Pacific & Western Credit Corp. (operating as PWC Capital) Announces Results for Its Fourth Quarter Ended October 31, 2013

Fourth Quarter Report
October 31, 2013

LONDON, Ontario--()--Pacific & Western Credit Corp., operating as PWC Capital (TSX:PWC)

FOURTH QUARTER SUMMARY (1)
(three months ended October 31, 2013, compared to three months ended October 31, 2012, unless otherwise noted)

PWC Capital

  • Net income (loss) of PWC Capital (the “Corporation) for the three months ended October 31, 2013, was ($3.0 million) or ($0.10) per share (basic and diluted) compared to ($2.7 million) or ($0.10) per share (basic and diluted) and includes restructuring charges of Pacific & Western Bank of Canada (the “Bank”) totalling $1.3 million.
  • Net income (loss) of the Corporation for the year ended October 31, 2013 was ($8.9 million) or ($0.30) per share (basic and diluted) compared to ($5.1 million) or ($0.19) per share (basic and diluted) for the same period a year ago. Net income (loss) for the current year includes restructuring charges of the Bank totalling $2.1 million.

Pacific & Western Bank of Canada

  • Net interest income for the Bank for the three months ended October 31, 2013 increased 25% to $6.9 million.
  • For the year ended October 31, 2013, net interest income increased 31% from a year ago to $25.7 million.
  • Spread for the current quarter increased to 1.95% from 1.42%
  • Net income (loss) for the quarter was ($190,000) or ($0.01) per share (basic and diluted) compared to ($907,000) or ($0.06) per share (basic and diluted) for the same period a year ago. However, adjusted net income, which excludes restructuring charges of the Bank, was $741,000 for the current quarter.
  • Net income for the year ended October 31, 2013 was $1.8 million and adjusted net income was $3.3 million compared to net income of $3.8 million a year ago. Net income a year ago included pre-tax gains from the sales of loans and securities which totalled $12.0 million compared to $1.0 million for the current year.
  • Credit quality continues to remain strong with negligible gross impaired loans at October 31, 2013 of $7,000 compared to $1.6 million a year ago.
  • At October 31, 2013, the Bank’s Common Equity Tier 1 (CET1) ratio exceeded many of its peers with a ratio of 11.29% compared to 10.52% at the end of the previous quarter.

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

PRESIDENT’S COMMENTS

I am pleased with the results of our fourth quarter. Our Bank’s net interest income continued to steadily grow with net interest income of $6.9 million compared to $6.7 million earned in the previous quarter and $5.5 million earned in the same quarter a year ago. This increase can be mainly attributed to a significant increase in spread, which improved by 37% over the same period last year to 1.95% this quarter. What is particularly impressive is that credit quality continued to be outstanding with almost no gross impaired loans. Overall, our Bank’s spread figures have now returned to pre-liquidity crisis levels and compare favourably to the large banks.

Our three new programs continue to grow. Bulk financing assets increased by 9% during the quarter to $188 million and 72% over last year’s balance. Our credit card program realized a modest profit in the fourth quarter compared to a loss of $187,000 for the previous quarter and a loss of $568,000 for the same period last year. Our trustee deposits initiative continues to gain considerable acceptance as new trustees throughout Canada are continuing to move their banking to us at an ever increasing pace. Overall, we are very pleased with the progress that we are making with our new initiatives.

On August 27th, we completed the Initial Public Offering and listed our Bank on the TSX. This was a key step in the Bank’s evolution, providing it with direct access to the public markets. Our Bank raised net proceeds of $8 million increasing its CET1 capital and resulting in the Bank’s capital ratios significantly exceeding the industry average while providing ample capacity for growth.

With the completion of the IPO, the Bank’s visibility and perception of value is increasing, which should soon be reflected in PWC’s share value. Additionally, PWC is now evaluating other lending and investing opportunities to diversify and develop additional revenue sources.

To ensure there is no confusion between Pacific & Western Bank of Canada, a Schedule I bank that we presently hold a substantial investment in, we have begun operating as PWC Capital. We intend to request shareholder approval to formally change our company’s name to PWC Capital Inc. at the upcoming shareholder meeting this spring.

These are exciting times for us shareholders. Our Bank has now been transformed so that it is able to earn ever increasing sustainable spread income, it has reduced its vulnerability to external factors and is well capitalized to provide for profitable growth. Our mission for the next year and the years to come is to utilize our Bank’s tremendously scalable platform by growing rapidly to produce ever increasing profits.

FINANCIAL HIGHLIGHTS          
(unaudited)         as at as at
    October 31 October 31 October 31 October 31
($CDN thousands except per share amounts )   2013   2012 2013   2012
Pacific & Western Bank of Canada
Balance Sheet Summary
Cash and securities $   216,214 $   296,693 $   216,214 $   296,693
Total loans 1,158,933 1,210,311 1,158,933 1,210,311
Average loans 1,176,247 1,232,953 1,184,622 1,179,738
Total assets 1,404,608 1,534,168 1,404,608 1,534,168
Average assets 1,405,975 1,536,469 1,469,388 1,509,951
Deposits 1,187,404 1,317,298 1,187,404 1,317,298
Subordinated notes payable 20,332 49,815 20,332 49,815
Shareholders' equity 133,133 93,104 133,133 93,104
Capital ratios (2012 based on Basel II)
Assets-to-capital ratio 9.33 10.86 9.33 10.86
Common Equity Tier 1 capital 124,278 n/a 124,278 n/a
Risk-weighted assets 1,101,190 1,121,815 1,101,190 1,121,815
Common Equity Tier 1 ratio 11.29% n/a 11.29% n/a
Tier 1 risk-based capital ratio 11.29% 8.54% 11.29% 8.54%
  Total risk-based capital ratio           12.99%       12.81%     12.99%       12.81%
              for the three months ended for the year ended
Results of operations
Net interest income $ 6,896 $ 5,503 $ 25,655 $ 19,608
Spread 1.95% 1.42% 1.75% 1.30%
Other income 325 2,370 2,320 13,287
Total revenue 7,221 7,873 27,975 32,895
Provision for credit losses 125 28 524 461
Restructuring charges 1,275 - 2,064 -
Net income (loss) before income taxes (190) (907) 1,764 3,824
Adjusted net income (loss) * 741 (907) 3,271 3,824
Return on average total assets -0.05% -0.23% 0.12% 0.25%
Gross impaired loans to total loans 0.00% 0.13% 0.00% 0.13%
Provision for credit losses as a % of average loans 0.01% 0.00% 0.04% 0.04%
Commercial lending segment income ** $ 1,034 $ 1,594 $ 5,825 $ 10,878
  Loan spread             2.20%       2.11%     2.21%       2.05%
Pacific & Western Credit Corp., (consolidated)
Results of operations
Net income of the Bank $ (190) $ (907) $ 1,764 $ 3,824
Deduct interest expense on notes of the Corporation (1,511) (725) (5,104) (2,730)
Interest expense relating to Class B
Preferred Share dividends (1,238) (1,223) (4,925) (4,865)
Net non-interest and other expenses of the Corporation 130 393 754 272
  Provision for income taxes           (226)       (232)     (1,386)       (1,573)
Net loss $ (3,035) $ (2,694) $ (8,897) $ (5,072)
Net loss of the Corporation available to:
Preferred shareholders - 66 66
    Common shareholders           (3,064)       (2,694)     (8,992)       (5,138)
Net loss available to equity shareholders $ (3,064) $ (2,694) $ (8,926) $ (5,072)
Loss per common share:
Basic $ (0.10) $ (0.10) $ (0.30) $ (0.19)
    Diluted         $   (0.10)   $   (0.10) $   (0.30)   $   (0.19)
* Adjusted net income (loss) is a non-GAAP measure and is defined as net income (loss) for the period for the Bank prior
to deducting restructuring charges on an after-tax basis.
 
** Commerical lending segment income includes gains on securities and loans of $nil for the three months ended October 31,
2013 (2012 - $1.9 million) and $1.1 million for the year ended October 31, 2013 (2012 - $12.0 million)



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 2013, dated December 4, 2013, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2013, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Corporation’s MD&A and the audited consolidated financial statements for the year ended October 31, 2012, 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, 2012, remain substantially unchanged.

Basis of Presentation

Non-GAAP and Additional GAAP Measures

Net Interest Income and Net Interest Margin or Spread

Most banks analyze profitability by net interest income (as presented in the Consolidated Statements of Income (Loss)) and net interest margin or spread. Net interest margin or spread is defined as net interest income as a percentage of average total assets. Net interest margin or spread does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.

Book Value Per Common Share

Book value per common share is defined as Shareholders’ Equity less amounts relating to preferred shares recorded in equity, divided by the number of common shares outstanding.

Adjusted Net Income (Loss)

Adjusted net income (loss) of Pacific & Western Bank of Canada (the “Bank”) is defined as net income (loss) for the period prior to deducting restructuring charges on an after-tax basis.

         
(thousands of Canadian dollars)   for the three months ended   for the year ended
  October 31   October 31   October 31   October 31
        2013       2012       2013       2012
Net income (loss) of the Bank $   (190) $   (907) $   1,764 $   3,824
 
Restructuring charges, net of tax       931       -       1,507       -
 
Adjusted net income   $   741   $   (907)   $   3,271   $   3,824



Overview

Pacific & Western Credit Corp., operating as PWC Capital (the `Corporation`) is a holding company whose shares trade on the Toronto Stock Exchange. Its principal subsidiary the Bank, of which it owns approximately 91% of its issued common shares provides lending services to selected niche markets and operates as a Schedule I bank under the Bank Act (Canada). On August 27, 2013, the Bank commenced trading on the Toronto Stock Exchange.

PWC Capital

Net income (loss) of the Corporation for the three months ending October 31, 2013, was ($3.0 million) or ($0.10) per share (basic and diluted) compared to ($2.2 million) or ($0.07) per share (basic and diluted) for the previous quarter and ($2.7 million) or ($0.10) per share (basic and diluted) for the same period last year. Net income (loss) for the current quarter includes restructuring charges of the Bank totalling $1.3 million and interest expense totalling $1.2 million relating to dividends paid on the Corporation’s Class B Preferred Shares. These dividends are recorded as interest expense in the consolidated financial statements as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet. Net income for the same period a year ago included pre-tax gains of $1.9 million from the sale of loans.

Net income (loss) of the Corporation for the year ended October 31, 2013 was ($8.9 million) or ($0.30) per share (basic and diluted) compared to ($5.1 million) or ($0.19) per share (basic and diluted) for the same period a year ago. Net income (loss) for the current year includes restructuring charges of the Bank totalling $2.1 million and interest expense totalling $4.9 million relating to dividends paid on the Corporation’s Class B Preferred Shares. Net income for the same period a year ago included pre-tax gains from the sale of loans and securities totalling $12.0 million compared to $1.0 million for the current year.

In August 2013, the Bank completed its Initial Public Offering (IPO) and under the IPO and the exercise of the related over allotment option, issued 625,000 common shares to the public for gross proceeds of $7.25 per share. In addition, as part of a secondary offering under the IPO, the Corporation sold 1,100,000 common shares of the Bank for the IPO issue price of $7.25 per share and used a portion of the proceeds to subscribe for 620,206 common shares of the Bank, also at the IPO issue price. As a result of the above transactions, the Corporation’s ownership interest in the Bank decreased from 100% to approximately 91% at October 31, 2013.

Pacific & Western Bank of Canada

Net income (loss) of the Bank for the three months ending October 31, 2013, was ($190,000) compared to $878,000 for the previous quarter and ($907,000) for the same period a year ago. Before deducting restructuring charges which totalled $931,000 on an after-tax basis, adjusted net income was $741,000 for the quarter. Included in net income for the same period a year ago were pre-tax gains of $1.9 million on the sale of loans. There were no gains realized on the sale of loans in the current quarter.

Net income of the Bank for the year ended October 31, 2013, was $1.8 million compared to $3.8 million a year ago. Before deducting restructuring charges totalling $1.5 million on an after-tax basis, adjusted net income was $3.3 million. These restructuring charges consist primarily of costs related to the Bank’s IPO and costs relating to the retirement of subordinated notes payable to the parent company. Included in net income a year ago were pre-tax gains of $12.0 million on the sale of loans and securities compared to pre-tax gains of $1.0 million realized in the current year on the sale of loans.

Net interest income and spread for the three months ended October 31, 2013 increased to $6.9 million and 1.95% respectively from $6.7 million and 1.91% for the previous quarter and from $5.5 million and 1.42% for the same period a year ago.

For the year ended October 31, 2013, net interest income and spread increased to $25.7 million and 1.75% respectively from $19.6 million and 1.30% a year ago. Net interest income and spread increased from previous periods due to lower interest expense as a result of the repayment in March 2013 of subordinated notes payable to the parent company and the booking of new loans with larger spreads during the current year.

At October 31, 2013, total assets of the Bank were $1.40 billion compared to $1.41 billion at the end of the previous quarter and $1.53 billion a year ago. The decrease in total assets from a year ago was due primarily to a lower level of cash and securities held at the end of the year and a lower level of lending assets resulting from several large loan repayments in the fourth quarter and loan sales over the past year. Lower levels of cash and securities were required at the end of the current year as the funding requirements for deposits in the coming months are less than that of a year ago.

Credit quality remains strong, with gross impaired loans totalling $7,000 at October 31, 2013 compared to $1.6 million a year ago and net impaired loans of $7,000 compared to $23,000 a year ago.

At October 31, 2013, the Bank significantly exceeded the new CET1 capital requirement of 7.0% with a ratio of 11.29%. In addition, its Tier 1 capital ratio was 11.29% and its total capital ratio was 12.99%. The Basel Committee on Banking Supervision published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). The Office of the Superintendent of Financial Institutions (OSFI) requires all Canadian banks to comply with the new Basel III standards on an “all in” basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a Common Equity Tier 1 (CET1) capital ratio of 7.0% at January 1, 2013, and at January 1, 2014 a Tier 1 capital ratio of 8.5% and a total capital ratio of 10.5%, all of which include a 2.50% capital conservation buffer.

Total Revenue

Total revenue consists of net interest income and other income. For the three months ended October 31, 2013, total revenue of the Bank was $7.2 million compared to $7.0 million in the previous quarter and $7.9 million for the same period last year. While the Bank saw an increase in net interest income of $1.4 in the current quarter from a year ago, total revenue decreased due primarily to gains totalling $1.9 million from the sale of loans realized last year compared to $nil in the current period. Compared to the previous quarter, total revenue of the Bank increased due primarily to the growth in net interest income.

For the year ended October 31, 2013, total revenue of the Bank was $28.0 million compared to $32.9 million a year ago. Despite an increase in net interest income which grew to $25.7 million in the current year from $19.6 million last year, total revenue decreased due primarily to gains from the sale of loans and securities of $1.0 million in the current year compared to $12.0 million last year.

Net Interest Income and Net Interest Margin or Spread

Net interest income of the Bank for the three months ended October 31, 2013 increased to $6.9 million from $6.7 million for the previous quarter and from $5.5 million for the same period a year ago. The growth in net interest income was due primarily to loans that matured during the period being replaced with loans with larger spreads and a decrease in interest expense as a result of the repayment in March 2013 of subordinated notes payable to the parent company. Net interest margin or spread for the three months ended October 31, 2013 increased to 1.95% from 1.91% for the previous quarter and from 1.42% last year due to the factors noted above.

For the year ending October 31, 2013, net interest income of the Bank increased to $25.7 million from $19.6 million a year ago and net interest margin or spread increased to 1.75% from 1.30% a year ago due to the factors noted previously.

Other Income

Other income for the three months ended October 31, 2013 was $325,000 compared to $315,000 for the previous quarter and $2.4 million for the same period a year ago. Other income for the current quarter includes non-interest revenue of $313,000 from credit cards compared to $306,000 for the previous quarter and $218,000 for the same period a year ago. Other income for the same period last year also included gains of $1.9 million from the sale of loans. There were no loans sold in the current quarter.

For the year ending October 31, 2013, other income totalled $2.3 million compared to $13.3 million last year with the difference due primarily to gains totalling $12.0 million on the sale of securities and loans compared to $1.0 million on the sale of loans in the current year. Non-interest revenue from credit cards for the current year totalled $1.1 million compared to $593,000 last year. Non-interest revenue from credit cards increased in the current year due to increases in credit card receivable balances and changes made to the credit card program’s fee structure in the fourth quarter of this year, the full impact of which will be realized in the coming year.

Non-Interest Expenses

Non-interest expenses of the Corporation, excluding restructuring charges, totalled $5.9 million for the current quarter compared to $5.2 million for the previous quarter and $6.4 million for the same period a year ago. The increase in non-interest expenses from the previous quarter was due primarily to timing of expenses. The decrease in non-interest expenses from the same period a year ago was due to a decrease in expenses related to the credit card program and a reduction in staff complement.

For the year ending October 31, 2013 non-interest expenses of the Corporation, excluding restructuring charges, totalled $22.5 million compared to $24.1 million last year with the decrease due to a reduction in staff complement and a reduction in costs to operate the credit card program.

Restructuring charges

For the three months ending October 31. 2013, the Corporation reported restructuring charges totalling $1.3 million. These charges relate to expenses incurred from the IPO of the Bank which was completed in August. For the year ending October 31, 2013, restructuring charges totalled $1.7 million and relate to expenses incurred from the IPO of the Bank as well as debt retirement and other restructuring costs incurred during the year.

Income Taxes

The Corporation’s statutory federal and provincial income tax rate and that of the Bank is approximately 27%, similar to that of the previous period. The effective rate is impacted by the tax benefit on operating losses in the parent company 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
        2013       2012       2013       2012
Income tax (recovery) on earnings of the Bank

$

 

(49)

$   - $   741 $   -
Income tax on dividends paid by the Corporation 386 205 1,546 1,546
Tax on gain on sale of securities - - - 2,697
Substantively enacted rate changes - - - (363)
Deferred tax asset adjustment - 1,881 - 1,881
Other       (160)       79       (160)       79
    $   177   $   2,165   $   2,127   $   5,840



For the current quarter, the provision for income taxes was $177,000 compared to $2.2 million for the same period a year ago with the decrease due to an income tax provision of $1.9 million a year ago relating to the deferred income tax asset in the Bank. The income tax provision in the current quarter also includes a provision in the parent company of $386,000 compared to $205,000 for the same period last year relating to an income tax on dividends paid by the Corporation on its Class B Preferred Shares.

For the year ended October 31, 2013, the provision for income taxes was $2.1 million compared to $5.8 million last year. This decrease was due primarily to the income tax provision of $1.9 million relating to the deferred income tax asset of the Bank and a provision of $2.7 million relating to the sale of securities a year ago compared to $nil in the current year. The income tax provision for the year also includes a provision in the parent company of $1.5 million similar to the amount last year relating to income tax on dividends paid by the Corporation on its Class B Preferred Shares.

At October 31, 2013, the Bank has a deferred income tax asset of $8.7 million compared to $9.1 million a year ago with the decrease due to the tax effect of operating results in the Bank over the past year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $42 million from previous periods. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized. In addition, the Corporation has income tax loss carry-forwards which total approximately $45 million, the benefit of which has not been recorded. Loss carry-forwards totalling approximately $1.0 million will expire in 2014 if unutilized; the remaining $44.0 million of loss carry-forwards are not scheduled to begin expiring until 2026 if unutilized.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of the net income (loss) for the period and other comprehensive income (loss) which consists primarily of unrealized gains and losses on available-for-sale securities. Comprehensive income (loss) for the three months ended October 31, 2013 was ($3.0 million) compared to ($2.2 million) for the previous quarter and ($2.7 million) a year ago. The change from a year ago is due to the net loss in the current period being greater than that last year by $300,000.

For the year ending October 31, 2013, comprehensive income (loss) was ($8.9 million) compared to ($12.4 million) last year with the change due to the difference in net loss for the current year compared to a year ago and amounts of unrealized gains on available-for-sale securities recorded in comprehensive income (loss) in previous years being reversed through other comprehensive loss when realized last year.

Segment Analysis

Commercial Lending

The commercial lending segment consists of the operations of the Bank related to issuing mortgages, loans and leases. The commercial lending segment is supported by deposit taking, treasury and administrative activities of the Bank. For the three months ended October 31, 2013, commercial lending segment income totalled $1.0 million compared to $1.4 million for the previous quarter and $1.6 million a year ago with the difference from a year ago due primarily to gains from the sale of securities last year which totalled $1.9 million compared to $nil in the current quarter.

For the year ending October 31, 2013, commercial lending segment income totalled $5.8 million compared to $10.9 million last year with the difference due primarily to gains from the sale of securities which totalled $12.0 million last year compared to $1.0 million this year.

Net interest income from commercial lending for the three months ended October 31, 2013, totalled $6.4 million compared to $6.4 million for the previous quarter and $5.3 million last year with the increase due primarily to higher yields on new loans and a decrease in interest expense. For the year ending October 31, 2013, net interest income from commercial lending totalled $24.3 million compared to $19.3 million last year.

Credit quality relating to the commercial lending segment remains strong with provisions (recoveries) for credit losses for the three months ended October 31, 2013 totalling ($155,000) compared to a recovery of ($215,000) for the previous quarter and a recovery of ($94,000) last year. For the year ending October 31, 2013, the provision for credit losses was a recovery of ($520,000) compared to a provision of $82,000 last year. Provisions (recoveries) for credit losses were lower in the current periods as a result of decreases in lending assets, a change in lending asset mix and maturation of the existing loan portfolio over the past year.

For the three months ended October 31, 2013, non-interest expenses for the commercial lending segment totalled $5.5 million compared to $4.9 million for the previous quarter and $6.0 million a year ago. For the year ending October 31, 2013, non-interest expenses totalled $20.2 million compared to $21.1 million last year.

Credit Card Operations

This segment consists of income and expenses related to the Bank’s private label credit card program which was launched on January 2, 2012. As at October 31, 2013, credit card receivables totalled $28.9 million compared to $26.2 million at the end of the previous quarter and $23.4 million a year ago. For the three months ended October 31, 2013, credit card operations’ segment income (loss) totalled $2,000 compared to ($187,000) for the previous quarter and ($568,000) last year. For the year ended October 31, 2013, credit card operations’ segment income (loss) was ($1.3 million) compared to ($2.8 million) last year. The results of the credit card program have improved from previous periods as a result of a reduction in related non-interest expenses and changes to the credit card program which took effect in the fourth quarter of 2013.

Net interest income from credit card operations for the three months ending October 31, 2013, totalled $491,000 compared to $370,000 for the previous quarter and $196,000 a year ago. For the year ending October 31, 2013, net interest income from credit card operations totalled $1.3 million compared to $259,000 last year.

For the three months ended October 31, 2013, non-interest revenue from credit card operations in the form of credit card fees totalled $313,000 compared to $306,000 for the previous quarter and $218,000 a year ago. For the year ending October 31, 2013, non-interest revenue from credit card operations totalled $1.1 million compared to $593,000 last year.

For the three months ending October 31, 2013, the Bank recorded a provision for credit losses of $280,000 relating to credit card receivables compared to $369,000 for the previous quarter and $122,000 a year ago. For the year ended October 31, 2013, the provision for credit card losses totalled $1.0 million compared to $379,000 last year. These provisions consist of adjustments to the collective allowance and write-offs of credit card balances.

Non-interest expenses relating to credit card operations totalled $522,000 for the current quarter compared to $494,000 for the previous quarter and $860,000 last year. For the year ending October 31, 2013, non-interest expenses totalled $2.7 million compared to $3.3 million last year. Non-interest expenses relating to credit cards decreased from last year as a result of a decrease in staff complement and an effort to reduce non-variable costs including changes to the credit card program.

Corporate Head Office Operations

This segment consists of income and expenses related to the operations of the parent company and typically consists of general and administrative activities as well as interest expense on notes payable and preferred share liabilities.

Consolidated Balance Sheet

Total assets of the Corporation at October 31, 2013, were $1.40 billion compared to $1.40 billion at the end of the previous quarter and $1.54 billion a year ago with the change due to decreases in cash and securities and a decrease in lending assets. Cash and securities decreased from a year ago due primarily to a lower level of deposits maturing in the coming months compared to a year ago, requiring less cash to fund the maturities. Lending assets decreased from a year ago primarily as a result of several large loan repayments which occurred in the current quarter and loans sold over the past year.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Corporation’s treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers’ acceptances and corporate debt. Cash and securities, which are held primarily for liquidity purposes, totalled $217.2 million or 15.5% of total assets compared to $185.3 million or 13.2% of total assets at the end of the previous quarter and $300.0 million or 19.5% of total assets a year ago. The decrease in cash and securities from a year ago was a result of the Corporation no longer having to hold the same levels of cash as deposit maturities in the coming months are less than those that were maturing last year. The increase in cash and securities from the previous quarter was due primarily to proceeds received in the current quarter from several large loan repayments.

At October 31, 2013, unrealized gains in the Corporation’s available-for-sale securities portfolio were $33,000 compared to unrealized gains of $99,000 a year ago. In addition, there was an unrealized loss of $435,000 at October 31, 2013 relating to a security the Corporation classifies as held-to-maturity compared to an unrealized loss of $559,000 at the end of the previous quarter and $1.2 million a year ago. This unrealized loss is due to changes in interest rates rather than due to changes in credit risk and management is of the opinion that no impairment charge is required at this time.

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

Loans

Loans totalled $1.16 billion at October 31, 2013, compared to $1.19 billion at the end of the previous quarter and $1.21 billion a year ago with the decrease from the previous quarter and a year ago due primarily to several large loan repayments which took place in the current quarter and the sale of loans which occurred over the past year.

At October 31, 2013, the balances of individual loan categories remained comparable with those from a year ago with the exception of decreases in government financings and uninsured residential mortgages. The decrease in government financings from a year ago was due to market conditions and the Corporation shifting its focus to corporate lending opportunities, sourced primarily through its bulk financing initiative as described below. The decrease in uninsured residential mortgages was due primarily to several large repayments in the current quarter.

Corporate loans and leases which were sourced through the bulk financing initiative showed significant growth, totalling $187.8 million at October 31, 2013 compared to $171.6 million at the end of the previous quarter and $108.7 million a year ago. The bulk financing program continues to be a key initiative for the Corporation and is expected to be the primary driver for growth of the Corporation’s lending portfolio.

Overall, new lending for the quarter totalled $153.0 million compared to $151.8 million for the previous quarter and $142.0 million a year ago. Loan repayments for the quarter totalled $187.5 million compared to $153.6 million for the previous quarter and $192.0 million, including loan sales, a year ago. For the year, new lending totalled $559.0 million compared to loan repayments of $609.0 million. Loan repayments for the year include loan sales totalling $37 million.

Residential mortgage exposure

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

Under OSFI’s definition, the Corporation’s exposure to residential mortgages is not significant and at October 31, 2013 totalled $1.2 million compared to $922,000 a year ago. The Corporation did not have any HELOC’s outstanding at the end of 2013 and 2012.

Credit Quality

The Corporation has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Gross impaired loans at October 31, 2013, totalled $7,000 compared to $1.8 million at the end of the previous quarter and $1.6 million a year ago. Provisions for credit losses in the current quarter totalled $125,000 compared to $154,000 in the previous quarter and $28,000 a year ago. For the year ended October 31, 2013, provisions for credit losses totalled $524,000 compared to $461,000 for the same period a year ago. The increase in the provision for credit losses from a year ago was due to additional provisions and write-offs related to credit card receivables.

At October 31, 2013, the Corporation’s collective allowance totalled $3.3 million, virtually unchanged from a year ago. Included in the Corporation’s collective allowance at October 31, 2013 was $809,000 relating to credit card receivables compared to $352,000 a year ago. The Corporation’s net impaired loans at October 31, 2013 totalled $7,000 compared to $23,000 a year ago. Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Corporation is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.

Other Assets

Other assets totalled $24.2 million at October 31, 2013 compared to $25.5 million at the end of the previous quarter and $25.0 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.7 million compared to $9.1 million last year and capital assets and prepaid expenses of $12.7 million at October 31, 2013 compared to $13.7 million a year ago.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at October 31, 2013 totalled $1.19 billion compared to $1.20 billion at the end of the previous quarter and $1.32 billion a year ago, and consist primarily of guaranteed investment certificates. The decrease in total deposits from a year ago is due to the decrease in total assets, specifically the level of cash and securities and loans. Of the total amount of deposits, $57.8 million or approximately 4.9% of total deposits at the end of the year were in the form of demand deposits compared to $26.4 million or approximately 2.0% of total deposits a year ago, with the remaining deposits having fixed terms. The increase in demand deposits from a year ago is due to growth in the deposits relating to the trustees in the bankruptcy industry as discussed below.

In order to diversify its sources of deposits and reduce its cost of new deposits, the Corporation has identified another source, that being deposits of trustees in the bankruptcy industry. The Corporation has developed new banking software to serve this deposit market and launched this product in April 2012. These services are now being offered to trustees in the bankruptcy industry across Canada and at October 31, 2013, deposits from this source totalled $35.4 million compared to $14.7 million at the end of the previous quarter.

An additional source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. From time to time, the Corporation uses these sources of short-term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At October 31, 2013, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.

Other liabilities consist primarily of accounts payable and accruals and the fair value of derivatives. At October 31, 2013, other liabilities totalled $23.9 million compared to $18.7 million at the end of the previous quarter and $32.7 million a year ago with the change from last year due to a decrease in the fair value of derivatives as interest rate swap contracts were unwound during the first quarter of 2013. See Interest Rate Risk Management in this Management’s Discussion and Analysis for more information.

Securitization Liabilities

The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At October 31, 2013, the amount of securitization liabilities totalled $43.4 million compared to $43.4 million a year ago. The Corporation did not enter into any securitization transactions in the current fiscal year. The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $41.0 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $78.1 million at October 31, 2013 compared to $82.2 million a year ago with the decrease due primarily to the repayment of short term notes.

Notes payable are comprised of Series C Notes with a par value of $61.7 million maturing in 2018 and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum. The Series C Notes were modified on August 27, 2013 in conjunction with the completion of the Bank’s IPO and its common shares being listed on the Toronto Stock Exchange. This modification allows the Corporation at its option, commencing June 30, 2014, to satisfy all future interest obligations of the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation. With this modification of the Series C Notes, $386,000, representing the equity element of the Series C Notes, net of applicable income taxes, has been recorded in shareholders’ equity on the Consolidated Balance Sheets.

Notes payable also include subordinated notes totalling $21.5 million issued by the Bank to an external party. These subordinated notes, of which $11.5 million are callable, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.

Preferred Share Liabilities

At October 31, 2013, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million before deducting issue and conversion costs. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.5 million, net of issue and conversion costs has been classified on the Corporation’s Consolidated Balance Sheet as Preferred Share Liabilities. In addition, an amount of $3.2 million, net of income taxes and issue costs, has been included in Shareholders’ Equity on the Corporation’s Consolidated Balance Sheet. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $42.5 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The increase is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 11.8%.

Shareholders’ Equity

At October 31, 2013, shareholders’ equity was $13.3 million compared to $15.7 million at the end of previous quarter and $17.9 million a year ago with the decrease due primarily to operating losses. Common shares outstanding at October 31, 2013 totalled 31,744,646 compared to 28,522,491 a year ago with the change due to 1,920,501 common shares issued since last year as part of the dividends on the Class B Preferred Shares and 1,301,654 common shares issued under private placements. In November 2012, 6,202,370 warrants to acquire common shares and common share warrants expired.

Common share options totalled 517,183 at the end of the year compared to 1,163,033 a year ago with the change due to the issue of 60,000 common share options and 705,850 common share options which expired during the past year. In addition, at October 31, 2013, there were 40,000 common share options outstanding in the Bank which were issued in October 2013.

At October 31, 2013, there were 314,572 Class A Preferred Shares outstanding, unchanged from a year ago and 1,909,458 Class B Preferred Shares outstanding, also unchanged from a year ago.

The Corporation’s book value per common share at October 31, 2013 was $0.28 compared to $0.36 at the end of the previous quarter and $0.48 a year ago. Assuming the outstanding Class B Preferred Shares are converted into common shares on the basis of $5.00 per share, the Corporation’s book value per common share at October 31, 2013 would be $1.32 per share.

Reduction of Stated Capital

On May 30, 2012, at a special meeting of the shareholders of the Corporation, approval was given authorizing the reduction of the stated capital of the common shares of the Corporation by $50,472,000 and correspondingly reducing retained earnings (deficit) by the same amount. There was no impact on total shareholders’ equity.

Updated Share Information

As at December 4, 2013, there were no changes since October 31, 2013 in the number of outstanding common shares, common share options and Class A or Class B Preferred Shares.

Off-Balance Sheet Arrangements

As at October 31, 2013, 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 12 to the unaudited interim consolidated financial statements.

Related Party Transactions

The Corporation’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 13 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, 2012, and are found on pages 47 to 52 of the Corporation’s 2012 Annual Report.

Capital Management and Capital Resources

The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). Significant changes under Basel III that are most relevant to the Bank include:

  • Increased focus on tangible common equity.
  • All forms of non-common equity such as the Bank’s conventional subordinated notes must be non-viability contingent capital (NVCC) compliant. NVCC compliant means the subordinated notes must include a clause that would require conversion to common equity in the event that OSFI deems the institution to be insolvent or a government is ready to inject a “bail out” payment.
  • Changes in the risk-weighting of certain assets.
  • Additional capital buffers.
  • New requirements for levels of liquidity and new liquidity measurements.

OSFI requires that all Canadian banks must comply with the Basel III standards on an “all-in” basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.5% capital conservation buffer. The Basel III rules provide for “transitional” adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.

Under the Basel III standards, total capital of the Bank totalled $143.0 million at October 31, 2013 compared to $134.4 million at the end of the previous quarter. The Bank exceeded the current capital requirements with a CET1 ratio of 11.29% compared to 10.52% at the end of the previous quarter. In addition, the Bank’s total capital ratio was 12.99% at October 31, 2013 compared to 12.14% at the end of the previous quarter which exceeded the capital requirements that are in effect on January 1, 2014. The Bank’s assets-to-capital ratio at October 31, 2013 was 9.33 compared to 9.75 at the end of the previous quarter.

See note 14 to the interim consolidated financial statements for more information regarding capital management.

The operations of the Corporation are not dependent upon significant amounts of capital assets to generate revenue. Currently, the Corporation does not have any commitments for capital expenditures or for significant additions to its level of capital assets.

Interest Rate Risk Management

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholder’s equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s shareholder’s equity over a 60 month period if no remedial actions are taken.

    October 31, 2013   October 31, 2012
   

Increase 100
bps

 

Decrease 100
bps

   

Increase 100
bps

 

Decrease 100
bps

       
Sensitivity of projected net interest
income during a 12 month period $   4,414 $   (4,368) $   5,397 $   (5,346)
Sensitivity of reported equity
during a 60 month period $ 1,156 $ (984) $ 8,341 $ (8,881)
                   
Duration difference between assets and
liabilities (months)       1.3             3.1    



The change in exposure to a decrease of 100 basis points in interest rates in a 60 month period and the change in the duration difference between assets and liabilities from a year ago was due primarily to the decrease in securities and increase in cash and cash equivalents as well as longer term loans being replaced by shorter loans, both of which resulted in a decrease in the duration of assets at the end of the year. An additional factor was the decision to unwind interest rate swaps during the first quarter of fiscal 2013.

The decision to unwind the swap contracts was made as the Bank decided to use on-balance sheet strategies to manage its interest rate risk rather than interest rate swaps. These strategies include the raising of longer term deposits and reducing the duration of its assets primarily by maintaining higher levels of shorter duration and highly liquid treasury assets. Another factor in unwinding its interest rate swap contracts was the decision to eliminate the basis risk that resulted from the decrease in the correlation between the yield on banker’s acceptances and the GIC’s the Bank issues that occurred during the global liquidity crisis.

Liquidity

PWC Capital, on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations for the next 12 months. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on Class B Preferred Shares. The Corporation on a non-consolidated basis may not be able to depend on funding to come from its subsidiary the Bank as regulatory requirements may restrict certain payments. As a result, the funding for the obligations beyond the next 12 months is expected to come primarily from cash and proceeds from the sales of securities as well as investments the Corporation is currently evaluating.

The unaudited Consolidated Statement of Cash Flows for the Corporation for the year ended October 31, 2013 shows cash used from operations in excess of cash provided by operations of $91.5 million compared to cash used from operations of $17.5 million last year. The Corporation’s operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the Corporation may manage the amount of deposits it receives and loans it funds in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Corporation will continue to fund its operations and meet contractual obligations as they become due from cash on hand and from managing the amount of deposits it receives as compared to the amount of loans it funds. See Note 12 to the unaudited interim consolidated financial statements.

Contractual Obligations

Contractual obligations of the Corporation as disclosed in its MD&A and audited consolidated financial statements for the year ended October 31, 2012, have not changed significantly during the year ended October 31, 2013.

Summary of Quarterly Results

                 
(thousands of dollars except per share amounts)  

2013

  2012
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
 
Results of operations:
Total interest income $   15,212 $   15,246 $   14,779 $   15,705 $   15,264 $   15,356 $   14,928 $   15,021
Interest expense 11,063 11,356 11,145 11,735 12,069 12,244 12,581 12,022
Net interest income 4,149 3,890 3,634 3,970 3,555 3,112 2,347 2,999
Other income 325 315 400 1,280 2,370 3,573 3,939 3,405
Total revenue 4,474 4,205 4,034 5,250 5,925 6,685 6,286 6,404
Provision for (recovery of) credit losses 125 154 266 (21) 28 249 - 184
Non-interest expenses 5,932 5,222 5,828 5,547 6,426 6,162 5,724 5,759
Restructuring charges (1,275) (287) (118) - - - - -
Income (loss) before income taxes (2,858) (1,458) (2,178) (276) (529) 274 562 461
Income tax provision (recovery) 177 735 393 822 2,165 888 1,473 1,314
Net income (loss) $ (3,035) $ (2,193) $ (2,571) $ (1,098) $ (2,694) $ (614) $ (911) $ (853)
 
Net income (loss) attributable to NCI 29 - - - - - - -
Net income (loss) attributable to:
Preferred shareholders - - - 66 - - - 66
Common shareholders (3,064) (2,193) (2,571) (1,164) (2,694) (614) (911) (919)
Earnings (loss) per share
-basic $ (0.10) $ (0.07) $ (0.09) $ (0.04) $ (0.10) $ (0.02) $ (0.03) $ (0.03)
-diluted $ (0.10) $ (0.07) $ (0.09) $ (0.04) $ (0.10) $ (0.02) $ (0.03) $ (0.03)



The financial results of the Corporation for each of the last eight quarters are summarized above. The Corporation’s results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect the overall increase in lending assets, adjusted for loan sales in the first quarter of 2013, with some seasonality occurring due to increases in residential construction lending. Additional factors in the increase in net interest income were higher yields on loans booked and a decrease in the cost of deposits over the past year.

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

Non-interest expenses reflect a strategy to reduce overhead expenses, a reduction in staff complement and the timing of expenses. Restructuring charges in the fourth quarter of 2013 relate to expenses incurred from the IPO of the Bank as discussed previously, as well as other restructuring costs incurred by the Bank during the year.

The provision for income taxes in each of the quarters of 2013 reflects the effective statutory income tax rate of the Bank applied to earnings (losses) and includes income taxes on dividends paid by the Corporation on its Class B Preferred Shares. The provision for income taxes in the fourth quarter of 2012 included an income tax adjustment of $1.9 million relating to a change in the estimate of previously recognized deferred income tax assets.

Significant Accounting Policies and Use of Estimates and Judgments

Significant accounting policies are detailed in Note 3 of the Corporation’s 2012 Audited Consolidated Financial Statements. There has been no change in accounting policies nor any significant new policies adopted during the current period.

In preparing the consolidated financial statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting periods. Areas where significant judgment was applied or estimates were developed include assessments of fair value and impairments of financial instruments, the calculation of the allowance for credit losses, and the measurement of deferred income taxes.

It is reasonably possible, on the basis of existing knowledge, that actual results may vary from that expected in the generation of these estimates. This could result in material adjustments to the carrying amounts of assets and/or liabilities affected in the future.

Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are applied prospectively once they are recognized.

The policies discussed below are considered particularly significant as they require management to make estimates or judgements, some of which may relate to matters that are inherently uncertain.

Financial Instruments

All financial assets are classified as one of the following: held-to-maturity, loans and receivables, financial assets recorded at fair value through profit or loss or available-for-sale. All financial liabilities are classified as fair value through profit or loss or other liabilities. Financial assets and liabilities recorded at fair value through profit or loss are measured at fair value with gains and losses recognized in net income. Financial assets held-to-maturity, loans and receivables and financial liabilities other than those held for trading, are measured at amortized cost based on the effective interest method. Available-for-sale instruments are measured at fair value with gains and losses, net of tax, recognized in other comprehensive income.

Estimates of fair value are developed using a variety of valuation methods and assumptions. The Corporation follows a fair value hierarchy to categorize the inputs used to measure fair value for its financial instruments. The fair value hierarchy is based on quoted prices in active markets (Level 1), valuation techniques using inputs other than quoted prices but with observable market data (Level 2), or valuation techniques using inputs that are not based on observable market data (Level 3). Valuation techniques may require the use of inputs, transaction values derived from models and input assumptions sourced from pricing services. Valuation inputs are either observable or unobservable. The Corporation looks to external readily observable market inputs when available and may include certain prices and rates for shorter-dated Canadian yield curves and bankers acceptances. Unobservable inputs may include credit spreads, probability of default and recovery rates.

Fair value measurements that fall into Level 2 of the fair value hierarchy comprise derivatives and Canadian municipal and corporate bonds that are classified as available-for-sale. Fair value of derivatives is estimated using a discounted cash flow valuation technique based on observable market data including interest rates, the Corporation’s and the counterparty's credit spreads, corresponding market interest rate volatility levels and other market-based pricing factors. For Canadian municipal and corporate bonds, fair value measurement is primarily based on quotes received from brokers that represent transaction prices in markets for identical instruments.

Securities

The Corporation holds securities primarily for liquidity purposes with the intention of holding the securities to maturity or until market conditions render alternative investments more attractive. Settlement date accounting is used for all securities transactions.

At the end of each reporting period, the Corporation assesses whether or not there is any objective evidence to suggest that a security may be impaired. Objective evidence of impairment results from one or more events that occur after the initial recognition of the security which has an impact that can be reliably estimated on the estimated future cash flows of the security such as financial difficulty of the issuer. An impairment loss is recognized for an equity instrument if the decline in fair value is significant or prolonged, as such circumstances provide objective evidence of impairment.

Impairment losses on a held-to-maturity security are recognized in income and loss in the period they are identified. When there is objective evidence of impairment of an available-for-sale security, the cumulative loss that has been recorded in accumulated other comprehensive income is reclassified to income or loss. For available-for-sale debt securities, if in a subsequent period the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was first recognized, then the previously recognized impairment loss is adjusted through income or loss to reflect the net recoverable amount of the impaired security. No adjustments of impairment losses are recognized for available-for-sale equity securities.

Loans

Loans are initially measured at fair value plus incremental direct transaction costs. Loans are subsequently measured at amortized cost, net of allowance for credit losses, using the effective interest method. On a monthly basis, the Corporation assesses whether or not there is any objective evidence to suggest that the carrying value of the loans may be impaired. Impairment assessments are facilitated through the identification of loss events and assessments of their impact on the estimated future cash flows of the loans.

A loan is classified as impaired when, in management's opinion, there has been deterioration in credit quality to the extent that there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. Loans, except credit cards, where interest or principal is contractually past due 90 days are automatically recognized as impaired, unless management determines that the loan is fully secured, in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to current status. All loans, except credit cards, are classified as impaired when interest or principal is past due 180 days, except for loans guaranteed or insured by the Canadian government, provinces, territories, or a Canadian government agency, which are classified as impaired when interest or principal is contractually 365 days in arrears. Credit card receivables are written off when payments are 180 days past due, or upon receipt of a bankruptcy notification.

As loans are classified as loans and receivables and measured at amortized cost, an impairment loss is measured as the difference between the carrying amount and the present value of future cash flows discounted using the effective interest rate computed at initial recognition, if future cash flows can be reasonably estimated. When the amounts and timing of cash flows cannot be reasonably estimated, the carrying amount of the loan is reduced to its estimated net realizable value based on either:

(i) the fair value of any security underlying the loan, net of expected costs of realization, or,

(ii) observable market prices for the loan.

Impairment losses are recognized in income or loss. If, in a subsequent period, the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was first recognized, then a recovery of a portion or all of the previously recognized impairment loss is adjusted through income or loss to reflect the net recoverable amount of the impaired loan.

Real estate held for resale is recorded at the lower of cost and fair value, less costs to sell.

Allowance for Credit Losses

The Corporation maintains an allowance for credit losses which, in management's opinion, is adequate to absorb all credit related losses in its loan portfolio. The allowance for credit losses consists of both individual and collective allowances and is reviewed on a monthly basis. The allowance is presented as a component of loans on the Corporation’s consolidated balance sheets.

The Corporation considers evidence of impairment for loans at both an individual asset and collective level. All individually significant loans are assessed for impairment first. All individually significant loans found not to be specifically impaired and all loans which are not individually significant are then collectively assessed for impairment by aggregating them into groups with similar credit risk characteristics.

The collective impairment allowance is determined by reviewing factors including historical loss experience in portfolios of similar credit risk characteristics, current portfolio credit quality trends, probability of default and recovery rates, and business and economic conditions. Historical loss experience is adjusted based on current observable data to reflect effects of current conditions that did not affect the period in which the historical loss experience is based. The collective impairment allowance may also be adjusted by management using its judgment taking into account other observable and unobservable factors.

Corporate Income Taxes

Current income taxes are calculated based on taxable income at the reporting period end. Taxable income differs from accounting income because of differences in the inclusion and deductibility of certain components of income which are established by Canadian taxation authorities. Current income taxes are measured at the amount expected to be recovered or paid using statutory tax rates at the reporting period end.

The 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

The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income during the carry-forward period sufficient to offset the income tax losses and deductible temporary timing differences. While management is of the opinion that it is probable that the Bank will be able to realize the deferred income tax asset, there is no guarantee the Bank will be able to generate sufficient taxable income during the carry-forward period.

Future Change in Accounting Policies

IFRS 9: Financial instruments (IFRS 9)

In November 2009, the IASB issued IFRS 9 as the first phase of an ongoing project to replace IAS 39. This first issuance of IFRS 9 introduced new requirements for classifying and measuring financial assets. IFRS 9 was then re-issued in October 2010, incorporating new requirements for the accounting of financial liabilities, and carrying over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. The mandatory effective date for the adoption of IFRS 9 was set for annual periods beginning on or after January 1, 2015, with earlier application permitted. In July 2013, the IASB deferred the mandatory effective date for the adoption of IFRS 9 to a date yet to be determined and to allow entities to early adopt only the own credit requirement in IFRS 9. The IASB continues to deliberate on the content of IFRS 9 and intends to expand the existing standard by adding new requirements for the impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various projects, IFRS 9 will represent a complete replacement of IAS 39.

The most significant changes expected under IFRS 9 relate to decreases in the classification categories available for financial instruments, a requirement that debt instruments meet a business model and cash flow characteristic test before being eligible for measurement at amortized cost, and a requirement that changes in the fair value of equity instruments be reported in profit or loss (unless an irrevocable election is made at initial recognition to recognize such changes in other comprehensive income). Management has performed preliminary evaluations of the impact of IFRS 9, however the impact on the Corporation’s Consolidated Financial Statements is not determinable at this time as it is dependent upon the nature of financial instruments held by the Corporation when IFRS 9 becomes effective. The Corporation is choosing not to early adopt IFRS 9.

Controls and Procedures

During the most recent interim period, there have been no changes in the Corporation’s policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Forward-Looking Statements

The statements in this management’s discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see page 52 of our 2012 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
Consolidated Balance Sheets
(Unaudited)

(thousands of Canadian dollars)                
          October 31   October 31
As at                       2013       2012
 
Assets
 
Cash and cash equivalents $   177,294 $   132,766
Securities (note 4) 39,891 167,227
Loans, net of allowance for credit losses (note 5) 1,158,933 1,210,311
Other assets 24,213 24,953
                         
                    $   1,400,331   $   1,535,257
 
Liabilities and Equity
 
Deposits $ 1,187,404 $ 1,317,298
Notes payable (note 6) 78,123 82,172
Securitization liabilities (note 7) 43,410 43,356
Other liabilities 23,876 32,711
Preferred share liabilities (note 8)             42,448       41,823
1,375,261 1,517,360
 
Equity attributable to shareholders:
Share capital (note 9) 26,671 21,888
Retained earnings (deficit) (13,432) (4,063)
Accumulated other comprehensive income       22       72
13,261 17,897
Non-controlling interests               11,809       -
25,070 17,897
                         
                    $   1,400,331   $   1,535,257

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



PWC Capital
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
          2013     2012     2013     2012
 
Interest income:
Loans $ 13,621 $ 13,935 $ 53,746 $ 53,413
Securities 575 647 2,728 3,700
Loan fees       1,016     1,042     4,468     3,816
15,212 15,624 60,942 60,929
 
Interest expense:
Deposits and other 7,759 8,727 31,926 35,763
Notes payable 2,066 2,119 8,448 8,288
Preferred share liabilities     1,238     1,223     4,925     4,865
11,063 12,069 45,299 48,916
                     
Net interest income 4,149 3,555 15,643 12,013
 
Other income (note 10)       325     2,370     2,320     13,287
Total revenue 4,474 5,925 17,963 25,300
 
Provision for credit losses (note 5)       125     28     524     461
4,349 5,897 17,439 24,839
 
Non-interest expenses:
Salaries and benefits 3,078 2,718 11,032 10,830
General and administrative 2,466 3,119 9,893 11,252
Premises and equipment     388     589     1,604     1,989
5,932 6,426 22,529 24,071
Restructuring charges       1,275     -     1,680     -
7,207 6,426 24,209 24,071
                     
Income (loss) before income taxes (2,858) (529) (6,770) 768
 
Income taxes (note 11) 177 2,165 2,127 5,840
                     
Net loss     $ (3,035)   $ (2,694)   $ (8,897)   $ (5,072)
 
Net income attributable to non-controlling interests 29 - 29 -
Net loss attributable to shareholders of the Corporation:
Preferred shareholders - - 66 66
  Common shareholders       (3,064)     (2,694)     (8,992)     (5,138)
(3,064) (2,694) (8,926) (5,072)
                     
Net loss     $ (3,035)   $ (2,694)   $ (8,897)   $ (5,072)
 
Basic loss per share $ (0.10) $ (0.10) $ (0.30) $ (0.19)
 
Diluted loss per share $ (0.10) $ (0.10) $ (0.30) $ (0.19)
 
Weighted average number of common shares outstanding 31,583,000 28,223,000 30,166,000 27,245,000

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



PWC Capital
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
          2013     2012       2013     2012
     
Net loss $ (3,035) $ (2,694) $ (8,897) $ (5,072)
 
Other comprehensive income (loss), net of tax
Net unrealized gains (losses) on assets held as available-for-sale (1) (4) 22 (22) (217)
Amount transferred to net income or loss on disposal of available-for-sale assets (2)       -     -       (26)     (7,079)
        (4)     22       (48)     (7,296)
                       
Comprehensive loss     $ (3,039)   $ (2,672)     $ (8,945)   $ (12,368)
 
Total comprehensive income (loss) attributable to:
Shareholders $ (3,066) $ (2,672) $ (8,972) $ (12,368)
  Non-controlling interests       27     -       27     -
        $ (3,039)   $ (2,672)     $ (8,945)   $ (12,368)

(1) Net of income tax benefit (expense) for three months of $1 (2012 – $(8)) and year of $8 (2012-$80)
(2) Net of income tax benefit (expense) for three months of $nil (2012 – $nil) and year of $10 (2012-$2,617)

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

PWC Capital
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
        2013     2012       2013     2012
         
Common shares (note 9(a)):
 
Balance, beginning of the period $ 18,620 $ 14,252 $ 14,913 $ 61,886
Issued on payment of Class B preferred share dividends 674 674 2,696 2,696
Issued during the period, net of issue costs and income taxes - (13) 1,685 803
Reduction of stated capital (note 9(c)) - - - (50,472)
                     
Balance, end of the period     $ 19,294   $ 14,913     $ 19,294   $ 14,913
 
Common share warrants:
 
Balance, beginning of the period $ - $ 2,003 $ 2,003 $ 2,003
Amount transferred to contributed surplus on expiry - - (2,003) -
                     
Balance, end of the period     $ -   $ 2,003     $ -   $ 2,003
 
Preferred shares (note 9(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 and end of the period     $ 3,187   $ 3,187     $ 3,187   $ 3,187
 
Contributed surplus (note 9(b)):
 
Balance, beginning of the period $ 2,755 $ 718 $ 724 $ 688
Fair value of stock options granted 64 6 92 36
Amount transferred from common share warrants - - 2,003 -
Other (76) - (76) -
                     
Balance, end of the period     $ 2,743   $ 724     $ 2,743   $ 724
 
Series C notes (note 6):
 
Balance, beginning of the period $ - $ - $ - $ -
Issued during the period, net of tax 386 - 386 -
                     
Balance, end of the period     $ 386   $ -     $ 386   $ -
                     
Total share capital     $ 26,671   $ 21,888     $ 26,671   $ 21,888
 
Retained earnings (deficit):
 
Balance, beginning of the period $ (9,991) $ (1,369) $ (4,063) $ (49,397)
Net loss attributable to shareholders of the Corporaiton (3,064) (2,694) (8,926) (5,072)
Change in non-controlling interests (377) - (377) -
Dividends paid - - (66) (66)
Reduction of stated capital (note 9(c)) - - - 50,472
                     
Balance, end of the period     $ (13,432)   $ (4,063)     $ (13,432)   $ (4,063)
 
Accumulated other comprehensive income net of taxes:
 
Balance, beginning of the period $ 28 $ 50 $ 72 $ 7,368
Other comprehensive income (loss) (2) 22 (46) (7,296)
Change in non-controlling interests (4) - (4) -
                     
Balance, end of the period     $ 22   $ 72     $ 22   $ 72
                     
Total shareholders' equity     $ 13,261   $ 17,897     $ 13,261   $ 17,897
 
Non-contolling interests:
 
Balance, beginning of the period $ - $ - $ - $ -
Net income attributable to non-controlling interests 29 - 29 -
Impact of shares issued to non-controlling interests 11,782 - 11,782 -
Other comprehensive income (loss) attributable to non-controlling interests (2) - (2) -
                     
Balance, end of the period     $ 11,809   $ -     $ 11,809   $ -
                     
Total equity     $ 25,070   $ 17,897     $ 25,070   $ 17,897

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

PWC Capital
Consolidated Statements of Cash Flows
(Unaudited)

(thousands of Canadian dollars)          
    October 31     October 31
For the year ended     2013       2012
     
Cash provided (used in):
 
Operations:
Net loss $ (8,897) $ (5,072)
Items not involving cash:
Provision for credit losses 524 461
Deferred income taxes 741 4,215
Stock-based compensation 92 36
Gain on disposal of securities - (10,141)
Gain on sale of lending assets (1,009) (1,879)
Interest income (60,942) (60,929)
Interest expense 45,299 48,916
Amortization of property and equipment 494 707
Interest received 59,768 58,449
Interest paid (42,285) (44,068)
Income taxes paid (1,031) (1,546)
Mortgages and loans 51,145 (62,645)
Deposits (129,894) 47,568
Change in other assets and liabilities     (5,485)       8,380
(91,480) (17,548)
Investing:
Purchase of securities (28,035) (131,273)
Proceeds from sale and maturity of securities     155,449       81,951
127,414 (49,322)
Financing:
Proceeds received from sale of subsidiary shares, net of costs (note 9(d)) 7,497 -
Proceeds of shares issued by subsidiary, net of costs (note 9(d)) 3,478 -
Notes payable (4,000) 4,000
Proceeds of shares issued, net of costs 1,685 803
Dividends paid     (66)       (66)
8,594 4,737
           
Increase (Decrease) in cash and cash equivalents 44,528 (62,133)
 
Cash and cash equivalents, beginning of the period 132,766 194,899
           
Cash and cash equivalents, end of the period   $ 177,294     $ 132,766
 
Cash and cash equivalents is represented by:
Cash $ 177,294 $ 81,656
Cash equivalents - 51,110
           
Cash and cash equivalents, end of the period   $ 177,294     $ 132,766

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

PWC Capital
Notes to Interim Consolidated Financial Statements
(Unaudited)

Three month period and year ended October 31, 2013 and 2012

1. Reporting entity:

Pacific & Western Credit Corp., operating as PWC Capital (the “Corporation”), is a holding company whose shares trade on the Toronto Stock Exchange. It is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2.

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

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, 2012.

The interim Consolidated Financial Statements for the three months and year ended October 31, 2013 and 2012 were approved by the Board of Directors on December 4, 2013.

b) Basis of measurement:

These interim Consolidated Financial Statements have been prepared on the historical cost basis except for securities designated as available-for-sale, loans in a hedging relationship, derivative liabilities and stock-based compensation that are measured at fair value in the Consolidated Balance Sheets.

c) Functional and presentation currency:

These interim Consolidated Financial Statements are presented in Canadian dollars which is the Corporation’s functional currency. Except as indicated, the financial information presented has been rounded to the nearest thousand.

d) Use of estimates and judgments:

In preparing these interim Consolidated Financial Statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting periods. Areas where significant judgment was applied or estimates were developed include the calculation of the allowance for credit losses, assessments of fair value and impairments of financial instruments, and the measurement of deferred income taxes.

It is reasonably possible, on the basis of existing knowledge, that actual results may vary from that expected in the generation of these estimates. This could result in material adjustments to the carrying amounts of assets and/or liabilities affected in the future.

Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are applied prospectively once they are recognized.

3. Significant accounting policies:

The accounting policies applied by the 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, 2012 and are detailed in Note 3 of the Corporation’s 2012 Audited Consolidated Financial Statements. There have been no changes in accounting policies nor any significant new policies adopted during the current period.

4. Securities:

Portfolio analysis:

  October 31   October 31
      2013     2012
 
Available-for-sale securities
Securities issued or guaranteed by:
Canadian federal government $ 5,025 $ 76,841
Canadian provincial governments 18,724 48,526
Canadian municipal governments 892 1,581
Corporate debt     50     25,012
Total available-for-sale securities   $ 24,691   $ 151,960
 
Held-to-maturity security
Corporate debt   $ 15,200   $ 15,267
Total securities   $ 39,891   $ 167,227



5. Loans:

a) Portfolio analysis:

  October 31   October 31
      2013     2012
 
Residential mortgages
Insured $ 24,094 $ 35,966
Uninsured 216,936 230,129
Securitized mortgages 41,028 41,894
Government financing 129,782 172,326
Commercial loans 620,882 630,738
Commercial leases 92,234 71,131
Other loans 3,948 5,080
Credit card receivables     28,934     23,397
1,157,838 1,210,661
 
Allowance for credit losses:
Collective (3,275) (3,283)
Individual     -     (1,579)
(3,275) (4,862)
         
1,154,563 1,205,799
 
Accrued interest 4,370 4,512
         
Total loans, net of allowance for credit losses   $ 1,158,933   $ 1,210,311


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

  October 31   October 31
      2013     2012
 
Residential mortgages $ 575 $ 600
Commercial and government loans 1,879 2,307
Other loans 12 24
Credit card receivables     809     352
    $ 3,275   $ 3,283


The Corporation holds collateral against the majority of its loans in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the nature of the underlying collateral. For mortgages secured by real estate, the value of collateral is determined at the time of borrowing by an appraisal. For loans secured by equipment, the value of collateral is assigned by the nature of the underlying equipment held.

b) Allowance for credit losses:

The allowance for credit losses results from the following:

      October 31   October 31
  2013   2012
For the three months ended   Collective   Individual  

Total
Allowance

 

Total
Allowance

 
Balance, beginning of the period $ 3,235 $ 1,662 $ 4,897 $ 4,854
Provision for (recovery of) credit losses 297 (172) 125 28
Recoveries (write-offs) (257) (1,490) (1,747) (20)
                 
Balance, end of the period   $ 3,275   $ -   $   3,275   $   4,862
 
                 
October 31 October 31
2013 2012
For the year ended   Collective   Individual  

Total
Allowance

 

Total
Allowance

 
Balance, beginning of the period $ 3,283 $ 1,579 $ 4,862 $ 4,387
Provision for (recovery of) credit losses 579 (55) 524 461
Recoveries (write-offs) (587) (1,524) (2,111) 14
                 
Balance, end of the period   $ 3,275   $ -   $   3,275   $   4,862


c) Impaired loans:

  October 31, 2013
    Gross impaired  

Individual
allowance

  Net impaired
   
Residential mortgages $   - $   - $   -
Other loans       7       -       7
    $   7   $   -   $   7
 
             
October 31, 2012    
    Gross impaired  

Individual
allowance

  Net impaired
 
Residential mortgages $ 1,579 $ 1,579 $ -
Other loans       23       -       23
    $   1,602   $   1,579   $   23



Interest income recognized on impaired loans for the three months and year ended October 31, 2013 was $46,000 (2012 - $39,000) and $163,000 (2012 - $150,000) respectively. An individual allowance has been recognized on the impaired loans to reflect the estimated recoverable amounts for impaired loans.

At October 31, 2013, loans, other than credit card receivables, past due but not impaired, totalled $nil (2012 - $nil). At October 31, 2013, credit card receivables overdue by one day or more but not impaired totalled $2,342,000 (2012 - $1,112,000).

6. Notes payable:

    October 31   October 31
        2013     2012
 
Ten year term Series C Notes unsecured, maturing 2018, net of issue costs of $nil (October 31, 2012 -$1,183) , effective interest of 10.85% $ 57,591 $ 57,774
 
Ten year term, unsecured, $11.5 million callable, subordinated notes payable by the Bank to an unrelated party, maturing between 2019 and 2021, net of issue costs of $1,168 (October 31, 2012 -$1,302), effective interest of 10.92% 20,332 22,198
 
Notes payable, unsecured, effective interest of 7.00% 200 2,200
           
      $ 78,123   $ 82,172



The Series C Notes were modified on August 27, 2013 in conjunction with the completion of the Bank’s Initial Public Offering (IPO) and its common shares being listed on the Toronto Stock Exchange. This modification allows the Corporation at its option, commencing June 30, 2014, to satisfy all future interest obligations of the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation for $10/share until October 16, 2016 and $12/share thereafter until maturity. With the recognition of the modified note, $386,000, representing the equity element of the Series C Notes, net of applicable income taxes, has been classified in share capital on the Consolidated Balance Sheets.

7. Securitization liabilities:

Securitization liabilities include amounts payable to counterparties for cash received upon initiation of securitization transactions, accrued interest on amounts payable to counterparties, and the unamortized balance of deferred costs and discounts which arose upon initiation of the securitization transactions.

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $40,832,000 (2012 - $41,643,000) are pledged as collateral for these liabilities.

8. Preferred share liabilities:

At October 31, 2013, the Corporation has outstanding 1,909,458 (2012 - 1,909,458) Class B Preferred Shares with a total face value of $47.7 million (October 31, 2012 – $47.7 million) less issue costs of $2.1 million (October 31, 2012 – $2.3 million). As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.4 million (October 31, 2012 – $41.8 million), net of issue costs, has been classified on the Corporation’s Consolidated Balance Sheets as a preferred share liability. In addition, an amount of $3.2 million (October 31, 2012 – $3.2 million) representing the equity element of the Class B Preferred Shares, net of issue costs, has been classified in share capital on the Consolidated Balance Sheets.

As the preferred shares must be redeemed by the Corporation in 2019 for approximately $47.7 million, the preferred share liability amount of $42.5 million (October 31, 2012 – $41.8 million) is being adjusted over the remaining term to redemption, until the amount is equal to the estimated redemption amount. The increase is included in interest expense in the Consolidated Statement of Income (Loss) calculated using the effective interest rate of 11.8%.

9. Share capital:

a) Share capital

                 
    Stock Options
       

Common

shares
outstanding

  Number  

Weighted-
average
exercise
price

 
Outstanding, October 31, 2012 28,522,491 1,163,033 $   4.77
Granted - 60,000 1.27
Issued for cash proceeds 1,301,654 - -
Issued pursuant to Class B Preferred Share dividend 1,920,501 - -
Expired       -   (705,850)       3.03
Outstanding, October 31, 2013     31,744,646   517,183   $   6.73



At October 31, 2013, there were 314,572 (2012 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (2012 - 1,909,458) Class B Preferred Shares outstanding. In November 2012, 6,202,370 warrants to acquire common shares and common share warrants expired.

b) Stock-based compensation

The Corporation recognized compensation expense relating to the estimated fair value of stock options granted for the three months and year ended October 31, 2013 of $64,000 (2012 - $6,000) and $92,000 (2012 - $36,000) respectively. During the three months ended October 31, 2013, 10,000 options were granted by the Corporation to an officer who is a member of the Corporation’s key management personnel. These options are exercisable into common shares at $1.31 per share and expire in 2023. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 2.12%, (ii) expected option life of 120 months and (iii) expected volatility of 37%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.65 per option.

During the year ended October 31, 2013, 60,000 options were granted by the Corporation to an officer who is a member of the Corporation’s key management personnel. These options are exercisable into common shares at a weighted-average price of $1.27 per share and expire in 2023. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following weighted-average assumptions: (i) risk-free interest rate of 1.63%, (ii) expected option life of 70 months and (iii) expected volatility of 61%. The forfeiture rate for these options was estimated at 0%. The weighted-average fair value of options granted was estimated at $0.69 per option.

During the year ended October 31, 2012, 50,000 options were granted to an officer who is a member of the Corporation’s key management personnel. These options are exercisable into common shares at $1.90 per share and expire in January, 2022. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.31%, (ii) expected option life of 60 months and (iii) expected volatility of 57.71%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.95 per option. No options were issued during the three months ended October 31, 2012.

On October 31, 2013, the Bank granted 40,000 options to an officer who is a member of the Bank’s key management personnel. These options are exercisable into common shares at $7.00 per share and expire in 2023. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 2.12%, (ii) expected option life of 120 months and (iii) expected volatility of 38%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $3.59 per option.

The Corporation recorded amounts in the Consolidated Statement of Income (Loss) relating to DSU’s for the three months and year ended October 31, 2013 of $23,000 recovery (2012 - $nil) and $116,000 expense (2012 - $225,000 expense) respectively. During the three months ended October 31, 2013, the Corporation issued nil DSU’s (2012 – nil) to its directors and a total of 144,131 DSU’s (2012 – 128,574) were issued for the year ended October 31, 2013. At October 31, 2013 there were 443,587 (2012 – 299,456) DSU’s of the Corporation outstanding.

During the three months and year ended October 31, 2013, the Bank issued 517 DSU’s (2012 – nil) to one of its directors. At October 31, 2013 there were 517 (2012 – nil) DSU’s outstanding.

c) Reduction of stated capital

On May 30, 2012, at a special meeting of the shareholders of the Corporation, approval was given authorizing the reduction of the stated capital of the common shares of the Corporation by $50,472,000 and correspondingly reducing retained earnings (deficit) by the same amount. There was no impact on total shareholders’ equity.

d) Shares issued by subsidiary:

On August 27, 2013, the Bank completed an Initial Public Offering (IPO) in which a total of 1,500,000 common shares were sold under the offering at a price of $7.25 per common share, for aggregate gross proceeds of $10,875,000. The treasury offering consisted of the issuance of 400,000 common shares of the Bank for gross proceeds of $2,900,000.

A secondary offering consisted of the sale of 1,100,000 common shares of the Bank held by the Corporation for gross proceeds of $7,975,000. Immediately following the closing of the secondary offering, the Bank issued an additional 620,206 common shares to PWC for $4,496,494.

On September 17, 2013 the overallotment option under the IPO was exercised and an additional 225,000 shares were issued by the Bank for gross proceeds of $1,631,250.

As a result of the above transactions, ownership of the Bank by the Corporation reduced from 100% to 91% at October 31, 2013.

Issue costs totaling $1,053,000, net of tax of $284,000, were allocated directly to the Bank’s share capital. Costs totaling $1,275,000 were recorded in restructuring charges.

10. Other income:

                   
      for the three months ended   for the year ended
  October 31   October 31   October 31   October 31
          2013       2012       2013       2012
 
Gain on sale of securities $   - $   - $   - $   10,141

Gain on sale of loans

- 1,879 1,009 1,879
Credit card non-interest revenue 313 218 1,136 593
Other income 12 273 175 674
                   
      $   325   $   2,370   $   2,320   $   13,287


11. Income taxes:

The Corporation’s statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The effective rate is impacted by the tax benefit on operating losses in the parent company 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
              2013       2012       2013       2012
 
Income tax (recovery) on earnings of the Bank $   (49) $   - $   741 $   -
Income tax on dividends paid by the Corporation 386 205 1,546 1,546
Tax on gain on sale of securities - - - 2,697
Substantively enacted rate changes - - - (363)
Deferred tax asset adjustment - 1,881 - 1,881
Other (160) 79 (160) 79
                       
          $   177   $   2,165   $   2,127   $   5,840


12. 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 amount with respect to the letters of credit are not necessarily indicative of credit risk as many of these arrangements are contracted for a limited period of usually less than one year and will expire or terminate without being drawn upon.

  October 31   October 31
        2013       2012
 
Loan commitments $   141,251 $   167,534
Undrawn credit card lines 147,990 107,006
Letters of credit 38,565 27,281
         
    $   327,806   $   301,821

Cash totaling $10,380,000 (2012 - $26,117,000) is pledged as collateral against liabilities and off-balance sheet items.


13. Related party transactions:

The Corporation’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 balances outstanding during the period.

The Corporation issues both mortgages and personal loans to employees and key management personnel. At October 31, 2013 amounts due from Senior Executive Officers totalled $2,322,000 (2012 - $1,023,000) and are unsecured.

The interest rates charged on these loans are similar to those charged in an arms-length transaction. Interest income earned on the above loans for the three months and year ended October 31, 2013 was $15,000 (2012 - $9,000) and $82,000 (2012 - $39,000) respectively. There was no provision for credit losses related to loans issued to key management personnel for the three months and year ended October 31, 2013 and 2012.

14. Capital management:

a) Overview:

The Corporation’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also important and the Corporation recognizes the need to maintain a balance between the higher returns that might be possible with greater leverage and the advantages and security afforded by a sound capital position.

The Corporation’s primary subsidiary is Pacific & Western Bank of Canada, (the “Bank”) and as a result, the following discussion on capital management is with respect to the capital of the Bank. The Bank operates as a bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI). OSFI sets and monitors capital requirements for the Bank.

Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and conditions in financial markets.

The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders. The Bank’s regulatory capital is comprised of share capital, retained earnings (deficit) and unrealized gains and losses on available-for-sale securities (Common Equity Tier 1 capital) and the face value of subordinated notes (Tier 2 capital).

The Bank monitors its capital adequacy and related capital ratios on a daily basis and has policies setting internal maximum and minimum amounts for its capital ratios. These capital ratios consist of the assets-to-capital multiple and the risk-based capital ratios.

During the period ended October 31, 2013 there were no material changes in the Bank’s management of capital.

b) Risk-Based Capital Ratio:

The Basel Committee on Banking Supervision has published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III).

OSFI requires that all Canadian banks must comply with the Basel III standards on an “all-in” basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. 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 2.50% capital conservation buffer. The Basel III rules provide for “transitional” adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.

OSFI also requires banks to measure capital adequacy in accordance with guidelines for determining risk adjusted capital and risk-weighted assets including off-balance sheet credit instruments as specified in the Basel III regulations. Based on the deemed credit risk for each type of asset, assets held by the Bank are assigned a weighting of 0% to 150% to determine the risk-based capital ratio.

The Bank’s risk-based capital ratios are calculated as follows:

               
  October 31, 2013
          "All-in"   "Transitional"
 
Common Equity Tier 1 (CET1) capital
Directly issued qualifying common share capital $   142,278 $   142,278
Retained earnings (deficit) (9,169) (9,169)
Accumulated other comprehensive income     24       24
CET1 before regulatory adjustments 133,133 133,133
Regulatory adjustments applied to CET1       (8,855)       -
Total Common Equity Tier 1 capital     $   124,278   $   133,133
 
Additional Tier 1 capital
Directly issued qualifying Additional Tier 1 instruments       -       -
Total Tier 1 capital       $   124,278   $   133,133
 
Tier 2 capital
Directly issued capital instruments subject to phase out from Tier 2 $ 21,500 $ 21,500
Tier 2 capital before regulatory adjustments 21,500 21,500
Regulatory adjustments applied to Tier 2       (2,749)       -
Total Tier 2 capital       $   18,751   $   21,500
Total capital         $   143,029   $   154,633
Total risk-weighted assets       $   1,101,190   $   1,112,794
Capital ratios
CET1 Ratio 11.29% 11.96%
Tier 1 Capital Ratio 11.29% 11.96%
Total Capital Ratio           12.99%       13.90%



c) Assets-to-Capital Multiple:

The Bank’s growth in total assets is governed by a permitted assets-to-capital multiple which is prescribed by OSFI and is defined as the ratio of the total assets of the Bank to its regulatory capital. The Bank’s assets-to-capital multiple is calculated as follows:

  October 31
          2013
 
Total assets (on and off-balance sheet)   $   1,443,173
Capital
Common shares $   142,278
Retained earnings (deficit) (9,169)
Accumulated other comprehensive income 24
Subordinated notes       21,500
Total regulatory capital   $   154,633
 
Assets-to-capital ratio       9.33

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



15. Interest rate position:

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact spread, net interest income and the economic value of assets, liabilities and shareholder’s equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s earnings during a 12 month period and the potential after-tax impact of a 100 basis point shift in interest rates on the Bank’s shareholder’s equity over a 60 month period if no remedial actions are taken.

      October 31, 2013       October 31, 2012
     

Increase
100 bps

 

Decrease 100
bps

 

Increase
100 bps

 

Decrease 100
bps

         
Sensitivity of projected net interest
income during a 12 month period $   4,414 $ (4,368) $   5,397 $   (5,346)
Sensitivity of reported equity
during a 60 month period $ 1,156 $ (984) $ 8,341 $ (8,881)
                       
Duration difference between assets and
liabilities (months)         1.3               3.1    



16. Segmented information:

The Corporation determines its operating segments based on the different business activities of its component operations. The Corporation has identified three distinct operating segments: commercial lending, credit card lending and corporate head office operations.

The commercial lending segment consists of the operations of the Bank related to issuing loans and leases and participating in securitization arrangements. The commercial lending segment is supported by deposit taking, and treasury and administrative activities. The credit card lending segment consists of the operations of the Bank related to its private label credit card program. The corporate head office operations segment consists of operations of the parent company, which are not directly related to the operations of the Bank.

Performance is measured based on segment income as included in internal management reports. Segment income does not include restructuring charges and income taxes. Segment income is used to measure performance as management believes that such information is most relevant in evaluating the results internally and against other entities. The financial results for all segments, which exclude restructuring charges, are presented on a consolidated basis.

The following tables detail financial results for the Corporation by operating segment:

         
                         
For the three months ended     October 31, 2013

Commercial
lending

Credit card
lending

Corporate
head office

Intersegment
eliminations

Total
                         
 
Net interest income $   6,405 $   491 $   (2,747) $   - $   4,149
Other income           12       313       -       -       325
Total revenue 6,417 804 (2,747) - 4,474
Provision for (recovery of) credit losses       (155)       280       -       -       125
Non-interest expenses           5,538       522       133       (261)       5,932
Segment income (loss)           1,034       2       (2,880)       261       (1,583)

Segment income (loss) excludes restructuring charges of $1,275,000.


For the three months ended     October 31, 2012
  Commercial lending   Credit card lending   Corporate head office   Intersegment eliminations   Total
                           
 
Net interest income $   5,307 $   196 $   (2,730) $   782 $   3,555
Other income           2,152       218       -       -       2,370
Total revenue 7,459 414 (2,730) 782 5,925
Provision for (recovery of) credit losses       (94)       122       -       -       28
Non-interest expenses           5,959       860       (97)       (296)       6,426
Segment income (loss)           1,594       (568)       (2,633)       1,078       (529)
 
                           
For the year ended       October 31, 2013
Commercial lending Credit card lending Corporate head office Intersegment eliminations Total
                           
 
Net interest income $ 24,306 $ 1,349 $ (11,136) $ 1,124 $ 15,643
Other income           1,184       1,136       -       -       2,320
Total revenue 25,490 2,485 (11,136) 1,124 17,963
Provision for (recovery of) credit losses       (520)       1,044       -       -       524
Non-interest expenses           20,185       2,697       424       (777)       22,529
Segment income (loss)           5,825       (1,256)       (11,560)       1,901       (5,090)
                           
Assets $ 1,346,213 $ 28,934 $ 971 $ - $ 1,376,118
Liabilities         $   1,268,954   $   -   $   100,239   $   -   $   1,369,193
 
 
                           

Segment income (loss) excludes restructuring charges of $1,680,000.

                           
For the year ended       October 31, 2012
Commercial lending Credit card lending (1) Corporate head office Intersegment eliminations Total
                           
 
Net interest income $ 19,349 $ 259 $ (10,802) $ 3,207 $ 12,013
Other income           12,694       593       -       -       13,287
Total revenue 32,043 852 (10,802) 3,207 25,300
Provision for credit losses         82       379       -       -       461
Non-interest expenses           21,083       3,260       909       (1,181)       24,071
Segment income (loss)           10,878       (2,787)       (11,711)       4,388       768
                           
Assets $ 1,483,607 $ 23,397 $ 3,300 $ - $ 1,510,304
Liabilities         $   1,435,431   $   -   $   101,797   $   (27,617)   $   1,509,611
 
Note 1: Credit card lending segment launched operations on January 2, 2012.

Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.4 billion in assets. PWBank specializes in providing commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.

Pacific & Western Credit Corp., operating as PWC Capital, shares trade on the TSX under the symbol PWC.

On behalf of the Board of Directors: David R. Taylor, President & C.E.O.

To receive company news releases, please contact:
Wade MacBain at wadem@pwccapital.com (519) 488-1280

Visit our website at: http://pwccapital.com

Contacts

Pacific & Western Credit Corp.
Investor Relations:
Wade MacBain, 519-488-1280
wadem@pwccapital.com
or
Public Relations & Media:
Tel Matrundola, 519-488-1280
Vice-President
telm@pwccapital.com

Release Summary

PACIFIC & WESTERN CREDIT CORP. ANNOUNCES RESULTS FOR ITS FOURTH QUARTER ENDED OCTOBER 31, 2013.

Sharing

Contacts

Pacific & Western Credit Corp.
Investor Relations:
Wade MacBain, 519-488-1280
wadem@pwccapital.com
or
Public Relations & Media:
Tel Matrundola, 519-488-1280
Vice-President
telm@pwccapital.com