Pacific & Western Credit Corp. announces results for its second quarter ended
April 30, 2010

LONDON, ON, June 2 /CNW/ -

    
    SECOND QUARTER SUMMARY

    (three months ended April 30, 2010, compared to three months ended
    April 30, 2009, unless otherwise noted):

    -   Total revenue (teb) of the Corporation's subsidiary Pacific & Western
        Bank of Canada (the "Bank") for the quarter ended April 30, 2010 was
        $4.0 million compared to $2.4 million for the same period last year
        and for the six months ended April 30, 2010 was $9.4 million compared
        to $3.9 million last year.
    -   Net income (loss) for the Bank for the quarter ended April 30, 2010
        was ($643,000) compared to ($934,000) for the same period last year
        and for the six months ended April 30, 2010 was $35,000 compared to
        ($2.4 million) last year.
    -   Net interest margin or spread (teb) for the Bank improved to 0.92%
        for the quarter compared to 0.71% for the same period last year and
        for the six months, improved to 1.26% from 0.65% a year ago.
    -   Net income (loss) of the Corporation for the quarter ended April 30,
        2010 was ($2.8 million) or ($0.21) per share (($0.21) diluted)
        compared to ($2.2 million) or ($0.16) per share (($0.16) diluted) for
        the same period last year. Prior to the deduction of interest expense
        relating to dividends on Class B Preferred Shares, net income (loss)
        of the Corporation for the current quarter was ($1.6 million).
    -   Net income (loss) of the Corporation for the six months ended April
        30, 2010 was ($4.2 million) or ($0.30) per share (($0.30) diluted)
        compared to ($4.9 million) or ($0.37) per share (($0.37) diluted) for
        the same period last year. Prior to the deduction of interest expense
        relating to dividends on Class B Preferred Shares, net income (loss)
        of the Corporation for the current six month period was ($2.1
        million).
    -   Credit quality remains strong with gross impaired loans decreasing to
        $5.2 million at April 30, 2010 from $7.8 million a year ago and from
        $6.7 million at January 31, 2010.

    PRESIDENT'S COMMENTS

    Total revenue for our wholly owned subsidiary Pacific & Western Bank of
Canada (the "Bank") showed a substantial improvement in the current period
over that achieved during the same period last year. Total revenue (teb) for
the Bank for the six months ended April 30, 2010 increased to $9.4 million
from $3.9 million last year. In addition, the Bank's net interest margin or
spread (teb) improved in the first six months to 1.26% from 0.65% last year.
Net interest income from our lending portfolio continued to increase in the
first six months exceeding our half year target, and net interest margin or
spread improved to 1.74% for the first six months compared to 1.09% last year.
In addition to these net interest income earnings, our lending operations also
contributed $890,000 in gains from securitization activities in the second
quarter. The substantial improvement in total revenue and spread from lending
operations in the first six months enabled the Bank to earn a modest profit in
the period. We expect this increasing spread trend to continue as thinly
priced loans (booked prior to the liquidity crisis) repay and are replaced at
today's wider spreads.
    For the first six months of 2010, results for the Corporation showed a net
loss of $4.2 million, however, before deducting interest expense relating to
the dividends on our Class B Preferred Shares which totalled $2.1 million for
the period, net loss for the six months was $2.1 million compared to $4.9
million for the same period last year.  Other items that impacted the results
for the current period were an impairment write-down of $326,000 on a security
and a tax provision of $503,000 relating to the valuation of our future income
tax asset.
    With the increasing spreads and net interest income from our lending
operations increasing, we expect the profitability of the Bank to increase
sufficiently to offset the additional interest expense in the parent company
making the way for overall profitability in the coming months.


    FINANCIAL HIGHLIGHTS
                                      for the               for the
    (unaudited)                 three months ended      six months ended
    ------------------------------------------------- -----------------------
    ($ thousands, except per   April 30    April 30    April 30    April 30
     share amounts)              2010        2009        2010        2009
    ------------------------------------------------- -----------------------
    Pacific & Western Bank of
     Canada
    Balance Sheet Summary
      Cash and securities     $  382,684  $  500,676  $  382,684  $  500,676
      Total loans                925,434   1,044,556     925,434   1,044,556
      Average loans              935,367   1,080,045     927,633     987,194
      Total assets             1,340,650   1,577,736   1,340,650   1,580,541
      Deposits                 1,192,779   1,417,663   1,192,779   1,417,663
      Subordinated notes
       payable                    41,500      40,000      41,500      40,000
      Shareholder's equity        79,424      76,775      79,424      76,775
    Capital ratios
    (Based on the subsidiary
     Pacific & Western Bank
     of Canada)
      Total regulatory
       capital                $  122,043  $  113,838  $  122,043  $  113,838
      Risk weighted assets       923,444     960,424     923,444     960,424
      Assets-to-capital ratio      11.23       14.11       11.23       14.11
      Tier 1 risk-based
       capital ratio               8.81%       7.90%       8.81%       7.90%
      Total risk-based capital
       ratio                      13.22%      11.85%      13.22%      11.85%
    ------------------------------------------------- -----------------------
    Results of operations (teb)
      Net interest income per
       financial statements   $    2,571  $    1,951  $    7,271  $    3,504
      Teb adjustment                 623         701       1,293       1,446
      Net interest income (teb)    3,194       2,652       8,564       4,949
      Spread                       0.92%       0.71%       1.26%       0.65%
      Provision for (recovery
       of) credit losses            (735)          8        (709)        118
      Other income (charges)          49        (275)         80        (845)
      Total revenue                3,978       2,369       9,353       3,886
      Non-interest expenses        4,158       3,255       8,258       6,646
      Net income (loss)             (643)       (934)         35      (2,431)
      Efficiency ratio            128.1%      136.9%       95.5%      166.0%
      Return on average total
       assets                     -0.18%      -0.24%       0.10%      -0.31%
      Gross impaired loans to
       total assets                0.39%       0.49%       0.39%       0.49%
      Provision for (recovery
       of) credit losses as a
       % of average loans         -0.08%       0.00%      -0.08%       0.01%
      Number of full time
       equivalent staff               55          54          55          54
    -------------------------------------------------------------------------
    Pacific & Western Credit
     Corp., (consolidated)
    Results of operations
      Net income (loss) for
       the Bank               $     (643)  $    (934) $       35  $   (2,431)
      Deduct interest expense
       relating to Class B
       Preferred Shares           (1,187)          -      (2,112)          -
      Deduct additonal interest
       expense on notes             (927)     (1,176)     (1,903)     (2,347)
      Deduct additional non-
       interest expenses of the
       parent                        (73)        (69)       (190)        (91)
      Net income (loss) for
       the Corporation        $   (2,830) $   (2,179) $   (4,170) $   (4,869)
      Earnings (loss) per
       common share:
        Basic                 $    (0.21) $    (0.16) $    (0.30) $    (0.37)
        Diluted               $    (0.21) $    (0.16) $    (0.30) $    (0.37)
      Return on average common
       shareholders' equity     -127.26%     -90.61%    -101.64%     -60.40%
    -------------------------------------------------------------------------
    

Non-GAAP measures

Tax equivalent basis (teb) - like most banks, the Corporation, through its wholly-owned subsidiary Pacific & Western Bank of Canada (the "Bank"), analyzes revenue on a teb to permit uniform measurement and comparison of net interest income. Net interest income includes tax-exempt income on certain securities. Since this income is not taxable, the rate of interest or dividends received is lower than would apply to a loan or taxable security of the same amount. The taxable equivalent basis includes an adjustment that increases interest income and the provision for income taxes by the same amount that adjusts the income on the tax-exempt securities to what income would have been had it been taxed at the statutory rate.

    
    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 second quarter of fiscal 2010 should be read in conjunction with the unaudited interim consolidated financial statements for the period ended April 30, 2010, included herein, and the audited consolidated financial statements and MD&A for the year ended October 31, 2009, 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, 2009, remain substantially unchanged.

Overview

Net income (loss) for the Corporation for the quarter ending April 30, 2010 was ($2.8 million) or ($0.21) per share (($0.21) diluted) and on a year-to-date basis was ($4.2 million) or ($0.30) (($0.30) diluted). Net income (loss) for the quarter and for the six months was impacted by increased spread on loans and gains totalling $884,000 from the securitization of mortgages. The results compared to the prior year were negatively impacted by increased amounts relating to dividends on Class B preferred shares which are recorded as interest expense in the consolidated financial statements. Prior to the deduction of dividends relating to the Class B Preferred Shares, net income (loss) for the quarter ending April 30, 2010 was ($1.6 million) compared to ($2.2 million) for the same period a year ago and for the six months ended April 30, 2010 was ($2.1 million) compared to ($4.9 million) a year ago.

For the Bank, net income (loss) for the quarter was ($643,000) compared to ($934,000) for the same period a year ago and for the six months was $35,000 compared to ($2.4 million) a year ago. Net income (loss) of the Bank improved from a year ago primarily as a result of an increase in net interest income and spread earned on its lending assets and a reduction in its cost of deposits.

At April 30, 2010, total assets of the Corporation were $1.35 billion compared to $1.58 billion a year ago. Lending assets were $925 million compared to $1.04 billion a year ago and credit quality remained strong with gross impaired loans decreasing to $5.2 million at April 30, 2010 from $7.8 million a year ago. At the end of the quarter, the ratio of gross impaired loans as a percentage of total assets was 0.39% compared to 0.49% a year ago.

Total Revenue (teb)

Total revenue (teb) of the Corporation, which is comprised of net interest income after the provision for credit losses and other income (charges), was $1.9 million for the quarter compared to $1.2 million for the same period a year ago and for the six months was $5.4 million compared to $1.5 million for the same period last year.

For the Bank, total revenue (teb), was $4.0 million for the quarter and $9.4 million for the six months compared to $2.4 million for the same quarter last year and $3.9 million for the six month period in the previous year. The increase in total revenue (teb) was due to improvements in the spread earned on lending assets and a decrease in the Bank's cost of deposits. In addition, total revenue during the quarter ended April 30, 2010, was positively impacted by gains totalling $884,000 from the securitization of mortgages. This item is included in Other Income (charges) in the Consolidated Statement of Operations.

Net Interest Income

Net interest income (teb) of the Corporation was $1.1 million for the quarter and $4.6 million for the six months ended April 30, 2010. Prior to deducting the interest expense relating to the dividends on the Class B Preferred Shares, net interest income for the quarter was $2.3 million and $6.7 million for the six months. This is in comparison to net interest income of $1.5 million and $2.6 million respectively for the same periods last year. As noted above, the improvement from the previous year was a result of improvements in the spread earned on lending assets and a decrease in the cost of deposits.

Net interest margin or spread (teb) for the Bank, which is net interest income as a percentage of average assets, increased to 0.92% for the quarter from 0.71% for the same period a year ago and for the six months was 1.26% compared to 0.65% a year ago. The improvement in the current quarter and six months from the same periods a year ago was due primarily to an increase in interest income from loans and a decrease in the Bank's cost of deposits. Income from loans includes loan fees totalled $856,000 for the quarter and $2.1 million for the six months compared to $197,000 and $774,000 for the same periods a year ago. The increase in loan fees reflects increasing lending activity and new loan commitments in the first two quarters which should result in increased loan fundings in the coming months. Interest expense on deposits decreased in the current quarter as a result of a large amount of deposits which matured over the past year that were replaced with deposits with lower interest rates. The maturing deposits had been booked during 2008 when interest rates on deposits were significantly higher.

Non-Interest Expenses

Non-interest expenses for the Corporation were $4.3 million for the second quarter and $8.5 million for the six months. This is in comparison to $3.3 million and $6.7 million respectively for the same periods a year ago. The increase in non-interest expenses for the quarter and six months compared to a year ago was in salaries and benefits which increased due to salary adjustments over the past year, as well as in general and administrative expenses which increased due to volume related expenses and higher amounts for capital taxes and consulting and professional fees.

Income Taxes

The Corporation's statutory federal and provincial income tax rate is approximately 31% compared to 32% last year with the difference due to changes in enacted statutory income tax rates. The Corporation's effective rate is impacted by non-taxable dividend income earned on preferred shares held in its securities portfolio and the tax benefit on operating losses in the parent company not being recorded for accounting purposes. These items resulted in an effective tax rate of 5.4% for the quarter and 5.3% for the six months. For the quarter and six months, the Corporation's provision for income taxes was a recovery of $160,000 and $233,000 respectively. Included in the income tax recovery in the current quarter was a provision of $503,000 which was required as a result of changes in corporate income tax rates and the expected timing of when the Bank expects to realize on the future income tax asset.

At April 30, 2010, the future income tax asset of the Bank was $13.8 million and is primarily a result of income tax losses from previous periods, the benefit of which was recorded in those periods. This amount compares to $15.2 million a year ago with the decrease due to changes in the market value of preferred shares which are deducted for income tax purposes, partially offset by operating losses of the Bank over the past year. The income tax loss carry forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

The income tax losses in the Bank which gave rise to the future income tax asset were caused primarily by declines in the market value of preferred shares, being primarily those of Canadian banks and insurance companies and operating losses of the Bank. The ultimate realization of the future 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 future income tax asset in future years. The realization of the future income tax asset is dependent upon the Bank being able to generate taxable income sufficient to offset these 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. It is also dependent upon the market value of the preferred shares recovering in value as they are carried at market value for income tax purposes with mark-to-market adjustments being added to or deducted from taxable income. At April 30, 2010, these preferred shares traded at a value of $16.7 million below their amortized cost compared to $16.4 million below their amortized cost at October 31, 2009 and $25.3 million below their amortized cost a year ago, reflecting improvements in market conditions in the financial services industry and in the global economy.

Balance Sheet

Total assets at April 30, 2010, were $1.35 billion compared to $1.58 billion a year ago. Mortgages and loans were $925 million at April 30, 2010 compared to $1.04 billion a year ago. The decrease in mortgages and loans from a year ago was due primarily to the sale of insured mortgages and scheduled repayments of loans. Cash and securities at April 30, 2010 were $394 million compared to $503 million a year ago.

Cash and Securities

Cash and securities, which are held for liquidity management purposes and to earn investment income, totalled $394 million at the end of the quarter compared to $503 million a year ago with the decrease due to lower levels of cash being held at the end of the current quarter as deposit maturities in the coming months are less than what they were at this time last year. At this time last year, the high levels of deposits scheduled to mature in the following months resulted in the Corporation taking the prudent action of increasing its level of liquid assets to act as a buffer in the event of potential market disruptions affecting its deposit taking activities. Securities in the Corporation's treasury portfolio typically consist of Government of Canada and Canadian provincial bonds and corporate debt and preferred shares.

At April 30, 2010, the net unrealized loss in the Corporation's securities portfolio was $19.3 million compared to a net unrealized loss of $23.9 million a year ago. These amounts are recorded net of income taxes in Accumulated Other Comprehensive Income (Loss). The fair values of securities held in our treasury portfolio are based on market values as all of the securities the Corporation owns are publicly traded. During the current quarter, the Corporation recorded an impairment charge of $326,000 relating to a security in its treasury portfolio as its market value had traded below the Corporation's amortized cost for an extended period of time. The Corporation is of the view that the unrealized losses in the other securities it owns do not represent other than temporary declines in value and impairment writedowns are not required at this time.

The Corporation's holdings of equity securities, consisting primarily of major Canadian banks and insurance companies' preferred shares, traded at a value of $16.7 million below their amortized cost at April 30, 2010 compared to $16.4 million below their amortized cost at October 31, 2009 and $25.3 million below their amortized cost a year ago. The Corporation intends to hold these securities until a recovery in value is achieved. The preferred shares have provisions that will allow the issuer to redeem them at various dates commencing over the years 2010 to 2013; however, there is no promise or legal requirement for the issuers to redeem these shares on those dates. Further recovery in their market values is dependent upon future market conditions or the ultimate future redemption of the shares by the issuers. Management is of the opinion that it is likely that these preferred shares will be redeemed by the issuers at their redemption dates.

Mortgages and Loans

Mortgages and loans totalled $925 million at April 30, 2010 compared to $1.04 billion a year ago with the decrease being primarily in insured residential mortgages which were securitized in the quarter and public sector loans, partially offset by increases in high quality commercial mortgages. New lending in the second quarter totalled $95 million bringing total new lending for the first six months to approximately $189 million compared to $294 million for the first six months last year. Loan repayments for the second quarter totalled $110 million bringing total loan repayments to $184 million for the first six months. As noted previously and as evidenced by the increase in loan fee income compared to a year ago, the Corporation is seeing increases in the demand for financing in its niche markets and expects to see increases in new lending in the coming months.

Credit Quality

Gross impaired loans at the end of the quarter totalled $5.2 million or 0.39% of total assets compared to $7.8 million or 0.49% of total assets a year ago. Gross impaired loans decreased as a result of impaired loans totalling $3.3 million being written off in the second quarter against allowances in the same amount. Gross impaired loans at April 30, 2010 consist primarily of loans totalling $2.6 million to individuals who invested in provincially sponsored immigrant investor funds.

Provisions for (recovery of) credit losses in the second quarter totalled ($735,000) compared to $8,000 a year ago and for the first six months were ($701,000) compared to $118,000 a year ago. The recovery of credit losses recorded in the second quarter relates to a reduction in the amount of the Corporation's total general allowance based on the level of loans and the results of the Corporation's general allowance model at April 30, 2010. The Corporation's general allowance totalled $4.3 million and at this level the Corporation is of the view that any credit losses which exist in its loan portfolio but cannot be specifically identified at this time are adequately provided for.

Other Assets

Other assets totalled $31.0 million at April 30, 2010 compared to $32.8 million a year ago. Included in other assets is the future income tax asset of the Bank totalling $13.8 million referred to previously, and the Corporation's investment in Discovery Air Inc. (DA) which is accounted for as an available-for-sale asset and carried at market value. At April 30, 2010, the investment in DA had a carrying value of $2.7 million compared to $2.0 million a year ago. Other items classified in other assets include capital assets and prepaid expenses.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised entirely through a well established and well diversified deposit broker network across Canada. Deposits at the end of the second quarter were $1.2 billion compared to $1.4 billion a year ago, and consist primarily of guaranteed investment certificates. Of these amounts, $46.4 million or approximately 3.9% of total deposits at the end of the quarter were in the form of demand deposits compared to $38.5 million or approximately 2.7% of total deposits a year ago, with the remaining deposits having fixed terms.

A second 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 the end of the second quarter, the Corporation did not have any amounts outstanding relating to securities sold under repurchase agreements or margin lines nor were any amounts outstanding at the same date last year.

Notes Payable

Notes payable, net of issue costs, totalled $75.6 million at April 30, 2010 compared to $103.7 million a year ago with the decrease due to notes converted into Class B Preferred Shares in August 2009 and the repayment of the Corporation's Series A Notes which matured in April 2010, offset slightly by new notes issued over the past year. Excluding issue costs, notes payable consist of Series C Notes totalling $55.3 million maturing in 2018 and short term notes totalling $5.2 million maturing in 2010. Notes payable bear interest at rates ranging from 7.0% to 9.00% per annum. In addition, the Corporation has outstanding subordinated notes payable totalling $21.5 million issued by the Bank to a third party. These subordinated notes bear interest at 11%, are callable by the Bank, and mature in 2019.

Preferred Share Liabilities

At April 30, 2010 the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $44.8 million, net of issue costs of $2.8 million. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $40.5 million, net of issue costs, representing the fair value of the Corporation's obligation to make future payments of principal and interest, and being the most easily measured component, has been classified on the Corporation's Consolidated Balance Sheet as a preferred share liability. In addition, an amount of $4.3 million, representing the equity portion of the Class B Preferred Shares, net of issue costs, has been included in shareholders' equity on the Corporation's Consolidated Balance Sheet.

As the Class B Preferred Shares may be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $40.5 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 April 30, 2010, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations due in the coming year. These obligations relate primarily to notes coming due in 2010, payments of interest on notes payable and the expected cash portion of dividends on outstanding Class B Preferred Shares. The funding for the obligations of the Corporation beyond 2010 is expected to come primarily from the sale of additional Class B Preferred Shares or common shares and from the Bank.

Shareholders' Equity

At April 30, 2010, shareholders' equity was $11.4 million compared to $13.5 million a year ago with the decrease due primarily to the net loss incurred since last year. Accumulated Other Comprehensive Income (Loss) was ($14.6 million) compared to ($18.7 million) a year ago with the change due primarily to improvements in the market value of preferred shares owned by the Corporation in its securities portfolio.

Common shares outstanding at April 30, 2010 totalled 13,983,972 compared to 13,642,452 a year ago with the change due to common shares issued as part of the dividends on the Class B Preferred Shares. Outstanding common share options totalled 931,933 at the end of the quarter compared to 895,401 a year ago with the change due to additional common share options granted in the quarter and common share options which expired during 2009. The Corporation's book value per common share at the end of the quarter was $0.44 compared to $0.93 a year ago.

At April 30, 2010, there were 314,572 Class A Preferred Shares outstanding compared to 1,142,556 a year ago with the change due to Class A Preferred Shares that were converted to Class B Preferred Shares. At April 30, 2010, there were 1,909,458 Class B Preferred Shares outstanding compared to 1,326,558 outstanding at October 31, 2009 with the increase due to 582,900 Class B Preferred Shares being issued with 128,400 of these being issued in the second quarter.

Updated Share Information

As at June 1, 2010, there were no changes in the number of outstanding common shares, common share options, Class A or Class B Preferred Shares since April 30, 2010.

Amendment of Financial Statements

Opening retained earnings (deficit) for the quarter ending April 30, 2010 and for the six months then ended have been restated to reflect an amendment to the Corporation's earnings for the year ended October 31, 2008 as a result of a change in accounting policy with respect to the separation of an embedded derivative contained in a collateral debt obligation (CDO), an investment in the Corporation's securities portfolio. This change in accounting policy has been applied retrospectively to November 1, 2006 and was a result of a commentary issued by the CICA Accounting Standards Board Staff in February of 2009 clarifying application of Section 3855 - Financial Instruments of the CICA Handbook and reflecting the conclusions of the commentary.

As a result of the above, opening Retained Earnings (deficit) of the Corporation for the six months ended April 30, 2010 has been adjusted from ($6.5 million) to ($12.4 million) and Accumulated Other Comprehensive Income (Loss) has been adjusted from ($16.3 million ) to ($13.2 million). The overall impact to total Shareholders' Equity as a result of the above was a decrease of approximately $2.8 million.

For more information on the amendment to financial statements, see Note

2 to the consolidated financial statements.

Subsequent Event

On May 17, 2010, the Corporation announced that it plans to raise up to $15 million through the issuance of additional Class B Preferred Shares, Common Shares, or a combination of both, by way of a short form prospectus. A decision as to what securities to offer under the prospectus will be made by the Corporation prior to filing the preliminary prospectus.

Capital Management

Total regulatory capital in the Corporation's principal subsidiary, the Bank, was $122.0 million at the end of the quarter compared to $113.8 million a year ago with the change due primarily to increases in the market value of preferred shares of Canadian banks and insurance companies which the Bank holds in its securities portfolio and subordinated notes issued in 2009 offset by operating results of the Bank since last year. Regulatory capital includes the after tax effect of unrealized gains and losses of available-for-sale equity securities owned by the Bank.

The Bank's total risk-based capital ratio, which is the ratio of regulatory capital to risk-weighted assets, was 13.22% at the end of the quarter compared to 11.85% 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 8.81% at the end of the quarter compared to 7.90% a year ago. The Bank's assets-to-capital ratio was 11.23 at the end of the quarter compared to 14.11 a year ago.

See note 11 to the interim consolidated financial statements for more information regarding capital management.

    
    Summary of Quarterly Results

    (thousands of dollars
     except per share amounts)         2010                    2009
    ------------------------------------------------- -----------------------
                                   Q2          Q1          Q4          Q3
    Results of operations:
    Total interest income
     per financial statements   $ 13,976    $ 17,047    $ 21,783    $ 19,476
    Teb adjustment                   623         669         667         621
    Total interest income         14,599      17,716      22,450      20,097
    Yield on assets (%)            4.27%       4.91%       5.87%       4.97%
    Interest expense              13,512      14,244      17,698      19,877
    Cost of funds (%)              3.96%       3.95%       4.63%       4.92%
    Net interest income            1,087       3,472       4,752         220
    Net interest margin (%)        0.31%       0.96%       1.24%       0.05%
    Provision for (recovery
     of) credit losses              (735)         34       3,183         148
    Impairment writedowns           (326)          -           -           -
    Other income (charges)           388          29       1,887         507
    Total revenue                  1,884       3,467       3,456         579
    Non-interest expenses          4,251       4,211       4,405       3,816
    Income (loss) before
     income taxes                 (2,367)       (744)       (949)     (3,237)
    Income tax provision
     (recovery)                     (463)        596       1,108        (268)
      Net income (loss)*      $ (2,830)   $ (1,340)   $ (2,057)   $ (2,969)
    Earnings (loss) per share
      -basic                    $  (0.21)   $  (0.10)   $  (0.15)   $  (0.22)
      -diluted                  $  (0.21)   $  (0.10)   $  (0.15)   $  (0.22)


    (thousands of dollars
     except per share amounts)         2009                    2008
    ------------------------------------------------- -----------------------
                                   Q2          Q1          Q4          Q3
    Results of operations:
    Total interest income
     per financial statements   $ 19,338    $ 18,401    $ 17,702    $ 16,022
    Teb adjustment                   701         745         675         679
    Total interest income         20,039      19,146      18,377      16,701
    Yield on assets (%)            5.38%       5.09%       5.01%       4.79%
    Interest expense              18,560      18,013      16,587      15,078
    Cost of funds (%)              4.98%       4.79%       4.52%       4.33%
    Net interest income            1,479       1,133       1,790       1,623
    Net interest margin (%)        0.40%       0.30%       0.49%       0.46%
    Provision for (recovery
     of) credit losses                 8         110       2,502         242
    Impairment writedowns              -           -     (11,341)     (3,703)
    Other income (charges)          (275)       (670)     (3,912)     (8,408)
    Total revenue                  1,196         353     (15,965)     (7,027)
    Non-interest expenses          3,328       3,418       3,280       3,523
    Income (loss) before
     income taxes                 (2,132)     (3,065)    (19,245)    (10,550)
    Income tax provision
     (recovery)                       47        (375)       (728)      3,090
      Net income (loss)*      $ (2,179)   $ (2,690)   $(18,517)   $ (7,460)
    Earnings (loss) per share
      -basic                    $  (0.16)   $  (0.20)   $  (1.36)   $  (0.55)
      -diluted                  $  (0.16)   $  (0.20)   $  (1.36)   $  (0.55)

    * Restated for Q3 and Q4 of 2008; see Note 2 to consolidated financial
        statments "Amendment to Financial Statements"
    

The financial results of the Corporation for each of the last eight quarters are summarized above. Total interest income (teb) decreased in the second quarter of 2010 compared to the previous quarter and the quarters in 2009. In the previous quarters the Corporation earned higher levels of income from loans and securities primarily due to increased levels of loans fees and securities being sold for liquidity purposes resulting in gains on sale. The cost of funds for the second quarter was comparable to the first quarter of 2010 and decreased from the previous quarters in 2009 as a result of a decrease in interest expense on deposits when high interest rate deposits booked in the previous year matured and were replaced by deposits with lower interest rates.

The provision for credit losses showed a net recovery of $735,000 in the second quarter of 2010 due primarily to a recovery in the Corporation's total general allowance based on the level of loans and the results of the Corporation's general allowance model at April 30, 2010. The provision for credit losses increased during the fourth quarter of 2009 primarily as a result of an increase of $3.1 million in the general allowance for credit losses resulting from the Corporation's review of its assumptions and methodology for estimating its level of general allowances.

Other income (charges) in the second quarter of 2010 included a gain of $884,000 on securitization of insured mortgages which were sold in the quarter. In previous quarters, other income (charges) included mark-to-market adjustments on interest rate swap contracts entered into for interest rate risk management purposes. These amounts were positive adjustments in the third and fourth quarters of 2009 as a result of changes in interest rates on bankers' acceptances on which the interest on swap agreements are based and the impact of interest rate contracts unwound during the periods. In addition, other income (charges) in the fourth quarter of 2009 included a gain of $626,000 being recorded on real estate held for sale.

Non-interest expenses in the first and second quarters of 2010 were comparable with previous quarters and increased from a year ago primarily in the categories of salaries and benefits and general and administrative expenses. Salaries and benefits increased over last year as a result of annual salary adjustments. General and administrative expenses increased from a year ago due to volume related expenses and higher amounts for capital taxes, consulting and professional fees.

The income tax provision (recovery) in the second quarter of 2010 included a provision of $503,000 related to the future income tax asset of the Bank. The provision (recovery) for income taxes is reflective of the Corporation's statutory income tax rate of 31%, adjusted by factors including non-taxable dividend income earned on preferred shares in the Bank's securities portfolio and the tax benefit on losses in the parent company not being recorded for accounting purposes.

Significant Accounting Policies

Significant accounting policies are detailed on pages 58 to 61 of the Corporation's 2009 Annual Report. An additional accounting policy for the six months ended April 30, 2010 relating to securitizations is as follows:

Securitization transactions

For each securitization transaction, where the Corporation retains the servicing rights, an asset is recognized as securitization retained interests on the Consolidated Balance Sheet. Securitization retained interests are investments classified as available-for-sale securities and are carried at fair value with changes in fair value reported in other comprehensive income, net of income taxes.

When mortgages are sold in a securitization transaction under terms that transfer control to third parties, the transaction is recorded as a sale and related mortgage assets are removed from the Consolidated Balance Sheet. In the securitization transaction, certain interests are retained, including the right to receive the future excess interest spread and the mortgage servicing obligation. The servicing liability is included in other liabilities. A gain or loss on the sale of mortgages is recognized immediately in the Consolidated Statement of Operations. The amount of the gain or loss recognized depends in part on the previous carrying amount of the mortgages involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. To obtain fair values, the Corporation uses estimates based on estimates of key assumptions including prepayment rates and discount rates commensurate with the risks involved.

Future Change in Accounting Policies

International Financial Reporting Standards

The Canadian Institute of Chartered Accountants has announced that public companies will be required to transition from Canadian Generally Accepted Accounting Principles (GAAP) to International Financial Accounting Standards (IFRS). For the Corporation, this will take place with its fiscal period commencing November 1, 2011. This transition date will require the restatement for comparative purposes of amounts reported by the Corporation for the interim periods and for the year ending October 31, 2011.

The Corporation continues its process of transition from current Canadian GAAP to IFRS. It has a project team assigned to plan for and achieve a smooth transition to IFRS. Regular process reporting to the Audit Committee of the Board of Directors on the status of the IFRS implementation continues to take place. The Corporation also provides frequent updates of its IFRS implementation status to its external auditors and to the Office of the Superintendent of Financial Institutions (OSFI).

The implementation project consists of three phases which include: research, diagnostic and planning phase; impact analysis, evaluation and design phase; and implementation, training and review phase. The Corporation has completed the research, diagnostic and planning phase, including the establishment of a detailed timetable with benchmarks, and has completed several aspects of the impact analysis, evaluation and design phase. The Corporation expects to complete the impact analysis, evaluation and design phase by the end of fiscal 2010. The results thus far of the Corporation's analysis of IFRS and comparison with Canadian GAAP have identified several differences. However the differences identified thus far are not expected to have a material impact on the reporting results and financial position of the Corporation other than those differences relating to derecognition on transfers of certain financial assets as discussed below. The impact of these differences is not known at this time as it is dependant on the value of financial assets transferred.

Certain financial assets that previously qualified for derecognition on transfer are expected to be re-recognized under IFRS. This would result in an adjustment to retained earnings intended to unwind the previously reported impact of all securitization transactions the Corporation has undertaken and retroactively re-recognize the assets that were previously considered to have been sold as amortizing assets that continue to reside on the Corporation's Consolidated Balance Sheet, earning spread income over their term.

As the Corporation prepares for its transition to IFRS, it continues to monitor ongoing changes to IFRS and adjust its transition and implementation plans accordingly. The Corporation's transition remains in line with its implementation schedule and is on track to meet the timelines essential to changeover.

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2009, and are found on pages 40 to 43 of the Corporation's 2009 Annual Report.

Controls and Procedures

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

Dated: June 1, 2010

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 2009 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
    (thousands of dollars)

                                       April 30     October 31     April 30
                                         2010          2009          2009
                                     ------------  ------------  ------------
                                     (unaudited)                 (unaudited)
                                                   (restated-    (restated-
                                                     note 2)       note 2)
    Assets
    Cash resources                   $    49,059   $   172,297   $   231,098
    Securities                           344,683       271,660       272,074
    Mortgages and loans                  925,434       929,831     1,044,556
    Other assets                          31,042        35,132        32,788
                                     ------------  ------------  ------------

                                     $ 1,350,218   $ 1,408,920   $ 1,580,516
                                     ------------  ------------  ------------
                                     ------------  ------------  ------------

    Liabilities and Shareholders'
     Equity
    Deposits                         $ 1,192,779   $ 1,217,136   $ 1,417,663
    Notes payable                         75,567        77,933       103,647
    Other liabilities                     29,917        71,293        45,740
                                     ------------  ------------  ------------
                                       1,298,263     1,366,362     1,567,050
                                     ------------  ------------  ------------

    Preferred share liabilities           40,537        27,892             -

    Shareholders' equity
    Share capital                         42,672        40,226        39,451
    Retained earnings (deficit)          (16,644)      (12,407)       (7,266)
    Accumulated other comprehensive
     income (loss)                       (14,610)      (13,153)      (18,719)
                                     ------------  ------------  ------------
                                          11,418        14,666        13,466
                                     ------------  ------------  ------------

                                     $ 1,350,218   $ 1,408,920   $ 1,580,516
                                     ------------  ------------  ------------
                                     ------------  ------------  ------------



    PACIFIC & WESTERN CREDIT CORP.
    Consolidated Statement of Operations
    (thousands of dollars)

                                     for the                for the
                                three months ended      six months ended
                             ------------------------------------------------
                               April 30    April 30    April 30    April 30
                                 2010        2009        2010        2009
                             ------------------------------------------------
                             (unaudited) (unaudited) (unaudited) (unaudited)
    Interest income
      Interest income on
       loans                  $   10,730  $   15,512  $   21,829  $   30,630
      Interest and income
       from securities             2,390       3,629       7,086       6,335
      Loan fee income                856         197       2,108         774
                             ------------------------ -----------------------
                                  13,976      19,338      31,023      37,739
    Interest expense
      Deposits and other          10,286      16,440      21,449      32,773
      Notes payable                2,039       2,120       4,195       3,800
      Preferred share
       liabilities                 1,187           -       2,112           -
                             ------------------------ -----------------------
                                  13,512      18,560      27,756      36,573
                             ------------------------ -----------------------

      Net interest income            464         778       3,267       1,166

      Provision for (recovery
       of) credit losses            (735)          8        (701)        118
                             ------------------------ -----------------------

      Net interest income
       after provision for
       credit losses               1,199         770       3,968       1,048

      Other income (charges)          62        (275)         91        (945)
                             ------------------------ -----------------------

                                   1,261         495       4,059         103
                             ------------------------ -----------------------

    Non-interest expenses
      Salaries and benefits        1,813       1,685       3,669       3,341
      General and administrative   1,932       1,092       3,789       2,323
      Premises and equipment         506         551       1,004       1,082
                             ------------------------ -----------------------
                                   4,251       3,328       8,462       6,746
                             ------------------------ -----------------------

      Loss before income taxes    (2,990)     (2,833)     (4,403)     (6,643)

      Income tax recovery           (160)       (654)       (233)     (1,774)
                             ------------------------ -----------------------

    Net loss                  $   (2,830) $   (2,179) $   (4,170) $   (4,869)
                             ------------------------ -----------------------
                             ------------------------ -----------------------

    Basic loss per share      $    (0.21) $    (0.16) $    (0.30) $    (0.37)
                             ------------------------ -----------------------
                             ------------------------ -----------------------

    Diluted loss per share    $    (0.21) $    (0.16) $    (0.30) $    (0.37)
                             ------------------------ -----------------------
                             ------------------------ -----------------------

    Weighted average number
     of common shares         13,872,000  13,642,000  13,797,000  13,642,000
                             ------------------------ -----------------------
                             ------------------------ -----------------------



    PACIFIC & WESTERN CREDIT CORP.
    Consolidated Statement of Comprehensive Income (Loss)
    (thousands of dollars)

                                     for the                for the
                                three months ended      six months ended
                             ------------------------------------------------
                               April 30    April 30    April 30    April 30
                                 2010        2009        2010        2009
                             ------------------------------------------------
                             (unaudited) (unaudited) (unaudited) (unaudited)

    Total net loss            $   (2,830) $   (2,179) $   (4,170) $   (4,869)
    Other comprehensive income
     (loss), net of tax:
      Net unrealized gains
       (losses) on assets held
       as available-for-sale(1)   (3,605)      1,636        (198)     (3,238)
      Amount transferred to net
       loss for available-for-
       sale assets(2)               (629)         91      (1,490)        423
      Amount transferred to
       net income for impairment
       writedown on available-
       for-sale assets(3)            231           -         231           -
                             ------------------------ -----------------------
      Total other comprehensive
       income (loss)              (4,003)      1,727      (1,457)     (2,815)
                             ------------------------ -----------------------
    Total comprehensive income
     (loss)                   $   (6,833) $     (452) $   (5,627) $   (7,684)
                             ------------------------ -----------------------

    (1) Net of income tax benefit (expense) for the three months of $1,333
        (2009-($1,189)) and six months of $73 (2009-$433).
    (2) Net of income tax benefit (expense) for the three months of $233
        (2009-($40)) and six months $533 (2009-($178)).
    (3) Net of income tax benefit (expense) for the three months of ($85)
        (2009-$nil) and six months ($85) (2009-$nil).



    PACIFIC & WESTERN CREDIT CORP.
    Consolidated Statement of Changes in Shareholders' Equity
    (thousands of dollars)

                                     for the                for the
                                three months ended      six months ended
                             ------------------------------------------------
                               April 30    April 30    April 30    April 30
                                 2010        2009        2010        2009
                             ------------------------------------------------
                             (unaudited) (unaudited) (unaudited) (unaudited)
                                          (restated-              (restated-
                                            note 2)                 note 2)
    Common shares
    Balance, beginning of
     period                   $   36,288  $   35,663  $   35,817  $   35,663
    Issued on payment of
     Class B preferred share
     dividend                        659           -       1,130           -
                             ------------------------ -----------------------
    Balance, end of period    $   36,947  $   35,663  $   36,947  $   35,663
                             ------------------------ -----------------------

    Class A preferred shares
                             ------------------------ -----------------------
    Balance, beginning and end
     of period                $    1,061  $    3,545  $    1,061  $    3,545
                             ------------------------ -----------------------

    Class B preferred shares
    Balance, beginning of
     period                   $    4,038  $        -  $    3,022  $        -
    Shares issued, net of
     costs                           224           -       1,240           -
                             ------------------------ -----------------------
    Balance, end of period    $    4,262  $        -  $    4,262  $        -
                             ------------------------ -----------------------
    Contributed surplus
    Balance, beginning of
     period                   $      381  $      217  $      326  $      179
    Fair value of stock
     option transactions
     (note 7)                         21          26          76          64
                             ------------------------ -----------------------
    Balance, end of period    $      402  $      243  $      402  $      243
                             ------------------------ -----------------------
    Retained earnings
     (deficit)
    Balance, beginning of
     period                   $  (13,814) $   (5,087) $  (12,407) $   (2,157)
    Net loss                      (2,830)     (2,179)     (4,170)     (4,869)
    Dividends on preferred
     shares                            -           -         (67)       (240)
                             ------------------------ -----------------------
    Balance, end of period    $  (16,644) $   (7,266) $  (16,644) $   (7,266)
                             ------------------------ -----------------------
    Accumulated other
     comprehensive income
     (loss), net of taxes
    Balance, beginning of
     period                   $  (10,607) $  (20,446) $  (13,153) $  (15,904)
    Other comprehensive income
     (loss)                       (4,003)      1,727      (1,457)     (2,815)
                             ------------------------ -----------------------
    Balance, end of period    $  (14,610) $  (18,719) $  (14,610) $  (18,719)
                             ------------------------ -----------------------

    Total shareholders'
     equity                   $   11,418  $   13,466  $   11,418  $   13,466
                             ------------------------ -----------------------
                             ------------------------ -----------------------



    PACIFIC & WESTERN CREDIT CORP.
    Consolidated Statement of Cash Flows
    (thousands of dollars)

                                     for the                for the
                                three months ended      six months ended
                             ------------------------------------------------
                               April 30    April 30    April 30    April 30
                                 2010        2009        2010        2009
                             ------------------------------------------------
                             (unaudited) (unaudited) (unaudited) (unaudited)

    Cash provided by (used in):

    Operations:
    Net loss                  $   (2,830) $   (2,179) $   (4,170) $   (4,869)
    Items not involving cash:
      Provision for (recovery
       of) credit losses            (735)          8        (701)        118
      Stock-based compensation
       (note 7)                       21          26          76          64
      Future income tax recovery    (160)       (654)       (233)     (1,774)
      Gain on sale of
       available-for-sale
       securities                   (122)     (1,032)     (1,790)     (1,203)
      Gains realized on
       securitization               (884)          -        (884)          -
      Change in derivative
       financial instruments         329          83         329         786
      Interest expense on
       preferred share
       liabilities                   659           -       1,130           -
    Change in other assets and
     liabilities                   4,982       1,839      14,615         (68)
                             ------------------------ -----------------------
                                   1,260      (1,909)      8,372      (6,946)
                             ------------------------ -----------------------

    Investing:
    Purchase of securities      (143,280)   (293,853)   (417,540)   (548,505)
    Proceeds from sale and
     maturity of securities       64,384     148,496     346,212     435,394
    Mortgages and loans           16,270      67,694        (977)     81,468
                             ------------------------ -----------------------
                                 (62,626)    (77,663)    (72,305)    (31,643)
                             ------------------------ -----------------------

    Financing:
    Deposits                     (71,353)     80,398     (24,357)     28,208
    Notes payable                 (2,612)     30,948      (2,612)     33,888
    Preferred share liabilities    3,621           -      14,308           -
    Short term financings        (20,164)          -     (46,578)          -
    Dividends paid                     -           -         (66)       (240)
                             ------------------------ -----------------------
                                 (90,508)    111,346     (59,305)     61,856
                             ------------------------ -----------------------

    Increase (decrease) in
     cash resources             (151,874)     31,774    (123,238)     23,267

    Cash resources, beginning
     of period                   200,933     199,324     172,297     207,831
                             ------------------------ -----------------------
    Cash resources, end of
     period                   $   49,059  $  231,098  $   49,059  $  231,098
                             ------------------------ -----------------------
                             ------------------------ -----------------------

    Supplementary cash flow
     information:
      Interest paid during the
       period                 $   11,733  $   10,983  $   23,976  $   23,556
      Income taxes paid during
       the period             $        -  $        -  $        -  $        -



    PACIFIC & WESTERN CREDIT CORP.
    Notes to the interim consolidated financial statements (unaudited)
    For the six months ended April 30, 2010

    1.  Basis of presentation

        The interim consolidated financial statements of Pacific & Western
        Credit Corp. (the Corporation) should be read in conjunction with the
        Corporation's consolidated financial statements for the year ended
        October 31, 2009, which are available on SEDAR at www.sedar.com.
        These consolidated financial statements have been prepared in
        accordance with Canadian generally accepted accounting principles
        using the same accounting policies and methods as were used for the
        Corporation's financial statements for the year ended October 31,
        2009. An additional accounting policy for the six months ended
        April 30, 2010 relating to securitizations is as follows:

        Securitization transactions

        For each securitization transaction, where the Corporation retains
        the servicing rights, an asset is recognized as securitization
        retained interests on the Consolidated Balance Sheet. Securitization
        retained interests are investments classified as available-for-sale
        securities and are carried at fair value with changes in fair value
        reported in other comprehensive income, net of income taxes.

        When mortgages are sold in a securitization transaction under terms
        that transfer control to third parties, the transaction is recorded
        as a sale and related mortgage assets are removed from the
        Consolidated Balance Sheet. In the securitization transaction,
        certain interests are retained, including the right to receive the
        future excess interest spread and the mortgage servicing obligation.
        The servicing liability is included in other liabilities. A gain or
        loss on the sale of mortgages is recognized immediately in the
        Consolidated Statement of Operations. The amount of the gain or loss
        recognized depends in part on the previous carrying amount of the
        mortgages involved in the transfer, allocated between the assets sold
        and the retained interests based on their relative fair values at the
        date of transfer. To obtain fair values, the Corporation uses
        estimates based on estimates of key assumptions including prepayment
        rates and discount rates commensurate with the risks involved.

        The risk management policies and procedures of the Corporation
        relating to credit, liquidity, and market risk are included on pages
        40 - 43 in the 2009 annual report and are an integral part of the
        Interim Consolidated Financial Statements.

    2.  Amendment to Financial Statements

        Opening retained earnings (deficit) for the quarter ending April 30,
        2010 and for the six months then ended have been restated to reflect
        an amendment to the Corporation's earnings for the year ended
        October 31, 2008 as a result of a change in accounting policy with
        respect to the separation of an embedded derivative contained in a
        collateral debt obligation (CDO), an investment in the Corporation's
        securities portfolio. This change in accounting policy has been
        applied retrospectively to November 1, 2006 and was a result of a
        commentary issued by the CICA Accounting Standards Board Staff in
        February of 2009 clarifying application of Section 3855 - Financial
        Instruments of the CICA Handbook and reflecting the conclusions of
        the commentary.

        During the quarter ending April 30, 2010, the Corporation re-examined
        contractual aspects of the CDO which the Corporation had purchased in
        2006 and reclassified to the held-to-maturity category from the
        available-for-sale category on August 1, 2008. Based on this re-
        examination, the Corporation concluded that the investment in the CDO
        contained an embedded derivative which under the CICA commentary
        issued in 2009, should have been separated retroactively to the
        adoption of Section 3855 on November 1, 2006. As a result, the
        Corporation has retrospectively amended it's accounting policy with
        respect to it's investment in the CDO. The impact of this change in
        accounting policy is that the earnings (loss) of the Corporation for
        the year ended October 31, 2008 have been adjusted to ($26.0 million)
        from the previously reported amount of ($20.1 million). Accordingly,
        ending retained earnings (deficit) for the Corporation as at
        October 31, 2008 has been adjusted from $3.8 million to ($2.2
        million) and Accumulated Other Comprehensive Income (Loss) has been
        adjusted from ($19.1 million) to ($15.9 million). In addition total
        Shareholders' Equity has been adjusted from $24.1 million to $21.3
        million. Basic and diluted earnings (loss) per share for the year
        ended October 31, 2008 have been adjusted to ($1.93) from the
        previously reported amount of ($1.49). The impact on the results of
        the Corporation for the year ended October 31, 2009 has been
        determined not to be material.

        As a result of the above, opening Retained Earnings (deficit) of the
        Corporation for the six months ended April 30, 2010 has been adjusted
        from ($6.5 million) to ($12.4 million) and Accumulated Other
        Comprehensive Income (Loss) has been adjusted from ($16.3 million )
        to ($13.2 million). The overall impact to total Shareholders' Equity
        as a result of the above was a decrease of approximately $2.8
        million.

    3.  Securities

        The Corporation's cash and securities are comprised of cash, federal
        government treasury bills, federal and provincial government bonds,
        government insured mortgage-backed securities, corporate bonds and
        corporate preferred shares. The Corporation does not have any direct
        exposure to asset-backed commercial paper in its treasury portfolio.

        During the three months ended April 30, 2010 the Corporation recorded
        an impairment charge of $326,000 relating to a security in its
        treasury portfolio as its market value had traded below the
        Corporation's amortized cost for an extended period of time. The
        Corporation is of the view that the unrealized losses in the other
        securities it owns do not represent other than temporary declines in
        value and impairment writedowns are not required at this time.

    4.  Allowance for credit losses

                                        for the three months ended
                              -----------------------------------------------
                                                                    April 30,
                                                  April 30, 2010        2009
                              -----------------------------------------------
                                 General    Specific       Total       Total
    (thousands of dollars)     allowance   allowance   allowance   allowance
    -------------------------------------------------------------------------
    Balance, beginning of the
     period                   $    8,401  $    1,159  $    9,560  $    6,152
    Provision for (recovery of)
    credit losses                   (786)         51        (735)          8
    Recoveries (write-offs)       (3,330)       (198)     (3,528)          -
    -------------------------------------------------------------------------
    Balance, end of period    $    4,285  $    1,012  $    5,297  $    6,160
    -------------------------------------------------------------------------


                                        for the six months ended
                              -----------------------------------------------
                                                                    April 30,
                                                  April 30, 2010        2009
                              -----------------------------------------------
                                 General    Specific      Total        Total
    (thousands of dollars)     allowance   allowance   allowance   allowance
    -------------------------------------------------------------------------
    Balance, beginning of the
     period                   $    8,401  $    1,133  $    6,042  $    6,042
    Provision for (recovery of)
    credit losses                   (786)         85        (701)        118
    Recoveries (write-offs)       (3,330)       (206)     (3,536)          -
    -------------------------------------------------------------------------
    Balance, end of period    $    4,285  $    1,012  $    1,805  $    6,160
    -------------------------------------------------------------------------

        Gross impaired loans at April 30, 2010 totalled $5,246,000 (April 30,
        2009 - $7,794,000). Loans past due but not impaired at April 30, 2010
        totalled $487,000 (April 30, 2009 - $851,000). Loans are secured
        primarily by collateral mortgages against real estate with respect to
        real estate lending and specific charges against equipment being
        financed for other lending activities.

    5.  Notes payable

        At April 30, 2010 notes payable, excluding issue costs, consist of
        Series C Notes totalling $55.3 million which mature in 2018, and
        short term notes totalling $5.2 million which mature in 2010. Notes
        payable bear interest at rates ranging from 7.0% to 9.00% per annum.
        In addition, the Corporation has subordinated notes of the Bank
        totalling $21.5 million owing to a third party. These subordinated
        notes bear interest at 11%, are callable by the Bank and mature in
        2019.

    6.  Preferred share liabilities

        At April 30, 2010 the Corporation had 1,909,458 Class B Preferred
        Shares outstanding with a total value of $44.8 million less issue
        costs of $2.8 million. As these Class B Preferred Shares carry
        certain redemption features and are convertible into common shares of
        the Corporation, an amount of $40.5 million, net of issue costs,
        representing the fair value of the Corporation's obligation to make
        future payments of principal and interest, and being the most easily
        measured component, has been classified on the Corporation's
        Consolidated Balance Sheet as a Preferred Share Liability. In
        addition, an amount of $4.3 million, representing the equity element
        of the Class B Preferred Shares, net of issue costs, has been
        included in Shareholders' Equity on the Corporation's Consolidated
        Balance Sheet.

        As the Class B Preferred Shares can be redeemed by the Corporation in
        2019 for approximately $47.7 million, the preferred share liability
        amount of $40.5 million will be increased over the remaining term to
        redemption, until the liability 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%.

    7.  Shareholders' equity

        i.   Share capital and contributed surplus:

                                                      Employee Stock Options
                                                   --------------------------
                                                                   Weighted-
                                          Common                     average
                                          shares                    exercise
                                     outstanding        Number         price
        ---------------------------------------------------------------------
        Outstanding, October 31,
         2009                         13,680,412       859,033   $      8.69
        Granted                                -        80,000          4.56
        Issued pursuant to Class B
         Preferred Share dividend        303,560             -             -
        Expired                                -        (7,100)        16.02
        ---------------------------------------------------------------------
        Outstanding, end of period    13,983,972       931,933   $      8.28
        ---------------------------------------------------------------------

        In addition, at April 30, 2010, there were 314,572 (2009-1,142,556)
        Class A Preferred Shares outstanding and 1,909,458 Class B Preferred
        Shares outstanding.

        During the period ended April 30, 2010, the Corporation recognized
        $76,000 (2009-$64,000) of salaries and benefits expense relating to
        the estimated fair value of stock options granted. The fair value of
        options granted during the period was estimated using the Black-
        Scholes option pricing model based on the following weighted-average
        assumptions: (i) risk-free interest rate of 2.31% (2009-2.41%), (ii)
        expected option life of 5 years (2009-5 years), (iii) expected
        volatility of 30% (2009-45%), and (iv) expected forfeiture rate of 5%
        (2009-5%). The weighted average fair value of options granted was
        estimated at $1.38 (2009-$1.26) per share.

        ii.  Accumulated other comprehensive income (loss):

             The balance in accumulated other comprehensive income (loss),
             net of income taxes, consists of:

                                                     April 30      April 30
        (thousands of dollars)                         2010          2009
        ---------------------------------------------------------------------
        Net unrealized losses on assets held as
         available-for-sale                        $   (14,610)  $   (21,867)
        ---------------------------------------------------------------------
        Balance, end of period                     $   (14,610)  $   (21,867)
        ---------------------------------------------------------------------

             Net of income tax benefit of $5,404,000 (2009 - $8,645,000).

    8.  Derivative instruments

        At April 30, 2010, the Corporation had outstanding contracts for
        asset liability management purposes to swap between floating and
        fixed interest rates with notional amounts totalling $281,572,000
        (2009 - $399,841,000). 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 current
        replacement cost of $1,521,000 (2009 - $237,000), a credit equivalent
        amount of $4,620,000 (2009 - $4,211,000) and a risk-weight of
        $924,000 (2009 - $842,000). As required under the accounting standard
        relating to hedges, at April 30, 2010, $12,591,000 (2009 -
        $38,838,000) 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.

        In addition, the Corporation enters into interest rate swap
        arrangements with accredited counterparties in order to transact with
        the Canada Housing Trust, as it securitizes mortgages under the CMB
        Program. Changes in the fair values of these arrangements are in
        included in gains on securitization activities and included in other
        income (charges) in the Consolidated Statement of Operations.
        Approved counterparties are limited to Canadian chartered banks. At
        April 30, 2010 the notional amount of these contracts totalled
        $12,680,000.

    9.  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.

                      (thousands of dollars)
                      ----------------------------------
                      Loan commitments         $ 103,138
                      Letters of credit           29,383
                      ----------------------------------
                                               $ 132,521
                      ----------------------------------

        In the ordinary course of business, the Corporation and its
        subsidiaries are party to claims or possible claims against it.
        Management of the Corporation believes that the resolution of any
        outstanding claims will not be material to the financial position of
        the Corporation.

        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:

                                                     April 30      April 30
        (thousands of dollars)                         2010          2009
        ---------------------------------------------------------------------

        Collateral related to derivative contracts $    11,162   $    37,559
        Collateral related to letters of credit              4         2,946
        Obligations related to securities sold
         under repurchase agreements                         -             -
        ---------------------------------------------------------------------
                                                   $    11,166   $    40,505
        ---------------------------------------------------------------------

    10. Securitization activities

        The Corporation securitizes Government of Canada guaranteed
        residential mortgages through the creation of mortgage backed
        securities and removes the mortgages from its consolidated balance
        sheet. As at April 30, 2010, outstanding securitized mortgages
        totalled $12,492,000.

        Retained interests are accounted for at the settlement date. The fair
        value of the retained interest is determined with internal valuation
        models using market data inputs, where possible, by discounting the
        expected future cash flows at similar Government of Canada bond
        interest rates plus a spread. The Corporation has assumed no credit
        risk for purposes of measuring its retained interests since all
        mortgages securitized to date are Government of Canada guaranteed.

        During the three months ended April 30, 2010, mortgages securitized
        and sold totalled $12,540,000 for cash proceeds of $12,455,000. The
        retained rights to future excess interest totaled $1,698,000 and the
        servicing liability recorded totalled $90,000. The key assumptions
        used in measuring the retained interests at the date of
        securitization included a discount rate of 2.73% and a rate of 1.25%
        for the excess spread. Gains on mortgages securitized and sold
        totalled $884,000 and are included in other income in the
        Consolidated Statement of Operations. There were no securitization
        activities carried out by the Corporation prior to the current
        quarter.

    11. Capital Management

        i.   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 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 for shareholders.
             The Bank's regulatory capital is comprised of share capital,
             retained earnings and unrealized gains (losses) on available-
             for-sale equity securities (Tier 1 capital) and subordinated
             notes (Tier 2 capital).

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

        ii.  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:

                                                     April 30      April 30
        (thousands of dollars)                         2010          2009
        ---------------------------------------------------------------------

        Total assets (on and off-balance sheet)    $ 1,370,033   $ 1,606,397
        ---------------------------------------------------------------------
        Capital
          Common shares                            $    95,365   $    95,365
          Retained earnings                             (1,331)          129
          Unrealized loss on available-for-sale
           equity securities                           (12,672)      (19,601)
          Subordinated debentures                       40,681        37,945
        ---------------------------------------------------------------------
        Total regulatory capital                   $   122,043   $   113,838
        ---------------------------------------------------------------------

        Assets-to-capital ratio                          11.23         14.11
        ---------------------------------------------------------------------

        iii. Risk-Based Capital Ratios:

             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 requires banks to maintain a minimum total
             risk-based capital ratio of 10% and a Tier 1 risk-based capital
             ratio in excess of 7%. The guidelines also require the inclusion
             of an explicit capital charge for operational risk in
             determining the amount of risk-weighted assets.

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

                                     April 30               April 30
                                       2010                   2009
        ---------------------------------------------------------------------
                               Notional/     Risk      Notional/     Risk
                                Drawn      Weighted     Drawn      Weighted
        (thousands of dollars)  Amount      Balance     Amount      Balance
        ---------------------------------------------------------------------

        Balance sheet assets  $1,340,650  $  824,736  $1,577,736  $  893,066
        Off-balance sheet
         assets                               59,714                  22,162
        Charge for operational
         risk                                 38,994                  45,196
        ---------------------------------------------------------------------
        Total risk-weighted assets        $  923,444              $  960,424
        ---------------------------------------------------------------------
        Regulatory capital                   122,043                 113,838
        ---------------------------------------------------------------------
        Total risk-based
         capital ratio                        13.22%                  11.85%
        ---------------------------------------------------------------------
        Tier 1 risk-based
         capital ratio                         8.81%                   7.90%
        ---------------------------------------------------------------------

    12. Interest Rate Position

        The Corporation 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 impact after-tax impact of a 100 basis point shift in
        interest rates on the Bank's shareholder's equity over a 60 month
        period.

                                     April 30                April 30
                                       2010                    2009
        ---------------------------------------------------------------------
        (thousands of          Increase    Decrease    Increase    Decrease
         dollars)               100 bps     100 bps     100 bps     100 bps
        ---------------------------------------------------------------------

        Maximum interest
         exposure during a 12
         month period         $    1,417         n/m  $    1,523         n/m
        Maximum interest
         exposure during a 60
         month period         $     (548)        n/m  $    2,696         n/m
        ---------------------------------------------------------------------

        Duration difference
         between assets and
         liabilities (months)        4.7                     4.8
        ---------------------------------------------------------------------
        n/m - not meaningful

    13. Subsidiary company information:

        The following table presents summary financial information of the
        Bank:

                                                     April 30      April 30
        (thousands of dollars)                         2010          2009
        ------------------------------------------------------- -------------
                                                   (unaudited)   (unaudited)
                                                                  (restated-
                                                                    note 2)

        Cash resources                             $    38,001   $   228,602
        Securities                                     344,683       272,074
        Mortgages and loans                            925,434     1,044,556
        Other assets                                    32,532        32,504
                                                   ------------  ------------

                                                   $ 1,340,650   $ 1,577,736
                                                   ------------  ------------
                                                   ------------  ------------

        Deposits                                   $ 1,192,779   $ 1,417,569
        Subordinated notes payable                      41,500        40,000
        Other liabilities                               26,947        43,392
                                                   ------------  ------------
                                                     1,261,226     1,500,961
                                                   ------------  ------------

        Share capital                                   95,365        95,365
        Retained earnings (deficit)                     (1,331)          129
        Accumulated other comprehensive income
         (loss)                                        (14,610)      (18,719)
                                                   ------------  ------------
        Shareholder's equity                            79,424        76,775
                                                   ------------  ------------
                                                   $ 1,340,650   $ 1,577,736
                                                   ------------  ------------
                                                   ------------  ------------


                                     for the                for the
                                three months ended      six months ended
                             ------------------------ -----------------------
        (thousands of          April 30    April 30    April 30    April 30
         dollars)                2010        2009        2010        2009
        --------------------------------------------- -----------------------
                              (unaudited) (unaudited) (unaudited) (unaudited)

        Interest income       $   13,969  $   19,335  $   31,012  $   37,730
        Interest expense          11,398      17,384      23,741      34,226
                              ----------- ----------- ----------- -----------
        Net interest income        2,571       1,951       7,271       3,504
        Provision for (recovery
         of) credit losses          (735)          8        (709)        118
                              ----------- ----------- ----------- -----------
        Net interest income
         after provision for
         credit losses             3,306       1,943       7,980       3,386
        Other income (charges)        49        (275)         80        (945)
                              ----------- ----------- ----------- -----------
        Net interest income and
         other income (charges)    3,355       1,668       8,060       2,441
        Non-interest expenses      4,158       3,255       8,258       6,646
                              ----------- ----------- ----------- -----------
        Income (loss) before
         income taxes               (803)     (1,587)       (198)     (4,205)
        Income taxes                (160)       (653)       (233)     (1,774)
                              ----------- ----------- ----------- -----------
        Net income (loss)     $     (643) $     (934) $       35  $   (2,431)
                              ----------- ----------- ----------- -----------

    14. Subsequent event

        On May 17, 2010, the Corporation announced that it plans to raise up
        to $15 million through the issuance of additional Class B Preferred
        Shares, Common Shares, or a combination of both, by way of a short
        form prospectus. A decision as to what securities to offer under the
        prospectus will be made by the Corporation prior to filing the
        preliminary prospectus.
    

Pacific & Western Bank of Canada (PWBank), a Canadian Schedule I chartered bank, is a branchless financial institution. PWBank specializes in providing financing throughout Canada to well established corporations and government entities, including hospitals, school boards, universities and colleges, municipalities, provinces and territories, 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.

Investor Relations: Wade MacBain, Director, (800) 244-1509, wadem@

pwbank.com; Public Relations & Media: Tel Matrundola, Vice-President,

(866) 787-9936, telm@pwbank.com

To receive company news releases, please contact Carla McPhee at carlam

@pwbank.com, (519) 675-4204

SOURCE Pacific & Western Credit Corp.

For further information: For further information: Visit our website at http://www.pwbank.com

Organization Profile

Pacific & Western Credit Corp.

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