Pacific & Western Credit Corp. announces results for its fourth quarter ended October 31, 2012

LONDON, ON, Dec. 6, 2012 /CNW/ -

FOURTH QUARTER SUMMARY
(three months ended October 31, 2012, compared to three months ended October 31, 2011, unless otherwise noted)

Pacific & Western Credit Corp. (the "Corporation") implemented International Financial Reporting Standards (IFRS) as of November 1, 2011 and prior period results have been restated to an IFRS basis. Key results for the fourth quarter of 2012 include the following:

Pacific & Western Bank of Canada

  • Income before income taxes for Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, for the three months ended October 31, 2012 was $1.0 million compared to $9.0 million for the same period a year ago. Net income (loss) for the Bank for the three months ended October 31, 2012 was ($907,000) compared to $6.2 million for the same period a year ago. Included in net income (loss) for the three months ended October 31, 2012 was an income tax adjustment of $1.9 million and the results from credit card operations where costs to implement the program exceeded revenues by $568,000.
  • For the year ended October 31, 2012, income before income taxes of the Bank was $8.1 million compared to $11.2 million a year ago. For the year, net income of the Bank was $3.8 million compared to $7.6 million last year. Included in net income for the year ended October 31, 2012 was an income tax adjustment of $1.9 million and the results from credit card operations where costs to implement the program exceeded revenues by $2.8 million.
  • Net interest income and spread for the Bank for the three months ended October 31, 2012 increased to $5.5 million and 1.42% respectively from $4.7 million and 1.25% respectively for the same period a year ago. For the year ended October 31, 2012, net interest income and spread increased to $19.6 million and 1.30% from $16.9 million and 1.21% last year.
  • Lending assets at October 31, 2012 increased to $1.21 billion from $1.15 billion a year ago.
  • Credit quality remains strong with gross impaired loans at October 31, 2012 totalling $1.6 million or 0.13% of total loans compared to $1.6 million or 0.14% of total loans a year ago. Net impaired loans totalled $23,000 at October 31, 2012 compared to $73,000 a year ago.

Pacific & Western Credit Corp.

  • Net income (loss) of Pacific & Western Credit Corp. for the three months ended October 31, 2012 was ($2.7 million) or ($0.10) per share (($0.10) diluted) compared to ($1.3 million) or ($0.05) per share (($0.05) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income (loss) of the Corporation for the current quarter was ($1.5 million) compared to ($74,000) a year ago.
  • Net income (loss) of Pacific & Western Credit Corp. for the year ended October 31, 2012 was ($5.1 million) or ($0.19) per share (($0.19) diluted) compared to ($8.2 million) or ($0.43) per share (($0.43) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) of the Corporation for the period was ($207,000) compared to ($3.4 million) a year ago.

PRESIDENT'S COMMENTS

Our Bank's net interest income and spread continue to improve.  Net interest income of $5.5 million was earned in the quarter bringing the total net interest income earned for the year to $19.6 million versus last year's $16.9 million.  This increase in net interest income was due to an increase in spread which grew from 1.21% to 1.30% and an increase in loan balances which grew from $1.15 billion last year to $1.21 billion this year. Taking into account other income which includes gains on sales of securities and loans, total revenue for the year was $32.4 million versus last year's $28.9 million.  The Bank's net income before taxes for the year was $8.1 million versus last year's $11.2 million with the decrease primarily attributable to the start-up costs associated with our new Home Hardware Credit Card Program.  The Bank's net income figure was adversely affected by an income tax adjustment of $1.9 million giving rise to a loss for the quarter of $907,000.  For the year the Bank earned $3.8 million versus the previous year's $7.6 million.

Overall our company earned $1.4 million before taxes and Class B preferred share dividends versus last year's loss of $417,000.  After taxes and Class B preferred share dividends the net loss reduced from $8.2 million to $5.1 million.

The Bank's three important new initiatives became fully operational during the year and are now being marketed throughout Canada.  Our Home Hardware credit cards and receivables are rapidly producing ever increasing revenues.  The net cost of the credit card program for the quarter reduced to $568,000 versus last quarter's $798,000.  We expect this net cost will continue to reduce as revenues from the credit card receivables grow so that this program will become a significant net contributor in the coming years. 

The Bank's new Deposit Product for the Trustees in Bankruptcy Industry is now fully operational and is already being utilized by Trustees throughout Canada.  This new product will increase the diversity of our Bank's deposit gathering network and result in a significant reduction to its cost of funds.

The Bank's Bulk Financing Program is growing rapidly and we expect that this new low-risk asset class will form a significant portion of our Bank's lending assets in the quarters to come. 

I am very pleased with the progress we have made during the past year.  The Bank's lending operations continue to generate ever increasing spread income with only a small fraction of the industry's non-performing loans.  Our Home Hardware credit card program is nearing breakeven and is likely to become a significant contributor to the Bank's overall earnings in the years to come.

In 2012 we successfully laid the foundation for solid steady growth in earnings for years to come.  Not only did we launch attractive new revenue streams, but we also significantly reduced our Bank's vulnerability to external factors.  For example, during the year we successfully sold the Bank's portfolio of equity securities, eliminating the Bank's vulnerability to a volatile asset class.  We are confident that our Bank is now well positioned to grow steadily in the future. 

 

FINANCIAL HIGHLIGHTS                            
(unaudited)     for the three months ended   for the year ended
($CDN thousands except per share amounts
and number of credit cards outstanding)
October 31
2012
October 31
2011
  October 31
2012
October 31
2011
Pacific & Western Bank of Canada                  
Balance Sheet Summary                    
  Cash and securities   $ 296,693 $ 306,672   $ 296,693 $ 306,672
  Total loans       1,210,311   1,149,164     1,210,311   1,149,164
  Average loans       1,232,953   1,135,254     1,179,738   1,076,836
  Total assets       1,534,168   1,485,734     1,534,168   1,485,734
  Deposits       1,317,298   1,269,730     1,317,298   1,269,730
  Subordinated notes payable   49,815   49,651     49,815   49,651
  Shareholder's equity     93,104   96,576     93,104   96,576
Capital ratios (2011 amounts based on CGAAP)                            
  Total regulatory capital   $ 143,714 $ 149,066   $ 143,714  $ 149,066
  Assets-to-capital ratio     10.86   9.87     10.86   9.87
  Tier 1 risk-based capital ratio   8.54%   8.89%     8.54%   8.89%
  Total risk-based capital ratio    12.81%   13.33%     12.81%   13.33%
Results of operations                    
  Net interest income   $ 5,503 $ 4,664   $ 19,608  $ 16,927
  Spread        1.42%   1.25%     1.30%   1.21%
  Other income      2,370   8,811     13,287   12,306
  Provision for credit losses   28   118     461   309
  Total revenue       7,845   13,357     32,434   28,924
  Net income before income taxes   1,026   9,021     8,091   11,190
  Net income (loss)     (907)   6,227     3,824   7,570
  Return on average total assets   -0.23%   1.68%     0.25%   0.54%
  Gross impaired loans to total loans   0.13%   0.14%     0.13%   0.14%
  Provision for credit losses as a % of average loans   0.00%   0.01%     0.04%   0.03%
Segmented operations summary                  
  Commercial Lending income before income taxes $ 1,594 $ 9,021   $ 10,878 $ 11,190
  Loan spread       2.14%   2.08%     2.04%   2.07%
  Results from Credit Card Operations $ (568) $ -   $ (2,787) $ -
  Credit card receivables   $ 23,397 $ -   $ 23,397 $ -
  Number of credit cards outstanding   25,200   -     25,200   -
Pacific & Western Credit Corp., (consolidated)                  
Results of operations                     
  Net income (loss) of the Bank   $ (907) $ 6,227   $ 3,824 $ 7,570
  Deduct interest expense on notes of the parent   (725)   (1,191)     (2,730)   (4,536)
  Non-interest expenses of the parent   393   (2,347)     272   (3,451)
  Net income (loss) before the following:   (1,239)   2,689     1,366   (417)
  Interest expense relating to Class B                  
  Preferred Share dividends   (1,223)   (1,209)     (4,865)   (4,812)
  Provision for taxes     (232)   (2,763)     (1,573)   (2,998)
  Net loss of the Corporation $ (2,694) $ (1,283)   $ (5,072) $ (8,227)
  Loss per common share:                  
    Basic $ (0.10) $ (0.05)   $ (0.19) $ (0.43)
    Diluted $ (0.10) $ (0.05)   $ (0.19) $ (0.43)

 

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 2012 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2012, 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 first quarter interim financial statements and its audited consolidated financial statements for the year ended October 31, 2011, together with notes which were prepared in accordance with previous Canadian Generally Accounting Principles ("CGAAP") and MD&A, 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, 2011, remain substantially unchanged.

Overview

Pacific & Western Credit Corp. is a holding company whose shares trade on the Toronto Stock Exchange. Its wholly-owned and principal subsidiary is Pacific & Western Bank of Canada which provides lending services to selected niche markets and operates as a Schedule I bank under the Bank Act (Canada).

Pacific & Western Credit Corp.

Net income (loss) of the Corporation for the three months ending October 31, 2012 was ($2.7 million) or ($0.10) per share (($0.10) diluted) compared to ($1.3 million) or ($0.05) per share (($0.05) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the three months ending October 31, 2012 was ($1.5 million) compared to ($74,000) last year. These dividends are recorded as interest expense in the consolidated financial statements as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet.

Net income (loss) of the Corporation for the year ended October 31, 2012 was ($5.1 million) or ($0.19) per share (($0.19) diluted) compared to ($8.2 million) or ($0.43) per share (($0.43) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the year ending October 31, 2012 was ($207,000) compared to ($3.4 million) last year.

Pacific & Western Bank of Canada

Income before income taxes of the Bank for the three months ending October 31, 2012 was $1.0 million compared to $9.0 million for the same period a year ago with the decrease due primarily to gains from the sale of preferred shares totalling $8.5 million a year ago compared to $nil in the current quarter and costs exceeding revenues by $568,000 in the current quarter relating to the Bank's private label credit card program which was launched in the current year. This variance in the current quarter was reduced by gains totalling $1.9 million on the sale of loans and an increase in net interest income due to growth in lending assets and increased spread. Net income (loss) for the Bank for the current period was ($907,000) compared to $6.2 million for the same period last year. Net income for the current quarter also included an income tax provision of $1.9 million relating to a change in the estimate of previously recognized deferred income tax assets of the Bank.

For the year ended October 31, 2012, income before income taxes of the Bank was $8.1 million compared to $11.2 million a year ago and included gains totalling $10.1 million on the sale of preferred shares compared to $11.7 million a year ago, gains totalling $1.9 million on the sale of lending assets compared to $nil last year, an increase in net interest income of $2.7 million on lending assets and costs exceeding revenues by $2.8 million in the current year relating to the Bank's private label credit card program. Net income of the Bank for the current year was $3.8 million compared to $7.6 million and also included the income tax provision of $1.9 million referred to above.

At October 31, 2012, total assets of the Bank were $1.53 billion compared to $1.49 billion a year ago with the increase due primarily to growth in lending assets which increased to $1.21 billion at October 31, 2012 from $1.15 billion last year. The growth in lending assets was due primarily to an increase in residential construction mortgages and bulk financings. Lending assets also increased as a result of credit card receivables totalling $23.4 million relating to the private label credit card program.

Credit quality remains strong, with gross impaired loans totalling $1.6 million at October 31, 2012 compared to $1.6 million a year ago and net impaired loans which were $23,000 compared to $73,000 a year ago. At October 31, 2012, the ratio of gross impaired loans as a percentage of total loans was 0.13% compared to 0.14% last year.

Total Revenue

Total revenue of the Bank for the three months ended October 31, 2012 was $7.9 million compared to $13.4 million for the same period last year and for the year ended October 31, 2012, total revenue was $32.4 million compared to $28.9 million last year. Total revenue increased from a year ago due to the growth in net interest income in the current periods and gains on the sale of lending assets totalling $1.9 million this year compared to $nil last year reduced by a lower amount of gains on the sale of preferred shares in the current year.

The provision for credit losses, which is also included in total revenue, was $28,000 in the current quarter compared to $118,000 a year ago and for the year ended October 31, 2012 was $461,000 compared to $309,000 a year ago. Included in the provision for credit losses for the current quarter and for the year were provisions totalling $122,000 and $379,000 respectively relating to credit card receivables.

Net Interest Income and Net Interest Margin

Net interest income for the Bank for the three months ended October 31, 2012 increased to $5.5 million compared to $4.7 million a year ago and for the year ended October 31, 2012, net interest income was $19.6 million compared to $16.9 million. Net interest income increased from a year ago primarily as a result of the growth in lending assets and increased spread.

Net interest margin or spread for the Bank for the three months ended October 31, 2012 increased to 1.42% from 1.25% last year and for the year ended October 31, 2012 increased to 1.30% from 1.21% last year with the increase due to the growth in lending assets and increased spread on new loans booked in the year.

Other Income  

Other income for the three months ended October 31, 2012 was $2.4 million compared to $8.8 million for the same period a year ago and for the year ended October 31, 2012 was $13.3 million compared to $12.3 million a year ago. Other income in the current quarter includes gains on the sale of lending assets totalling $1.9 million compared to $nil a year ago and non-interest revenue from credit cards and other income totalling $491,000 compared to $268,000 last year. A year ago, gains from the sale of securities totalled $8.5 million in the quarter compared to $nil in the current quarter. For the year ended October 31, 2012, gains from the sale of preferred shares and lending assets totalled $12.0 million compared to $11.7 million last year and non-interest revenue earned from credit card operations and other income totalled $1.3 million compared to $511,000 last year.

Non-Interest Expenses

Non-interest expenses of the Corporation, including those relating to credit card operations, totalled $6.4 million for the current quarter compared to $6.7 million for the same period a year ago and for the year ended October 31, 2012 totalled $24.1 million compared to $21.2 million last year. The increase in non-interest expenses for the year was due to increases in general and administrative expenses relating to credit card operations and increases in professional and consulting fees and other volume related expenses. Non-interest expenses relating to credit card operations totalled $860,000 for the current quarter and for the year ended October 31, 2012, totalled $3.3 million. In addition, salaries and benefits increased in the current quarter and for the year primarily as a result of increased staff in the lending and credit card areas.

Income Taxes

The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 27% compared to 29% for the previous periods. The effective rate is impacted by the tax benefit on operating losses not being recorded for accounting purposes, non-taxable dividend income earned in the Bank's treasury portfolio, and other items not being taxable or deductible for income tax purposes with the primary item being the dividends on Class B Preferred Shares which are recorded as interest expense in the Consolidated Statement of Income (Loss). 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
      2012   2011     2012   2011
                     
Tax on gain on sale of securities    $ -  $ 2,307    $ 2,710  $ 3,171
Income tax on dividends paid by the Corporation     205   2,763     1,546   2,998
Substantively enacted rate change     -   -     (376)   -
Deferred tax asset adjustment     1,881   -     1,881   -
Other     79   488     79   449
                     
     $ 2,165  $ 5,558    $ 5,840  $ 6,618

For the current quarter, the provision for income taxes was $2.2 million compared to $5.6 million a year ago and includes an income tax provision of $1.9 million relating to a change in the estimate of previously recognized deferred tax assets of the Bank and an income tax provision of $205,000 in the parent company relating to income tax on dividends paid by the Corporation on its Class B Preferred Shares. The income tax provision for the same quarter last year included an income tax provision of $2.3 million relating to gains on the sale of preferred shares and a provision of $2.8 million in the parent company relating to the income tax on dividends paid by the Corporation on its Class B Preferred Shares.

For the year ending October 31, 2012, the provision for income taxes was $5.8 million compared to $6.6 million a year ago and includes the income tax provision of $1.9 million relating to unrecognized deferred tax assets of the Bank and an income tax provision of $2.7 million relating to gains on the sale of preferred shares. Last year the provision for income taxes included $3.2 million relating to gains on sale of preferred shares and a provision of $1.6 million in the parent company relating to the income tax on dividends paid by the Corporation on its Class B Preferred Shares. Also included in the provision for income taxes in the current year was a recovery of $376,000 relating to the impact on the Bank's deferred income tax asset from the change in corporate income tax rates substantively enacted during the third quarter.

At October 31, 2012, the deferred income tax asset in the Bank was $9.1 million compared to $10.6 million a year ago with the decrease due to the tax effect of the current year's results and reduced by the recording of an income tax adjustment totalling $1.9 million. The deferred income tax asset is primarily a result of income tax losses from previous periods, the benefit of which was recorded at the time. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

The ultimate realization of the deferred income tax asset cannot be determined with certainty however management is of the opinion that it is probable the Bank will be able to realize the deferred income tax asset in future years. The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income in future years sufficient to offset the income tax losses. The ability to generate sufficient taxable income may be dependent upon the Bank increasing its capital to facilitate growth in its lending assets thereby increasing income from operations.

Comprehensive Income (Loss)

Total comprehensive income (loss) is comprised of the net loss for the period and other comprehensive income (loss) which consists primarily of unrealized gains and losses on available-for-sale securities. Total comprehensive income (loss) for the three months ended October 31, 2012 was ($2.7 million) compared to ($9.6 million) a year ago and for the year ended October 31, 2012, total comprehensive income (loss) was ($12.4 million) compared to ($14.9 million) last year. The differences from a year ago are due to higher amounts of unrealized gains on available-for-sale securities recorded in comprehensive income (loss) in previous years being reversed when realized in the current periods.

Segment Analysis 

Commercial Lending  

The commercial lending segment consists of the operations of the Bank related to issuing mortgages, loans and leases. The commercial lending segment is supported by deposit taking and treasury activities. During the three months ended October 31, 2012, income before income taxes of the commercial lending segment totalled $1.6 million compared to $9.0 million a year ago with the difference due primarily to gains on the sale of preferred shares and lending assets in the quarter which were $1.9 million compared to $8.5 million for the same period last year. For the year ended October 31, 2012, income before income taxes of the commercial lending segment totalled $10.9 million compared to $11.2 million a year ago.

For the three months ended October 31, 2012, net interest income from commercial lending totalled $5.3 million compared to $4.7 million last year and for the year ended October 31, 2012, net interest income from commercial lending totalled $19.3 million compared to $16.9 million last year with the increase due primarily to an increase in lending assets and increased spreads on new loans.

For the three months ended October 31, 2012, non-interest expenses for the commercial lending segment totalled $6.0 million compared to $4.3 million a year ago and for the year ended October 31, 2012, non-interest expenses for the commercial lending segment totalled $21.1 million compared to $17.7 million a year ago. Non-interest expenses increased from the previous periods as a result of an increase in professional and consulting fees, volume related expenses and an increase in salaries and benefits due to additional staff being hired.

Credit Card Operations 

This segment consists of income and expenses related to the Bank's private label credit card program that was launched on January 2, 2012.  As at October 31, 2012, credit card balances totalled $23.4 million with 25,200 credit cards issued compared to $17.8 million outstanding and 21,300 cards issued at the end of the previous quarter. For the three months ending October 31, 2012, net interest income from credit card operations totalled $196,000 and for the year, net interest income totalled $259,000. Net interest income from credit card operations was impacted by incentive programs being introduced to generate new cards being issued.  Non-interest revenue from credit card operations in the form of credit card fees totalled $218,000 in the quarter and for the year totalled $593,000.

For the three months ending October 31, 2012, the Bank recorded a provision for credit losses relating to credit cards of $122,000 and for the year the provision for credit losses relating to credit cards totalled $379,000. As at October 31, 2012, the collective allowance relating to credit card receivables totalled $352,000.

Non-interest expenses relating to credit card operations totalled $860,000 in the current quarter and for the year totalled $3.3 million. These expenses consisted of salaries and benefits relating to the credit card operations, expenses for activities carried out by external parties to establish certain aspects of the program and to administer processing of the credit cards, marketing and promotional costs also as part of the start-up of the programs well as general and administrative expenses.

Consolidated Balance Sheet

Total assets of the Corporation at October 31, 2012, were $1.53 billion compared to $1.49 billion a year ago with the increase due primarily to growth in lending assets which increased from $1.15 billion to $1.21 billion at October 31, 2012. The impact of the growth in lending assets was reduced by the amount of cash and securities which decreased from $313 million a year ago to $300 million at the end of the year.

Cash and Securities

Cash and cash equivalents typically consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Corporation's treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers' acceptances and corporate debt. Cash and securities, which are held primarily for liquidity management purposes, totalled $300 million or 20% of total assets at October 31, 2012 compared to $313 million or 21% of total assets a year ago. Cash and cash equivalents were $133 million of the total amount of cash and securities at October 31, 2012, compared to $195 million of the total amount a year ago. The decrease was a result of the Corporation shifting its strategy to hold higher levels of liquid securities in its treasury portfolio compared to previous years in order to comply with changes in global regulatory liquidity requirements.

At October 31, 2012, the Corporation had sold all of its holdings of preferred shares which totalled $30 million a year ago. Although the preferred shares held by the Corporation yielded an attractive after-tax rate of return, the Corporation undertook the strategy of reducing its holdings of preferred shares in order to minimize the impact on regulatory capital of mark-to-market adjustments on the preferred shares as regulatory capital includes unrealized gains and losses on available-for-sale equity securities. As well, future changes in global banking regulations makes other financial institutions' preferred shares unattractive due to negative impacts in calculating regulatory capital.

At October 31, 2012, the net unrealized gain in the Corporation's securities portfolio was $99,000 compared to net unrealized gains of $10.1 million a year ago with the change due to gains being realized over the past year. The unrealized gains are recorded net of income taxes in Accumulated Other Comprehensive Income (Loss). The fair values of securities held in the Corporation's treasury portfolio are based primarily on market values as the securities the Corporation owns are publicly traded. The Corporation is of the view that there is no objective evidence of impairment relating to any unrealized losses on the remaining securities it owns and no impairment charges are required at this time.

Mortgages and Loans

Mortgages and loans totalled $1.21 billion at October 31, 2012, compared to $1.15 billion a year ago with the increase primarily in residential construction mortgages and bulk financings. New lending in the current quarter totalled $142 million compared to $130 million a year ago and loan repayments for the current quarter totalled $192 million compared to $114 million last year. For the current year, loan advances totalled $542 million compared to $545 million last year and loan repayments for the year totalled $480 million compared to $413 million last year. Loan repayments for the current quarter and for the year include loan sales totalling $39 million. In the current quarter the Bank sold lending assets to assist it in managing its capital levels and as well as to manage its exposure to commercial real estate.

At October 31, 2012, the Corporation's bulk financing portfolio, which consists of loans and leases acquired through its bulk financing initiative, totalled $109 million compared to $62 million a year ago. The Corporation is continuing to enter into agreements with vendors for the bulk lease financing program and expects to see accelerated growth in this market in the coming months.

Credit Quality

Gross impaired loans at October 31, 2012 totalled $1.6 million or 0.13% of total loans compared to $1.6 million or 0.14% of total loans a year ago. The Corporation has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Provisions for credit losses in the current quarter totalled $28,000 compared to $118,000 a year ago and for the year ended October 31, 2012 the provision for credit losses totalled $461,000 compared to $309,000 for the same period a year ago. The increase in the provision for credit losses from a year ago was due to loan growth and credit card receivables.

At October 31, 2012 the Corporation's collective allowance totalled $3.3 million compared to $2.8 million a year ago and at October 31, 2012, the Corporation's individual allowance for credit losses totalled $1.6 million compared to $1.6 million a year ago. Included in the Corporation's collective allowance at October 31, 2012 is an amount of $352,000 relating to credit card receivables.

Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Corporation is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.

Other Assets 

Other assets totalled $25.0 million at October 31, 2012 compared to $26.9 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $9.1 million compared to $10.6 million last year and capital assets and prepaid expenses totalling $13.7 million at October 31, 2012 compared to $13.7 million last year.

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, 2012 totalled $1.32 billion compared to $1.27 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $26.4 million or approximately 2.0% of total deposits at the end of the year were in the form of demand deposits compared to $29.8 million or approximately 2.3% of total deposits a year ago, with the remaining deposits having fixed terms. Total deposits increased from last year in order to fund the growth in lending assets.

In order to diversify its sources of deposits and reduce its cost of new deposits, the Corporation has identified a new source, that being deposits of trustees in bankruptcy. The Corporation has developed new banking software to serve this new deposit market and launched this product on a pilot basis in April 2012. These services are now being offered to the trustees in bankruptcy industry across Canada.

A further source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. From time to time, the Corporation uses these sources of short-term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At October 31, 2012, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.

Other liabilities consist primarily of the fair value of derivatives and accounts payable and accruals. At October 31, 2012, other liabilities totalled $32.7 million compared to $30.0 million a year ago. The fair value of derivatives at the end of the current quarter totalled $16.4 million compared to $18.5 million last year with the decrease due primarily to interest rate swaps unwound or maturing during the past year and changes in interest rates from a year ago. Under the accounting standard for hedges, the offsetting amount to the fair value of derivatives is included in the carrying values of the assets to which they relate.

Securitization Liabilities 

The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At October 31, 2012, the amount of securitization liabilities totalled $43.4 million compared to $43.3 million a year ago. The Corporation has not entered into any securitization transactions in the current year.

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $41.6 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $82.2 million at October 31, 2012 compared to $77.6 million a year ago with the increase due primarily to additional notes issued during the year by the Corporation. Excluding issue costs, notes payable consist of Series C Notes totalling $61.7 million maturing in 2018, a five year note in the amount of $2.0 million bearing interest at 6% and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum.

In addition, the Corporation has outstanding subordinated notes totalling $23.5 million issued by the Bank to external parties. These subordinated notes bear interest at rates ranging from 8.00% to 11.00%, are callable by the Bank, and mature between 2019 and 2022.

Preferred Share Liabilities

At October 31, 2012, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million, before deducting issue costs of $2.3 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.8 million, net of issue and conversion costs, representing the fair value of the Corporation's obligation to make future payments of principal and interest has been classified on the Corporation's Consolidated Balance Sheet as Preferred Share Liabilities.  In addition, an amount of $3.2 million, net of income taxes and issue costs, representing the equity portion of the Class B Preferred Shares, has been included in Shareholders' Equity on the Corporation's Consolidated Statement of Financial Position. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $41.8 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount, with the increase included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 11.8%.

Liquidity

At October 31, 2012, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations due to the end of fiscal 2013. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on Class B Preferred Shares. The funding for the obligations beyond 2013 is expected to come primarily from cash and interest income earned by the Corporation.

Shareholders' Equity

At October 31, 2012, Shareholders' Equity was $17.9 million compared to $26.8 million a year ago.  Common shares outstanding at October 31, 2012 totalled 28,522,491 compared to 26,237,594 a year ago with the change due to 1,763,877 common shares issued since last year as part of the dividends on the Class B Preferred Shares and 521,020 common shares issued under a private placement. Common share options outstanding totalled 1,163,033 at the end of the year compared to 1,143,033 a year ago with the change due to common share options issued, net of common share options which expired.

In addition, the Corporation has 5,398,700 warrants outstanding at October 31, 2012 which if exercised would result in one common share being issued for $2.80, as well as 747,600 broker warrants outstanding which if exercised would result in a unit consisting of one common share and one-half warrant being issued for $2.25, and 56,070 broker warrants which if exercised would result in one warrant being issued for $0.22. All of the warrants and broker warrants expired in November, 2012.

At October 31, 2012, there were 314,572 Class A Preferred Shares outstanding, unchanged from a year ago and 1,909,458 Class B Preferred Shares outstanding, also unchanged from a year ago.

The Corporation's book value per common share at October 31, 2012 was $0.48 compared to $0.82 a year ago. Assuming the outstanding Class B Preferred Shares are converted into common shares on the basis of $5.00 per share, the Corporation's book value per common share at October 31, 2012 would be $1.55 per share.

On May 30, 2012, at a special meeting of the shareholders of the Corporation, approval was given authorizing the reduction of the stated capital of the common shares of the Corporation by $50,472,000 and correspondingly reducing Retained Earnings (Deficit) by the same amount. There was no impact on total Shareholders' Equity.

Updated Share Information

As at December 5, 2012, there were no changes since October 31, 2012 in the number of outstanding common shares, Class A or Class B Preferred Shares. As at December 5, 2012, there were 489,083 common share options outstanding with the change since October 31, 2012 due to the expiry of 673,950 options.

Capital Management

Regulatory capital in the Corporation's principal subsidiary, the Bank, totalled $143.7 million at October 31, 2012 compared to $149.1 million a year ago with the change due primarily to operating results of the Bank over the past year and the impact on regulatory capital of the Bank's conversion to IFRS.

The Bank's total risk-based capital ratio, which is the ratio of regulatory capital to risk-weighted assets, was 12.81% at October 31, 2012 compared to 13.33% a year ago. The Bank's Tier 1 risk-based capital ratio, which is the ratio of Tier 1 capital to risk-weighted assets, was 8.54% at the end of the year compared to 8.89% last year. The Bank's assets-to-capital ratio was 10.86 at the end of the year compared to 9.87 a year ago. The changes in the Bank's capital ratios from a year ago were due to the decrease in regulatory capital as well as an increase in total assets and risk-weighted assets, primarily from the growth in lending assets.

As per OSFI's Capital Adequacy Guidelines, financial institutions may elect a phase-in of the impact of the conversion to IFRS on their regulatory capital reporting. The Bank made this election to phase-in the IFRS conversion impact over a five quarter period starting with the first quarter ending January 31, 2012. The phase-in amount is based on the impact on Retained Earnings (Deficit) of IFRS conversion as at November 1, 2011 and is recognized in regulatory capital on a straight-line basis. The estimate of the phase-in amount over the full five quarters is a reduction of regulatory capital of approximately $14.0 million and relates primarily to the impairment, net of income taxes, in previous years of available-for-sale securities. In the absence of this election, the Bank's Tier 1 and Total capital would have been 8.29% and 12.44% respectively at October 31, 2012.

See note 15 to the interim consolidated financial statements for more information regarding capital management.

Summary of Quarterly Results

(thousands of dollars except per share amounts)   2012   2011
      Q4   Q3   Q2   Q1     Q4   Q3   Q2   Q1
                                     
Results of operations:                                    
Total interest income    $ 15,264 $ 15,356 $ 14,928 $ 15,021   $ 14,798 $ 14,644 $ 13,594 $ 13,389
Interest expense     12,069   12,244   12,581   12,022     12,374   12,969   11,995   11,235
Net interest income     3,555   3,112   2,347   2,999     2,424   1,675   1,599   2,154
Provision for credit losses     28   249   -   184     118   37   78   76
Other income     2,370   3,573   3,939   3,405     8,649   255   919   2,210
Total revenue     5,897   6,436   6,286   6,220     10,955   1,893   2,440   4,288
Non-interest expenses     6,426   6,162   5,724   5,759     6,680   5,582   4,293   4,630
Income (loss) before income taxes     (529)   274   562   461     4,275   (3,689)   (1,853)   (342)
Income tax provision (recovery)     2,165   888   1,473   1,314     5,558   (154)   293   921
 Net income (loss)   $ (2,694) $ (614) $ (911) $ (853)   $ (1,283) $ (3,535) $ (2,146) $ (1,263)
Earnings (loss) per share                                    
  -basic   $ (0.10) $ (0.02) $ (0.03) $ (0.03)   $ (0.05) $ (0.17) $ (0.14) $ (0.09)
  -diluted   $ (0.10) $ (0.02) $ (0.03) $ (0.03)   $ (0.05) $ (0.17) $ (0.14) $ (0.09)
                                     

The financial results of the Corporation for each of the last eight quarters are summarized above. The Corporation's results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect the increase in lending assets with some seasonality occurring during the spring and summer months due to residential construction lending. Other income during the quarters shows variability due to the level of gains realized in each quarter on the sale of preferred shares held in the Corporation's treasury portfolio and in the fourth quarter of 2012 from the sale of lending assets. The provision for credit losses recorded in the third quarter of 2012 was due to loan growth in the quarter and in the collective allowance relating to credit card receivables.

Non-interest expenses over the past year have been comparable between quarters but have increased since last year. Non-interest expenses increased in the fourth quarter of 2011 as a result of expenses being incurred totalling approximately $1.3 million relating to professional and consulting fees. Non-interest expenses increased in the third quarter of 2012 as a result of additional accruals relating to the credit card program and increased in the fourth quarter of 2012 due to year end accruals for consulting and other expenses. Overall, non-interest expenses increased over the past year due to increased staff relating to lending operations and the credit card program and increased general and administrative expenses incurred to administer the credit card program which launched on January 2, 2012.

The provision for income taxes in the fourth quarter of 2012 included an income tax provision of $1.9 million relating to a change in the estimate of previously recognized deferred income tax assets. The income tax provision in the third quarter of 2012 decreased from previous quarters as a result of a recovery for income taxes relating to a change in corporate income tax rates substantively enacted during the quarter. The provision for income taxes in the other quarters of 2012 showed variability depending on the level of preferred shares sold in the quarter and includes provisions in the parent company relating to income tax on dividends paid by the Corporation on its Class B Preferred Shares. The provision for income taxes in the fourth quarter of 2011 included an income tax provision of $2.8 million relating to income taxes in the parent company.

International Financial Reporting Standards

Significant Accounting Policies

Significant accounting policies are detailed on pages 58 to 63 of the Corporation's 2011 Annual Report. Beginning with the interim period ended January 31, 2012 the Consolidated Financial Statements are prepared in accordance with IFRS. All adjustments to the Consolidated Financial Statements to facilitate the first time adoption of IFRS have been stipulated in "IFRS 1: First-time adoption of International Financial Reporting Standards". The majority of the transitional adjustments required as a result of the adoption of IFRS are applied retrospectively against opening retained earnings at November 1, 2010, unless IFRS 1 specifically provides for prospective application.

The elected exemptions and mandatory exceptions from full retrospective application of IFRS were disclosed in detail in the January 31, 2012 Interim Consolidated Financial Statements, along with accounting policy changes that had a quantitative impact on the consolidated financial statements at November 1, 2010 and October 31, 2011.

During the third quarter of fiscal 2012, the Corporation revised the classification previously provided in its interim financial statements for the periods ended January 31, 2012 and April 30, 2012 of certain of its financial instruments and changed an election under IFRS1.  As at November 1, 2010, the Corporation reclassified financial instruments totalling $17,638,000 from securities to loans and receivables and changed its elected exemption under IFRS1 to change the classification of a security to held-to-maturity from its prior classification as available-for-sale. This impacted Accumulated Other Comprehensive Income (AOCI) as these items are no longer marked to market through AOCI.  The Deferred Income Tax Asset included in Other Assets was also impacted. See Note 4 to the interim Consolidated Financial Statements for more information.

Future Change in Accounting Policies

IFRS 9: Financial instruments (IFRS 9)

In November 2009, the IASB issued IFRS 9 as the first phase of an ongoing project to replace IAS 39. This first issuance of IFRS 9 introduced new requirements for classifying and measuring financial assets. IFRS 9 was then re-issued in October 2010, incorporating new requirements for the accounting of financial liabilities, and carrying over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. The mandatory effective date for the adoption of IFRS 9 was set for annual periods beginning on or after January 1, 2013, with earlier application permitted. In December 2011, the IASB amended the mandatory effective date for the adoption of IFRS 9 for annual periods beginning on or after January 1, 2015, with earlier application permitted. The IASB continues to deliberate on the content of IFRS 9 and intends to expand the existing standard by adding new requirements for the impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various projects, IFRS 9 will represent a complete replacement of IAS 39.

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

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2011, and are found on pages 39 to 43 of the Corporation's 2011 Annual Report.

Controls and Procedures

Due to the Corporation's adoption of IFRS effective November 1, 2011, management identified and implemented changes to certain accounting processes and procedures during the period November 1, 2011 to October 31, 2012 in order to comply with IFRS. These changes relate to conversion of historical CGAAP financial information to IFRS for comparative purposes, as well as:

  • Accounting for securitized mortgages on the Corporation's Statement of Financial Position.
  • Accounting for securitization liabilities.
  • Accounting for securitized mortgages interest income and securitization liability interest expense.
  • Accounting for impaired available-for-sale securities and sales of impaired available-for-sale securities.
  • Accounting for loan fee income.

In addition during the current period, as a result of the launch of the Corporation's private label credit card program in January 2012, certain accounting processes and procedures were implemented relating to the recording of outstanding credit card receivable balances, recording of related collective allowances, recording of revenue from credit cards and recording of expenses relating to the credit card program.

As a result, management revised certain existing controls over financial reporting and implemented new controls to provide reasonable assurance that the risk of material misstatements in the Corporation's financial reporting continues to be at an acceptably low level.

There were no other changes in the Corporation's policies and procedures and other processes during the three months ended October 31, 2012 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.

Dated: December 5, 2012

Forward-Looking Statements

The statements in this management's discussion and analysis that relate to the future are forward-looking statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, many of which are out of our control. Risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in monetary and fiscal policy, including changes in interest rate policies of the Bank of Canada; the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the timely development and introduction of new products in receptive markets; the impact of changes in the laws and regulations regulating financial services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; unexpected changes in consumer spending and savings habits; and our anticipation of and success in managing the risks implicated by the foregoing. For a detailed discussion of certain key factors that may affect our future results, please see pages 43 and 44 of our 2011 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.

PACIFIC & WESTERN CREDIT CORP.
Consolidated Balance Sheet
(Unaudited)

(thousands of Canadian dollars)          
            October 31 October 31
As at           2012 2011
               
Assets              
               
Cash and cash equivalents        $ 132,766  $ 194,899
Securities (note 5)           167,227   117,678
Loans, net of allowance for credit losses (note 6)     1,210,311   1,149,164
Other assets            24,953   26,893
               
             $ 1,535,257  $ 1,488,634
               
Liabilities and Shareholders' Equity      
               
Deposits             $ 1,317,298  $ 1,269,730
Notes payable (note 7)         82,172   77,581
Securitization liabilities (note 8)         43,356   43,247
Other liabilities            32,711   30,024
Preferred share liabilities (note 9)       41,823   41,256
              1,517,360   1,461,838
               
Shareholders' equity:            
  Share capital (note 10)       21,888   68,825
  Retained earnings (deficit)       (4,063)   (49,397)
  Accumulated other comprehensive income      72   7,368
              17,897   26,796
               
             $ 1,535,257  $ 1,488,634
               

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

PACIFIC & WESTERN CREDIT CORP.
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
            2012 2011   2012 2011
                     
Interest income:                
  Loans          $ 13,935  $ 11,733    $ 53,413  $ 45,004
  Securities           647   1,846     3,700   8,054
  Loan fees           1,042   1,057     3,816   3,145
              15,624   14,636     60,929   56,203
                             
Interest expense:                        
  Deposits and other         8,727   8,560     35,763   33,972
  Notes payable         2,119   2,605     8,288   9,789
  Preferred share liabilities       1,223   1,209     4,865   4,812
              12,069   12,374     48,916   48,573
                             
Net interest income         3,555   2,262     12,013   7,630
                             
Other income (note 11)         2,370   8,811     13,287   12,255
Net interest and other income        5,925   11,073     25,300   19,885
                             
Provision for credit losses (note 6b)       28   118     461   309
Net interest and other income after provision for credit losses   5,897   10,955     24,839   19,576
                             
Non-interest expenses:                        
  Salaries and benefits         2,718   2,418     10,830   9,191
  General and administrative       3,119   3,888     11,252   10,318
  Premises and equipment       589   374     1,989   1,676
              6,426   6,680     24,071   21,185
                             
Income (loss) before income taxes       (529)   4,275     768   (1,609)
                             
Income tax provision (recovery)        2,165   5,558     5,840   6,618
                             
Net loss          $ (2,694)  $ (1,283)    $ (5,072)  $ (8,227)
                             
Basic earnings (loss) per share       $ (0.10)  $ (0.05)    $ (0.19)  $ (0.43)
                             
Diluted earnings (loss) per share       $ (0.10)  $ (0.05)    $ (0.19)  $ (0.43)
                             
Weighted average number of common shares outstanding   28,223,000   25,392,000     27,245,000   19,255,000
                         
                       

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

PACIFIC & WESTERN CREDIT CORP.
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
            2012 2011   2012 2011
                       
Net loss          $ (2,694)  $ (1,283)    $ (5,072)  $ (8,227)
                             
Other comprehensive income (loss), net of tax                    
  Net unrealized gains (losses) on assets held as available-for-sale (1)   22   (3,869)     (217)   (30)
  Amount transferred to income or loss on disposal of available-for-sale assets (2)   -   (4,401)     (7,079)   (6,624)
              22   (8,270)     (7,296)   (6,654)
                             
Comprehensive loss        $ (2,672)  $ (9,553)    $ (12,368)  $ (14,881)
                       

(1)      Net of income tax benefit (expense) for three months of $(8) (2011 - $1,429) and year of $80 (2011 - $11)
(2)      Net of income tax benefit (expense) for three months of $nil (2011 - $1,628) and year of $2,618 (2011 - $2,450)

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

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)

(thousands of Canadian dollars)                        
            for the three months ended   for the year ended
 
 
 
 
 
 
 
 
October 31
2012
October 31
2011
 
 
October 31
2012
October 31
2011
                         
Common shares (note 10):                        
                         
Balance, beginning of the period        $ 14,252  $ 56,428    $ 61,886  $ 38,295
Issued on payment of Class B preferred share dividends         674   674     2,696   2,696
Issued during the period, net of issue costs         (13)   4,784     803   20,895
Reduction of stated capital (note 10)         -   -     (50,472)   -
                         
Balance, end of the period        $ 14,913  $ 61,886    $ 14,913  $ 61,886
                           
Common share warrants:                        
                           
Balance, beginning of the period        $ 2,003  $ 1,761    $ 2,003  $ -
Issued during the period         -   242     -   2,003
                         
Balance, end of the period        $ 2,003  $ 2,003    $ 2,003  $ 2,003
                           
Preferred shares (note 10):                          
                           
Class A preferred shares                        
Balance, beginning and end of the period       $ 1,061  $ 1,061    $ 1,061  $ 1,061
                         
Class B preferred shares                        
Balance, beginning and end of the period       $ 3,187  $ 3,187    $ 3,187  $ 3,187
                           
Contributed surplus (note 10):                        
                         
Balance, beginning of the period        $ 718  $ 684    $ 688  $ 436
Fair value of stock options granted         6   4     36   252
                         
Balance, end of the period        $ 724  $ 688    $ 724  $ 688
                         
Retained earnings (deficit):                        
                         
Balance, beginning of the period        $ (1,369)  $ (48,114)    $ (49,397)  $ (41,104)
Net loss         (2,694)     (1,283)   (5,072)   (8,227)
Reduction of stated capital (note 10)         -   -     50,472   -
Dividends paid         -   -     (66)   (66)
                         
Balance, end of the period        $ (4,063)  $ (49,397)    $ (4,063)  $ (49,397)
                         
Accumulated other comprehensive income (loss) net of taxes:                        
                         
Balance, beginning of the period        $ 50  $ 15,638    $ 7,368  $ 14,022
Other comprehensive income (loss)         22   (8,270)     (7,296)   (6,654)
                           
Balance, end of the period        $ 72  $ 7,368    $ 72  $ 7,368
                         
Total shareholders' equity        $ 17,897  $ 26,796    $ 17,897  $ 26,796
                     

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

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Cash Flows
(Unaudited) 

(thousands of Canadian dollars)            
            October 31     October 31
For the year ended       2012     2011
                   
Cash provided (used in):              
                   
Operations:                
  Net loss      $ (5,072)    $ (8,227)
  Items not involving cash:            
    Provision for credit losses   461     309
    Change in derivative financial instruments   (96)     (429)
    Deferred income taxes   4,215     6,618
    Stock-based compensation   36     252
    Gain on disposal of securities   (10,141)     (12,809)
    Impairment writedown on securities   -     622
    Interest income     (60,929)     (56,365)
    Interest expense      48,916     48,573
    Gain on sale of lending assets   (1,879)     -
  Mortgages and loans     (62,645)     (148,040)
  Interest received        58,449     53,599
  Proceeds from mortgage securitizations   -     18,868
  Deposits       47,568     118,827
  Interest paid        (44,068)     (40,908)
  Income taxes paid      (1,546)     (2,762)
  Change in other assets and liabilities   9,183     (6,457)
            (17,548)     (28,329)
Investing:                
  Purchase of securities     (131,273)     (35,545)
  Proceeds from sale and maturity of securities   81,951     137,552
            (49,322)     102,007
Financing:                
  Proceeds on issuance of notes payable   4,000     19,980
  Repayment of notes payable     -     (18,580)
  Proceeds from shares issued   803     22,898
  Dividends paid       (66)     (66)
            4,737     24,232
                   
Increase in cash and cash equivalents   (62,133)     97,910
                   
Cash and cash equivalents, beginning of the period   194,899     96,989
                   
Cash and cash equivalents, end of the period  $ 132,766    $ 194,899
                   
Cash and cash equivalents is represented by:          
  Cash        $ 81,656    $ 189,698
  Cash equivalents       51,110     5,201
                   
Cash and cash equivalents, end of the period  $ 132,766    $ 194,899
                   

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

PACIFIC & WESTERN CREDIT CORP.
Notes to Interim Consolidated Financial Statements
(Unaudited)

Three month period and year ended October 31, 2012 and 2011


1. Reporting entity:

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

The Corporation's wholly-owned and 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).  Pacific & Western Bank of Canada is involved in the business of providing financial solutions to clients in 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.

The interim Consolidated Financial Statements should be read in conjunction with the Corporation's audited Consolidated Financial Statements for the year ended October 31, 2011 and its first and third quarters of 2012 interim financial statements. As these condensed statements are being prepared for interim reporting purposes, they do not include all of the disclosures required for annual financial statements prepared under IFRS. Transitional reconciliations and disclosures required under IFRS that were not included in the Corporation's most recent annual financial statements or in the first quarter interim Consolidated Financial Statements have been included in Note 4.

The interim Consolidated Financial Statements for the three months and year ended October 31, 2012 and 2011 were approved by the Board of Directors on December 5, 2012.

b) 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.

3. Significant accounting policies:

These interim Consolidated Financial Statements are the Corporation's third set of interim financial statements prepared under IFRS. As a result of the application of the new accounting framework, certain accounting policies have changed as those applied at October 31, 2011 were consistent with Canadian Generally Accepted Accounting Principles (CGAAP). The Corporation's accounting policies under IFRS were disclosed in detail in the January 31, 2012 interim Consolidated Financial Statements and were applied consistently to all periods presented. There have been no changes to the IFRS accounting policies applied in the October 31, 2012 interim Consolidated Financial Statements.

4. Transition to IFRS:

Newly adopted accounting standards

Canadian publicly accountable enterprises are required to transition from CGAAP to IFRS effective for fiscal years beginning on or after January 1, 2011. For the Corporation, the change in financial reporting standards is effective for interim and annual financial statements for the fiscal year ending October 31, 2012, however transitional rules require restatement of comparative amounts for the interim and annual financial statements of the fiscal year ending October 31, 2011. Consequently, the Corporation's transition date to IFRS is November 1, 2010.

Beginning with the interim period ended January 31, 2012, the Consolidated Financial Statements are prepared in accordance with IFRS. All adjustments to the Consolidated Financial Statements to facilitate the first time adoption of IFRS have been stipulated in "IFRS1: First-time adoption of International Financial Reporting Standards". The majority of the transitional adjustments required as a result of the adoption of IFRS are applied retrospectively against opening retained earnings at November 1, 2010, unless IFRS1 specifically provides for prospective application.

The elected exemptions and mandatory exceptions from full retrospective application of IFRS were disclosed in detail in the January 31, 2012 interim Consolidated Financial Statements, along with accounting policy changes that had a quantitative impact on the consolidated financial statements at November 1, 2010 and October 31, 2011.

As at July 31, 2012 the Corporation revised the classification previously provided in its interim financial statements for the periods ended January 31, 2012 and April 30, 2012 of certain of its financial instruments and was disclosed in detail in the third quarter interim statements.

The quantitative impact of adopting IFRS, including these reclassifications, is outlined below.

Reconciliation of the Consolidated Statement of Financial Position - October 31, 2011

                       
            Balance   IFRS Adjustment     Balance
As at October 31, 2011       CGAAP Securitization AFS Other    IFRS
                       
Assets                    
                       
Cash and cash equivalents   $ 194,899 - - -  $ 194,899
Securities         135,137 (4,293) - (13,166)   117,678
Loans, net of allowances for credit losses   1,090,932 42,917 - 15,315   1,149,164
Other assets         26,171 1,536 - (814)   26,893
                       
             $1,447,139 40,160 - 1,335  $ 1,488,634
                       
Liabilities and Shareholders' Equity              
                       
Deposits       $ 1,269,730 - - -  $ 1,269,730
Notes payable         77,581 - - -   77,581
Securitization liabilities       - 43,247 - -   43,247
Other liabilities       31,219 (1,871) - 676   30,024
Preferred share liabilities       - - - 41,256   41,256
            1,378,530 41,376 - 41,932   1,461,838
                       
Preferred share liabilities       41,256 - - (41,256)   -
                       
Shareholders' equity:                  
  Share capital       69,900 - - (1,075)   68,825
  Retained earnings (deficit)     (36,444) (747) (10,755) (1,451)   (49,397)
  Accumulated other comprehensive income (loss)   (6,103) (469) 10,755 3,185   7,368
            27,353 (1,216) - 659   26,796
                       
          $ 1,447,139 40,160 - 1,335  $ 1,488,634
                       

 Reconciliation of Net Income (Loss) and Total Comprehensive Income (Loss) - for the three months and year ended October 31, 2011.

                     
    Balance     IFRS Adjustment   Balance
For the three months ended October 31, 2011   CGAAP   Securitization AFS     Other    IFRS
                     
Interest income  $ 14,105  $ 443  $ -  $ 88  $ 14,636
Interest expense   12,022   352   -   -   12,374
Net interest income   2,083   91   -   88   2,262
Provision for (recovery of) credit losses   83   -   -   35   118
Net interest income after provision for (recovery of) credit losses   2,000   91   -   53   2,144
Other income (charges)   (185)   (367)   9,363   -   8,811
Net interest income and other income (charges)   1,815   (276)   9,363   53   10,955
Non-interest expense   6,781   -   -   (101)   6,680
Loss before income taxes   (4,966)   (276)   9,363   154   4,275
Income tax expense (recovery)   3,121   (22)   2,715   (256)   5,558
Net income (loss)  $ (8,087)  $ (254)  $ 6,648  $ 410  $ (1,283)
                     
Other comprehensive income, net of tax:                    
Net unrealized gains (losses) on assets held as available-for-sale   (4,401)   (126)   -   658   (3,869)
Amount transferred to profit or loss on disposal of available-for-sale assets   2,135   -   (6,648)   112   (4,401)
Total other comprehensive income   (2,266)   (126)   (6,648)   770   (8,270)
Total comprehensive income (loss)  $ (10,353)  $ (380)  $ -  $ 1,180  $ (9,553)
                     
                     
    Balance     IFRS Adjustment    Balance
For the year ended October 31, 2011   CGAAP   Securitization AFS     Other    IFRS
                     
Interest income  $ 55,113  $ 1,564  $ -  $ (474)  $ 56,203
Interest expense   47,256   1,317   -   -   48,573
Net interest income   7,857   247   -   (474)   7,630
Provision for (recovery of) credit losses   165   -   -   144   309
Net interest income after provision for (recovery of) credit losses   7,692   247   -   (618)   7,321
Other income (charges)   593   (436)   12,098   -   12,255
Net interest income and other income (charges)   8,285   (189)   12,098   (618)   19,576
Non-interest expense   21,117   -   -   68   21,185
Loss before income taxes   (12,832)   (189)   12,098   (686)   (1,609)
Income tax expense (recovery)   2,998   -   3,508   112   6,618
Net income (loss)  $ (15,830)  $ (189)  $ 8,590  $ (798)  $ (8,227)
                     
Other comprehensive income, net of tax:                    
Net unrealized gains (losses) on assets held as available-for-sale   (1,581)   (218)   -   1,769   (30)
Amount transferred to profit or loss on disposal of available-for-sale assets   1,854   -   (8,590)   112   (6,624)
Total other comprehensive income   273   (218)   (8,590)   1,881   (6,654)
Total comprehensive income (loss)  $ (15,557)  $ (407)  $ -  $ 1,083  $ (14,881)
               

5. Securities:

Portfolio analysis:

     
  October 31 October 31
  2012 2011
         
Available-for-sale securities          
Securities issued or guaranteed by:      
  Canadian federal government  $ 76,841  $ 28,940
  Canadian provincial governments   48,526   21,214
  Canadian municipal governments   1,581   4,622
Corporate debt   24,966   17,570
Corporate equity   46   29,999
Total available-for-sale securities  $ 151,960  $ 102,345
     
Held-to-maturity securities  
Corporate debt  $ 15,267  $ 15,333
Total securities  $ 167,227  $ 117,678



6. Loans:

a) Portfolio analysis:

         
      October 31 October 31
      2012 2011
         
Residential mortgages      
  Insured      $ 35,966  $ 36,685
  Uninsured     230,129   176,555
Securitized mortgages   41,894   42,712
Government financing   172,326   201,185
Corporate loans     630,738   602,114
Corporate leases     71,131   84,106
Other loans     5,080   4,833
Credit card receivables   23,397   -
      1,210,661   1,148,190
           
Allowance for credit losses:        
  Collective     (3,283)   (2,827)
  Individual     (1,579)   (1,560)
      (4,862)   (4,387)
           
      1,205,799   1,143,803
           
Accrued interest     4,512   5,361
         
Total loans, net of allowance for credit losses  $ 1,210,311  $ 1,149,164
         

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

           
    October 31 October 31
    2012 2011
           
Residential mortgages  $ 600  $ 367
Corporate and government loans   2,307   2,408
Other loans     24   52
Credit card receivables   352   -
     $ 3,283  $ 2,827
           

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

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                 
          October 31 October 31
          2012 2011
For the three months ended   Collective Individual Total
Allowance
Total
Allowance
                 
Balance, beginning of the period  $ 3,182  $ 1,672  $ 4,854  $ 4,244
Provision for (recovery of) credit losses   (10)   38   28   118
Recoveries (write-offs)   111   (131)   (20)   25
                 
Balance, end of the period    $ 3,283  $ 1,579  $ 4,862  $ 4,387
                 
                 
          October 31 October 31
          2012 2011
For the year ended   Collective Individual Total
Allowance
Total
Allowance
                 
Balance, beginning of the period  $ 2,827  $ 1,560  $ 4,387  $ 5,426
Provision for credit losses   311   150   461   309
Recoveries (write-offs)   145   (131)   14   (1,348)
                 
Balance, end of the period    $ 3,283  $ 1,579  $ 4,862  $ 4,387
               

c)  Impaired loans:

                 
      October 31, 2012
      Gross
impaired
Individual allowance Net impaired
                 
Residential mortgages      $ 1,579  $ 1,579  $ -
Other loans       23   -   23
       $ 1,602  $ 1,579  $ 23
                 
                 
      October 31, 2011
      Gross
impaired
Individual allowance Net impaired
                 
Residential mortgages      $ 1,588  $ 1,560  $ 28
Other loans       45   -   45
       $ 1,633  $ 1,560  $ 73
           

Impaired loans at October 31, 2012 include foreclosed real estate held for sale with a gross carrying value of $83,000 (2011 - $157,000) and a related allowance of $83,000 (2011 - $110,000). Real estate held for sale is measured at the lower of cost and the fair value less costs to sell.

Interest income recognized on impaired loans for the three months and year ended October 31, 2012 was $39,000 (2011 - $35,000) and $150,000 (2011 - $144,000) respectively. An individual allowance has been recognized on the impaired loans to reflect the estimated recoverable amounts for impaired loans.

At October 31, 2012, loans, other than credit card receivables, past due but not impaired totalled $nil (2011 - $nil). At October 31, 2012, credit card receivables overdue by one day or more but not impaired totalled $1,112,000 (2011 - $nil).

7. Notes payable:

      
   October 31 October 31
   2012 2011
 
Ten year term Series C Notes unsecured, maturing 2018,
net of issue costs of $1,183, effective interest of
10.56% 
 $ 57,774  $ 57,309
         
Notes payable, unsecured, net of issue costs of $nil,
effective interest of 6.09% 
  2,200   200
         
Ten year term, unsecured, callable, subordinated
notes payable by the Bank to third parties, maturing
between 2019 and 2022, net of issue costs of $1,302,
effective interest of 10.80% 
  22,198   20,072
         
   $ 82,172  $ 77,581

8. Securitization liabilities:

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

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020.  Securitized insured mortgages with a carrying value of $41,643,000 (2011 - $42,413,000) are pledged as collateral for these liabilities.

9. Preferred share liabilities:

At October 31, 2012, the Corporation has outstanding 1,909,458 (2011 - 1,909,458) Class B Preferred Shares with a total value of $47.7 million (2011 - $47.7 million) less issue costs of $2.3 million (2011 - $2.5 million).  As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.8 million (2011 - $41.3 million), net of issue costs, representing the fair value of the Corporation's obligation to make future payments of principle and interest has been classified on the Corporation's Consolidated Statement of Financial Position as a preferred share liability.  In addition, an amount of $3.2 million (2011 - $3.2 million) representing the equity element of the Class B Preferred Shares, net of issue costs, has been classified in share capital on the Consolidated Statement of Financial Position.

As the preferred shares must be redeemed by the Corporation for approximately $47.7 million (2011 - $47.7 million), the preferred share liability amount of $41.8 million (2011 - $41.3 million) is being adjusted over the remaining term to redemption, until the amount is equal to the estimated redemption amount with the increase included in interest expense in the Consolidated Statement of Income (Loss) calculated using the effective interest rate of 11.8%.

10. Share capital:

               
            Stock Options
          Common
shares
outstanding
Number Weighted-
average
exercise
price
               
Outstanding, October 31, 2011      26,237,594 1,143,033  $ 4.93
Granted      - 50,000   1.90
Issued for cash proceeds     521,020 -   -
Issued pursuant to Class B Preferred Share dividend     1,763,877 -   -
Expired      - (30,000)   6.00
Outstanding, July 31, 2012      28,522,491 1,163,033  $ 4.77
               

At October 31, 2012, the Corporation has 6,202,370 (2011 - 6,202,370) warrants outstanding to acquire common shares and common share warrants that expire in November, 2012. In addition, at October 31, 2012, there were 314,572 (2011 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (2011 - 1,909,458) Class B Preferred Shares outstanding.

The Corporation recognized compensation expense relating to the estimated fair value of stock options granted for the three month period and year ended October 31, 2012 of $6,000 (2011 - $232,000) and $36,000 (2011 - $252,000) respectively. During the three months ended January 31, 2012, 50,000 options were granted to an officer who is a member of the Corporation's key management personnel. These options are exercisable into common shares at $1.90 per share and expire in January, 2022. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.31%, (ii) expected option life of 60 months and (iii) expected volatility of 57.71%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.95 per option. No additional options were granted during the three months ended October 31, 2012.

During the three months ended January 31, 2012, the Corporation issued 128,574 DSU's (2011 - 46,669) to its directors, with no additional grants of DSU's during the remainder of 2012. The amounts recorded in the Consolidated Statement of Income (Loss) relating to DSU's for the three months and year ended October 31, 2012 was $nil (2011 - $10,000 recovery) and $225,000 expense (2011 - $97,000 recovery) respectively.

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

11. Other income:

                   
    for the three months ended   for the year ended
    October 31 October 31   October 31 October 31
    2012 2011   2012 2011
                   
Gain on sale of securities  $ -  $ 8,543    $ 10,141  $ 11,744
Gain on sale of loans   1,879   -     1,879   -
Credit card non-interest revenue   218   -     593   -
Other income (charges)   273   (83)     578   82
Mark-to-market adjustment for derivatives   -   351     96   429
                   
  $ 2,370  $ 8,811    $ 13,287  $ 12,255
                 

12. Derivative instruments:

At October 31, 2012, the Corporation had outstanding contracts for asset liability management purposes to swap from fixed to floating interest rates with notional amounts totalling $134,352,000 (2011 - $179,128,000), all of which qualified for hedge accounting. The Corporation only enters into these interest rate contracts for its own account and does not act as an intermediary in this market. These contracts have a risk-weight of $287,000 (2011 - $529,000) for purposes of determining the Bank's regulatory capital ratios.  As required under the accounting standard relating to hedges, at October 31, 2012, $16,420,000 (2011 - $18,531,000) relating to these contracts was included in other liabilities and the offsetting amount included in the carrying values of the assets to which they relate. Approved counterparties are limited to Canadian chartered banks.

In 2011, the Corporation had entered into interest rate swaps that did not qualify for hedge accounting as a result of transactions with the Canada Housing TrustTM. At October 31, 2011 the notional amount of these contracts totalled $1,093,000 and $nil at October 31, 2012 as the swaps were unwound in the current fiscal year.

13. Commitments and contingencies:

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

         
      October 31 October 31
      2012 2011
         
Loan comittments      $ 167,534  $ 227,332
Undrawn credit card lines       107,006   -
Letters of credit       27,281   27,273
         
       $ 301,821  $ 254,605
         

In the ordinary course of business, cash and securities are pledged against liabilities and off-balance sheet items.

Details of assets pledged are as follows:

         
      October 31 October 31
      2012 2011
         
Collateral related to derivative transactions    $ 16,861  $ 18,551
Collateral related to letters of credit     9,256   9,003
         
       $ 26,117  $ 27,554
         

14. Related party transactions:

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

The Corporation issues both mortgages and personal loans to employees and Senior Executive Officers. At October 31, 2012 balances due from Senior Executive Officers totalled $1,023,000 (2011 - $1,084,000) of which $nil (2011 - $43,000) are secured by residential or other property.

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, 2012 was $9,000 (2011 - $29,000) and $39,000 (2011 - $117,000) respectively. There was $nil provision for credit losses related to loans issued to key management personnel for the three months and year ended October 31, 2012 and 2011.

15. Capital management:

a) Overview:

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

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

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

The goal is to maintain adequate regulatory capital to be considered well capitalized, protect consumer deposits and provide capacity for internally generated growth and strategic opportunities that do not otherwise require accessing the public capital markets, all the while providing a satisfactory return to shareholders.  The Bank's regulatory capital is comprised of share capital, retained earnings and unrealized losses on available-for-sale equity securities (Tier 1 capital) and unrealized gains on available-for-sale equity and the face value of subordinated notes (Tier 2 capital).  Subordinated notes included in regulatory capital is limited to 50% of Tier 1 capital (leverageable amount).

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

During the year ended October 31, 2012, there were no material changes in the Bank's management of capital.

b) Assets-to-Capital Multiple:

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

          
  October 31 October 31
  2012 2011
  IFRS CGAAP
         
Total assets (on and off-balance sheet) $ 1,561,449  $ 1,471,512
Capital        
  Common shares $ 103,965  $ 103,965
  Retained earnings (deficit)   (10,933)   (868)
  Unrealized gain (loss) on available-for-sale equity securities   -   (3,719)
  Subordinated notes (leverageable amount)   47,905   49,688
  OSFI phase-in adjustment of the impact of IFRS (note 10c)   2,777   -
Total regulatory capital  $ 143,714  $ 149,066
         
Assets-to-capital ratio   10.86   9.87
       

The Bank was in compliance with the assets-to-capital multiple prescribed by OSFI throughout the periods presented. Regulatory capital and related calculations for all comparable periods presented are reported under CGAAP as the Corporation is not required by OSFI to restate such figures.

c) Risk-Based Capital Ratio:

OSFI 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.  Based on the deemed credit risk for each type of asset, a weighting of 0% to 150% is assigned to determine the risk-based capital ratio.  OSFI recommends that banks maintain a minimum total risk-based capital ratio in excess of 10% and a Tier 1 risk-based capital ratio in excess of 7%.

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

               
      October 31, 2012   October 31, 2011
      IFRS   CGAAP
      Notional
Drawn
Amount
Risk
Weighted
Balance
  Notional
Drawn
Amount
Risk
Weighted
Balance
               
Balance sheet assets    $ 1,534,168  $ 996,958    $ 1,444,239  $ 978,941
Off-balance sheet assets   436,174   91,105     520,707   118,382
Charge for operational risk       33,752         20,713
Total risk-weighted assets     $ 1,121,815       $ 1,118,036
Regulatory capital       143,714         149,066
Total risk-based capital ratio       12.81%         13.33%
Tier 1 risk-based capital ratio       8.54%         8.89%
               

Impact of IFRS on Regulatory Capital

Reporting of the Bank's regulatory capital under IFRS commenced on November 1, 2011. As per OSFI's Capital Adequacy Guidelines, financial institutions may elect a phase-in of the impact of the conversion to IFRS on their regulatory capital. The Bank made this election to phase-in the IFRS conversion impact over a five quarter period starting with the first quarter ending January 31, 2012. The phase-in amount is based on the impact on Retained Earnings (Deficit) of IFRS conversion as at November 1, 2011 and is recognized in regulatory capital on a straight-line basis. The estimate of the phase-in amount over the full five quarters is a reduction of regulatory capital of approximately $14.0 million and relates primarily to the impairment in previous years of available-for-sale securities.  In the absence of this election, the Bank's Tier 1 and Total capital ratios would be 8.29% and 12.44% respectively at October 31, 2012.

16. Interest rate position:

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

                   
      October 31, 2012   October 31, 2011
      Increase 100
bps
Decrease 100
bps
  Increase 100
bps
Decrease 100
bps
               
Sensitivity of projected net interest
  income during a 12 month period
 $ 5,397  $ (5,346)    $ 3,336  $ (3,321)
Sensitivity of projected net interest
  income during a 60 month period
  8,341  $ (8,881)     (5,187)  $ 5,512
                   
Duration difference between assets and liabilities (months)   3         2    
               

17. Segment information:

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

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

Operating segment financial results are based on internal financial reporting documents which are provided to the Corporation's chief decision makers. Accounting policies applied and measurement bases used are consistent with those applied in the preparation of the Corporation's Consolidated Financial Statements. The financial results for all segments are presented on a consolidated basis. Transactions between segments have been eliminated.

The following table details financial results for the Corporation by operating segment:

                                   
For the three months ended       October 31, 2012 October 31, 2011
            Commercial lending Credit card lending (1) Corporate head office  Intercompany eliminations Total Total
           
                                   
Net interest income          $ 5,307  $ 196  $ (2,730)  $ 782  $ 3,555  $ 2,262
Other income           2,152   218   -   -   2,370   8,811
Net interest income and other income       7,459   414   (2,730)   782   5,925   11,073
Provision for credit losses         (94)   122   -   -   28   118
Net interest and other income (loss) after provision for credit losses   7,553   292   (2,730)   782   5,897   10,955
Non-interest expense           5,959   860   (97)   (296)   6,426   6,680
Income (loss) before income taxes       1,594   (568)   (2,633)   1,078   (529)   4,275
Income tax expense (recovery)         1,933   -   232   -   2,165   5,558
Net income (loss)          $ (339)  $ (568)  $ (2,865)  $ 1,078  $ (2,694)  $ (1,283)
                                   
                                 
For the year ended         October 31, 2012 October 31, 2011
            Commercial lending Credit card lending (1) Corporate head office  Intercompany eliminations Total Total
           
                       
Net interest income          $ 19,349  $ 259  $ (10,802)  $ 3,207  $ 12,013  $ 7,630
Other income           12,694   593   -   -   13,287   12,255
Net interest income and other income (charges)     32,043   852   (10,802)   3,207   25,300   19,885
Provision for credit losses         82   379   -   -   461   309
Net interest and other income (loss) after provision for credit losses   31,961   473   (10,802)   3,207   24,839   19,576
Non-interest expense           21,083   3,260   909   (1,181)   24,071   21,185
Income (loss) before income taxes       10,878   (2,787)   (11,711)   4,388   768   (1,609)
Income tax expense           4,267   -   1,573   -   5,840   6,618
Net income (loss)          $ 6,611  $ (2,787)  $ (13,284)  $ 4,388  $ (5,072)  $ (8,227)

Note 1:  Credit card lending segment launched operations on January 2, 2012.

18. Subsidiary company information:

The following table presents summary financial information regarding the Bank on a consolidated basis:

Consolidated balance sheets

         
        October 31 October 31
        2012 2011
           
Cash and cash equivalents    $ 129,466  $ 188,994
Securities       167,227   117,678
Loans, net of allowance for credit losses   1,210,311   1,149,164
Other assets     27,164   29,898
         $ 1,534,168  $ 1,485,734
           
Deposits        $ 1,317,298  $ 1,269,730
Subordinated notes payable   49,815   49,651
Securitization liabilities   43,356   43,247
Other liabilities     30,595   26,530
        1,441,064   1,389,158
           
Shareholder's equity     93,104   96,576
           
         $ 1,534,168  $ 1,485,734
           

Consolidated statements of income

           
      for the three months ended   for the year ended
      October 31 October 31   October 31 October 31
      2012 2011   2012 2011
               
Interest income    $ 15,620  $ 14,618    $ 60,902  $ 56,102
Interest expense   10,117   9,954     41,294   39,175
Net interest income   5,503   4,664     19,608   16,927
Other income    2,370   8,811     13,287   12,306
Net interest income and other income   7,873   13,475     32,895   29,233
Provision for credit losses   28   118     461   309
Net interest and other income after
  provision for credit losses
  7,845   13,357     32,434   28,924
Non-interest expense   6,819   4,336     24,343   17,734
Income before income taxes   1,026   9,021     8,091   11,190
Income tax expense    1,933   2,794     4,267   3,620
Net income (loss)    $ (907)  $ 6,227    $ 3,824  $ 7,570
               

Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.5 billion in assets.  PWBank specializes in providing innovative financing to large corporate and government entities including hospitals, school boards, universities and colleges, municipalities and provincial and federal government agencies.

Pacific & Western Bank of Canada is wholly owned by Pacific & Western Credit Corp., whose 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@pwbank.com (519) 675-4201

FOR FURTHER INFORMATION PLEASE CONTACT:
Investor Relations: (800) 244-1509, wadem@pwbank.com
Public Relations & Media: Tel Matrundola, Vice-President, (416) 203-0882, telm@pwbank.com
Visit our website at:  http://www.pwbank.com

 

 

 

 

 

SOURCE Pacific & Western Credit Corp.



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