PWC Capital Inc. Announces Results for Its Fourth Quarter Ended October 31, 2015

LONDON, Ontario--()--PWC Capital Inc. (TSX:PWC)

FOURTH QUARTER SUMMARY (1)
(compared to the same periods in the prior year unless otherwise noted)

PWC Capital Inc.

  • Net income (loss) of PWC Capital Inc. (the “Corporation”) for the three months ended October 31, 2015, was $418,000 or ($0.02) per common share (basic and diluted) compared to $1.2 million or $0.01 per common share (basic and diluted) for the previous quarter and ($1.0 million) or ($0.04) per common share (basic and diluted) for the same period last year. Net income for the previous quarter included a net gain of $1.8 million on debt settlement relating to the redemption by the Corporation of 800,000 of its Class B Preferred Shares.
  • Net income (loss) of the Corporation for the year ended October 31, 2015, was ($1.1 million) or ($0.10) per common share (basic and diluted) compared to ($7.5 million) or ($0.24) per common share (basic and diluted) for the previous year. Net loss for the current year improved from a year ago as a result of increased earnings of its principal subsidiary, Pacific & Western Bank of Canada (“the Bank”) as discussed below and the net gain of $1.8 million on debt settlement in the Corporation.

Pacific & Western Bank of Canada

  • Net income of the Bank for the current quarter increased to $2.8 million or $0.11 per common share (basic and diluted) from $1.7 million or $0.05 per common share (basic and diluted) for the previous quarter and from $2.5 million or $0.13 per common share (basic and diluted) for the same period a year ago. Earnings per share amounts are after the deduction for dividends on preferred shares. Net income for the current quarter includes an income tax recovery of $1.0 million related to previously unrecognized deferred income tax assets compared to $nil in the previous quarter and $1.2 million for the same period a year ago.
  • Net income of the Bank for the year ended October 31, 2015 increased 45% to $8.2 million or $0.33 per common share (basic and diluted) from $5.7 million or $0.29 per common share (basic and diluted) for the same period a year ago. Net income for the current year includes an income tax recovery of $1.7 million related to previously unrecognized deferred income tax assets compared to $1.2 million for the same period a year ago.
  • Net interest margin or spread for the current quarter was 2.23% compared to 2.24% for the previous quarter and increased from 2.16% for the same period a year ago. For the year ended October 31, 2015, net interest margin increased to 2.21% from 1.96% a year ago.
  • Lending assets grew to $1.45 billion from $1.38 billion at the end of the previous quarter and from $1.22 billion a year ago. The growth in loans was a result of increases in loans and lease receivables sourced through the Bank’s bulk purchase program.
  • Credit quality remains exceptional with no gross impaired loans at October 31, 2015, or at July 31, 2015 or a year ago.
  • At October 31, 2015, the Bank’s Common Equity Tier 1 (CET1) ratio was 10.32% compared to 10.68% at the end of the previous quarter and 11.25% a year ago. The Bank’s total capital ratio was 13.51% at October 31, 2015, compared to 14.01% at the end of the previous quarter and 13.69% last year.

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

PRESIDENT’S COMMENTS

PWC Capital owns approximately 13 million of Pacific & Western Bank of Canada common shares (68%) and 100% of Versabanq Innovations common shares. The Bank is by far our largest and most important investment and the value of PWC is highly dependent on the Bank’s value.

I am pleased to report that our Bank has completed another very successful year. Significant progress was made in all key areas. Assets increased by 12% over the previous year and NIM increased by 13% over the previous year, resulting in net income increasing by more than 45% over the previous year.

Loans and leases acquired and warehoused through our Bulk Purchase Program increased more than 150% over the previous year, with the year-end balance reaching over $600 million. We purchase loans and leases from an increasing number of non-bank and fintech financiers who operate throughout Canada in a variety of industries, many of which are taking advantage of new technologies to reach their customers. Our program facilitates this type of financing and indirectly provides much needed financing for small businesses and greater choice for consumers across Canada. We have developed state of the art highly scalable systems that allow us to process large numbers of these small ticket transactions. Credit risk is reduced to acceptable levels by substantial cash deposits made by our partners to be available to offset potential credit losses. Our Bank is at the leading edge of this new method of financing and this business is rapidly becoming a major portion of the Bank’s total assets and revenue stream.

Our well established Commercial Real Estate financing business again made significant contributions to the Bank’s overall earnings. Total loans in this division increased modestly to $667 million. The Bank lends to well establish real estate developers with projects mainly located in Ontario, occasionally lending in other markets throughout Canada.

Asset quality again remained industry leading with the Bank again reporting no impaired loans. The Bank prides its self on maintaining stellar credit adjudication and processes that consistently deliver industry leading results.

Many years ago the Bank developed custom software to enable it to gather deposits without the need for traditional branches. Our Bank now has a substantial network of over 100 deposit gathering partners that includes many of the larger banks’ brokerage firms. This channel provides a steady reliable stream of low cost deposits. In addition, our Bank opened up a new channel for gathering deposits that involved developing a custom banking solution for niche markets that may have unique challenges in dealing with the traditional banks. This new channel for deposit gathering is not only diversifying the Bank’s deposit base, but is also serving to lower its cost of funds. The Bank’s overall cost of funds decreased by 7% to 1.98% over the previous year.

Total revenue for the quarter increased by 3% to $9.3 million over the previous quarter and total revenue for the year increased by 16% to $35.4 million over the previous year. Net interest margin (NIM) increased by 13% to 2.21% over the previous year. Net income for the year was $8.2 million versus the previous year’s $5.7 million. Earnings per common share increased by 14% from $0.29 cents to $0.33 cents over previous year.

We have designed a state of the art, highly scalable Bank that, through utilization of specialized software and well-experienced staff, is able to rapidly acquire loans, leases and deposits with minimal costs. By targeting niche markets that are not well served by the larger financial institutions, our Bank is able to earn excellent margins without accepting much risk. The financial market place is embracing innovative new ideas and your Bank is at the forefront of prudently applying new ideas and technology to provide Canadians with greater choice and more economical financing solutions.

The Bank’s increased earnings, together with the savings associated with the redemption of 800,000 Preference B shares, significantly improved our company’s profit situation. The net loss reduced from $7.5 million incurred in the previous year to $1.1 million this year. I am pleased with this reduction; however, we continue to explore strategies to accelerate and release value to us shareholders.

FINANCIAL HIGHLIGHTS

                         
(unaudited)       for the three months ended   for the year ended
    October 31   October 31 October 31   October 31
($CDN thousands except per share amounts )   2015   2014   2015   2014
Pacific & Western Bank of Canada
Results of operations
Net interest income $ 8,961 $ 7,609 $ 33,974 $ 27,874
Net interest margin* 2.23% 2.16% 2.21% 1.96%
Non-interest income 384 791 1,394 2,633
Total revenue 9,345 8,400 35,368 30,507
Provision for credit losses 319 400 1,545 919
Non-interest expenses 6,562 6,243 24,784 22,947
Restructuring charges - - - 434
Income before income taxes 2,464 1,757 9,039 6,207
Net income 2,770 2,476 8,218 5,676
Return on average common equity* 6.11% 7.14% 4.50% 4.17%
Gross impaired loans to total loans 0.00% 0.00% 0.00% 0.00%
  Provision for credit losses as a % of average loans   0.02%   0.03%   0.12%   0.08%
 
PWC Capital Inc. (consolidated)
Results of operations
Net income of the Bank $ 2,770 $ 2,476 $ 8,218 $ 5,676
Additional interest expense on notes of PWC (1,679) (1,655) (6,558) (6,512)
Interest expense relating to Class B
Preferred Share dividends (616) (1,254) (3,347) (4,989)
Net non-interest and other expenses of PWC 126 (160) (27) 239
Gain on debt settlement - - 1,790 -
  Provision for income taxes   (183)   (436)   (1,156)   (1,946)
Net income (loss) $ 418 $ (1,029) $ (1,080) $ (7,532)
 
Net income attributable to non-controlling interests 897 284 1,854 580
  Net income (loss) attributable to shareholders   (479)   (1,313)   (2,934)   (8,112)
$ 418 $ (1,029) $ (1,080) $ (7,532)
Income (loss) per common share:
Basic $ (0.02) $ (0.04) $ (0.10) $ (0.24)
    Diluted     $ (0.02) $ (0.04) $ (0.10) $ (0.24)
as at
October 31 October 31
PWC Capital Inc. (consolidated)   2015   2014
Balance Sheet Summary
Cash and securities $ 153,047 $ 196,101
Total loans 1,447,660 1,224,247
Total assets 1,625,144 1,443,445
Deposits 1,325,828 1,193,797
Notes payable and preferred share liabilities 105,317 118,969
  Shareholders' equity               1,389     10,195
* This is a non-GAAP measure. See definition under 'Basis of Presentation' in the attached
Management's Discussion and Analysis.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

This management’s discussion and analysis (MD&A) of operations and financial condition for the fourth quarter of fiscal 2015, dated December 2, 2015, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2015, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Corporation’s MD&A and the audited consolidated financial statements for the year ended October 31, 2014, 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, 2014, remain substantially unchanged.

Basis of Presentation

Non-GAAP and Additional GAAP Measure

Net Interest Income and Net Interest Margin or Spread

Most banks analyze profitability by net interest income (as presented in the Consolidated Statements of 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.

Basel III Common Equity Tier 1, Tier 1 and Total Capital Adequacy Ratios

Basel III Common Equity Tier 1, Tier 1 and total capital adequacy ratios are determined in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (“OSFI”).

Return on Average Common Equity

Return on average common equity for Pacific & Western Bank of Canada (the “Bank”), is defined as annualized net income of the Bank less amounts relating to preferred share dividends, divided by common shareholders’ equity which is shareholders’ equity less amounts relating to preferred shares recorded in equity.

Overview

PWC Capital Inc. (the “Corporation”) is a holding company whose shares trade on the Toronto Stock Exchange. Its principal subsidiary, the Bank, of which it currently owns approximately 68% of its issued common shares, provides commercial banking services to selected niche markets and operates as a Schedule I bank under the Bank Act (Canada). The Bank’s shares also trade on the Toronto Stock Exchange.

PWC Capital Inc.

Net income (loss) of the Corporation for the three months ended October 31, 2015, was $418,000 or ($0.02) per common share (basic and diluted) compared to $1.2 million or $0.01 per common share (basic and diluted) for the previous quarter and ($1.0 million) or ($0.04) per common share (basic and diluted) for the same period last year. Net income for the previous quarter included a net gain of $1.8 million on debt settlement relating to the redemption by the Corporation of 800,000 of its Class B Preferred Shares.

Net income (loss) of the Corporation for the year ended October 31, 2015, was ($1.1 million) or ($0.10) per common share (basic and diluted) compared to ($7.5 million) or ($0.24) per common share (basic and diluted) for the previous year. Net income (loss) for the current year improved from a year ago as a result of increased earnings of its principal subsidiary, Pacific & Western Bank of Canada (“the Bank”) as discussed below and the net gain of $1.8 million on debt settlement in the Corporation.

Interest income of the Corporation on a non-consolidated basis includes interest income, which is nominal, earned on its cash balances. For the three months ending October 31, 2015, interest expense of the Corporation on a non-consolidated basis consisted of $1.7 million relating to its notes payable and dividends totalling $616,000 on its Class B Preferred Shares. For the year ending October 31, 2015, interest expense of the Corporation on a non-consolidated basis consisted of $6.6 million relating to its notes payable and dividends totalling $3.3 million on its Class B Preferred Shares. Dividends on Class B Preferred Shares are recorded as interest expense in the consolidated financial statements of the Corporation as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet.

Pacific & Western Bank of Canada

Net income of the Bank for the current quarter increased by 62% to $2.8 million or $0.11 per common share (basic and diluted) from $1.7 million or $0.05 per common share (basic and diluted) for the previous quarter and from $2.5 million or $0.13 per common share (basic and diluted) for the same period a year ago. Net income for the current quarter includes an income tax recovery of $1.0 million relating to previously unrecognized deferred income tax assets compared to $nil in the previous quarter and $1.2 million for the same period a year ago. Earnings per share amounts are after the deduction for dividends on preferred shares.

Net income of the Bank for the year ended October 31, 2015 increased 45% to $8.2 million or $0.33 per common share (basic and diluted) from $5.7 million or $0.29 per common share (basic and diluted) for the same period a year ago. Net income for the current year includes an income tax recovery of $1.7 million relating to previously unrecognized deferred income tax assets compared to $1.2 million for the same period a year ago. Net income for same period a year ago also included restructuring charges of $434,000 related to the early repayment of subordinated debt.

Total revenue of the Bank consists of net interest income and non-interest income. For the three months ended October 31, 2015, total revenue increased to $9.3 million from $9.1 million for the previous quarter and from $8.4 million for the same period ago. For the year ended October 31, 2015, total revenue increased to $35.4 million from $30.5 million a year ago, an increase of 16%. Total revenue increased from previous periods as a result of an increase in net interest income in the current periods which was due to growth in loans and lease receivables sourced through the Bank’s bulk purchase program. Total revenue for the twelve month period a year ago included gains of $1,207,000 from the sale of loans. There were no loan sales in the current year.

Net interest income for the three months ended October 31, 2015 increased to $9.0 million from $8.7 million for the previous quarter and $7.6 million for the same period a year ago. For the year ended October 31, 2015, net interest income increased to $34.0 million from $27.9 million a year ago. The increases in net interest income from previous periods were due to higher levels of interest income in the current period primarily as a result of growth in lending assets as well as a lower cost of funds. For the year ended October 31, 2015, the Bank’s cost of funds decreased to 1.98% from 2.13% for the previous year.

Net interest margin for the three months ended October 31, 2015 was 2.23% compared to 2.24% for the previous quarter and 2.16% for the same period a year ago. For the year ended October 31, 2015, net interest margin increased to 2.21% from 1.96% a year ago. Net interest margin increased from a year ago primarily as a result of a more optimal asset mix. Net interest margin of the Bank has not been impacted significantly by reductions in the interest rate by the Bank of Canada over the past year.

At October 31, 2015, total assets of the Bank were $1.63 billion compared to $1.56 billion at the end of the previous quarter and $1.45 billion a year ago. Cash and securities, which are held primarily for liquidity purposes, totalled $150 million at the end of the current quarter compared to $157 million at the end of the previous quarter and $194 million a year ago. Total loans at October 31, 2015 increased to $1.45 billion from $1.38 billion at the end of the previous quarter and from $1.22 billion a year ago with the increase due primarily to growth in commercial and consumer loans and leases sourced through the Bank’s bulk purchase program. The Bank has maintained its strong underwriting standards and credit quality remains exceptional with no gross impaired loans at October 31, 2015, or at July 31, 2015 or a year ago.

At October 31, 2015, the Bank continued to exceed the Common Equity Tier 1 (CET1) capital requirement of 7.0% with a CET1 ratio of 10.32% compared to 10.68% at the end of the previous quarter and 11.25% a year ago. The decrease in the CET1 ratio from previous periods was due to the growth in lending assets. At October 31, 2015, the Bank’s Tier 1 capital ratio was 12.54% compared to 13.01% at the end of the previous quarter and 12.43% a year ago. At October 31, 2015, the Bank’s total capital ratio was 13.51% compared to 14.01% at the end of the previous quarter and 13.69% a year ago. The increase in the Bank’s Tier 1 capital ratio and its total capital ratio from a year ago was a result of the issue over the past year of preferred shares which qualify as Additional Tier 1 capital. Required minimum regulatory capital ratios are a CET1 capital ratio of 7.0%, a Tier 1 capital ratio of 8.5% and a total capital ratio of 10.5%, all of which include a 2.50% capital conservation buffer.

During the current year, the Bank issued 1,681,320 Non-Cumulative 6-Year Rate Reset Series 3 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $15.7 million. For the initial 6-year period ending April 30, 2021, these Series 3 Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors of the Bank.

Non-Interest Expenses

Non-interest expenses of the Bank, totalled $6.6 million for the current quarter compared to $6.4 million for the previous quarter and $6.2 million for the same period a year ago. For the year ended October 31, 2015, non-interest expenses of the Bank, excluding restructuring charges, totalled $24.8 million compared to $22.9 million for the same period a year ago. Restructuring charges of the Bank in the previous year totalling $434,000 related to the repayment in December 2013 of subordinated debt of the Bank. Non-interest expenses were higher than a year ago due to increases in professional and consulting fees, employee compensation and costs relating to the issue of NVCC preferred shares.

Non-interest expenses of the Corporation on a non-consolidated basis are not significant and relate primarily to the costs of being a publicly traded company such as directors’ fees, listing and annual filing fees and professional fees.

Income Taxes

The statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The effective rate is impacted by the tax benefit on operating losses in the Corporation on a non-consolidated basis not being recorded for accounting purposes and certain items not being taxable or deductible for income tax purposes. The provision (recovery) for income taxes consists of the following items:

                       
(thousands of Canadian dollars)   for the three months ended for the year ended
    October 31   October 31 October 31   October 31
          2015   2014   2015   2014
 
Income tax on earnings of the Bank $ 694 $ 491 $ 2,545 $ 1,741
Recognition of previously unrecognized deferred income tax asset (1,000) (1,210) (1,724) (1,210)
Income tax on dividends paid by the Corporation 183 436 1,156 1,946
            -    
        $ (123) $ (283) $ 1,977 $ 2,477

For the three months ended October 31, 2015, the provision (recovery) for income taxes was ($123,000) compared to ($283,000) for the same period a year ago. For the year ended October 31, 2015, the provision for income taxes was $2.0 million compared to $2.5 million for the same period a year ago with the decrease due primarily to the income tax recoveries recorded in the Bank on account of previously unrecognized deferred income tax assets. In addition, the change in the income tax provision from a year ago was due to a higher level of earnings in the Bank and a lower amount of income tax on dividends paid by the Corporation. This was due to the redemption in the previous quarter of 800,000 Class B Preferred Shares resulting in a lower amount of dividends being paid and a reduction in the income tax provision.

At October 31, 2015, the Bank has a deferred income tax asset of $8.8 million compared to $8.3 million at the end of the previous quarter and $8.5 million a year ago with the changes as a result of the drawdown of loss carryforwards due to the positive operating results over the past year, offset by the recognition of previously unrecognized deferred income assets as discussed above. The deferred income tax asset is primarily a result of income tax losses totalling approximately $27.0 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, at October 31, the Corporation has income tax loss carry-forwards which total approximately $68.0 million, the benefit of which has not been recorded. These loss carry-forwards are not scheduled to begin expiring until 2026.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) for the period and other comprehensive income (loss) which consists of unrealized gains and losses on available-for-sale securities. Comprehensive income (loss) of the Corporation for the three months ended October 31, 2015 was $406,000 compared to $1.2 million for the previous quarter and ($1.0 million) a year ago. Comprehensive income (loss) for the year ended October 31, 2015 was ($1.1 million) compared to ($7.5 million) a year ago. Due to the current composition of the Bank’s treasury portfolio, which consists primarily of liquid securities, unrealized gains or losses in the portfolio are not significant and as a result, comprehensive income (loss) does not differ significantly from net income (loss).

Consolidated Balance Sheet

Substantially all of the Corporation’s consolidated assets are held in the Bank. Total consolidated assets at October 31, 2015 increased to $1.63 billion from $1.56 billion at the end of previous quarter and from $1.44 billion a year ago. This increase was due to growth in lending assets which grew to $1.45 billion from $1.38 billion at the end of the previous quarter and from $1.22 billion a year ago. Growth in lending assets was primarily a result of an increase in loans and lease receivables sourced through the Bank’s bulk purchase program as discussed below.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian financial institutions and government treasury bills with less than ninety days to maturity from the date of acquisition. Securities in the treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, term deposits and debt of other financial institutions. Amounts invested in each of these securities are determined based on liquidity needs, investment yield and capital management considerations. Cash and securities, which are held primarily for liquidity purposes, totalled $153 million or 9% of total assets compared to $157 million or 10% of total assets at the end of the previous quarter and $196 million or 14% of total assets a year ago. The decrease in cash and securities from a year ago was due primarily to a lower level of deposits maturing in the coming months requiring a lower level of cash and liquid securities. The current level of cash and securities as a percentage of total assets is expected to be maintained in the coming months.

At October 31, 2015, unrealized gains in the available-for-sale securities portfolio were $18,000 compared to unrealized gains of $35,000 at the end of the previous quarter and $26,000 a year ago. In addition, there was an unrealized loss of $47,000 at October 31, 2015 relating to a security that is classified as held-to-maturity, compared to an unrealized loss of $52,000 at the end of the previous quarter. This unrealized loss is due to factors other than changes in credit risk and management is of the opinion that no impairment charge is required. This security matures in June 2016.

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

Loans

At October 31, 2015, loans increased to $1.45 billion from $1.38 billion at the end of the previous quarter and from $1.22 billion a year ago. The increase from the previous quarter and from the previous year was due primarily to growth in commercial and consumer loans and lease receivables sourced through the Bank’s bulk purchase program.

At October 31, 2015, the balances of individual loan categories compared to the end of the previous quarter and a year ago reflects a change in lending strategy where focus on government financings has been reduced due to market conditions, and has been replaced by commercial and consumer lending opportunities, particularly those sourced through the bulk purchase program. At October 31, 2015, there was a decrease from previous periods in residential multi-family mortgages which was due primarily to the timing of loan transactions.

Commercial and consumer loans and lease receivables sourced through the bulk purchase program continued to show strong growth during the past year, particularly those in the consumer category, Outstanding balances from this source increased to $620 million at October 31, 2015 from $564 million at the end of the previous quarter, a net increase of $56 million or 10%, and from $394 million last year, a net increase of $226 million, or 57%. The bulk purchase program, which consists of the purchase of individual loans and lease receivables, continues to be a key initiative and the primary driver for growth of the lending portfolio in the coming years. These loans and lease receivables normally attract a lower collective allowance due to the level of cash holdbacks that are retained.

Total new lending for the quarter was $338 million compared to $277 million for the previous quarter and $189 million a year ago. Loan repayments for the quarter totalled $268 million compared to $246 million for the previous quarter and $144 million a year ago. For the current year, new lending totalled $1.09 billion compared to $707 million a year ago and loan repayments totalled $859 million for the year compared to $637 million last year. At October 31, 2015, loan commitments representing loans in the Bank’s pipeline totalled $243 million compared to $210 million at the end of the previous quarter and $195 million a year ago.

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

Under OSFI’s definition, the Bank’s exposure to residential mortgages at October 31, 2015 totalled $761,000 compared to $816,000 at the end of the previous quarter and $1.1 million a year ago. The Bank did not have any HELOC’s outstanding at October 31, 2015, or at the end of the previous quarter or a year ago.

Credit Quality

The Bank maintains high credit quality and strong underwriting standards and as a result traditionally requires minimal provisions for credit losses. Gross impaired loans at October 31, 2015, were $nil, unchanged from the end of the previous quarter and a year ago. The provision for credit losses in the current quarter was $319,000 or 2 basis points of average loans compared to $297,000 or 2 basis points of average loans for the previous quarter and $400,000 or 3 basis points of average loans a year ago. For the year ended October 31, 2015, the provision for credit losses totalled $1.6 million or 12 basis points of average loans compared to $919,000 or 8 basis points of average loans for the same period a year ago. The provision for credit losses increased from a year ago due to an increase in the collective allowance as a result of the growth in loans. Loan write offs during the past two years relate solely to credit card receivables. However, the total provision for credit losses still remains below the Bank’s target of 17 basis points of average loans for the current year.

At October 31, 2015, the collective allowance totalled $3.2 million compared to $3.1 million at the end of previous quarter and $2.9 million a year ago. Included in the collective allowance at October 31, 2015 was $1.0 million relating to credit card receivables, compared to $1.0 million at the end of the previous quarter and $962,000 a year ago.

Based on results from ongoing stress testing of the loan portfolio under various scenarios and the secured nature of the existing loan portfolio, the Bank is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for. The Bank’s loan exposure to the province of Alberta and to the oil and gas industry is not significant. As well, the Bank has minimal exposure to the housing market in Toronto, Calgary and Vancouver.

Other Assets

Other assets totalled $24.4 million at October 31, 2015, compared to $25.2 million at the end of the previous quarter and $23.1 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.8 million compared to $8.3 million at the end of the previous quarter and $8.5 million a year ago. Also included in other assets are capital assets and prepaid expenses of $15.2 million compared to $16.1 million at the end of the previous quarter and $14.2 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, 2015, totalled $1.33 billion compared to $1.28 billion at the end of the previous quarter and $1.19 billion a year ago, and consist primarily of guaranteed investment certificates. The increase in deposits from the previous periods was due to the raising of deposits to fund the increase in lending assets.

Of the total amount of deposits outstanding, $17.0 million or approximately 1.3% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $17.7 million or 1.4% of total deposits at the end of the previous quarter and $19.3 million or approximately 1.6% of total deposits a year ago. In addition, the Bank has chequing accounts related to trustees in the Canadian bankruptcy industry as discussed below.

The Bank continues to grow and expand its deposit broker network across Canada. In addition, in order to further diversify its sources of deposits and reduce its cost of new deposits, the Bank identified another source, that being chequing accounts of trustees in the Canadian bankruptcy industry. The Bank has developed banking software to enable this market to efficiently administer its chequing accounts. These services are provided to trustees in the bankruptcy industry across Canada and at October 31, 2015, balances from this source totalled $110.6 million compared to $108.7 million at the end of the previous quarter and $83.8 million a year ago.

Other liabilities typically consist of accounts payable, accruals, holdbacks payable related to the bulk purchase program and securities sold under repurchase agreements. At October 31, 2015, other liabilities totalled $71.3 million compared to $60.4 million at the end of the previous quarter and $46.6 million a year ago with the increases due to increased holdbacks associated with loans and leases sourced through the bulk purchase program which have shown significant growth over the past year.

An additional source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. At October 31, 2015, there were no amounts outstanding from these sources compared to none outstanding at the end of the previous quarter and none outstanding a year ago.

Securitization Liabilities

Securitization liabilities relate to amounts payable to counterparties for cash received upon initiation of securitization transactions in previous years. At October 31, 2015, securitization liabilities totalled $43.5 million compared to $43.6 million at the end of the previous quarter and $43.5 million a year ago. There have been no securitization transactions in the past several years. The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages and other assets are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $80.5 million at October 31, 2015 compared to $75.2 million at the end of the previous quarter and $75.8 million a year ago. During the current year the Corporation issued secured notes payable totalling $7,225,000 bearing interest at 7.50%, maturing in 2017. As well, during the current year the Corporation repaid in cash, notes totalling $988,000 and repaid notes totalling $2,420,000 through the distribution of common shares of the Bank owned by the Corporation.

At October 31, 2015, notes payable are comprised of Series C Notes with a face value of $61.7 million maturing in 2018 and other notes totalling $7.3 million before issue costs, maturing in 2017. The Series C Notes bear interest at 9.00% per annum and allow the Corporation at its option, to pay interest on the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. At the option of the holder, the Series C Notes are convertible into common shares of the Bank held by the Corporation. During the year ended October 31, 2015, as payment of the interest due on the Series C Notes, the Corporation distributed 980,845 common shares it owned of the Bank.

Notes payable also include subordinated notes totalling $14.5 million issued by the Bank to an unrelated party. These subordinated notes, of which $4.5 million are currently callable and $10 million are callable beginning in 2016, bear interest at rates ranging from 8.00% to 11.00% and mature between 2019 and 2021.

Preferred Share Liabilities

At October 31, 2015, the Corporation had 1,094,058 Class B Preferred Shares outstanding with a redemption value of $27.4 million before deducting issue costs and amounts recorded as equity on issuance. As the Class B Preferred Shares must be redeemed by the Corporation in 2019, the preferred share liability is being adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 9.78%.

Shareholders’ Equity

At October 31, 2015, shareholders’ equity was $1.4 million compared to $1.8 million at the end of the previous quarter and $10.2 million a year ago with the change from the previous periods due to operating losses incurred by the Corporation and the redemption of Class B preferred shares with shares of the Bank.

Common shares outstanding at October 31, 2015 totalled 44,592,260, unchanged from the end of the previous quarter. At October 31, 2015, there were 314,572 Class A Preferred Shares outstanding, unchanged from the previous quarter and 1,094,058 Class B Preferred Shares outstanding also unchanged from the end of the previous quarter.

At the annual general meeting of the shareholders of the Corporation held in April 2015, the terms of the Class B Preferred Shares were modified whereby the holders of Class B Preferred Shares would be entitled to fixed cumulative dividends at the rate of 6.72%, payable in cash. The conversion feature of the Class B Preferred Shares was also modified to provide each holder of Class B Preferred Share, at its option, with the right to convert into common shares of the Corporation on the basis of 12.5 common shares of the Corporation for each Class B Preferred Share.

During the previous quarter, the Corporation redeemed 800,000 Class B Preferred Shares by transfer of 2,740,000 common shares of the Bank owned by the Corporation. This resulted in the Corporation recording a $1.8 million net gain on debt settlement in Non-interest Income in the Consolidated Statements of Income (Loss). The redemption of the Class B Preferred Shares also resulted in a charge against share capital of $1.9 million and other equity of $1.6 million.

Common share options totalled 466,423 at October 31, 2015 compared to 468,023 common shares options outstanding at the end of the previous quarter with the decrease due to the expiry of 1,600 options.

At October 31, 2015, there were 40,000 common share options of the Bank outstanding, unchanged from the end of the previous quarter.

Normal Course Issuer Bids

On March 12, 2015, the Corporation obtained approval from the Toronto Stock Exchange (TSX) to proceed with Normal Course Issuer Bids (NCIBs) for its Common Shares, Class B Preferred Shares and Series C Notes. All three NCIBs commenced on March 16, 2015 and will terminate on March 15, 2016, or such earlier date as the Corporation may complete its purchases pursuant to the NCIBs. Purchases made by the Corporation will be made through the facilities of the TSX or alternative trading systems and in accordance with the rules of the TSX, and the prices that the Corporation will pay for any Common Shares, Class B Preferred Shares and Series C Notes will be the market price of such shares or notes at the time of acquisition.

Pursuant to the NCIBs, the Corporation may purchase for cancellation:

  • Up to 2,470,000 of its Common Shares representing 9.98% of the public float. Daily purchases are limited to 25% of the average daily trading volume (ADTV), which is 12,524 common shares, other than block purchase exceptions.
  • Up to 185,000 of its Class B Preferred Shares representing 9.79% of the public float. Daily purchases are limited to 1,000 Class B Preferred Shares, other than block purchase exceptions.
  • Up to $3,300,000 of its Series C Notes representing 9.79% of the public float. Daily purchases are limited to 25% of the ADTV, which is $14,100 Series C Notes, other than block purchase exceptions.

During the year ended October 31, 2015, the Corporation purchased and cancelled a total of 15,400 Class B Preferred Shares through the Normal Course Issuer Bid.

Non-Controlling Interests

Non-controlling interests relate to the amount which outside interests own of the common equity of the Bank as well as the amounts of preferred shares issued by the Bank to outside interests. Non-controlling interests totalled $77.8 million at October 31, 2015, compared to $77.5 million at the end of the previous quarter and $30.5 million a year ago. Non-controlling interests increased from a year ago as a result of the Corporation’s ownership interest in the Bank decreasing from 89% to 68% at October 31, 2015. This decrease was a result of the Corporation transferring 3,249,579 common shares of the Bank it owned to redeem 800,000 Class B Preferred Shares and pay interest on Series C Notes in the year. Non-controlling interests also increased from a year ago due to the issue by the Bank of preferred shares totalling $16.8 million over the past year.

Updated Share Information

As at December 2, 2015, there were no changes since October 31, 2015 in the number of outstanding common shares, Class A and Class B Preferred Shares. There were 425,659 options outstanding as 40,764 options have expired since October 31, 2015.

Off-Balance Sheet Arrangements

As at October 31, 2015, the Corporation does not have any significant off-balance sheet arrangements other than loan commitments and letters of credit resulting from normal course business activities. See Note 14 to the unaudited interim consolidated financial statements for more information.

Related Party Transactions

The Corporation’s and the Bank’s Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or outstanding balances during the period. See Note 15 to the unaudited interim consolidated financial statements for details on related party transactions and balances.

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2014, and are found on pages 39 to 45 of the Corporation’s 2014 Annual Report.

Capital Management and Capital Resources

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

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

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

Under the Basel III standards, total regulatory capital of the Bank was $178.3 million at October 31, 2015 compared to $176.6 million at the end of the previous quarter and $158.3 million a year ago. The increase in total regulatory capital from the previous periods was due primarily to earnings in the Bank during the periods and the issue of Series 3 Preferred Shares in the second quarter of 2015 as noted below.

At October 31, 2015, the Bank exceeded the current regulatory capital requirements with a CET1 ratio of 10.32% compared to 10.68% at the end of the previous quarter and 11.25% a year ago. The decrease in the CET1 ratio from previous periods was due primarily to an increase in risk-weighted assets resulting from the growth in lending assets. At October 31, 2015, the Bank’s Tier 1 capital ratio was 12.54% compared to 13.01% at the end of the previous quarter and 12.43% a year ago. In addition, the Bank’s total capital ratio was 13.51% at October 31, 2015, compared to 14.01% at the end of the previous quarter and 13.69% a year ago. At October 31, 2015, the Bank’s leverage ratio was 9.53% compared to 9.84% at the end of the previous quarter. On January 1, 2015, the previous Assets–to-Capital Ratio was replaced by the Leverage Ratio which is prescribed under the Basel III Accord.

During the current year, the Bank issued 1,681,320 Non-Cumulative 6-Year Rate Reset Series 3 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $15.7 million. These preferred shares qualify as Additional Tier 1 Capital. For the initial 6-year period ending April 30, 2021, these Series 3 Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors of the Bank.

See Note 16 to the interim consolidated financial statements for more information regarding capital management.

Interest Rate Risk Management

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

         
                       
      October 31, 2015   October 31, 2014
     

Increase 100
bps

Decrease 100
bps

Increase 100
bps

Decrease 100
bps

 
Impact on projected net interest
income during a 12 month period $ 3,371 $ (3,114) $ 3,543 $ (3,493)
Impact on reported equity
during a 60 month period $ 295 $ (86) $ (319) $ 484
               
Duration difference between assets and
liabilities (months)     0.8       0.2  

The Bank’s sensitivity to changes in interest rates and its duration difference between assets and liabilities at October 31, 2015 has not changed significantly since a year ago. As indicated by the above, at October 31, 2015, the impact on net interest income during a 12 month period of a 100 basis point increase would be approximately $3.4 million and the impact on net interest income of a 100 basis point decrease would be approximately ($3.1 million). Similarly at October 31, 2015, the impact on equity during a 60 month period of a 100 basis point increase would be approximately $295,000 and the impact on equity of a 100 basis point decrease would be approximately ($86,000). As indicated by the above, the duration difference between assets and liabilities has not changed significantly from a year ago and shows that the Bank’s assets and liabilities would reprice at approximately the same time in the event of a change in interest rates.

Liquidity of the Corporation

A large percentage of the amount of cash and securities reflected on the Corporation’s Consolidated Balance Sheets is that of the Bank. As a holding company, PWC Capital Inc., on a non-consolidated basis, has no revenue generating activities and has cash obligations relating primarily to payments of interest on notes payable, dividends on preferred Shares and other operational requirements. On a non-consolidated basis, the Corporation does not depend on funding to come from its subsidiary, the Bank, other than normal dividends that may be declared from time to time by the Bank. As a result, the settlement of the obligations described above will be dependent upon cash and proceeds received from the sales of Bank shares, borrowings by the Corporation or alternative financing arrangements.

The unaudited Consolidated Statement of Cash Flows for the year ended October 31, 2015 shows cash provided by (used in) operations of ($62.0 million) compared to ($34.9 million) for the same period last year. Operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the amount of deposits received and loans funded are managed in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Corporation will continue to fund operations and meet contractual obligations as they become due.

Liquidity Management in the Bank

The Bank has established policies to ensure that its cash outflows and inflows are closely matched and that its sources of deposits are diversified between funding sources and over a wide geographic area. The Bank maintains a conservative investment profile by ensuring:

  • all Bank investments are high quality and include government debt securities, bankers acceptances and Canadian bank debt;
  • specific investment criteria and procedures are in place to manage the Bank's securities portfolio;
  • regular review, monitoring and approval of the Bank's investment policies by the Risk Oversight Committee of the Board of Directors; and
  • quarterly reporting to the Risk Oversight Committee on the composition of the Bank's securities portfolio.

Liquidity management is further supported by processes, which include but are not limited to:

  • monitoring of liquidity levels;
  • monitoring of liquidity trends and key risk indicators;
  • scenario stress testing;
  • monitoring the credit profile of the liquidity portfolio; and
  • monitoring deposit concentration.

In order to manage its liquidity needs, the Bank has a liquidity risk management program that is comprised specifically of the following policies and procedures:

  • Holding sufficient liquid assets which results in positive cumulative cash flow for a period of 31 to 60 days.
  • Holding of high quality liquid securities at levels that represent no less than 6% of total assets. High quality liquid securities include Canadian federal, provincial and municipal debt, debt of federally regulated Canadian financial institutions, widely distributed debt instruments, all of which are to be rated investment grade, cash on deposit and banker’s acceptances.
  • Maintaining liquid assets at no less than 65% of obligations payable within 90 days.
  • On a weekly basis, monitoring its cash flow requirements using a liquidity forecasting template under a highly stressed scenario.
  • On a monthly basis, testing liquidity using three specific disruption scenarios; specifically, industry specific disruption scenario, company specific liquidity disruption scenario and a systematic disruption scenario.
  • Managing liquidity in accordance with guidelines specified by OSFI.

Contractual Obligations

Contractual obligations as disclosed in the MD&A and audited consolidated financial statements for the year ended October 31, 2014, have not changed significantly as at October 31, 2015.

Capital Assets

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

Summary of Quarterly Results

                                 
($CDN thousands except per share amounts)  

2015

  2014
Q4   Q3   Q2   Q1 Q4   Q3   Q2   Q1
 
Results of operations:
Total interest income $ 16,686 $ 16,514 $ 15,631 $ 15,630 $ 15,080 $ 14,158 $ 13,980 $ 14,953
Interest expense 10,043 9,933 10,185 10,359 10,382 10,381 10,177 10,852
Net interest income 6,643 6,581 5,446 5,271 4,698 3,777 3,803 4,101
Non-interest income 384 2,158 304 338 791 619 886 337
Total revenue 7,027 8,739 5,750 5,609 5,489 4,396 4,689 4,438
Provision for (recovery of) credit losses 319 297 427 502 400 303 267 (51)
Non-interest expenses 6,413 6,442 6,240 5,588 6,401 5,436 5,369 5,508
Restructuring charges - - - - - - - 434
Income (loss) before income taxes 295 2,000 (917) (481) (1,312) (1,343) (947) (1,453)
Income tax provision (recovery) (123) 770 242 1,088 (283) 1,135 858 767
Net income (loss) $ 418 $ 1,230 $ (1,159) $ (1,569) $ (1,029) $ (2,478) $ (1,805) $ (2,220)
 
Net income attributable to non-controlling interests 897 451 287 219 284 103 107 86
Net income (loss) attributable to shareholders (479) 779 (1,446) (1,788) (1,313) (2,581) (1,912) (2,306)
Income (loss) per common share
Basic $ (0.02) $ 0.01 $ (0.04) $ (0.05) $ (0.04) $ (0.08) $ (0.06) $ (0.07)
Diluted $ (0.02) $ 0.01 $ (0.04) $ (0.05) $ (0.04) $ (0.08) $ (0.06) $ (0.07)

The financial results for each of the last eight quarters are summarized above. The results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect some seasonality occurring, primarily in residential construction lending. Total interest income increased in 2015 as a result of growth in lending assets, specifically loan and leases sourced through the bulk purchase program.

Non-interest income increased in the third quarter of 2015 as a result of the net gain on debt settlement in the Corporation and the remaining quarters show variability due to the level of gains realized on the sale of loans in 2014. The other component of non-interest income consists primarily of credit card fees which have been comparable over the quarters.

Non-interest expenses increased since the first quarter of 2015 primarily due to increases in professional and consulting fees, employee compensation and costs relating to the issue of NVCC Preferred Shares. Restructuring charges in in the first quarter of 2014 resulted from the write-off of unamortized issue costs related to the repayment of subordinated notes in the Bank.

The provision for income taxes in each of the quarters reflects the effective statutory income tax rate applied to earnings in the Bank. The provision for income taxes in the fourth and second quarters of 2015 and the fourth quarter of 2014 includes positive income tax adjustments of $1.0 million, $724,000 and $1.2 million respectively relating to a change in the estimate of previously unrecognized deferred income tax assets of the Bank.

Significant Accounting Policies and Use of Estimates and Judgments

Significant accounting policies are detailed in Note 3 of the Corporation’s 2014 Audited Consolidated Financial Statements. There have been no material changes in accounting policies since October 31, 2014.

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

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

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

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

Financial Instruments

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

Securities

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

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

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

Loans

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

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

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

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

or,

(ii) observable market prices for the loan.

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

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

Allowance for Credit Losses

An allowance for credit losses is maintained which, in management’s opinion, is adequate to absorb all credit related losses in its loan portfolio. The allowance for credit losses consists of both individual and collective allowances and is reviewed on a monthly basis. The allowance is included in loans on the Consolidated Balance Sheets.

Evidence of impairment of loans is assessed at both an individual asset and collective level. All individually significant loans are assessed for impairment first. All individually significant loans found not to be specifically impaired and all loans which are not individually significant are then collectively assessed for impairment.

The collective allowance is determined by separating loans into categories that are considered to have common risk elements and reviewing factors such as current portfolio credit quality trends, exposure at default, probability of default and loss given default rates and business and economic conditions. The collective allowance may also be adjusted by management using its judgment taking into account other observable and unobservable factors.

Corporate Income Taxes

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

The Corporation follows the asset and liability method of accounting for deferred income taxes. Deferred income tax assets and liabilities arise from temporary differences between financial statement carrying values and the respective tax base of those assets and liabilities. Deferred income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years when temporary differences are expected to be recovered or settled.

Deferred income tax assets are recognized in the Corporation’s consolidated financial statements to the extent that it is probable that the Corporation will have sufficient taxable income to enable the benefit of the deferred income tax asset to be realized. Unrecognized deferred income tax assets are reassessed for recoverability at each reporting period end.

Future Change in Accounting Policies

Financial instruments (IFRS 9)

In July, 2014, the International Accounting Standards Board (IASB) issued the final revised IFRS 9 standard which addresses classification, measurement and impairment of financial instruments and hedge accounting. IFRS 9 specifies that financial assets be classified into one of three categories: financial assets measured at amortized cost, financial assets measured at fair value through profit or loss or financial assets measured at fair value through other comprehensive income. The standard also includes an expected credit loss model and a general hedging model.

IFRS 9 will be mandatorily effective for the Corporation’s fiscal year beginning on November 1, 2018, although early adoption is permitted. In January 2015, OSFI determined that Domestic Systematically Important Banks (D-SIBs) should adopt IFRS 9 for their annual periods beginning November 1, 2017, while early adoption is permitted but not required for other federally regulated Canadian banks with October year ends such as the Bank. The Corporation is of the view that at this time, it will not 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.

At October 31, 2015, an evaluation was carried out by management of the effectiveness of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and financial statement compliance with International Financial Reporting Standards. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer will file a certificate that the design and operating effectiveness of internal control over financial reporting were effective. These evaluations were conducted in accordance with the standards of the 2013 Internal Control - Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and the requirements of National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators.

Forward-Looking Statements

The statements in this management’s discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; commodity prices, the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see page 46 of our 2014 Annual Report.

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


PWC CAPITAL INC.
Consolidated Balance Sheets
(Unaudited)

(thousands of Canadian dollars)            
  October 31 October 31
As at             2015   2014
 
Assets
 
Cash and cash equivalents $ 130,614 $ 147,301
Securities (note 4) 22,433 48,800
Loans, net of allowance for credit losses (note 5) 1,447,660 1,224,247
Other assets 24,437 23,097
               
            $ 1,625,144 $ 1,443,445
 
Liabilities and Equity
 
Deposits $ 1,325,828 $ 1,193,797
Notes payable (note 6) 80,467 75,832
Securitization liabilities (note 7) 43,525 43,466
Other liabilities (note 8) 71,306 46,558
Preferred share liabilities (note 9)       24,850   43,137
1,545,976 1,402,790
 
Equity attributable to shareholders:
Share capital (note 10) 29,285 29,885
Retained earnings (deficit) (27,345) (22,466)
Other equity (560) 2,759
Accumulated other comprehensive income   9   17
1,389 10,195
Non-controlling interests         77,779   30,460
79,168 40,655
               
            $ 1,625,144 $ 1,443,445

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


PWC CAPITAL INC.
Consolidated Statements of Income (Loss)
(Unaudited)

(thousands of Canadian dollars, except per share amounts)            
              for the three months ended   for the year ended
  October 31 October 31   October 31 October 31
              2015   2014   2015   2014
 
Interest income:
Loans $ 16,409 $ 14,517 $ 62,973 $ 55,278
Securities         277   563   1,488   2,893
16,686 15,080 64,461 58,171
Interest expense:
Deposits and other 7,396 7,124 29,223 28,771
Notes payable 2,031 2,004 7,950 8,032
Preferred share liabilities       616   1,254   3,347   4,989
10,043 10,382 40,520 41,792
                   
Net interest income 6,643 4,698 23,941 16,379
 
Non-interest income (note 11)       384   791   3,183   2,633
Total revenue 7,027 5,489 27,124 19,012
 
Provision for credit losses (note 5b)     319   400   1,545   919
6,708 5,089 25,579 18,093
Non-interest expenses:
Salaries and benefits 3,637 3,049 13,015 11,222
General and administrative 2,405 2,943 10,171 10,005
Premises and equipment       371   409   1,496   1,487
6,413 6,401 24,682 22,714
Restructuring charges       -   -   -   434
6,413 6,401 24,682 23,148
                   
Income (loss) before income taxes 295 (1,312) 897 (5,055)
 
Income tax (recovery) provision (note 12) (123) (283) 1,977 2,477
                   
Net income (loss)       $ 418 $ (1,029) $ (1,080) $ (7,532)
 
Net income (loss) attributable to:
Shareholders $ (479) $ (1,313) $ (2,934) $ (8,112)
Non-controlling interests 897 284 1,854 580
                   
Net income (loss)       $ 418 $ (1,029) $ (1,080) $ (7,532)
 
Basic income (loss) per common share (note 13) $ (0.02) $ (0.04) $ (0.10) $ (0.24)
 
Diluted income (loss) per common share $ (0.02) $ (0.04) $ (0.10) $ (0.24)
 
Weighted average number of common shares outstanding     44,592,000     37,193,000     43,173,000     34,103,000

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

PWC CAPITAL INC.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

(thousands of Canadian dollars)                    
              for the three months ended   for the year ended
      October 31   October 31 October 31   October 31
              2015   2014   2015   2014
 
Net income (loss) $ 418 $ (1,029) $ (1,080) $ (7,532)
 
Other comprehensive income (loss), net of tax

Net unrealized losses on assets held as
available-for-sale (1)

(12) - (6) (5)
                   
Comprehensive income (loss)     $ 406 $ (1,029) $ (1,086) $ (7,537)
 
Total comprehensive income (loss) attributable to:
Shareholders $ (487) $ (1,313) $ (2,938) $ (8,117)
  Non-controlling interests       893   284     1,852   580
            $ 406 $ (1,029)   $ (1,086) $ (7,537)

(1) Net of income tax benefit for three months of $5 (2014 – $nil) and for the year of $2 (2014 – $2 benefit)

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


PWC CAPITAL INC.
Consolidated Statements of Changes in Equity
(Unaudited)

(thousands of Canadian dollars)                    
              for the three months ended   for the year ended
    October 31   October 31 October 31   October 31
              2015   2014   2015   2014
 
Common shares (note 10(a)):
 
Balance, beginning of the period $ 26,977 $ 22,160 $ 25,637 $ 19,294
Issued on payment of Class B preferred share dividends - 674 1,340 2,696
Issued during the period, net of issue costs - 2,803 - 3,647
                   
Balance, end of the period       $ 26,977 $ 25,637 $ 26,977 $ 25,637
 
Preferred shares (note 10(a)):
 
Class A preferred shares              
Balance, beginning and end of the period   $ 1,061 $ 1,061 $ 1,061 $ 1,061
 
Class B preferred shares
Balance, beginning of the period $ 1,247 $ 3,187 $ 3,187 $ 3,187
Redeemed during the period - - (1,940) -
                   
Balance, end of the period       $ 1,247 $ 3,187 $ 1,247 $ 3,187
 
Total share capital       $ 29,285 $ 29,885   $ 29,285 $ 29,885

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

PWC CAPITAL INC.
Consolidated Statements of Changes in Equity - continued
(Unaudited)

(thousands of Canadian dollars)                    
              for the three months ended   for the year ended
October 31   October 31 October 31   October 31
              2015   2014   2015   2014
 
Retained earnings (deficit):
 
Balance, beginning of the period $ (26,494) $ (20,297) $ (22,466) $ (13,432)
Net loss attributable to shareholders (479) (1,313) (2,934) (8,112)
Costs of shares issued by subsidiary - (856) (557) (856)
Dividends paid - - (66) (66)
Dividends paid by subsidiary (372) - (1,322) -
                   
Balance, end of the period       $ (27,345) $ (22,466) $ (27,345) $ (22,466)
 
Other equity
 
Balance, beginning of the period $ (563) $ 2,747 $ 2,759 $ 3,129
Preferred shares redeemed during the
period (note 10 (a)) - (1,620) -
Loss on distribution of subsidiary shares - (3) (1,719) (444)
Fair value of stock options granted 3 15 20 74
                   
Balance, end of the period       $ (560) $ 2,759 $ (560) $ 2,759
 
Accumulated other comprehensive income net of taxes:
 
Balance, beginning of the period $ 17 $ 17 $ 17 $ 22
Other comprehensive loss (4) - (6) (5)
Change in non-controlling interests (4) - (2) -
                   
Balance, end of the period       $ 9 $ 17 $ 9 $ 17
 
Total shareholders' equity       $ 1,389 $ 10,195 $ 1,389 $ 10,195
 
Non-controlling interests:
 
Balance, beginning of the period $ 77,063 $ 15,614 $ 30,460 $ 11,809
Net income attributable to non-controlling interests 897 284 1,854 580
Impact of subsidiary shares distributed - 58 29,724 3,567
Preferred shares, net of issue costs and income tax, -
issued by subsidiary - 14,504 16,247 14,504
Dividends paid by subsidiary (179) - (500) -
Other (2) - (6) -
                   
Balance, end of the period       $ 77,779 $ 30,460 $ 77,779 $ 30,460
                   
            $ 79,168 $ 40,655 $ 79,168 $ 40,655

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


PWC CAPITAL INC.
Consolidated Statements of Cash Flows
(Unaudited)

(thousands of Canadian dollars)            
      October 31   October 31
for the year ended         2015   2014
 
Cash provided by (used in):
 
Operations:
Net loss $ (1,080) $ (7,532)
Adjustments to determine net cash flows:
Items not involving cash:
Provision for credit losses 1,545 919
Income tax provision 1,977 2,477
Stock-based compensation 20 74
Other gains (1,789) (1,207)
Interest income (64,461) (58,171)
Interest expense 40,520 41,792
Restructuring charges - 434
Amortization of property and equipment 393 396
Interest received 63,301 56,959
Interest paid (31,270) (35,907)
Income taxes paid (1,726) (746)
Change in operating assets and liabilities:
Mortgages and loans (223,565) (64,395)
Deposits 131,612 7,647
  Change in other assets and liabilities     22,555   22,360
(61,968) (34,900)
Investing:
Purchase of securities - (34,894)
Proceeds from sale and maturity of securities     25,922   26,443
25,922 (8,451)
Financing:
Proceeds of shares issued by subsidiary, net of costs 15,275 13,289
Notes payable 6,167 3,488
Purchase of preferred shares for cancellation (195) -
Repayment of notes by subsidiary - (7,000)
Proceeds of shares issued, net of costs - 3,647
Dividends paid (66) (66)
Dividends paid by subsidiary       (1,822)   -
19,359 13,358
                 
Decrease in cash and cash equivalents (16,687) (29,993)
 
Cash and cash equivalents, beginning of the period 147,301 177,294
                 
Cash and cash equivalents, end of the period   $ 130,614 $ 147,301
 
Cash and cash equivalents is represented by:
Cash $ 42,627 $ 54,700
Cash equivalents 87,987 92,601
                 
Cash and cash equivalents, end of the period   $ 130,614 $ 147,301

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

PWC CAPITAL INC.
Notes to Interim Consolidated Financial Statements
(Unaudited)

Three month period and year ended October 31, 2015 and 2014

1. Reporting entity:

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

The Corporation’s principal subsidiary is Pacific & Western Bank of Canada (“PWB” or the “Bank”) which operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank, whose shares of which the Corporation owns approximately 68% (2014 – 89%), trade on the Toronto Stock Exchange, is involved in the business of providing commercial lending services to selected niche markets.

2. Basis of preparation:

a) Statement of compliance:

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 – Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Corporation’s audited Consolidated Financial Statements for the year ended October 31, 2014.

The interim Consolidated Financial Statements for the three months and year ended October 31, 2015 and 2014 were approved by the Audit Committee of the Board of Directors on December 2, 2015.

b) Basis of measurement:

These interim Consolidated Financial Statements have been prepared on the historical cost basis except for securities designated as available-for-sale that are measured at fair value in the Consolidated Balance Sheets.

c) Functional and presentation currency:

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

d) Use of estimates and judgments:

In preparing these interim Consolidated Financial Statements, management has exercised judgment and developed estimates in applying accounting policies and generating reported amounts of assets and liabilities at the date of the financial statements and income and expenses during the reporting periods. Areas where significant judgment was applied were in the assessments of impairment of financial instruments. Estimates were developed include 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.

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, 2014 and are detailed in Note 3 of the Corporation’s 2014 Audited Consolidated Financial Statements. There have been no material changes in accounting policies.

4. Securities:

Portfolio analysis:

               
    October 31 October 31
          2015   2014
 
Available-for-sale securities
Securities issued or guaranteed by:
Canadian provincial governments $ 9,607 $ 9,581
Canadian municipal governments 279 554
Term deposits     -   26,055
Total available-for-sale securities $ 9,886 $ 36,190
 
Held-to-maturity security
Debt of other financial insitutions $ 12,547 $ 12,610
Total securities   $ 22,433 $ 48,800

Canadian provincial government securities are carried at fair value based on quoted market prices (Level 1) and term deposits and Canadian municipal debt fall into Level 2 of the fair value hierarchy. See Note 3 (c) of the October 31, 2014 consolidated financial statements for more information.

5. Loans:

a) Portfolio analysis:

           
  October 31 October 31
    2015 2014
 
 
Government financing $ 72,181 $ 87,332
Residential multi-family mortgages 112,759 122,686
Commercial and consumer loans and leases 783,780 548,240
Commercial mortgages 445,941 432,567
Credit card receivables 27,447 27,972
Other loans   3,721 3,967
1,445,829 1,222,764
 
Collective allowance (3,212) (2,905)
Accrued interest 5,043 4,388
       
Total loans, net of allowance for credit losses   $ 1,447,660 $ 1,224,247

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

           
  October 31 October 31
      2015   2014
 
Government financing $ 18 $ 13
Residential multi-family mortgages 30 66
Commercial and consumer loans and leases 624 446
Commercial mortgages 1,475 1,393
Credit card receivables 1,044 962
Other loans     21   25
    $ 3,212 $ 2,905

The Corporation holds security against the majority of its loans in the form of either mortgage interests over property, other registered securities over assets, guarantees and holdbacks on commercial and consumer loans and lease receivables (note 8).

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                       
  October 31 October 31
2015 2014
For the three months ended     Collective Individual Total Allowance Total Allowance
 
Balance, beginning of the period $ 3,118 $ - $ 3,118 $ 2,807
Provision for credit losses 319 - 319 400
Write-offs (225) - (225) (302)
               
Balance, end of the period     $ 3,212 $ - $ 3,212 $ 2,905
 
                       
October 31 October 31
2015 2014
For the year ended       Collective Individual Total Allowance Total Allowance
 
Balance, beginning of the period $ 2,905 $ - $ 2,905 $ 3,275
Provision for credit losses 1,545 - 1,545 919
Write-offs (1,238) - (1,238) (1,289)
               
Balance, end of the period     $ 3,212 $ - $ 3,212 $ 2,905

c) Impaired loans:

At October 31, 2015, there were no impaired loans (October 31, 2014 - $nil). At October 31, 2015, loans, other than credit card receivables, past due totalled $nil (October 31, 2014 - $nil). At October 31, 2015, credit card receivables overdue by one day or more totalled $2,773,000 (October 31, 2014 - $2,999,000).

6. Notes payable:

         
October 31 October 31
    2015   2014
 

Ten year term Series C Notes unsecured, maturing
2018, effective interest of 10.85%

$

59,053

$

58,285

 

Ten year term, unsecured, callable, subordinated notes
payable by the Bank to an unrelated party, maturing
between 2019 and 2021, net of issue costs of $541
(October 31, 2014 - $637), effective interest of 10.06%

13,959

13,863

 

Notes payable, secured by 1,806,658 shares of the Bank
held by the Corporation, maturing in 2017, net of issue costs
of $50 (October 31, 2014 - $4) effective interest of 8.03%
(2014 - 7.95%)

7,455 3,684
     
  $ 80,467 $ 75,832

During the year ending October 31, 2015, the Corporation issued notes payable totalling $7,225,000 and repaid notes payable totalling $3,408,000 with cash and common shares it held of the Bank.

7. Securitization liabilities:

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

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages and other assets are pledged as collateral for these liabilities.

8. Other liabilities:

           
  October 31 October 31
      2015   2014
 
Accounts payable and other $ 10,303 $ 9,722
Holdbacks payable on commercial and consumer loans and leases 61,003 36,836
       
    $ 71,306 $ 46,558

9. Preferred share liabilities:

At October 31, 2015, the Corporation has outstanding 1,094,058 (October 31, 2014 - 1,909,458) Class B Preferred Shares with a redemption value of $27.4 million (October 31, 2014 – $47.7 million) less unamortized issue and conversion costs of $2.5 million (October 31, 2014 – $4.6 million).

As the preferred shares must be redeemed by the Corporation in 2019, the preferred share liability is being adjusted over the remaining term to redemption, until the liability is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Income (Loss) calculated using an effective interest rate of 9.78% (2014 – 11.80%).

10. Share capital:

a) Share capital:

                     
        Stock Options
         

Common
shares
outstanding

Number  

Weighted-
average
exercise
price

 
Outstanding, October 31, 2014 40,145,504 471,773 $ 6.25
Issued pursuant to Class B Preferred Share dividend 4,446,756 - -
Expired         - (5,350) 7.97
Outstanding, October 31, 2015     44,592,260 466,423 $ 6.23

In addition, at October 31, 2015, there were 314,572 (October 31, 2014 - 314,572) Class A Preferred Shares outstanding and 1,094,058 (October 31, 2014 - 1,909,458) Class B Preferred Shares outstanding.

At the annual general meeting of the shareholders of the Corporation held in April 2015, the terms of the Class B Preferred Shares were modified whereby the holders of Class B Preferred Shares would be entitled to fixed cumulative dividends at the rate of 6.72%, payable in cash. The conversion feature of the Class B Preferred Shares was also modified to provide each holder of Class B Preferred Share, at its option, with the right to convert into common shares of the Corporation on the basis of 12.5 common shares of the Corporation for each Class B Preferred Share.

On May 25, 2015, the Corporation redeemed 800,000 Class B Preferred Shares by transfer of 2,740,000 common shares of the Bank owned by the Corporation. This resulted in the Corporation’s recording a $1.8 million net gain on debt settlement in Non-interest Income in the Consolidated Statements of Loss. The redemption of the Class B Preferred Shares also resulted in a charge against share capital of $1.9 million and other equity of $1.6 million.

In addition, during the year ended October 31, 2015 the Corporation purchased and cancelled a total of 15,400 (October 31, 2014 – nil) Class B Preferred Shares through a Normal Course Issuer Bid.

On February 26, 2015, the Bank issued 1,681,320 Series 3 Preferred Shares for net proceeds of $15,690,000. These shares are non-cumulative six year rate reset preferred shares which qualify as Additional Tier 1 Capital (see note 16).

b) Stock-based compensation:

During the three months and year ended October 31, 2015, the Corporation recognized compensation expense of $3,000 (October 31, 2014 - $15,000) and $20,000 (October 31, 2014 - $74,000) respectively, relating to the estimated fair value of stock options granted in prior periods by the Corporation and the Bank. No stock options were granted by the Corporation or the Bank during the current period.

The Corporation recorded amounts in the Consolidated Statement of Loss relating to DSU’s for the three months and year ended October 31, 2015 of $nil (October 31, 2014 - $7,000 recovery) and $29,000 recovery (October 31, 2014 - $172,000 recovery) respectively. At October 31, 2015 there were 160,660 (October 31, 2014 – 160,660) DSU’s of the Corporation outstanding.

11. Non-interest income:

                   
      for the three months ended   For the year ended
October 31   October 31 October 31   October 31
      2015   2014   2015   2014
 
Credit card non-interest revenue $ 330 $ 378 $ 1,308 $ 1,369
Other income 54 13 86 57
Gain on debt settlement - - 1,789 -
Gain on sale of loans - 400 - 1,207
           
    $ 384 $ 791 $ 3,183 $ 2,633

12. Income taxes:

The Corporation’s statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The effective rate is impacted by the tax benefit on operating losses in the Corporation on a non-consolidated basis not being recorded for accounting purposes, and certain items not being taxable or deductible for income tax purposes. The (recovery of) 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
          2015   2014   2015   2014
 
Income tax on earnings of the Bank $ 694 $ 491 $ 2,545 $ 1,741
Recognition of previously unrecognized deferred income tax asset (1,000) (1,210) (1,724) (1,210)
Income tax on dividends paid by the Corporation 183 436 1,156 1,946
               
        $ (123) $ (283) $ 1,977 $ 2,477

13. Income (loss) per share:

                       
          for the three months ended   for the year ended
  October 31   October 31 October 31   October 31
          2015   2014   2015   2014
 
Net loss attributable to common shareholders $ (479) $ (1,313) $ (2,934) $ (8,112)
Less: dividends on preferred shares (66) (66) (66) (66)
Less: dividends on preferred shares of subsidiary   (372)   -   (1,322)   -
(917) (1,379) (4,322) (8,178)
 
Average number of common shares outstanding 44,592,000 37,193,000 43,173,000 34,103,000
               
Income per share:       $ (0.02) $ (0.04) $ (0.10) $ (0.24)

14. Commitments and contingencies:

The amount of credit related commitments represents the maximum amount of additional credit that the Corporation could be obligated to extend. Under certain circumstances, the Corporation may cancel loan commitments at its option. The amounts with respect to the letters of credit are not necessarily indicative of credit risk as many of these arrangements are contracted for a limited period of usually less than one year and will expire or terminate without being drawn upon.

           
  October 31 October 31
      2015   2014
 
Loan commitments $ 243,252 $ 195,148
Undrawn credit card lines 140,071 159,306
Letters of credit 39,015 43,926
       
    $ 422,338 $ 398,380

15. Related party transactions:

The Corporation’s and the Bank’s Board of Directors and the Corporation’s Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or balances outstanding during the periods.

The Corporation has loans to employees and key management personnel. At October 31, 2015 amounts due from key management personnel totalled $2,030,000 (October 31, 2014 - $2,013,000) 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, 2015 was $16,000 (October 31, 2014 - $18,000) and $64,000 (October 31, 2014 - $72,000) respectively.

There were no provisions for credit losses related to loans issued to key management personnel for the three months and year ended October 31, 2015 and 2014.

During the year ending October 31, 2015, the Corporation received short-term financing from a related party in the amount of $570,000, of which $320,000 was repaid with common shares of the Bank held by the Corporation.

16. 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 principal subsidiary is Pacific & Western Bank of Canada, (the “Bank”) and as a result, the following discussion on capital management is with respect to the capital management of the Bank. OSFI sets and monitors capital requirements for the Bank. Capital is managed in accordance with policies and plans that are regularly reviewed and approved by the Board of Directors and take into account forecasted capital needs and conditions in financial markets.

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

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

During the three months and year ended October 31, 2015 there were no material changes in the Bank’s management of capital.

b) Risk-Based Capital Ratio:

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

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

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

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

                         
            October 31, 2015   October 31, 2014
          "All-in"   "Transitional" "All-in"   "Transitional"
 
Common Equity Tier 1 (CET1) capital
Directly issued qualifying common share capital $ 142,369 $ 142,369 $ 142,346 $ 142,346
Retained earnings (deficit) 2,903 2,903 (3,493) (3,493)
  Accumulated other comprehensive income   13   13   19   19
CET1 capital before regulatory adjustments 145,285 145,285 138,872 138,872
  Total regulatory adjustments to CET1   (9,031)   (3,612)   (8,693)   (1,739)
Common Equity Tier 1 capital   $ 136,254 $ 141,673 $ 130,179 $ 137,133
 
Additional Tier 1 (AT1) capital
  Directly issued qualifying AT1 instruments $ 29,337 $ 29,337 $ 13,647 $ 13,647
Tier 1 capital     $ 165,591 $ 171,010 $ 143,826 $ 150,780
 
Tier 2 capital
Directly issued capital instruments subject to
  phase out from Tier 2     $ 12,700 $ 12,700 $ 14,500 $ 14,500
Tier 2 capital before regulatory adjustments 12,700 12,700 14,500 14,500
  Total regulatory adjustments to Tier 2 capital   -   -   -   -
Tier 2 capital       $ 12,700 $ 12,700 $ 14,500 $ 14,500
Total capital       $ 178,291 $ 183,710 $ 158,326 $ 165,280
Total risk-weighted assets   $ 1,320,158 $ 1,325,576 $ 1,156,832 $ 1,163,786
Capital ratios
CET1 Ratio 10.32% 10.69% 11.25% 11.78%
Tier 1 Capital Ratio 12.54% 12.90% 12.43% 12.96%
  Total Capital Ratio       13.51%   13.86%   13.69%   14.20%

c) Leverage Ratio:

On January 1, 2015, the assets-to-capital multiple was replaced by a leverage ratio that is prescribed under the Basel III Accord. The leverage ratio is a supplementary measure to the risk-based capital requirements and is defined as the ratio of Tier 1 capital to its total exposures. The Bank is in compliance with its leverage ratio that is calculated as follows:

       
October 31
      2015
 
On-balance sheet assets $ 1,625,806
Asset amounts deducted in determining Basel III "all in" Tier 1 Capital   (9,031)
Total on-balance sheet exposures     1,616,775
 
Off-balance sheet exposure at gross notional amount $ 422,339
Adjustments for conversion to credit equivalent amount     (301,674)
Off-balance sheet exposures     120,665
 
Tier 1 Capital     165,591
Total Exposures 1,737,440
 
Basel III Leverage Ratio     9.53%

The Bank was in compliance with the leverage ratio prescribed by OSFI throughout the period presented.

17. Interest rate position:

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

        October 31, 2015   October 31, 2014
     

Increase 100
bps

 

Decrease 100
bps

Increase 100
bps

 

Decrease 100
bps

 
Impact on projected net interest
income during a 12 month period $ 3,371 $ (3,114) $ 3,543 $ (3,493)
Impact on reported equity
during a 60 month period $ 295 $ (86) $ (319) $ 484
             
Duration difference between assets and
liabilities (months)     0.8     0.2  

18. Fair Value of Financial Instruments:

Fair values are based on management’s best estimates of market conditions and valuation policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgment and as such, may not be reflective of future fair values. The Corporation’s loans and deposits lack an available market as they are not typically exchanged. Therefore, they are not necessarily representative of amounts realizable upon immediate settlement. See Note 23 to the October 31, 2014 consolidated financial statements for more information on fair values.

    October 31, 2015   October 31, 2014
  Fair value   Fair value
Book of assets Book of assets
  Value and liabilities Value and liabilities
 
Assets
 
Cash and cash equivalents $ 130,614 $ 130,614 $ 147,301 $ 147,301
Securities 22,433 22,386 48,800 48,671
Loans 1,447,660 1,449,567 1,224,247 1,224,730
Other financial assets 4,622 4,622 3,793 3,793
         
 
Liabilities
 
Deposits $1,325,828 $ 1,333,366 $1,193,797 $ 1,198,530
Notes payable 80,467 66,333 75,832 63,850
Securitization liabilities 43,525 47,604 43,466 46,732
Other financial liabilities 71,306 71,306 46,558 46,558
Preferred share liabilities   24,850   16,433   43,137   21,943

Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.6 billion in assets. PWBank specializes in providing commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.

PWC Capital Inc. shares trade on the TSX under the symbol PWC.

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

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

Contacts

PWC Capital Inc.
Investor Relations:
Wade MacBain, 519-488-1280
wadem@pwccapital.com
or
Public Relations & Media:
Tel Matrundola, 519-488-1280
Vice-President
telm@pwccapital.com

Contacts

PWC Capital Inc.
Investor Relations:
Wade MacBain, 519-488-1280
wadem@pwccapital.com
or
Public Relations & Media:
Tel Matrundola, 519-488-1280
Vice-President
telm@pwccapital.com