Pacific & Western Credit Corp. announces results for its third quarter ended July 31, 2012

LONDON, ON, Aug. 30, 2012 /CNW/ -

THIRD QUARTER SUMMARY
(three months ended July 31, 2012, compared to three months ended July 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 third quarter of 2012 include the following:

Pacific & Western Bank of Canada

• Net income (loss) for Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, for the three months ended July 31, 2012 was $1.8 million compared to ($323,000) for the same period a year ago. Included in net income for the three months ended July 31, 2012 were the results from credit card operations which showed costs to implement the program exceeding revenues by $798,000.
• For the nine months ended July 31, 2012, net income of the Bank was $4.7 million compared to $1.3 million last year. Included in net income for the nine months ended July 31, 2012 was the results from credit card operations where costs to implement the program exceeded revenues by $2.2 million for the period.
• Spread for the Bank for the three months ended July 31, 2012 increased to 1.25% from 1.12% for the same period a year ago and for the nine months ended July 31, 2012 increased to 1.24% from 1.17% last year.
• Total revenue for the three months ended July 31, 2012 increased to $8.4 million from $4.5 million a year ago and included gains from the sale of securities of $3.0 million compared to $nil a year ago. For the nine months ended July 31, 2012, total revenue increased to $24.6 million compared to $15.6 million last year and included gains on the sale of securities of $10.1 million compared to $3.2 million last year.
• Lending assets at July 31, 2012 increased to $1.26 billion from $1.12 billion a year ago, an increase of 12%.
• Credit quality remains strong with gross impaired loans at July 31, 2012 totalling $1.7 million or 0.14% of total loans compared to $1.6 million or 0.14% of total loans a year ago. Net impaired loans totalled $51,000 at July 31, 2012 compared to $63,000 a year ago.

Pacific & Western Credit Corp.

• Net income (loss) of Pacific & Western Credit Corp. for the three months ended July 31, 2012 was ($614,000) or ($0.02) per share (($0.02) diluted) compared to ($3.5 million) or ($0.17) per share (($0.17) diluted) for the same period a year ago. Prior to the payment 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 $600,000 compared to ($2.3 million) a year ago.
• Net income (loss) of Pacific & Western Credit Corp. for the nine months ended July 31, 2012 was ($2.4 million) or ($0.09) per share (($0.09) diluted) compared to ($6.9 million) or ($0.41) per share (($0.41) diluted) for the same period a year ago. Prior to the payment of dividends on Class B Preferred Shares, net income (loss) of the Corporation for the period was $1.3 million compared to ($3.3 million) a year ago.

PRESIDENT'S COMMENTS

Continued strong performance by our Bank's lending team and additional gains earned on the sale of the Bank's preferred share portfolio were once again key drivers to the Bank's and PWCC's continued improvement in earnings.  During the third quarter the Bank earned $1.8 million versus a loss of $323,000 in the same quarter a year ago, and for the nine months ending July 31^st the Bank earned $4.7 million versus $1.3 million for the same period a year ago.  PWCC's results showed a similar improvement with earnings of $1.1 million during the third quarter before dividend expenses and provision for taxes, versus a loss of $2.3 million for the same period last year.  For the nine months ending July 31^st PWCC earned $2.6 million before dividend expenses and provision for taxes, versus a loss of $3.1 million for the same period last year.  After dividend expenses and provision for taxes PWCC showed a loss of $614,000 for the quarter versus a loss of $3.5 million in the same quarter last year, and for the nine months ended July 31^st PWCC showed a loss of $2.4 million versus a loss of $6.9 million for the same period last year.  The Bank's commercial lending operations continued to grow in the quarter, with average loan balances increasing to $1.23 billion from $1.21 billion in the previous quarter.  Loan spreads increased from the previous quarter, from 1.97% to 2.04%.  Total revenue earned from the Bank's commercial lending segment increased to $8.2 million during the quarter versus $4.5 million for the same quarter last year.  On a year-to-date basis total revenue earned from the Bank's commercial lending segment increased to $24.4 million from $15.6 million earned in the same period last year.

The Bank's three important new initiatives are all now fully operational and are being marketed throughout Canada.  Our Home Hardware credit cards and receivables are building rapidly giving rise to increased revenues.  Net cost of this credit card program for the quarter was $798,000 versus the cost of $935,000 in the previous quarter.  We expect this net cost to continue to decline as revenues from the credit card receivables grow.  After successfully piloting our new deposit product for trustees in the bankruptcy industry we are now marketing this product to trustees throughout Canada.  This new product will greatly increase the diversity of our Bank's deposit gathering network and will result in a significant reduction to its cost of funds.  Our bulk financing program is now growing rapidly.  Bulk financing assets grew to $94.8 million versus $59.0 million at the close of the same quarter last year.  We now have in place financing arrangements for eleven loan and lease originators and are in discussions with another seven vendors.

I am very pleased with the continued progress that we have made during the first nine months of this fiscal year. The Bank's commercial lending segment continues to perform very well with no loan losses and significantly increasing revenues.  The significant investments we have made in our three new initiatives are beginning to pay dividends and I am confident they will become major contributors to the Bank's and PWCC's future profitability.

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 third quarter of fiscal 2012 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 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 July 31, 2012 was ($614,000) or ($0.02) per share (($0.02) diluted) compared to ($3.5 million) or ($0.17) per share (($0.17) 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 July 31, 2012 was $600,000 compared to ($2.3 million) 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 Statement of Financial Position.

Net income (loss) of the Corporation for the nine months ending July 31, 2012 was ($2.4 million) or ($0.09) per share (($0.09) diluted) compared to ($6.9 million) or ($0.41) per share (($0.41) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the nine months ending July 31, 2012 was $1.3 million compared to ($3.3 million) last year.

Pacific & Western Bank of Canada

Net income (loss) of the Bank for the three months ending July 31, 2012 was $1.8 million compared to ($323,000) for the same period a year ago. For the nine months ending July 31, 2012, net income was $4.7 million compared to $1.3 million a year ago. The increase in net income of the Bank for the current quarter was due primarily to an increase in net interest income resulting from growth in lending assets and a higher level of gains from the sale of preferred shares, reduced by the impact of the Bank's private label credit card program which was launched on January 2, 2012.  For the three months ended July 31, 2012, the costs to implement the program exceeded revenues by $798,000 and for the year-to-date, costs to implement the program exceeded revenues by $2.2 million. Gains from the sale of preferred shares on an after-tax basis for the current quarter totalled $2.2 million and for the nine months ending July 31, 2012 totalled $7.4 million.

At July 31, 2012, total assets of the Bank were $1.54 billion compared to $1.46 billion a year ago with the increase due to growth in lending assets which increased to $1.26 billion at July 31, 2012 from $1.12 billion last year. The growth in lending assets was due primarily to an increase in commercial term mortgages and loans and residential construction mortgages. Also included in lending assets at July 31, 2012 were credit card receivables totalling $17.8 million relating to the private label credit card program which was launched on January 2, 2012.

Credit quality remains strong, with gross impaired loans totalling $1.7 million at July 31, 2012 compared to $1.6 million a year ago. At July 31, 2012, the ratio of gross impaired loans as a percentage of total loans was 0.14% compared to 0.14% last year.

Total Revenue

Total revenue of the Bank for the three months ended July 31, 2012 was $8.4 million compared to $4.5 million for the same period last year and for the nine months ended July 31, 2012, total revenue was $24.6 million compared to $15.6 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 preferred shares being higher than that realized a year ago.

The provision for credit losses, which is also included in total revenue, was $249,000 in the current quarter compared to $37,000 a year ago and for the nine months ended July 31, 2012 was $433,000 compared to $191,000 a year ago. Included in the provision for credit losses for the current and year-to-date periods were provisions totalling $137,000 and $257,000 respectively relating to credit card receivables.

Net Interest Income and Net Interest Margin

Net interest income for the Bank for the three months ended July 31, 2012 was $5.1 million compared to $4.2 million a year ago and for the nine months ended July 31, 2012, net interest income was $14.1 million compared to $12.3 million. Net interest income increased from a year ago primarily as a result of the growth in lending assets but was impacted by a lower level of net interest income earned on the Bank's treasury portfolio due primarily to the sale of preferred shares over the past year which reduced the yield from treasury assets. An additional factor impacting net interest income during the current periods was the cost of holding higher levels of liquid assets in order to fund a large volume of deposits that matured during the third quarter of 2012.

Net interest margin or spread for the Bank for the three months ended July 31, 2012 increased to 1.25% from 1.12% last year and for the nine months ended July 31, 2012 increased to 1.24% from 1.17% last year.

Other Income  

Other income for the three months ended July 31, 2012 was $3.6 million compared to $255,000 for the same period a year ago and for the nine months ended July 31, 2012 was $10.9 million compared to $3.4 million a year ago. Other income in the current quarter includes gains totalling $3.0 million from the sale of preferred shares compared to $nil a year ago and for the nine months ended July 31, 2012, gains from the sale of preferred shares totalled $10.1 million compared to $3.2 million a year ago. Also included in other income is non-interest revenue earned from credit card services totalling $259,000 for the current quarter and $375,000 for the nine months ended July 31, 2012.

Non-Interest Expenses

Non-interest expenses of the Corporation, including those relating to credit card services, totalled $6.2 million for the current quarter compared to $5.6 million for the same period a year ago and for the nine months ended July 31, 2012 totalled $17.6 million compared to $14.5 million last year. The increase in non-interest expenses for the current quarter and for the nine month period was due to increases in general and administrative expenses relating to credit card services and other volume related expenses. Non-interest expenses relating to credit card services totalled $989,000 for the current quarter and for the nine months ended July 31, 2012 totalled $2.4 million. In addition, salaries and benefits increased in the current periods compared to a year ago 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 in the parent company not being recorded for accounting purposes, non-taxable dividend income earned on preferred shares 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 recorded as interest expense in the Consolidated Statement of Income (Loss). The provision (recovery) for income taxes consists of the following items:

For the current quarter the provision (recovery) for income taxes was $888,000 compared to ($154,000) a year ago and includes an income tax provision of $454,000 in the parent company relating to a refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares, and an income tax provision of $810,000 relating to gains on the sale of preferred shares. Also included in the provision for income taxes in the current quarter was a recovery of $376,000 relating to the impact on the Bank's deferred income tax asset from a change in corporate income tax rates substantively enacted during the quarter. For the nine months ending July 31, 2012, the provision for income taxes was $3.7 million compared to $1.1 million a year ago and includes an income tax provision of $1.3 million in the parent company relating to the refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares and an income tax provision of $2.7 million relating to gains on the sale of preferred shares.

At July 31, 2012, the deferred income tax asset in the Bank was $11.0 million compared to $11.6 million a year ago and 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 more likely than not that 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 generating income from operations or on converting non-taxable income sources to taxable income sources during the carry-forward period. At July 31, 2012, the Bank had sold all of its holdings of preferred shares thereby eliminating non-taxable dividend income received from the preferred shares and reinvesting the proceeds in assets which will generate taxable income in the coming years.

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 July 31, 2012 was ($3.5 million) compared to ($3.0 million) a year ago and for the nine months ended July 31, 2012, total comprehensive income (loss) was ($9.7 million) compared to ($5.3 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 period.

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 activities and treasury activities. During the three months ended July 31, 2012, net income (loss) of the commercial lending segment totalled $2.6 million compared to ($323,000) a year ago with the increase due primarily to growth in net interest income from lending and gains on the sale of preferred shares in the quarter. For the nine months ended July 31, 2012, net income of the commercial lending segment totalled $7.0 million compared to $1.3 million with the increase also due primarily to a growth in net interest income and gains on the sale of preferred shares.

For the three months ended July 31, 2012, net interest income from commercial lending totalled $5.0 million compared to $4.2 million last year and for the nine months ended July 31, 2012, net interest income from commercial lending totalled $14.0 million compared to $12.3 million last year.

For the three months ended July 31, 2012, non-interest expenses for the commercial lending segment totalled $5.2 million compared to $5.0 million a year ago and for the nine months ended July 31, 2012, non-interest expenses for the commercial lending segment totalled $15.1 million compared to $13.4 million a year ago. Non-interest expenses increased from the previous periods as a result of volume related expenses and an increase in salaries and benefits due to additional staff being hired.

Credit Card Services 

On January 2, 2012, the Bank launched its private label credit card program and as at July 31, 2012, 21,300 credit cards had been issued with credit card balances totalling $17.8 million compared to $9.7 million at the end of the previous quarter. For the three months ending July 31, 2012, net interest income from credit card services totalled $69,000 and for the nine month period net interest income totalled $63,000. Net interest income from credit card services was impacted by incentive programs being introduced to generate new cards being issued.  Non-interest revenue from credit card services in the form of credit card fees totalled $259,000 in the quarter and for the nine month period totalled $375,000.

For the three months ending July 31, 2012, the Bank recorded a provision for credit losses relating to credit cards of $137,000 and for the year-to-date the provision for credit losses relating to credit cards totalled $257,000. As at July 31, 2012, the collective allowance relating to credit card receivables totalled $250,000.

Non-interest expenses relating to credit card services totalled $989,000 in the current quarter and for the nine months ended July 31, 2012 totalled $2.4 million. These expenses consisted of salaries and benefits relating to the credit card operations, expenses for activities carried out by external parties to administer processing of the credit cards, marketing and promotional costs as well as general and administrative expenses.

Consolidated Statement of Financial Position

Total assets of the Corporation at July 31, 2012, were $1.54 billion compared to $1.48 billion a year ago with the increase due primarily to growth in lending assets which increased from $1.12 billion to $1.26 billion at July 31, 2012, an increase of 12%.  This increase was slightly offset by a decrease in the amount of cash and securities which reduced from $330 million a year ago to $253 million.

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 and equity. Cash and securities, which are held primarily for liquidity management purposes, totalled $253 million or 16% of total assets at July 31, 2012 compared to $330 million or 22% of total assets a year ago. Cash and securities decreased from last year primarily as a result of a decrease in the level of preferred shares held. Cash and cash equivalents comprised $196 million of the total amount of cash and securities at July 31, 2012, compared to $180 million of the total amount a year ago. The increase was a result of the Corporation focusing its strategy on holding higher levels of liquid assets and reducing its holdings of preferred shares and other treasury assets over the past year. In addition, current market conditions enable the Corporation to earn higher yields on cash and cash equivalents than on government securities.

At July 31, 2012, the Corporation had sold all of its holdings of preferred shares which totalled $60.9 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 the holdings other financial institutions' preferred shares unattractive due to additional negative impacts on determining regulatory capital.

At July 31, 2012, the net unrealized gain in the Corporation's securities portfolio was $70,000 compared to a net unrealized loss of $5.9 million a year ago with the change due to gains being realized over the past year, primarily through the sale of preferred shares. 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 further impairment charges are required at this time.

Mortgages and Loans

Mortgages and loans totalled $1.26 billion at July 31, 2012, compared to $1.12 billion a year ago with the increase from last year primarily in commercial term mortgages and loans and residential construction mortgages. Average loans outstanding during the current quarter totalled $1.23 billion compared to $1.11 billion a year ago. New lending in the current quarter totalled $166 million compared to $118 million a year ago and loan repayments for the current quarter totalled $135 million compared to $91 million last year. Loan commitments related to commercial lending at July 31, 2012 increased to $216 million compared to $204 million a year ago and commitments at July 31, 2012 relating to undrawn credit card lines totalled $92.8 million.

At July 31, 2012, the Corporation's bulk financing portfolio, which consists of loans and leases acquired through its bulk financing initiative, totalled $94.8 million compared to $59.0 million a year ago. The Corporation is continuing to enter into agreements with vendors for the bulk lease financing program and currently has relationships with eleven vendors and expects to see accelerated growth in this market in the coming months.

Also included in mortgages and loans are credit card receivables totalling $17.8 million. As noted previously, on January 2, 2012 the Corporation launched its private label credit card program and at July 31, 2012, a total of 21,300 cards had been issued. The Corporation expects to see continued growth in credit card receivables in the coming months.

Credit Quality

Gross impaired loans at July 31, 2012 totalled $1.7 million or 0.14% 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 $249,000 compared to $37,000 a year ago and for the nine months ended July 31, 2012 the provision for credit losses totalled $433,000 compared to $191,000 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 July 31, 2012 the Corporation's collective allowance totalled $3.2 million compared to $2.7 million a year ago and at July 31, 2012, the Corporation's individual allowance for credit losses totalled $1.7 million compared to $1.5 million a year ago. Included in the Corporation's collective allowance at July 31, 2012 is an amount of $250,000 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 $30.4 million at July 31, 2012 compared to $29.0 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $11.0 million compared to $11.6 million last year and capital assets and prepaid expenses totalling $19.4 million at July 31, 2012 compared to $18.3 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 July 31, 2012 totalled $1.32 billion compared to $1.26 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $34.9 million or approximately 2.6% of total deposits at the end of the quarter were in the form of demand deposits compared to $33.2 million or approximately 2.6% 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 and to provide for liquidity to cover deposit maturities in the coming months.

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. At July 31, 2012, deposits from this new source totalled $935,000.

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 July 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 July 31, 2012, other liabilities totalled $30.6 million compared to $23.4 million a year ago. The fair value of derivatives at the end of the current quarter totalled $17.3 million compared to $14.9 million last year with the increase due primarily to changes in interest rates from a year ago. Under the accounting standard for hedges, the offsetting amount 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 July 31, 2012, the amount of securitization liabilities totalled $43.5 million compared to $33.1 million a year ago with the increase due to securitization transactions entered into between August 1, 2011 and October 31, 2011. 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 $41.8 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $80.0 million at July 31, 2012 compared to $92.6 million a year ago with the decrease due primarily to subordinated notes issued by the Bank to an external party being repurchased by the Corporation. Excluding issue costs, notes payable consist of Series C Notes totalling $61.7 million maturing in 2018, and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum.

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 2017 and 2021.

Preferred Share Liabilities

At July 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 $2.4 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.7 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 Statement of Financial Position as Preferred Share Liabilities.  In addition, an amount of $4.3 million, net of 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 $41.7 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 Operations, calculated using an effective interest rate of 11.8%.

Liquidity

At July 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 July 31, 2012, Shareholders' Equity was $19.9 million compared to $30.6 million a year ago.  Common shares outstanding at July 31, 2012 totalled 28,077,872 compared to 23,663,542 a year ago with the change due to 2,721,020 common shares issued since last year under private placements and 1,693,310 common shares issued since last year as part of the dividends on the Class B Preferred Shares. Common share options outstanding totalled 1,163,033 at the end of the quarter compared to 1,160,333 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 July 31, 2012 resulting from a public offering and a private placement 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 the warrants currently expire in November 2012.

At July 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 July 31, 2012 was $0.52 compared to $0.98 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 July 31, 2012 would be $1.62 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 August 29, 2012, there were no changes since July 31, 2012 in the number of outstanding common shares, common share warrants or options, Class A or Class B Preferred Shares.

Capital Management

Regulatory capital in the Corporation's principal subsidiary, the Bank, totalled $149.0 million at July 31, 2012 compared to $151.6 million a year ago with the change due primarily to additional Tier 1 capital in the form of common shares being issued by the Bank to the Corporation in 2011, 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 12.67% at July 31, 2012 compared to 13.65% 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 8.46% at the end of the quarter compared to 9.10% last year. The Bank's assets-to-capital ratio was 10.50 at the end of the quarter compared to 9.63 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 7.99% and 11.99% respectively at July 31, 2012.

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

Summary of Quarterly Results

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. The provision for credit losses recorded in the third quarter of 2012 was due to loan growth in the quarter and an adjustment 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 for implementation of the Corporation's private label credit card program. Non-interest expenses increased in the third quarter of 2012 as a result of additional accruals relating to the credit card program. 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 2011 includes an income tax adjustment of $2.8 million relating to income taxes in the parent company. The provision for income taxes in the first three quarters of 2012 includes a provision in the parent company relating to a refundable income tax on dividends paid by the Corporation on its Class B Preferred Shares.  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.

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.

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 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 carried out 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 July 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 July 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: August 29, 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 Statement of Financial Position
(Unaudited)

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

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Income (Loss)
(Unaudited)

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

PACIFIC & WESTERN CREDIT CORP.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

(1)     Net of income tax benefit (expense) for three months of $328 (2011 - ($463)) and nine months of $88 (2011 - ($1,418))
(2)     Net of income tax benefit (expense) for three months of $739 (2011 - $267) and nine months of $2,618 (2011 - $822)

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)

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

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

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 and nine month periods ended July 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 quarter 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 and nine month periods ended July 31, 2012 and 2011 were approved by the Board of Directors on August 29, 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 July 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 changed an election under IFRS1 as noted below.

As at November 1, 2010, the Corporation reclassified financial instruments totaling $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.

The increase (decrease) of the above on the Consolidated Statement of Financial Position at November 1, 2010 and October 31, 2011 is as follows:

As a result of this reclassification, comprehensive loss for the year ended October 31, 2011 decreased by $1,769,000.

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

Reconciliation of the Consolidated Statement of Financial Position - November 1, 2010, July 31, 2011 and October 31, 2011

 

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

 

5. Securities:

Portfolio analysis: 

Loans:

a) Portfolio analysis:

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

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:

 

 

c)  Impaired loans:

 

Impaired loans at July 31, 2012 include foreclosed real estate held for sale with a gross carrying value of $159,000 (2011 - $149,000) and a related allowance of $120,000 (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 and nine months ended July 31, 2012 was $38,000 (2011 - $36,000) and $111,000 (2011 - $109,000) respectively. An individual allowance has been recognized equal to the amount of interest accrued on impaired loans to reflect the estimated recoverable amounts for impaired loans.

At July 31, 2012, loans, other than credit card receivables, past due but not impaired totalled $nil (2011 - $nil). At July 31, 2012, credit card receivables overdue by one day or more but not impaired totalled $849,000.

7. Notes payable:

 

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 $41,837,000 (2011 - $32,268,000) are pledged as collateral for these liabilities.

9. Preferred share liabilities:

At July 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 $2.4 million (2011 - $2.6 million).  As these Class B preferred shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $41.7 million (2011 - $41.1 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 $4.3 million (2011 - $4.3 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 $41.7 million (2011 - $41.1 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:

 

At July 31, 2012, the Corporation has 6,202,370 (2011 - nil) warrants outstanding to acquire common shares and common share warrants. In addition, at July 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 and nine months ended July 31, 2012 of $6,000 (2011 - $6,000) and $30,000 (2011 - $20,000) 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 July 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 in the second and third quarters of 2012. The amounts recorded in the Consolidated Statement of Income (Loss) relating to DSU's for the three and nine months July 31, 2012 was $12,000 expense (2011 - $87,000 recovery) and $225,000 expense (2011 - $4,000 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:

 

12. Derivative instruments:

At July 31, 2012, the Corporation had outstanding contracts for asset liability management purposes to swap from fixed to floating interest rates with notional amounts totalling $135,929,000 (2011 - $212,200,000), 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 $382,000 (2011 - $585,000) for purposes of determining the Bank's regulatory capital ratios.  As required under the accounting standard relating to hedges, at July 31, 2012, $17,342,000 (2011 - $14,887,000) 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 Trust^TM. At July 31, 2011 the notional amount of these contracts totalled $884,000 and $nil at July 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.

 

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:

 

14. Related party transactions:

The Corporation's Board of Directors and selected 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 Executive Officers. At July 31, 2012 balances due from Executive Officers totalled $961,000 (2011 - $2,669,000) of which none 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 and nine months ended July 31, 2012 was $10,000 (2011 - $29,000) and $30,000 (2011 - $88,000) respectively. There was $nil provision for credit losses related to loans issued to key management personnel for the three and nine months ended July 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 period ended July 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:

 

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:

 

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 7.99% and 11.99% respectively at July 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.

 

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:

 

 

18. Subsidiary company information:

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

 

 

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 [email protected] (519) 675-4201

 

SOURCE: Pacific & Western Credit Corp.