 | 2015 | |||||||||||
| Cash provided by (used in): | |||||||||||||
| Operations: | |||||||||||||
| Net loss | $ | (1,145) | $ | (2,728) | |||||||||
| Adjustments to determine net cash flows: | |||||||||||||
| Items not involving cash: | |||||||||||||
| Provision for credit losses | 425 | 929 | |||||||||||
| Income tax provision | 1,968 | 1,330 | |||||||||||
| Stock-based compensation | - | 12 | |||||||||||
| Interest income | (34,575) | (31,261) | |||||||||||
| Interest expense | 20,871 | 20,544 | |||||||||||
| Interest received | 34,072 | 31,206 | |||||||||||
| Interest paid | (18,746) | (17,845) | |||||||||||
| Income taxes paid | (1,021) | - | |||||||||||
| Change in operating assets and liabilities: | |||||||||||||
| Loans | (73,536) | (120,073) | |||||||||||
| Deposits | 53,739 | 53,517 | |||||||||||
| Change in other assets and liabilities | 4,681 | 6,484 | |||||||||||
| (13,267) | (57,885) | ||||||||||||
| Investing: | |||||||||||||
| Purchase of securities | (9,583) | - | |||||||||||
| Proceeds from sale and maturity of securities | 9,338 | 25,603 | |||||||||||
| (245) | 25,603 | ||||||||||||
| Financing: | |||||||||||||
| Proceeds of shares issued by subsidiary, net of costs | 5,000 | 15,275 | |||||||||||
| Notes payable | 1,000 | 917 | |||||||||||
| Purchase of preferred shares for cancellation | - | (195) | |||||||||||
| Dividends paid | (66) | (66) | |||||||||||
| Dividends paid by subsidiary | (1,100) | (513) | |||||||||||
| 4,834 | 15,418 | ||||||||||||
| Decrease in cash and cash equivalents | (8,678) | (16,864) | |||||||||||
| Cash and cash equivalents, beginning of the period | 130,614 | 147,301 | |||||||||||
| Cash and cash equivalents, end of the period | $ | 121,936 | $ | 130,437 | |||||||||
| Cash and cash equivalents is represented by: | |||||||||||||
| Cash | $ | 46,958 | $ | 43,456 | |||||||||
| Cash equivalents | 74,978 | 86,981 | |||||||||||
| Cash and cash equivalents, end of the period | $ | 121,936 | $ | 130,437 | |||||||||
|
The accompanying notes are an integral part of these interim Consolidated Financial Statements. |
|||||||||||||
PWC CAPITAL INC.
Notes to Interim Consolidated Financial Statements
(Unaudited)
Three and six month periods ended April 30, 2016 and 2015
1. Reporting entity:
PWC Capital Inc. (the “Corporation” or “PWC”), is a holding company whose shares trade on the Toronto Stock Exchange. It is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2.
The Corporation’s principal subsidiary is Pacific & Western Bank of Canada (“PWB” or the “Bank”) which 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 of which the Corporation owns approximately 63% (October 31, 2015 – 68%), trade on the Toronto Stock Exchange, is involved in the business of providing commercial lending services to selected niche markets. On May 13, 2016, the Bank received regulatory approval to change its name from Pacific & Western Bank of Canada to VersaBank.
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 Corporation’s audited Consolidated Financial Statements for the year ended October 31, 2015.
The interim Consolidated Financial Statements for the three months and six months ended April 30, 2016 and 2015 were approved by the Audit Committee of the Board of Directors on May 31, 2016.
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 Corporation’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 periods. Areas where significant judgment was applied were in the assessments of impairment of financial instruments. Estimates include the calculation of the allowance for credit losses and the measurement of deferred income taxes.
When preparing financial statements, management is required to make an assessment of the Corporation’s ability to continue as a going concern. At April 30, 2016, the Corporation had a shareholders’ deficit of $2,811,000 which was primarily the result of operating losses and charges against equity of the parent company. The Corporation’s primary investment, Pacific & Western Bank of Canada, on its own has shareholders’ equity of $182,633,000 (see Note 18). In determining whether the Corporation on a non-consolidated basis has the ability to meets its obligations and operate as a going concern, management has made certain assumptions which consist of future operating expenses and other obligations of the Corporation on a non-consolidated basis and an estimate of the net realizable value of the Corporation’s investment in the common shares of the Bank. By their very nature, these judgements made by management involve inherent risks and uncertainties, both general and specific, and risks exist that these judgements and predictions may not be achieved. The estimated net realizable value of the investment in the common shares of the Bank is impacted by current market conditions and market volatility. This estimate could impact the Corporation’s ability to declare dividends on its Class B Preferred Shares.
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 Corporation in these interim Consolidated Financial Statements are the same as those applied by the Corporation as at and for the year ended October 31, 2015 and are detailed in Note 3 of the Corporation’s 2015 Audited Consolidated Financial Statements.
4. Securities:
Portfolio analysis:
| April 30 | October 31 | April 30 | ||||||||
| 2016 | 2015 | 2015 | ||||||||
| Available-for-sale securities | ||||||||||
| Securities issued or guaranteed by: | ||||||||||
| Canadian provincial governments | $ | 9,650 | $ | 9,607 | $ | 9,602 | ||||
| Canadian municipal governments | 274 | 279 | 558 | |||||||
| Total available-for-sale securities | $ | 9,924 | $ | 9,886 | $ | 10,160 | ||||
| Held-to-maturity security | ||||||||||
| Debt of other financial institutions | $ | 12,519 | $ | 12,547 | $ | 12,577 | ||||
| Total securities | $ | 22,443 | $ | 22,433 | $ | 22,737 | ||||
Canadian provincial government securities are carried at fair value based on quoted market prices (Level 1) and Canadian municipal debt falls into Level 2 of the fair value hierarchy. See Note 3 (c) of the October 31, 2015 consolidated financial statements for more information.
5. Loans:
a) Portfolio analysis:
| April 30 | October 31 | April 30 | ||||||||
| 2016 | 2015 | 2015 | ||||||||
| Government loans | $ | 67,067 | $ | 72,181 | $ | 80,307 | ||||
| Loan and lease receivables | 706,072 | 618,432 | 510,452 | |||||||
| Residential mortgages | 121,427 | 112,759 | 108,326 | |||||||
| Commercial mortgages | 263,792 | 269,193 | 251,899 | |||||||
| Construction mortgages | 236,053 | 237,100 | 235,939 | |||||||
| Commercial loans | 98,268 | 104,996 | 128,271 | |||||||
| Credit card receivables and other | 27,549 | 31,168 | 27,509 | |||||||
| 1,520,228 | 1,445,829 | 1,342,703 | ||||||||
| Collective allowance | (3,104) | (3,212) | (3,086) | |||||||
| Accrued interest | 5,156 | 5,043 | 4,564 | |||||||
| Total loans, net of allowance for credit losses | $ | 1,522,280 | $ | 1,447,660 | $ | 1,344,181 | ||||
The collective allowance for credit losses relates to the following loan portfolios:
| April 30 | October 31 | April 30 | ||||||||
| 2016 | 2015 | 2015 | ||||||||
| Government loans | $ | 15 | $ | 18 | $ | 18 | ||||
| Loan and lease receivables | 314 | 269 | 222 | |||||||
| Residential mortgages | 271 | 268 | 57 | |||||||
| Commercial mortgages | 521 | 587 | 650 | |||||||
| Construction mortgages | 755 | 776 | 833 | |||||||
| Commercial loans | 166 | 228 | 239 | |||||||
| Credit card receivables and other | 1,062 | 1,066 | 1,067 | |||||||
| $ | 3,104 | $ | 3,212 | $ | 3,086 | |||||
The Corporation holds security against the majority of its loans in the form of either mortgage interests over property, other registered securities over assets, guarantees and holdbacks on consumer loan and lease receivables (note 8).
b) Allowance for credit losses:
The allowance for credit losses results from the following:
| April 30 | April 30 | |||||||||||||
| 2016 | 2015 | |||||||||||||
| For the three months ended | Collective | Individual |
Total |
Total |
||||||||||
| Balance, beginning of the period | $ | 3,163 | $ | - | $ | 3,163 | $ | 3,050 | ||||||
| Provision for credit losses | 213 | - | 213 | 427 | ||||||||||
| Write-offs | (272) | - | (272) | (391) | ||||||||||
| Balance, end of the period | $ | 3,104 | $ | - | $ | 3,104 | $ | 3,086 | ||||||
| April 30 | April 30 | |||||||||||||
| 2016 | 2015 | |||||||||||||
| for the six months ended | Collective | Individual | Total Allowance | Total Allowance | ||||||||||
| Balance, beginning of the period | $ | 3,212 | $ | - | $ | 3,212 | $ | 2,905 | ||||||
| Provision for credit losses | 425 | - | 425 | 929 | ||||||||||
| Write-offs | (533) | - | (533) | (748) | ||||||||||
| Balance, end of the period | $ | 3,104 | $ | - | $ | 3,104 | $ | 3,086 | ||||||
c) Impaired loans:
At April 30, 2016, there were $nil impaired loans (October 31, 2015 - $nil). At April 30, 2016, loans, other than credit card receivables, past due loans totalled $nil (October 31, 2015 - $nil). At April 30, 2016, credit card receivables overdue by one day or more totalled $2,268,000 (October 31, 2015 - $2,773,000).
6. Notes payable:
| April 30 2016 | October 31 2015 | April 30 2015 | |||||||||||
| Ten year term Series C Notes unsecured, maturing 2018, effective interest of 10.85% |
$ |
59,466 |
$ |
59,053 |
$ |
58,662 |
|||||||
|
|
|
|
|||||||||||
| 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 $489 (October 31, 2015 - $541), effective interest of 10.06% |
14,011 |
13,959 |
13,910 |
||||||||||
| Notes payable, secured by 1,731,658 shares of the Bank held by the Corporation, maturing in 2017, net of issue costs of $34 (October 31, 2015 - $50) effective interest of 7.99% |
8,322 |
7,455 |
2,188 |
||||||||||
| $ | 81,799 | $ | 80,467 | $ | 74,760 | ||||||||
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:
| April 30 | October 31 | April 30 | ||||||||
| 2016 | 2015 | 2015 | ||||||||
| Accounts payable and other | $ | 10,073 | $ | 10,303 | $ | 9,182 | ||||
| Holdbacks payable on loan and lease receivables | 74,022 | 61,003 | 47,367 | |||||||
| $ | 84,095 | $ | 71,306 | $ | 56,549 | |||||
9. Preferred share liabilities:
At April 30, 2016, the Corporation has outstanding 1,094,058 (October 31, 2015 - 1,094,058) Class B Preferred Shares with a redemption value of $27.4 million (October 31, 2015 – $27.4 million) less unamortized issue and conversion costs of $2.2 million (October 31, 2015 – $2.5 million).
As the preferred shares must be redeemed by the Corporation in 2019, the preferred share liability is being adjusted over the remaining term to redemption, until the liability is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Loss calculated using an effective interest rate of 9.78% (2015 – 9.78%).
10. Share capital:
a) Share capital:
| Stock Options | |||||||||||
|
Common |
Number |
Weighted- |
|||||||||
| Outstanding, October 31, 2015 | 44,592,260 | 466,423 | $ | 6.23 | |||||||
| Expired | - | (44,464) | 11.18 | ||||||||
| Outstanding, April 30, 2016 | 44,592,260 | 421,959 | $ | 5.71 | |||||||
In addition, at April 30, 2016, there were 314,572 (October 31, 2015 - 314,572) Class A Preferred Shares outstanding and 1,094,058 (October 31, 2015 - 1,094,058) Class B Preferred Shares outstanding.
The holders of Class B Preferred Shares are entitled to fixed cumulative dividends at the rate of 6.72%, payable in cash. The Class B Preferred Shares also provide each holder, at its option, with the right to convert into common shares of the Corporation on the basis of 12.5 common shares of the Corporation for each Class B Preferred Share.
b) Stock-based compensation:
The Corporation recorded an expense in the Consolidated Statement of Loss relating to DSU’s for the three months and six months ended April 30, 2016 of $5,000 (April 30, 2015 - $11,000 recovery) and $3,000 recovery (April 30, 2015 - $25,000 recovery) respectively. At April 30, 2016 there were 160,660 (October 31, 2015 – 160,660) DSU’s of the Corporation outstanding.
11. Income taxes:
The Corporation’s statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The effective rate is impacted by the tax benefit on operating losses in the Corporation on a non-consolidated basis not being recorded for accounting purposes, and certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:
| for the three months ended | for the six months ended | |||||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Income tax on earnings of the Bank | $ | 708 | $ | 530 | $ | 1,601 | $ | 1,181 | ||||||||
| Recognition of previously unrecognized deferred income tax asset | - | (724) | - | (724) | ||||||||||||
| Income tax on dividends paid by the Corporation | 183 | 436 | 367 | 873 | ||||||||||||
| $ | 891 | $ | 242 | $ | 1,968 | $ | 1,330 | |||||||||
12. Loss per common share:
| for the three months ended | for the six months ended | |||||||||||||||
| April 30 | April 30 | April 30 | April 30 | |||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Net loss attributable to common shareholders | $ | (1,574) | $ | (1,446) | $ | (2,566) | $ | (3,234) | ||||||||
| Less: dividends on preferred shares | (16) | (16) | (33) | (33) | ||||||||||||
| Less: dividends on preferred shares of subsidiary | (346) | (220) | (704) | (442) | ||||||||||||
| (1,936) | (1,682) | (3,303) | (3,709) | |||||||||||||
| Average number of common shares outstanding | 44,592,000 | 42,776,000 | 44,592,000 | 41,731,000 | ||||||||||||
| Loss per common share: | $ | (0.04) | $ | (0.04) | $ | (0.07) | $ | (0.09) | ||||||||
13. Commitments and contingencies:
The amount of credit related commitments represents the maximum amount of additional credit that the Corporation could be obligated to extend. Under certain circumstances, the Corporation may cancel loan commitments at its option. The 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.
| April 30 | October 31 | April 30 | ||||||||
| 2016 | 2015 | 2015 | ||||||||
| Loan commitments | $ | 228,449 | $ | 243,253 | $ | 189,270 | ||||
| Undrawn credit card lines | 134,620 | 140,071 | 147,835 | |||||||
| Letters of credit | 42,543 | 39,015 | 37,587 | |||||||
| $ | 405,612 | $ | 422,339 | $ | 374,692 | |||||
14. Related party transactions:
The Corporation’s and the Bank’s Board of Directors and the Corporation’s Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or balances outstanding during the periods.
The Corporation has loans to employees and key management personnel. At April 30, 2016 amounts due from key management personnel totalled $2,030,000 (October 31, 2015 - $2,030,000) 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 and six months ended April 30, 2016 was $15,000 (April 30, 2015 - $15,000) and $31,000 (April 30, 2015 - $33,000) respectively.
There were no provisions for credit losses related to loans issued to key management personnel for the three months and six months ended April 30, 2016 and 2015.
15. Capital management:
a) Overview:
The Corporation’s policy is to maintain a capital base that is sufficient to sustain current operating activities and to ensure the Corporation has the ability to meet its obligations as they come due.
The Corporation’s principal subsidiary is Pacific & Western Bank of Canada, (the “Bank”) and as a result, the following discussion on capital management is with respect to the capital management of the Bank. OSFI sets and monitors capital requirements for the Bank. Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and conditions in financial markets.
The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders. The Bank’s regulatory capital is comprised of share capital, retained earnings and unrealized gains and losses on available-for-sale securities (Common Equity Tier 1 capital), 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 April 30, 2016 there were no material changes in the Bank’s management of capital.
b) Risk-Based Capital Ratio:
The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III).
OSFI requires that all Canadian banks must comply with the Basel III standards on an “all-in” basis for purposes of determining its risk-based capital ratios. The 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.
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:
| April 30, 2016 | October 31, 2015 | ||||||||||||||||
| "All-in" | "Transitional" | "All-in" | "Transitional" | ||||||||||||||
| Common Equity Tier 1 (CET1) capital | |||||||||||||||||
| Directly issued qualifying common share capital | $ | 147,368 | $ | 147,368 | $ | 142,369 | $ | 142,369 | |||||||||
| Retained earnings | 5,921 | 5,921 | 2,903 | 2,903 | |||||||||||||
| Accumulated other comprehensive income | 6 | 6 | 13 | 13 | |||||||||||||
| CET1 capital before regulatory adjustments | 153,295 | 153,295 | 145,285 | 145,285 | |||||||||||||
| Total regulatory adjustments to CET1 | (7,841) | (4,705) | (9,031) | (3,612) | |||||||||||||
| Common Equity Tier 1 capital | $ | 145,454 | $ | 148,590 | $ | 136,254 | $ | 141,673 | |||||||||
| Additional Tier 1 (AT1) capital | |||||||||||||||||
| Directly issued qualifying AT1 instruments | $ | 29,337 | $ | 29,337 | $ | 29,337 | $ | 29,337 | |||||||||
| Tier 1 capital | $ | 174,791 | $ | 177,927 | $ | 165,591 | $ | 171,010 | |||||||||
| Tier 2 capital | |||||||||||||||||
| Directly issued capital instruments subject to | |||||||||||||||||
| phase out from Tier 2 | $ | 9,800 | $ | 9,800 | $ | 12,700 | $ | 12,700 | |||||||||
| Tier 2 capital before regulatory adjustments | 9,800 | 9,800 | 12,700 | 12,700 | |||||||||||||
| Total regulatory adjustments to Tier 2 capital | - | - | - | - | |||||||||||||
| Tier 2 capital | $ | 9,800 | $ | 9,800 | $ | 12,700 | $ | 12,700 | |||||||||
| Total capital | $ | 184,591 | $ | 187,727 | $ | 178,291 | $ | 183,710 | |||||||||
| Total risk-weighted assets | $ | 1,373,594 | $ | 1,376,730 | $ | 1,320,158 | $ | 1,325,576 | |||||||||
| Capital ratios | |||||||||||||||||
| CET1 Ratio | 10.59% | 10.79% | 10.32% | 10.69% | |||||||||||||
| Tier 1 Capital Ratio | 12.73% | 12.92% | 12.54% | 12.90% | |||||||||||||
| Total Capital Ratio | 13.44% | 13.64% | 13.51% | 13.86% | |||||||||||||
c) Leverage Ratio:
The leverage ratio, which is prescribed under the Basel III Accord, is a supplementary measure to the risk-based capital requirements and is defined as the ratio of Tier 1 capital to its total exposures. The leverage ratio is calculated as follows:
| April 30 | October 31 | ||||||
| 2016 | 2015 | ||||||
| On-balance sheet assets | $ | 1,698,305 | $ | 1,625,806 | |||
| Asset amounts deducted in determining Basel III "all in" Tier 1 Capital | (7,841) | (9,031) | |||||
| Total on-balance sheet exposures | 1,690,464 | 1,616,775 | |||||
| Off-balance sheet exposure at gross notional amount | $ | 405,612 | $ | 422,339 | |||
| Adjustments for conversion to credit equivalent amount | (290,895) | (301,674) | |||||
| Off-balance sheet exposures | 114,717 | 120,665 | |||||
| Tier 1 Capital | 174,791 | 165,591 | |||||
| Total Exposures | 1,805,181 | 1,737,440 | |||||
| Leverage Ratio | 9.68% | 9.53% | |||||
The Bank was in compliance with the leverage ratio as prescribed by OSFI throughout the periods 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.
| April 30, 2016 | October 31, 2015 | |||||||||||||
| Increase 100 bps | Decrease 100 bps | Increase 100 bps | Decrease 100 bps | |||||||||||
| Impact on projected net interest | ||||||||||||||
| income during a 12 month period | $ | 3,670 | $ | (3,587) | $ | 3,371 | $ | (3,114) | ||||||
| Impact on reported equity | ||||||||||||||
| during a 60 month period | $ | 1,168 | $ | (1,112) | $ | 295 | $ | (86) | ||||||
| Duration difference between assets and | ||||||||||||||
| liabilities (months) | 1.3 | 0.8 | ||||||||||||
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 Corporation’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, 2015 consolidated financial statements for more information on fair values.
| April 30, 2016 | October 31, 2015 | |||||||||||
| Fair value | Fair value | |||||||||||
| Book | of assets | Book | of assets | |||||||||
| Value | and liabilities | Value | and liabilities | |||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 121,936 | $ | 121,936 | $ | 130,614 | $ | 130,614 | ||||
| Securities | 22,443 | 22,454 | 22,433 | 22,386 | ||||||||
| Loans | 1,522,280 | 1,519,259 | 1,447,660 | 1,449,567 | ||||||||
| Other financial assets | 11,813 | 11,813 | 4,622 | 4,622 | ||||||||
| Liabilities | ||||||||||||
| Deposits | $ | 1,378,023 | $ | 1,380,811 | $ | 1,325,828 | $ | 1,333,366 | ||||
| Notes payable | 81,799 | 73,449 | 80,467 | 66,333 | ||||||||
| Securitization liabilities | 43,555 | 47,165 | 43,525 | 47,604 | ||||||||
| Other financial liabilities | 84,095 | 84,095 | 71,306 | 71,306 | ||||||||
| Preferred share liabilities | 25,163 | 16,235 | 24,850 | 16,433 | ||||||||
18. Subsidiary company information:
The following table presents summary financial information regarding the Bank on a consolidated basis:
| Consolidated balance sheets | ||||||||||||
| April 30 | October | April 30 | ||||||||||
| 2016 | 2015 | 2015 | ||||||||||
| Cash and cash equivalents | $ | 119,091 | $ | 127,078 | $ | 129,084 | ||||||
| Securities | 22,443 | 22,433 | 22,737 | |||||||||
| Loans, net of allowance for credit losses | 1,522,280 | 1,447,660 | 1,344,181 | |||||||||
| Other assets | 34,491 | 28,635 | 29,617 | |||||||||
| $ | 1,698,305 | $ | 1,625,806 | $ | 1,525,619 | |||||||
| Deposits | $ | 1,378,023 | $ | 1,325,828 | $ | 1,245,271 | ||||||
| Subordinated notes payable | 14,011 | 13,959 | 13,910 | |||||||||
| Securitization liabilities | 43,555 | 43,525 | 43,495 | |||||||||
| Other liabilities | 80,083 | 67,872 | 51,480 | |||||||||
| 1,515,672 | 1,451,184 | 1,354,156 | ||||||||||
| Shareholders' equity | 182,633 | 174,622 | 171,463 | |||||||||
| $ | 1,698,305 | $ | 1,625,806 | $ | 1,525,619 | |||||||
|
Consolidated statements of income |
|||||||||||||||||
| for the three months ended | for the six months ended | ||||||||||||||||
| April 30 | April 30 | April 30 | April 30 | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Interest income | $ | 17,346 | $ | 15,630 | $ | 34,572 | $ | 31,259 | |||||||||
| Interest expense | 7,986 | 7,375 | 16,070 | 14,973 | |||||||||||||
| Net interest income | 9,360 | 8,255 | 18,502 | 16,286 | |||||||||||||
| Non-interest income | 285 | 304 | 610 | 642 | |||||||||||||
| Total Revenue | 9,645 | 8,559 | 19,112 | 16,928 | |||||||||||||
| Provision for credit losses | 213 | 427 | 425 | 929 | |||||||||||||
| Net interest and non-interest income after | |||||||||||||||||
| provision for credit losses | 9,432 | 8,132 | 18,687 | 15,999 | |||||||||||||
| Non-interest expense | 6,472 | 6,264 | 12,523 | 11,801 | |||||||||||||
| Restructuring charges | 445 | - | 445 | - | |||||||||||||
| Income before income taxes | 2,515 | 1,868 | 5,719 | 4,198 | |||||||||||||
| Income tax expense (recovery) | 708 | (194) | 1,601 | 457 | |||||||||||||
| Net income | $ | 1,807 | $ | 2,062 | $ | 4,118 | $ | 3,741 | |||||||||
Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with approximately $1.7 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.
PWC Capital Inc. shares trade on the TSX under the symbol PWC.
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@pwccapital.com (519) 488-1280
