PWC CAPITAL INC PWC Capital Inc.: Fourth Quarter Report October 31, 2016
November 30th 2016Dateline City:
LONDON, Ontario
PWC CAPITAL INC. ANNOUNCES RESULTS FOR ITS FOURTH QUARTER ENDED OCTOBER 31, 2016
LONDON, Ontario--(BUSINESS WIRE)--PWC Capital Inc. (TSX:PWC):
FOURTH QUARTER SUMMARY
(compared to the same periods in the prior year unless otherwise noted)
PWC Capital Inc.
- Net income (loss) of PWC Capital Inc. (the 'Corporation') for the three months ended October 31, 2016, was ($745,000) or ($0.04) per common share (basic and diluted) compared to ($84,000) or ($0.03) per common share (basic and diluted) for the previous quarter and $418,000 or ($0.02) per common share (basic and diluted) for the same period a year ago. Net income for the current period includes restructuring charges of $714,000 compared to $98,000 for the previous quarter and $nil a year ago.
- Net income (loss) of the Corporation for the year ended October 31, 2016, was ($2.0 million) or ($0.15) per common share (basic and diluted) compared to ($1.1 million) or ($0.10) per common share (basic and diluted) for the same period a year ago. Net income for the current year includes restructuring charges of $1.3 million. Net income for the same period a year ago included a net gain of $1.8 million on debt settlement.
VersaBank
- Net income of the Corporation's principal subsidiary, VersaBank (formerly Pacific & Western Bank of Canada) (the 'Bank') for the current quarter was $1.9 million or $0.07 per common share (basic and diluted), compared to $2.5 million or $0.09 per common share (basic and diluted) for the previous quarter and $2.8 million or $0.11 per common share (basic and diluted) a year ago. Net income of the Bank for the current quarter includes restructuring charges of $549,000 compared to $98,000 for the previous quarter and $nil a year ago. Income before restructuring charges and income taxes for the current quarter was $3.2 million compared to $2.5 million for the same period a year ago. Net income for the same period a year ago includes an income tax recovery of $1.0 million related to previously unrecognized deferred income tax assets
- Net income of the Bank for the year ended October 31, 2016 was $8.5 million or $0.32 per common share (basic and diluted), compared to $8.2 million or $0.33 per common share (basic and diluted) for the same period a year ago. Net income for the current year includes restructuring charges of $1.1 million compared to $nil for the same period a year ago. Income before restructuring charges and income taxes for the year was $12.9 million compared to $9.0 million for the same period a year ago. Net income for the same period a year ago included an income tax recovery of $1.7 million related to previously unrecognized deferred income tax assets
- Net interest margin or spread for the current quarter increased to 2.36% from 2.31% for the previous quarter and from 2.23% for the same period a year ago.
- For the year ended October 31, 2016, net interest margin or spread increased to 2.31% from 2.21% for the same period a year ago.
- Credit quality remains exceptional with no gross impaired loans at October 31, 2016 or at July 31, 2016, or a year ago.
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 Inc. ('PWC') owns approximately 12.6 million common shares (63%) of VersaBank 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 VersaBank has completed another very successful year. Our strategy to use new technologies to better serve certain niche markets is paying off. Mainly due to a substantial decrease in our costs of funds, income before taxes and restructuring charges increased by more than 42% over the previous year.
VersaBank's well established Commercial Lending Division again made a significant contribution to the Bank's overall earnings. Total loans in this division declined by about 5% over the previous year, bringing the year-end balance to $685 million. This division finances well established real estate developers with projects mainly located in Ontario and other commercial businesses located throughout Canada. A few years ago we became concerned over the rapid increase in real estate prices in some of Canada's major centres and decided to limit our lending activity in these centres to only the most credit worthy borrowers.
VersaBank's relatively new Structured Finance Division continued to grow rapidly. The balance of loans and leases acquired and warehoused through our electronic Bulk Purchase Program increased more than 27% over the previous year, with the year-end balance reaching over $783 million. VersaBank purchases loans and leases 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. VersaBank's program facilitates this type of financing and indirectly provides much needed financing for small businesses and greater choice for consumers across Canada. VersaBank has 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 the substantial cash deposits made by our partners to offset potential credit losses. VersaBank is at the leading edge of this new method of financing and this business is now a major portion of VersaBank's total assets and revenue stream.
Asset quality remained industry leading with VersaBank again reporting no impaired loans. VersaBank prides its self on maintaining stellar credit adjudication and processes that consistently deliver industry leading results.
Many years ago VersaBank developed custom software to enable it to gather deposits without the need for traditional branches. VersaBank now has a substantial network of over 100 deposit gathering partners that includes many of the larger banks' brokerage firms. This channel provides a steady reliable stream of low cost deposits. In addition, VersaBank opened up a new channel for gathering deposits that involved developing a custom banking solution for niche markets that may have unique challenges in dealing with the generic services provided by traditional banks. This new channel for deposit gathering is not only diversifying VersaBank's deposit base, but it is also serving to significantly lower its cost of funds. During the 4 Quarter, VersaBank's cost of funds decreased to 1.73%. This figure represents one of the lowest costs of funds figure in the industry and about a 90 basis point improvement over what it was four years ago.
Total revenue for the year increased by 12% to $39.7 million and net interest margin increased by 6% to an industry leading 2.36% over the previous year's figures. This gave rise to a substantial increase in Income before restructuring charges and income taxes that increased by more than 42% over the previous year.
VersaBank is a state of the art Bank that, through utilization of specialized software and experienced staff, is able to rapidly acquire large amounts of loans, leases and deposits with minimal transactional costs. And by targeting niche markets that are not well served by the larger financial institutions, VersaBank is able to pay less for its deposits and invest in lower risk loans, but still earn an industry leading NIM. The financial market place is embracing innovative new ideas and VersaBank is at the forefront of prudently applying new ideas and technology to provide Canadians with greater choice and more economical financing solutions.
On November 15, 2016 we announced amended terms to the planned recapitalization and amalgamation with VersaBank. Both VersaBank and PWC would benefit significantly from the recapitalization and amalgamation and I recommend that you vote in favour, as I intend to do. For further information about the proposed recapitalization and amalgamation, please review the information circular and joint disclosure booklet which is available on PWC's issuer profile on www.sedar.com and on our website: www.PWCcapital.com.
FINANCIAL HIGHLIGHTS
| (unaudited) | for the three months ended | for the year ended | ||||||||||||||
| October 31 | October 31 | October 31 | October 31 | |||||||||||||
| ($CDN thousands except per share amounts ) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
| VersaBank | ||||||||||||||||
| Results of operations | ||||||||||||||||
| Net interest income | $ | 10,066 | $ | 8,961 | $ | 38,404 | $ | 33,974 | ||||||||
| Net interest margin* | 2.36% | 2.23% | 2.31% | 2.21% | ||||||||||||
| Non-interest income | 320 | 384 | 1,273 | 1,394 | ||||||||||||
| Total revenue | 10,386 | 9,345 | 39,677 | 35,368 | ||||||||||||
| Provision for credit losses | 422 | 319 | 871 | 1,545 | ||||||||||||
| Non-interest expenses | 6,779 | 6,562 | 25,956 | 24,784 | ||||||||||||
| Income before restructuring charges and income taxes* | 3,185 | 2,464 | 12,850 | 9,039 | ||||||||||||
| Restructuring charges | 549 | - | 1,092 | - | ||||||||||||
| Net income | 1,896 | 2,770 | 8,470 | 8,218 | ||||||||||||
| Return on average common equity* | 3.43% | 6.11% | 4.15% | 4.50% | ||||||||||||
| Gross impaired loans to total loans | 0.00% | 0.00% | 0.00% | 0.00% | ||||||||||||
| Provision for credit losses as a % of average loans | 0.03% | 0.02% | 0.06% | 0.12% | ||||||||||||
| PWC Capital Inc. (consolidated) | ||||||||||||||||
| Results of operations | ||||||||||||||||
| Net income of the Bank | $ | 1,896 | $ | 2,770 | $ | 8,470 | $ | 8,218 | ||||||||
| Additional interest expense of PWC | (1,794) | (1,679) | (7,147) | (6,558) | ||||||||||||
| Interest expense relating to Class B | ||||||||||||||||
| Preferred Share dividends | (613) | (616) | (2,461) | (3,347) | ||||||||||||
| Net non-interest and other expenses of PWC | (50) | 126 | (101) | (27) | ||||||||||||
| Gain on debt settlement | - | - | - | 1,790 | ||||||||||||
| Provision for income taxes | (184) | (183) | (735) | (1,156) | ||||||||||||
| Net income (loss) | $ | (745) | $ | 418 | $ | (1,974) | $ | (1,080) | ||||||||
| Net income attributable to non-controlling interests | 705 | 897 | 3,042 | 1,854 | ||||||||||||
| Net loss attributable to shareholders | (1,450) | (479) | (5,016) | (2,934) | ||||||||||||
| $ | (745) | $ | 418 | $ | (1,974) | $ | (1,080) | |||||||||
| Loss per common share: | ||||||||||||||||
| Basic | $ | (0.04) | $ | (0.02) | $ | (0.15) | $ | (0.10) | ||||||||
| Diluted | $ | (0.04) | $ | (0.02) | $ | (0.15) | $ | (0.10) | ||||||||
| as at | ||||||||||||||||
| October 31 | October 31 | |||||||||||||||
| PWC Capital Inc. (consolidated) | 2016 | 2015 | ||||||||||||||
| Balance Sheet Summary | ||||||||||||||||
| Cash and securities | $ | 104,133 | $ | 153,047 | ||||||||||||
| Total loans | 1,563,612 | 1,447,660 | ||||||||||||||
| Total assets | 1,701,094 | 1,625,144 | ||||||||||||||
| Deposits | 1,369,647 | 1,325,828 | ||||||||||||||
| Notes payable and preferred share liabilities | 107,778 | 105,317 | ||||||||||||||
| Shareholders' (deficit) equity | (5,949) | 1,389 | ||||||||||||||
| * This is a non-GAAP measure. See definition under 'Basis of Presentation' in the attached | ||||||||||||||||
| Management's Discussion and Analysis. | ||||||||||||||||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
This management's discussion and analysis (MD&A) of operations and financial condition for the fourth quarter of fiscal 2016, dated November 29, 2016, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 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.
Income before restructuring charges and income taxes
Income before restructuring charges and income taxes is equal to total revenue less the provision for credit losses and non-interest expenses before restructuring charges revenue, as presented in the Consolidated Statements of Loss.
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 VersaBank (the 'Bank'), (formerly Pacific & Western Bank of Canada), is defined as annualized net income of the Bank less amounts relating to preferred share dividends, divided by average common shareholders' equity which is average 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 average assets.
PWC Capital Inc.
PWC Capital Inc. (the 'Corporation') is a holding company whose shares trade on the Toronto Stock Exchange. Its principal subsidiary, VersaBank (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 changed 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. Subsequently, on September 12, 2016 and November 15, 2016 the Corporation and the Bank jointly announced that they have entered into an agreement to merge by amalgamation under the Bank Act (Canada). After the amalgamation, which is subject to regulatory and other approvals, including approvals by the various security holders of both entities, the combined entity will continue to be named VersaBank. Concurrently with the amalgamation, the Corporation will undertake a series of transactions, such that immediately prior to an amalgamation its Series C Notes and certain other notes payable and its issued and outstanding Class B preferred shares will be converted into common shares of the Corporation which will be exchanged for VersaBank common shares. At this time, there can be no assurance that the amalgamation will take place or its nature, terms or timing. See Note 20 to the interim consolidated financial statements.
Net income (loss) of the Corporation for the three months ended October 31, 2016, was ($745,000) or ($0.04) per common share (basic and diluted) compared to ($84,000) or ($0.03) per common share (basic and diluted) for the previous quarter and $418,000 or ($0.02) per common share (basic and diluted) for the same period a year ago. Net income for the current period includes restructuring charges of $714,000 compared to $98,000 for the previous quarter and $nil a year ago.
Net income (loss) of the Corporation for the year ended October 31, 2016, was ($2.0 million) or ($0.15) per common share (basic and diluted) compared to ($1.1 million) or ($0.10) per common share (basic and diluted) for the same period a year ago. Net income for the current year includes restructuring charges of $1.3 million. Net income for the same period a year ago included a net gain of $1.8 million on debt settlement.
For the three months ending October 31, 2016, interest expense of the Corporation on a non-consolidated basis consisted of (i) $1.8 million relating to its notes payable compared to $1.8 million for the previous quarter and $1.7 million for the same period a year ago and (ii) interest expense of $613,000 relating to dividends on its Class B Preferred Shares compared to $617,000 for the previous quarter and $616,000 for the same period a year ago. 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 year ending October 31, 2016, interest expense of the Corporation on a non-consolidated basis consisted of $7.1 million relating to its notes payable compared to $6.6 million for the same period a year ago and interest expense of $2.5 million relating to dividends on its Class B Preferred Shares compared to $3.3 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.
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. In addition, during the year, the Corporation on a non-consolidated basis had restructuring charges of $165,000.
The Corporation on a non-consolidated basis also incurs corporate income tax related to dividends paid on its outstanding Class B Preferred Shares.
VersaBank
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. The Bank also makes residential development and commercial loans and mortgages which are sourced through direct contact with its lending staff.
Net income of the Bank for the current quarter was $1.9 million or $0.07 per common share (basic and diluted), compared to $2.5 million or $0.09 per common share (basic and diluted) for the previous quarter and $2.8 million or $0.11 per common share (basic and diluted) a year ago. Net income of the Bank for the current quarter includes restructuring charges of $549,000 compared to $98,000 for the previous quarter and $nil a year ago. Income before restructuring charges and income taxes for the current quarter was $3.2 million compared to $2.5 million for the same period a year ago. Net income for the current quarter reflects growth in net interest income compared to the previous quarter and the same period a year ago. Net income for the same period a year ago included an income tax recovery of $1.0 million related to previously unrecognized deferred income tax assets.
Net income of the Bank for the year ended October 31, 2016 was $8.5 million or $0.32 per common share (basic and diluted), compared to $8.2 million or $0.33 per common share (basic and diluted) for the same period a year ago. Net income for the current year includes restructuring charges of $1.1 million and also reflects growth in net interest income. Income before restructuring charges and income taxes for the year was $12.9 million compared to $9.0 million for the same period a year ago. Net income for the same period a year ago included an income tax recovery of $1.7 million related to previously unrecognized deferred income tax assets.
Total assets of the Bank at October 31, 2016 were $1.70 billion compared to $1.69 billion at the end of the previous quarter and $1.63 billion a year ago. Lending assets totaled $1.56 billion compared to $1.50 billion at the end of the previous quarter and $1.45 billion a year ago. Credit quality remains strong with no gross impaired loans at October 31, 2016, or at July 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 October 31, 2016, total revenue increased to $10.4 million from $10.2 million for the previous quarter and from $9.3 million for the same period a year ago, an increase of 11%, with the increases due to growth in net interest income.
For the year ended October 31, 2016, total revenue increased by 12% to $39.7 million from $35.4 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 October 31, 2016 increased to $10.1 million from $9.8 million for the previous quarter and from $9.0 million for the same period a year ago, an increase of 12%. The increase in net interest income from a year ago was due primarily to growth in lending assets which grew to $1.56 billion at October 31, 2016 from $1.45 billion last year, an increase of 8%, and from a decrease in the Bank's cost of funds which decreased to 1.73% for the quarter from 1.92% a year ago.
Net interest income for the year ended October 31, 2016 increased to $38.4 million from $34.0 million for the same period year ago, an increase of 13%, due primarily to growth in lending assets and a decrease in the Bank's cost of funds which decreased to 1.87% for the year from 1.98% a year ago.
Net Interest Margin
Net interest margin or spread for the three months ended October 31, 2016 increased to 2.36% from 2.31% for the previous quarter and 2.23% for the same period a year ago. Net interest margin increased as a result of a decrease in the Bank's cost of deposits as noted above.
Net interest margin or spread for the year ended October 31, 2016 increased to 2.31% 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 $422,000 compared to $24,000 for the previous quarter and $319,000 for the same period a year ago. The provision for credit losses increased from the previous quarter as a result of an increase in the collective allowance and increased from a year ago due to a higher amount of write-offs related to credit card receivables.
The provision for credit losses for the year ended October 31, 2016 was $871,000 or 6 basis points of average loans compared to $1.5 million or 12 basis points of average loans for the same period a year ago with the decrease due primarily to the change in loan mix over the past year with a decrease in commercial mortgages and loans offset by growth in loan and lease receivables sourced through the bulk finance program which require a lower collective allowance due to the cash holdbacks that are retained.
Non-Interest Expenses
Non-interest expenses of the Bank, excluding restructuring costs, totalled $6.8 million for the current quarter compared to $6.7 million for the previous quarter and $6.6 million for the same period a year ago. The increase in non-interest expenses from a year ago was due primarily to an increase in employee compensation as a result of an increase in employee complement and an increase in premises costs.
Non-interest expenses of the Bank, excluding restructuring costs, for the year ended October 31, 2016 totalled $26.0 million compared to $24.8 million for the prior year with the increase due to higher employee compensation as a result of an increase in employee complement and an increase in premises costs. The Bank continues to see economies of scale as non-interest expenses as a percentage of average assets for the current year decreased to 1.56% from 1.61% for the same period a year ago.
Restructuring Charges
During the three months ended October 31, 2016, the Bank incurred restructuring charges totalling $549,000 and for the year ended October 31, 2016 incurred restructuring charges of $1.1 million relating to costs associated with the review of strategic alternatives commenced by the Bank earlier in the year as noted above.
Income Taxes
The statutory federal and provincial income tax rate of the Bank is approximately 27%, similar to that of the previous periods. The statutory rate is impacted by certain items not being taxable or deductible for income tax purposes.
For the three months ended October 31, 2016, the provision (recovery) for income taxes was $740,000 compared to $947,000 for the previous quarter and ($306,000) for the same period a year ago. The decrease in the provision for income taxes from the previous quarter was due to a lower level of earnings in the Bank caused by restructuring charges. The provision for income taxes for the same period a year ago included a recovery of $1.0 million related to previously unrecognized deferred income tax assets.
For the year ended October 31, 2016, the provision for income taxes was $3.3 million compared to $821,000 for the same period a year ago with the change due to a higher level of earnings in the Bank, even after restructuring charges, and an income tax recovery of $1.7 million 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 October 31, 2016 was $1.9 million compared to $2.5 million for the previous quarter and $2.8 million a year ago.
For the year ended October 31, 2016, comprehensive income of the Bank was $8.5 million compared to $8.2 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 of the Corporation at October 31, 2016 were $1.70 billion compared to $1.68 billion at the end of the previous quarter and $1.63 billion a year ago. The increase from a year ago was due to growth in lending assets which grew to $1.56 billion from $1.45 billion last year. 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, 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 $104 million or 6.1% of total assets compared to $152 million or 9.0% of total assets at the end of the previous quarter and $153 million or 9.4% of total assets a year ago.
The level of cash and securities as a percentage of total assets decreased over the past year as a result of a decrease in deposits maturing in the upcoming months which allows the Corporation to hold lower levels of liquidity. The current level of cash and securities as a percentage of total assets is expected to remain at the current level.
Loans
At October 31, 2016, loans totalled $1.56 billion compared to $1.50 billion at the end of the previous quarter and $1.45 billion a year ago. The increase in loans from the previous quarter and a year ago was due primarily to growth in loan and lease receivables purchased through the Bank's bulk purchase program, partially offset by repayments in the commercial mortgage portfolio.
At October 31, 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 construction mortgages and loan and lease receivables and a decrease in government loans as discussed above. The decreases in residential and commercial mortgages were due primarily to timing of repayments.
As noted above, loan and lease receivables purchased through the bulk purchase program continued to show strong growth during the year and increased to $784 million at October 31, 2016 from $740 million at the end of the previous quarter, a net increase of $44 million, and from $618 million last year, a net increase of $166 million or 27%. 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 $262 million compared to $234 million for the previous quarter and $338 million a year ago. Loan repayments for the quarter totalled $198 million compared to $259 million for the previous quarter and $268 million a year ago. For the year ended October 31, 2016, new lending totalled $924 million compared to $1.1 billion for the same period a year ago and loan repayments totalled $808 million compared to $859 million last year. At October 31, 2016, loan commitments representing loans in the Bank's pipeline totalled $266 million compared to $301 million at the end of the previous quarter and $243 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 October 31, 2016 totalled $637,000 compared to $647,000 at the end of the previous quarter and $761,000 a year ago. The Bank did not have any HELOC's outstanding at October 31, 2016, or at the end of the previous quarter or a year ago.
Credit Quality
Gross impaired loans at October 31, 2016, were $nil, unchanged from the end of the previous quarter and a year ago. At October 31, 2016, the collective allowance totalled $3.0 million compared to $2.9 million at the end of previous quarter and $3.2 million a year ago. The collective allowance decreased from a year ago as a result of changes in the mix of the loan portfolio, particularly growth in loan and lease receivables sourced through the bulk finance program which require a lower collective allowance due to the cash holdbacks that are retained. Included in the collective allowance at October 31, 2016 was $1.1 million relating to credit card receivables which is similar to 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 October 31, 2016 has not changed significantly from that at the end of the previous quarter and from a year ago where a majority of the lending portfolio is in the province of Ontario.
Other Assets
Included in other assets are prepaid expenses, funds held for securitization liabilities, capital assets and the deferred income tax asset of the Bank. Other assets of the Corporation totalled $33.3 million at October 31, 2016, compared to $30.8 million at the end of the previous quarter and $24.4 million a year ago with the change from a year ago due primarily to an increase in funds held for securitization liabilities.
The deferred income tax asset of the Bank was $6.4 million at October 31, 2016, compared to $6.9 million at the end of the previous quarter and $8.8 million a year ago. The changes from previous periods were primarily a result of the utilization of loss carry-forwards due to taxable income earned by the Bank. The deferred income tax asset is a result of income tax losses of the Bank totalling approximately $18.0 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 $77.0 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 $21 million ýsavings against future income.
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 which the Bank continues to grow and expand across Canada. Deposits at October 31, 2016, totalled $1.37 billion compared to $1.36 billion at the end of the previous quarter and $1.33 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 growth in lending assets.
Of the total amount of deposits outstanding, $17.5 million or approximately 1.27% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $17.3 million or 1.28% of total deposits at the end of the previous quarter and $17.0 million or approximately 1.29% of total deposits a year ago. In addition, the Bank has chequing accounts related to trustees in the Canadian bankruptcy industry as discussed below.
In order to further diversify its sources of deposits and reduce its cost of new deposits, the Bank has another source of funds, 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 October 31, 2016, balances for these low cost chequing accounts totalled $189.1 million compared to $160.3 million at the end of the previous quarter and $110.6 million a year ago.
Other liabilities typically consist of accounts payable and accruals and holdbacks payable related to the bulk purchase program. At October 31, 2016, other liabilities totalled $97.1 million compared to $88.8 million at the end of the previous quarter and $71.3 million a year ago with the increase due primarily to holdbacks associated with loan and lease receivables purchased through the bulk purchase program which have shown significant growth over the past year. These holdbacks payable totalled $82.6 million at October 31, 2016 compared to $77.7 million at the end of previous quarter and $61.0 million a year ago.
An additional source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. At October 31, 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 October 31, 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 December 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 $82.3 million at October 31, 2016 compared to $82.0 million at the end of the previous quarter and $80.5 million a year ago. Notes payable include Series C Notes with a face value of $61.7 million maturing in 2018, and secured notes payable totalling $8.4 million maturing in 2017, and subordinated notes issued by the Bank totalling $14.5 million. The subordinated notes, are 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 owned by the Corporation. During the year ended October 31, 2016, as payment of interest due on the Series C Notes, the Corporation distributed 493,725 common shares it owned of the Bank which resulted in a loss on distribution of $956,000 which was charged to directly to shareholders' equity (deficit).
Preferred Share Liabilities
At October 31, 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 October 31, 2016, shareholders' equity (deficit) was ($6.0 million) compared to ($4.2 million) at the end of the previous quarter and $1.4 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.
Common Shares outstanding at October 31, 2016 totalled 44,592,260, unchanged from the end of the previous quarter. At October 31, 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 418,709 at October 31, 2016 unchanged from the end of the previous quarter and compared to 466,423 a year ago with the decrease due to the expiry of 47,714 options.
At October 31, 2016, there were 40,000 common share options of the Bank outstanding, unchanged from the end of the previous quarter and a year ago.
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 year ended October 31, 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 $88.9 million at October 31, 2016, compared to $88.4 million at the end of the previous quarter and $77.8 million a year ago. Non-controlling interests increased from the end of the previous quarter as a result of earnings of the Bank and from a year ago as a result of earnings of the Bank and the Corporation's ownership interest in the Bank decreasing from 68% a year ago to 63% at October 31, 2016. The decrease in the ownership interest in the Bank was a result of the Bank issuing common shares to outside interests and the Corporation transferring common shares of the Bank it owned to settle notes payable and pay interest on Series C Notes over the past year as noted above.
Updated Share Information
As at November 29, 2016, there were no changes since October 31, 2016 in the number of outstanding Common Shares and Class A and Class B Preferred Shares. In addition, at November 29, 2016 there were 416,209 Common share options outstanding as 2,500 expired since October 31, 2016.
Off-Balance Sheet Arrangements
As at October 31, 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 14 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 15 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 may require the Bank to carry 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 $189.1 million at October 31, 2016 compared to $187.2 million at the end of the previous quarter and $178.3 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 $5.0 million by the Bank in March 2016.
At October 31, 2016, the Bank exceeded the current minimum Basel III regulatory capital requirements referred to above with a CET1 ratio of 10.52% compared to 10.70% at the end of the previous quarter and 10.32% a year ago. At October 31, 2016, the Bank's Tier 1 capital ratio was 12.58% compared to 12.82% at the end of the previous quarter and 12.54% a year ago. In addition, the Bank's total capital ratio was 13.27% at October 31, 2016, compared to 13.53% at the end of the previous quarter and 13.51% a year ago. At October 31, 2016, the Bank's leverage ratio was 9.82% compared to 9.77% at the end of the previous quarter and 9.53% a year ago.
See Note 16 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.
| October 31, 2016 | October 31, 2015 | |||||||||||||||
| Increase 100 | Decrease 100 | Increase 100 | Decrease 100 | |||||||||||||
| bps | bps | bps | bps | |||||||||||||
| Impact on projected net interest | ||||||||||||||||
| income during a 12 month period | $ | 2,387 | $ | (2,243 | ) | $ | 3,371 | $ | (3,114 | ) | ||||||
| Impact on reported equity | ||||||||||||||||
| during a 60 month period | $ | (1,631 | ) | $ | 1,667 | $ | 295 | $ | (86 | ) | ||||||
| Duration difference between assets and | ||||||||||||||||
| liabilities (months) | 0.6 | 0.8 | ||||||||||||||
The Bank's sensitivity to changes in interest rates and its duration difference between assets and liabilities at October 31, 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 $2.4 million and the impact on net interest income of a 100 basis point decrease would be approximately ($2.2 million). Similarly at October 31, 2016, the impact on equity during a 60 month period of a 100 basis point increase would be approximately ($1.6 million) and the impact on equity of a 100 basis point decrease would be approximately $1.7 million. At October 31, 2016 the duration difference between assets and liabilities is less than 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 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 notes payable (see Note 6 to the interim consolidated financial statements), preferred shares (see Note 9 to the interim consolidated financial statements) and other operational requirements. On a non-consolidated basis, the Corporation does not depend on funding 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, equity contributions and/or restructuring of the Corporate group.
The unaudited Consolidated Statement of Cash Flows for the year ended October 31, 2016 shows cash provided by (used in) operations of ($53.4 million) compared to ($62.0 million) for the same period last year. Operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the amount of deposits received and loans funded are managed in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Corporation believes it will be able to continue to fund operations and meet contractual obligations as they become due.
Contractual Obligations
Contractual obligations as disclosed in the MD&A and audited consolidated financial statements for the year ended October 31, 2015, have not changed significantly at October 31, 2016.
Capital Assets
Operations are not dependent upon significant amounts of capital assets to generate revenue. Currently, the Corporation does not have any significant commitments for capital expenditures or for significant additions to its level of capital assets.
Summary of Quarterly Results
| ($CDN thousands except per share amounts) | 2016 | 2015 | |||||||||||||||||||||||
| Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||
| Results of operations: | |||||||||||||||||||||||||
| Total interest income | $ | 17,462 | $ | 17,628 | $ | 17,347 | $ | 17,228 | $ | 16,686 | $ | 16,514 | $ | 15,631 | $ | 15,630 | |||||||||
| Interest expense | 9,803 | 10,193 | 10,439 | 10,432 | 10,043 | 9,933 | 10,185 | 10,359 | |||||||||||||||||
| Net interest income | 7,659 | 7,435 | 6,908 | 6,796 | 6,643 | 6,581 | 5,446 | 5,271 | |||||||||||||||||
| Non-interest income | 320 | 344 | 285 | 325 | 384 | 2,158 | 304 | 338 | |||||||||||||||||
| Total revenue | 7,979 | 7,779 | 7,193 | 7,121 | 7,027 | 8,739 | 5,750 | 5,609 | |||||||||||||||||
| Provision for credit losses | 422 | 24 | 213 | 212 | 319 | 297 | 427 | 502 | |||||||||||||||||
| Non-interest expenses | 6,664 | 6,610 | 6,563 | 6,058 | 6,413 | 6,442 | 6,240 | 5,588 | |||||||||||||||||
| Restructuring charges | 714 | 98 | 445 | - | - | - | - | - | |||||||||||||||||
| Income (loss) before income taxes | 179 | 1,047 | (28) | 851 | 295 | 2,000 | (917) | (481) | |||||||||||||||||
| Income tax provision (recovery) | 924 | 1,131 | 891 | 1,077 | (123) | 770 | 242 | 1,088 | |||||||||||||||||
| Net income (loss) | $ | (745) | $ | (84) | $ | (919) | $ | (226) | $ | 418 | $ | 1,230 | $ | (1,159) | $ | (1,569) | |||||||||
| Net income attributable to non-controlling interests | 705 | 916 | 655 | 766 | 897 | 451 | 287 | 219 | |||||||||||||||||
| Net income (loss) attributable to shareholders | (1,450) | (1,000) | (1,574) | (992) | (479) | 779 | (1,446) | (1,788) | |||||||||||||||||
| Income (loss) per common share | |||||||||||||||||||||||||
| Basic | $ | (0.04) | $ | (0.03) | $ | (0.04) | $ | (0.03) | $ | (0.02) | $ | 0.01 | $ | (0.04) | $ | (0.05) | |||||||||
| Diluted | $ | (0.04) | $ | (0.03) | $ | (0.04) | $ | (0.03) | $ | (0.02) | $ | 0.01 | $ | (0.04) | $ | (0.05) | |||||||||
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 2016 as a result of growth in lending assets, specifically loan and lease receivables purchased through the Bank's bulk purchase program and from a decrease in the Bank's cost of funds.
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.
Restructuring charges in 2016 relate to rebranding of the Bank and costs associated with the review of strategic alternatives commenced by the Corporation and the Bank in the second quarter as discussed previously.
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 second and fourth quarters of 2015 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 October 31, 2016, the Corporation had a shareholders' deficit of $6.0 million which was primarily the result of operating losses and charges against equity of the parent company. The Corporation's primary investment, VersaBank, on its own, has shareholders' equity of $185.9 million (see Note 19 to the interim consolidated financial statements).
In determining whether the Corporation on a non-consolidated basis has the ability to realize its assets and settle its obligations in the normal course of business and operate as a going concern, management must make certain estimates regarding future operating expenses and other obligations of the Corporation on a non-consolidated basis and the net realizable value of the Corporation's investment in the common shares of the Bank. These obligations include the Series C Notes Payable of the parent company which mature in 2018 (see Note 6 to the interim consolidated financial statements) and the Class B Preferred shares of the parent company which must be redeemed in 2019 (see Note 9 to the interim consolidated financial statements). By their very nature, these estimates made by management involve inherent risks and uncertainties, both general and specific, and risks exist that these estimates 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 and meet its debt and equity obligations described above.
As noted previously, on March 7, 2016, the Corporation and the Bank announced they were undertaking a review of their strategic alternatives. Subsequently, on September 12, 2016 and November 15, 2016 the Corporation and the Bank jointly announced that they have entered into an agreement to merge by amalgamation under the Bank Act (Canada). After the amalgamation, which is subject to regulatory and other approvals, including approvals by the various security holders of both entities, the combined entity will continue to be named VersaBank. Concurrently with the amalgamation, the Corporation will undertake a series of transactions, such that immediately prior to an amalgamation its Series C Notes and certain other notes payable and its issued and outstanding Class B preferred shares will be converted into common shares of the Corporation which will be exchanged for VersaBank common shares. At this time, there can be no assurance that the amalgamation will take place or its nature, terms or timing. See Note 20 to the interim consolidated financial statements. However if the amalgamation between the Corporation and the Bank does take place in accordance with the terms proposed, obligations relating to Series C Notes Payable, other notes payable and the Class A and Class B Preferred Shares will be eliminated as a result of proposed repayments by cash and issue of common shares of the Corporation. See Note 20 to the interim consolidated financial statements.
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.
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.
Leases (IFRS 16)
In January, 2016, the IASB issued IFRS 16, requiring most leases to be recorded on the balance sheet. For lessees, most operating leases other than short-term or low-value leases will be capitalized, and will result in a balance sheet increase in lease assets and lease liabilities, and a decrease in operating lease expenses and increase in financing costs and amortization expense on the income statement. The new standard will not impact lessor accounting beyond additional disclosures. The new standard is effective for the Corporation's fiscal year beginning November 1, 2019 with early adoption permitted if IFRS 15 Revenue from Contracts with Customers is also applied. The Corporation is currently reviewing IFRS 16 to determine the impact of adoption on its consolidated financial statements.
Controls and Procedures
During the quarter ended October 31, 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) | ||||||||||||
| October 31 | October 31 | |||||||||||
| As at | 2016 | 2015 | ||||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 94,175 | $ | 130,614 | ||||||||
| Securities (note 4) | 9,958 | 22,433 | ||||||||||
| Loans, net of allowance for credit losses (note 5) | 1,563,612 | 1,447,660 | ||||||||||
| Other assets | 33,349 | 24,437 | ||||||||||
| $ | 1,701,094 | $ | 1,625,144 | |||||||||
| Liabilities and Equity | ||||||||||||
| Deposits | $ | 1,369,647 | $ | 1,325,828 | ||||||||
| Notes payable (note 6) | 82,300 | 80,467 | ||||||||||
| Securitization liabilities (note 7) | 43,585 | 43,525 | ||||||||||
| Other liabilities (note 8) | 97,147 | 71,306 | ||||||||||
| Preferred share liabilities (note 9) | 25,478 | 24,850 | ||||||||||
| 1,618,157 | 1,545,976 | |||||||||||
| Equity (deficit) attributable to shareholders: | ||||||||||||
| Share capital (note 10) | 29,285 | 29,285 | ||||||||||
| Deficit | (35,237) | (27,905) | ||||||||||
| Accumulated other comprehensive income | 3 | 9 | ||||||||||
| (5,949) | 1,389 | |||||||||||
| Non-controlling interests | 88,886 | 77,779 | ||||||||||
| 82,937 | 79,168 | |||||||||||
| $ | 1,701,094 | $ | 1,625,144 | |||||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PWC CAPITAL INC.
Consolidated Statements of Income (Loss)
(Unaudited)
| (thousands of Canadian dollars, except per share amounts) | ||||||||||||||
| for the three months ended | for the year ended | |||||||||||||
| October 31 | October 31 | October 31 | October 31 | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||
| Interest income: | ||||||||||||||
| Loans | $ | 17,209 | $ | 16,409 | $ | 68,496 | $ | 62,973 | ||||||
| Securities | 253 | 277 | 1,169 | 1,488 | ||||||||||
| 17,462 | 16,686 | 69,665 | 64,461 | |||||||||||
| Interest expense: | ||||||||||||||
| Deposits and other | 7,045 | 7,396 | 29,967 | 29,223 | ||||||||||
| Notes payable | 2,145 | 2,031 | 8,438 | 7,950 | ||||||||||
| Preferred share liabilities | 613 | 616 | 2,461 | 3,347 | ||||||||||
| 9,803 | 10,043 | 40,866 | 40,520 | |||||||||||
| Net interest income | 7,659 | 6,643 | 28,799 | 23,941 | ||||||||||
| Non-interest income (note 11) | 320 | 384 | 1,273 | 3,183 | ||||||||||
| Total revenue | 7,979 | 7,027 | 30,072 | 27,124 | ||||||||||
| Provision for credit losses (note 5b) | 422 | 319 | 871 | 1,545 | ||||||||||
| 7,557 | 6,708 | 29,201 | 25,579 | |||||||||||
| Non-interest expenses: | ||||||||||||||
| Salaries and benefits | 3,593 | 3,637 | 14,123 | 13,015 | ||||||||||
| General and administrative | 2,649 | 2,405 | 9,985 | 10,171 | ||||||||||
| Premises and equipment | 422 | 371 | 1,787 | 1,496 | ||||||||||
| 6,664 | 6,413 | 25,895 | 24,682 | |||||||||||
| Restructuring charges (note 20) | 714 | - | 1,257 | - | ||||||||||
| 7,378 | 6,413 | 27,152 | 24,682 | |||||||||||
| Income before income taxes | 179 | 295 | 2,049 | 897 | ||||||||||
| Income tax provision (recovery) (note 12) | 924 | (123) | 4,023 | 1,977 | ||||||||||
| Net income (loss) | $ | (745) | $ | 418 | $ | (1,974) | $ | (1,080) | ||||||
| Net income (loss) attributable to: | ||||||||||||||
| Shareholders | $ | (1,450) | $ | (479) | $ | (5,016) | $ | (2,934) | ||||||
| Non-controlling interests | 705 | 897 | 3,042 | 1,854 | ||||||||||
| Net income (loss) | $ | (745) | $ | 418 | $ | (1,974) | $ | (1,080) | ||||||
| Basic loss per common share (note 13) | $ | (0.04) | $ | (0.02) | $ | (0.15) | $ | (0.10) | ||||||
| Diluted loss per common share | $ | (0.04) | $ | (0.02) | $ | (0.15) | $ | (0.10) | ||||||
| Weighted average number of common shares outstanding | 44,592,000 | 44,592,000 | 44,592,000 | 43,173,000 | ||||||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PWC CAPITAL INC.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| (thousands of Canadian dollars) | ||||||||||||||
| for the three months ended | for the year ended | |||||||||||||
| October 31 | October 31 | October 31 | October 31 | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||
| Net income (loss) | $ | (745) | $ | 418 | $ | (1,974) | $ | (1,080) | ||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||
| Net unrealized gains (losses) on assets held as available-for-sale | 2 | (12) | (7) | (6) | ||||||||||
| Comprehensive income (loss) | $ | (743) | $ | 406 | $ | (1,981) | $ | (1,086) | ||||||
| Total comprehensive income (loss) attributable to: | ||||||||||||||
| Shareholders | $ | (1,449) | $ | (487) | $ | (5,021) | $ | (2,938) | ||||||
| Non-controlling interests | 706 | 893 | 3,040 | 1,852 | ||||||||||
| $ | (743) | $ | 406 | $ | (1,981) | $ | (1,086) | |||||||
(1) Net of income tax expense for three months of $1 (2015 - $5 benefit) and income tax benefit for the year of $3 (2015 - $2)
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PWC CAPITAL INC.
Consolidated Statements of Changes in Equity
(Unaudited)
| (thousands of Canadian dollars) | ||||||||||||||
| for the three months ended | for the year ended | |||||||||||||
| October 31 | October 31 | October 31 | October 31 | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||
| Common shares (note 10(a)): | ||||||||||||||
| Balance, beginning of the period | $ | 26,977 | $ | 26,977 | $ | 26,977 | $ | 25,637 | ||||||
| Issued on payment of Class B preferred share dividends | - | - | - | 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 | $ | 1,247 | $ | 1,247 | $ | 3,187 | ||||||
| Redeemed during the period | - | - | - | (1,940) | ||||||||||
| Balance, beginning and end of the period | $ | 1,247 | $ | 1,247 | $ | 1,247 | $ | 1,247 | ||||||
| Total share capital | $ | 29,285 | $ | 29,285 | $ | 29,285 | $ | 29,285 | ||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PWC CAPITAL INC.
Consolidated Statements of Changes in Equity - continued
(Unaudited)
| (thousands of Canadian dollars) | ||||||||||||||
| for the three months ended | for the year ended | |||||||||||||
| October 31 | October 31 | October 31 | October 31 | |||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||
| Deficit: | ||||||||||||||
| Balance, beginning of the period | $ | (33,442) | $ | (27,057) | $ | (27,905) | $ | (19,707) | ||||||
| Net loss attributable to shareholders | (1,450) | (479) | (5,016) | (2,934) | ||||||||||
| Dividends paid | - | - | (66) | (66) | ||||||||||
| Dividends paid by subsidiary | (345) | (372) | (1,396) | (1,322) | ||||||||||
| Loss on distribution of subsidiary shares | - | - | (956) | (3,339) | ||||||||||
| Other | - | 3 | 102 | (537) | ||||||||||
| Balance, end of the period | $ | (35,237) | $ | (27,905) | $ | (35,237) | $ | (27,905) | ||||||
| Accumulated other comprehensive income net of taxes: | ||||||||||||||
| Balance, beginning of the period | $ | 3 | $ | 17 | $ | 9 | $ | 17 | ||||||
| Other comprehensive income (loss) | 2 | (12) | (7) | (6) | ||||||||||
| Change in non-controlling interests | (2) | 4 | 1 | (2) | ||||||||||
| Balance, end of the period | $ | 3 | $ | 9 | $ | 3 | $ | 9 | ||||||
| Total shareholders' equity (deficit) | $ | (5,949) | $ | 1,389 | $ | (5,949) | $ | 1,389 | ||||||
| Non-controlling interests: | ||||||||||||||
| Balance, beginning of the period | $ | 88,384 | $ | 77,063 | $ | 77,779 | $ | 30,460 | ||||||
| Common shares issued by subsidiary | - | - | 5,000 | - | ||||||||||
| Net income attributable to non-controlling interests | 705 | 897 | 3,042 | 1,854 | ||||||||||
| Impact of subsidiary shares distributed | - | - | 3,758 | 29,724 | ||||||||||
| Preferred shares, net of issue costs and income tax, | ||||||||||||||
| issued by subsidiary | - | - | - | 16,247 | ||||||||||
| Dividends paid by subsidiary | (206) | (179) | (805) | (500) | ||||||||||
| Other | 3 | (2) | 112 | (6) | ||||||||||
| Balance, end of the period | $ | 88,886 | $ | 77,779 | $ | 88,886 | $ | 77,779 | ||||||
| $ | 82,937 | $ | 79,168 | $ | 82,937 | $ | 79,168 | |||||||
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) | |||||||||||||
| October 31 | October 31 | ||||||||||||
| for the year ended | 2016 | 2015 | |||||||||||
| Cash provided by (used in): | |||||||||||||
| Operations: | |||||||||||||
| Net loss | $ | (1,974 | ) | $ | (1,080 | ) | |||||||
| Adjustments to determine net cash flows: | |||||||||||||
Items not involving cash: | |||||||||||||
| Provision for credit losses | 871 | 1,545 | |||||||||||
| Income tax provision | 4,023 | 1,977 | |||||||||||
| Stock-based compensation | - | 20 | |||||||||||
| Interest income | (69,665 | ) | (64,461 | ) | |||||||||
| Interest expense | 40,866 | 40,520 | |||||||||||
| Ammortization of property and equipment | 776 | 393 | |||||||||||
| Gain on debt settlement | - | (1,789 | ) | ||||||||||
| Interest received | 68,271 | 63,301 | |||||||||||
| Interest paid | (36,618 | ) | (31,270 | ) | |||||||||
| Income taxes paid | (1,252 | ) | (1,726 | ) | |||||||||
| Change in operating assets and liabilities: | |||||||||||||
| Loans | (114,892 | ) | (223,565 | ) | |||||||||
| Deposits | 44,146 | 131,612 | |||||||||||
| Change in other assets and liabilities | 12,020 | 22,555 | |||||||||||
| (53,428 | ) | (61,968 | ) | ||||||||||
| Investing: | |||||||||||||
| Purchase of securities | (9,583 | ) | - | ||||||||||
| Proceeds from sale and maturity of securities | 21,846 | 25,922 | |||||||||||
| 12,263 | 25,922 | ||||||||||||
| Financing: | |||||||||||||
| Proceeds of shares issued by subsidiary, net of costs | 5,000 | 15,275 | |||||||||||
| Notes payable | 1,100 | 6,167 | |||||||||||
| Other liabilities | 2,350 | - | |||||||||||
| Purchase of preferred shares for cancellation | - | (195 | ) | ||||||||||
| Dividends paid | (66 | ) | (66 | ) | |||||||||
| Dividends paid by subsidiary | (2,201 | ) | (1,822 | ) | |||||||||
| Income taxes paid by subsidiary | (1,457 | ) | - | ||||||||||
| 4,726 | 19,359 | ||||||||||||
| Decrease in cash and cash equivalents | (36,439 | ) | (16,687 | ) | |||||||||
| Cash and cash equivalents, beginning of the year | 130,614 | 147,301 | |||||||||||
| Cash and cash equivalents, end of the year | $ | 94,175 | $ | 130,614 | |||||||||
| Cash and cash equivalents is represented by: | |||||||||||||
| Cash | $ | 94,175 | $ | 42,627 | |||||||||
| Cash equivalents | - | 87,987 | |||||||||||
| Cash and cash equivalents, end of the year | $ | 94,175 | $ | 130,614 | |||||||||
The accompanying notes are an integral part of these interim Consolidated Financial Statements.
PWC CAPITAL INC.
Notes to Interim Consolidated Financial Statements
(Unaudited)
Three months and year ended October 31, 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 VersaBank ('VB' 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.
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 year ended October 31, 2016 and 2015 were approved by the Audit Committee of the Board of Directors on November 29, 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 interimConsolidated 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 interimConsolidated 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 October 31, 2016, the Corporation had a shareholders' deficit of $6.0 million which was primarily the result of operating losses and charges against equity of the parent company. The Corporation's primary investment, VersaBank, on its own, has shareholders' equity of $185.9 million (see Note 19). In determining whether the Corporation on a non-consolidated basis has the ability to realize its assets and settle its obligations in the normal course of business and operate as a going concern, management has made certain estimates regarding future operating expenses and other obligations of the Corporation on a non-consolidated basis and the net realizable value of the Corporation's investment in the common shares of the Bank. These obligations include the Series C Notes payable of the parent company which mature in 2018 (see Note 6) and the Class B Preferred shares of the parent company which must be redeemed in 2019 (see Note 9). By their very nature, these estimates made by management involve inherent risks and uncertainties, both general and specific, and risks exist that these estimates 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 and meet its debt and equity obligations described above. See Note 20 for further information.
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:
| October 31 | October 31 | ||||||
| 2016 | 2015 | ||||||
| Available-for-sale securities | |||||||
| Securities issued or guaranteed by: | |||||||
| Canadian provincial governments | $ | 9,687 | $ | 9,607 | |||
| Canadian municipal governments | 271 | 279 | |||||
| Total available-for-sale securities | $ | 9,958 | $ | 9,886 | |||
| Held-to-maturity security | |||||||
| Debt of other financial institutions | $ | - | $ | 12,547 | |||
| Total securities | $ | 9,958 | $ | 22,433 | |||
Canadian provincial government securities are carried at fair value based on quoted market prices (Level 1). 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:
| October 31 | October 31 | ||||||
| 2016 | 2015 | ||||||
| Government loans | $ | 66,016 | $ | 72,181 | |||
| Loan and lease receivables | 783,669 | 618,432 | |||||
| Residential mortgages | 95,624 | 112,759 | |||||
| Commercial mortgages | 227,816 | 269,193 | |||||
| Construction mortgages | 256,429 | 237,100 | |||||
| Commercial loans | 102,265 | 104,996 | |||||
| Credit card receivables and other | 29,373 | 31,168 | |||||
| 1,561,192 | 1,445,829 | ||||||
| Collective allowance | (3,031) | (3,212) | |||||
| Accrued interest | 5,451 | 5,043 | |||||
| Total loans, net of allowance for credit losses | $ | 1,563,612 | $ | 1,447,660 | |||
The collective allowance for credit losses relates to the following loan portfolios:
| October 31 | October 31 | |||||
| 2016 | 2015 | |||||
| Government loans | $ | 14 | $ | 18 | ||
| Loan and lease receivables | 344 | 269 | ||||
| Residential mortgages | 165 | 268 | ||||
| Commercial mortgages | 412 | 587 | ||||
| Construction mortgages | 765 | 776 | ||||
| Commercial loans | 276 | 228 | ||||
| Credit card receivables and other | 1,055 | 1,066 | ||||
| $ | 3,031 | $ | 3,212 | |||
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 loan and lease receivables (note 8).
b) Allowance for credit losses:
The allowance for credit losses results from the following:
| October 31 | October 31 | ||||||||||||
| 2016 | 2015 | ||||||||||||
| For the three months ended | Collective | Individual | Total Allowance | Total Allowance | |||||||||
| Balance, beginning of the period | $ | 2,894 | $ | - | $ | 2,894 | $ | 3,118 | |||||
| Provision for credit losses | 422 | - | 422 | 319 | |||||||||
| Write-offs | (285) | - | (285) | (225) | |||||||||
| Balance, end of the period | $ | 3,031 | $ | - | $ | 3,031 | $ | 3,212 | |||||
| October 31 | October 31 | ||||||||||||
| 2016 | 2015 | ||||||||||||
| for the year ended | Collective | Individual | Total Allowance | Total Allowance | |||||||||
| Balance, beginning of the period | $ | 3,212 | $ | - | $ | 3,212 | $ | 2,905 | |||||
| Provision for credit losses | 871 | - | 871 | 1,545 | |||||||||
| Write-offs | (1,052) | - | (1,052) | (1,238) | |||||||||
| Balance, end of the period | $ | 3,031 | $ | - | $ | 3,031 | $ | 3,212 | |||||
c) Impaired loans:
At October 31, 2016, there were $nil impaired loans (October 31, 2015 - $nil). At October 31, 2016, loans, other than credit card receivables, past due were $936,000 (October 31, 2015 - $nil). At October 31, 2016, credit card receivables overdue by one day or more totalled $2,290,000 (October 31, 2015 - $2,773,000).
6.Notes payable:
| October 31 | October 31 | ||||||
| 2016 | 2015 | ||||||
| Ten year term Series C Notes unsecured, maturing 2018, effective interest of 10.85% | $ | 59,894 | $ | 59,053 | |||
| 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 $433 (October 31, 2015 - $541), effective interest of 10.06% | 14,067 | 13,959 | |||||
| Notes payable, secured by 1,731,658 shares of the Bank held by the Corporation, maturing in 2017, net of issue costs of $15 (October 31, 2015 - $50) effective interest of 7.65% | 8,339 | 7,455 | |||||
| $ | 82,300 | $ | 80,467 | ||||
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 December 2016 and 2020. Securitized residential insured mortgages and other assets are pledged as collateral for these liabilities.
8.Other liabilities:
| October 31 | October 31 | ||||||
| 2016 | 2015 | ||||||
| Accounts payable and other | $ | 14,583 | $ | 10,303 | |||
| Holdbacks payable on loan and lease receivables | 82,564 | 61,003 | |||||
| $ | 97,147 | $ | 71,306 | ||||
9.Preferred share liabilities:
At October 31, 2016, the Corporation has Class B Preferred Shares outstanding which have a redemption value of $27.4 million (October 31, 2015 - $27.4 million) less unamortized issue and conversion costs of $1.9 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 Income (Loss) calculated using an effective interest rate of 9.78% (2015 - 9.78%).
10.Share capital:
a) Share capital:
| Stock Options | ||||||||
Common shares | Number |
Weighted-average | ||||||
| Outstanding, October 31, 2015 | 44,592,260 | 466,423 | $ | 6.23 | ||||
| Expired | - | (47,714) | 11.22 | |||||
| Outstanding, October 31, 2016 | 44,592,260 | 418,709 | $ | 5.66 | ||||
In addition, at October 31, 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 in the Consolidated Statement of Income (Loss) for the three months and year ended October 31, 2016 a recovery of $7,000 (October 31, 2015 - $3,000 expense) and $10,000 recovery (October 31, 2015 - $20,000 expense) respectively relating to DSU's. At October 31, 2016 there were 160,660 (October 31, 2015 - 160,660) DSU's outstanding.
11. Non-Interest Income:
| for the three months ended | for the year ended | ||||||||||||
| October 31 | October 31 | October 31 | October 31 | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Credit card non-interest revenue | $ | 318 | $ | 330 | $ | 1,234 | $ | 1,308 | |||||
| Other income | 2 | 54 | 39 | 86 | |||||||||
| Gain on debt settlement | - | - | - | 1,789 | |||||||||
| $ | 320 | $ | 384 | $ | 1,273 | $ | 3,183 | ||||||
12. Income taxes:
The Corporation's statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The statutory 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 year ended | ||||||||||||
| October 31 | October 31 | October 31 | October 31 | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Income tax on earnings of the Bank | $ | 740 | $ | 694 | $ | 3,288 | $ | 2,545 | |||||
| Recognition of previously unrecognized deferred income tax asset | - | (1,000) | - | (1,724) | |||||||||
| Income tax on dividends paid by the Corporation | 184 | 183 | 735 | 1,156 | |||||||||
| $ | 924 | $ | (123) | $ | 4,023 | $ | 1,977 | ||||||
13. Loss per common share:
| for the three months ended | for the year ended | ||||||||||||
| October 31 | October 31 | October 31 | October 31 | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Net loss attributable to common shareholders | $ | (1,450) | $ | (479) | $ | (5,016) | $ | (2,934) | |||||
| Less: dividends on preferred shares | (17) | (17) | (66) | (66) | |||||||||
| Less: dividends on preferred shares of subsidiary | (345) | (372) | (1,396) | (1,322) | |||||||||
| (1,812) | (868) | (6,478) | (4,322) | ||||||||||
| Average number of common shares outstanding | 44,592,000 | 44,592,000 | 44,592,000 | 43,173,000 | |||||||||
| Loss per common share: | $ | (0.04) | $ | (0.02) | $ | (0.15) | $ | (0.10) | |||||
14. 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.
| October 31 | October 31 | ||||||
| 2016 | 2015 | ||||||
| Loan commitments | $ | 265,631 | $ | 243,253 | |||
| Undrawn credit card lines | 127,116 | 140,071 | |||||
| Letters of credit | 42,809 | 39,015 | |||||
| $ | 435,556 | $ | 422,339 | ||||
15.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 October 31, 2016 amounts due from key management personnel totalled $2,030,000 (October 31, 2015 - $2,030,000). 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 year ended October 31, 2016 was $16,000 (October 31, 2015 - $16,000) and $62,000 (October 31, 2015 - $64,000) respectively. There were no provisions for credit losses related to loans issued to key management personnel for the three months and year ended October 31, 2016 and 2015.
16.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 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 year ended October 31, 2016 there were no material changes in the Bank's management of capital.
b) Risk-Based Capital Ratios:
The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III).
OSFI requires that all Canadian banks must comply with the Basel III standards on an 'all-in' basis 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:
| October 31, 2016 | October 31, 2015 | |||||||||||||
| 'All-in' | 'Transitional' | 'All-in' | 'Transitional' | |||||||||||
| Common Equity Tier 1 (CET1) capital | ||||||||||||||
| Directly issued qualifying common share capital | $ | 147,369 | $ | 147,369 | $ | 142,369 | $ | 142,369 | ||||||
| Retained earnings | 9,172 | 9,172 | 2,903 | 2,903 | ||||||||||
| Accumulated other comprehensive income | 6 | 6 | 13 | 13 | ||||||||||
| CET1 capital before regulatory adjustments | 156,547 | 156,547 | 145,285 | 145,285 | ||||||||||
| Total regulatory adjustments to CET1 | (6,562) | (3,937) | (9,031) | (3,612) | ||||||||||
| Common Equity Tier 1 capital | $ | 149,985 | $ | 152,610 | $ | 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 | $ | 179,322 | $ | 181,947 | $ | 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 | $ | 189,122 | $ | 191,747 | $ | 178,291 | $ | 183,710 | ||||||
| Total risk-weighted assets | $ | 1,425,171 | $ | 1,427,796 | $ | 1,320,158 | $ | 1,325,576 | ||||||
| Capital ratios | ||||||||||||||
| CET1 Ratio | 10.52% | 10.69% | 10.32% | 10.69% | ||||||||||
| Tier 1 Capital Ratio | 12.58% | 12.74% | 12.54% | 12.90% | ||||||||||
| Total Capital Ratio | 13.27% | 13.43% | 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:
| October 31 | October 31 | ||||||
| 2016 | 2015 | ||||||
| On-balance sheet assets | $ | 1,704,400 | $ | 1,625,806 | |||
| Asset amounts deducted in determining Basel III 'all in' Tier 1 Capital | (6,562) | (9,031) | |||||
| Total on-balance sheet exposures | 1,697,838 | 1,616,775 | |||||
| Off-balance sheet exposure at gross notional amount | $ | 435,556 | $ | 422,339 | |||
| Adjustments for conversion to credit equivalent amount | (306,877) | (301,674) | |||||
| Off-balance sheet exposures | 128,679 | 120,665 | |||||
| Tier 1 Capital | 179,322 | 165,591 | |||||
| Total Exposures | 1,826,517 | 1,737,440 | |||||
| Leverage Ratio | 9.82% | 9.53% | |||||
The Bank was in compliance with the leverage ratio as prescribed by OSFI throughout the periods presented.
17.Interest rate and liquidity risk:
A large percentage of the cash and securities reflected on the Corporation's Consolidated Balance Sheets is that of the Bank (note 19). As a holding company, PWC Capital Inc., on a non-consolidated basis, has no revenue generating activities and has cash obligations relating primarily to notes payable (note 6), preferred shares (note 9) and other operational requirements. On a non-consolidated basis, the Corporation does not depend on funding 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, equity contributions and/or restructuring of the Corporate group.
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.
| October 31, 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 | $ | 2,387 | $ | (2,243) | $ | 3,371 | $ | (3,114) | |||||
| Impact on reported equity | |||||||||||||
| during a 60 month period | $ | (1,631) | $ | 1,667 | $ | 295 | $ | (86) | |||||
| Duration difference between assets and | |||||||||||||
| liabilities (months) | 0.6 | 0.8 | |||||||||||
18.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 Audited Consolidated Financial Statements for more information on fair values.
| October 31, 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 | $ | 94,175 | $ | 94,175 | $ | 130,614 | $ | 130,614 | |||||
| Securities | 9,958 | 9,958 | 22,433 | 22,386 | |||||||||
| Loans | 1,563,612 | 1,563,299 | 1,447,660 | 1,449,567 | |||||||||
| Other financial assets | 15,008 | 15,008 | 4,622 | 4,622 | |||||||||
| Liabilities | |||||||||||||
| Deposits | $ | 1,369,647 | $ | 1,380,685 | $ | 1,325,828 | $ | 1,333,366 | |||||
| Notes payable | 82,300 | 61,720 | 80,467 | 66,333 | |||||||||
| Securitization liabilities | 43,585 | 46,923 | 43,525 | 47,604 | |||||||||
| Other financial liabilities | 97,147 | 97,147 | 71,306 | 71,306 | |||||||||
| Preferred share liabilities | 25,478 | 13,364 | 24,850 | 16,433 | |||||||||
19.Subsidiary company information:
The following table presents summary financial information regarding the Bank on a consolidated basis:
| Consolidated balance sheets | |||||||
| October 31 | October | ||||||
| 2016 | 2015 | ||||||
| Cash and cash equivalents | $ | 93,964 | $ | 127,078 | |||
| Securities | 9,958 | 22,433 | |||||
| Loans, net of allowance for credit losses | 1,563,612 | 1,447,660 | |||||
| Other assets | 36,866 | 28,635 | |||||
| $ | 1,704,400 | $ | 1,625,806 | ||||
| Deposits | $ | 1,369,647 | $ | 1,325,828 | |||
| Subordinated notes payable | 14,067 | 13,959 | |||||
| Securitization liabilities | 43,585 | 43,525 | |||||
| Other liabilities | 91,217 | 67,872 | |||||
| 1,518,516 | 1,451,184 | ||||||
| Shareholders' equity | 185,884 | 174,622 | |||||
| $ | 1,704,400 | $ | 1,625,806 | ||||
| Consolidated statements of income | |||||||||||||
| for the three months ended | for the year ended | ||||||||||||
| October 31 | October 31 | October 31 | October 31 | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||
| Interest income | $ | 17,462 | $ | 16,685 | $ | 69,662 | $ | 64,457 | |||||
| Interest expense | 7,396 | 7,724 | 31,258 | 30,483 | |||||||||
| Net interest income | 10,066 | 8,961 | 38,404 | 33,974 | |||||||||
| Non-interest income | 320 | 384 | 1,273 | 1,394 | |||||||||
| Total revenue | 10,386 | 9,345 | 39,677 | 35,368 | |||||||||
| Provision for credit losses | 422 | 319 | 871 | 1,545 | |||||||||
Net interest and non-interest income after | 9,964 | 9,026 | 38,806 | 33,823 | |||||||||
| Non-interest expense | 6,779 | 6,562 | 25,956 | 24,784 | |||||||||
| Restructuring charges | 549 | - | 1,092 | - | |||||||||
| Income before income taxes | 2,636 | 2,464 | 11,758 | 9,039 | |||||||||
| Income tax provision (recovery) | 740 | (306) | 3,288 | 821 | |||||||||
| Net income | $ | 1,896 | $ | 2,770 | $ | 8,470 | $ | 8,218 | |||||
20.Proposed Amalgamation of the Corporation and the Bank:
On March 7, 2016, the Corporation and the Bank announced they were undertaking a review of their strategic alternatives. Subsequently on September 12, 2016 and November 15, 2016, the Corporation and the Bank jointly announced that they have entered into an agreement to merge by amalgamation under the Bank Act (Canada). After the amalgamation, which is subject to regulatory and other approvals, including approvals by the various security holders of both entities, the combined entity will continue to be named VersaBank. Concurrently with the amalgamation, the Corporation will undertake a series of transactions, such that immediately prior to an amalgamation its Series C Notes and certain other notes payable and its issued and outstanding Class B preferred shares will be converted into common shares of the Corporation which will be exchanged for VersaBank common shares. At this time, there can be no assurance that the amalgamation will take place or of its nature, terms or timing.
During the year ended October 31, 2016, the Corporation incurred restructuring charges relating to costs associated with the review of strategic alternatives commenced by the Corporation earlier in the year as noted above.
VersaBank, a Schedule I chartered bank, is a branchless financial institution with approximately $1.7 billion in assets. VersaBank 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.
Visit our website at: http://pwccapital.com
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Pacific & Western Credit Corp. published this content on 30 November 2016 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 30 November 2016 17:20:10 UTC.
Original documenthttp://www.pwccapital.com/news/article/1913310
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