Pacific & Western Credit Corp. announces results for its second quarter ended April 30, 2013

LONDON, ON, June 6, 2013 /CNW/ -

SECOND QUARTER SUMMARY
(three months ended April 30, 2013, compared to three months ended April 30, 2012, unless otherwise noted)

Pacific & Western Credit Corp.

  • Net income (loss) of Pacific & Western Credit Corp. for the three months ended April 30, 2013 was ($2.6 million) or ($0.09) per share (($0.09) diluted) compared to ($1.1 million) or ($0.04) per share (($0.04) diluted) for the previous quarter and ($911,000) or ($0.03) per share (($0.03) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income (loss) of the Corporation for the current quarter was ($1.3 million) compared to $129,000 for the previous quarter and $357,000 a year ago.
  • Net income (loss) of Pacific & Western Credit Corp. for the six months ended April 30, 2013 was ($3.7 million) or ($0.13) per share (($0.13) diluted) compared to ($1.8 million) or ($0.07) per share (($0.07) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) of the Corporation for the six months ended April 30, 2013 was ($1.2 million) compared to $664,000 for the same period a year ago.

Pacific & Western Bank of Canada

  • Net interest income and spread for Pacific & Western Bank of Canada (the "Bank"), Pacific & Western Credit Corp.'s wholly-owned subsidiary, for the three months ended April 30, 2013 increased to $6.1 million and 1.77% respectively from $5.9 million and 1.59% for the previous quarter and $4.3 million and 1.07% respectively for the same period a year ago.
  • For the six months ended April 30, 2013, net interest income and spread increased to $12.0 million and 1.66% respectively from $9.0 million and 1.15% a year ago.
  • Lending assets at April 30, 2013 totalled $1.20 billion compared to $1.17 billion at the end of the previous quarter and $1.21 billion a year ago.
  • Credit quality continues to remain strong with gross impaired loans at April 30, 2013 totalling $1.7 million or 0.14% of total loans compared to $1.7 million or 0.14% of total loans a year ago. Net impaired loans totalled $98,000 at April 30, 2013 compared to $57,000 a year ago.
  • At April 30, 2013, the Bank significantly increased and exceeded the new capital requirements with a Common Equity Tier 1 (CET1) ratio of 10.34% compared to 7.81% at the end of the previous quarter.
  • Net income (loss) for the Bank for the three months ended April 30, 2013 was ($39,000) compared to $1.1 million for the previous quarter and $1.1 million for the same period a year ago. Net income for the previous quarter included gains from the sale of loans which totaled $738,000 after income taxes.Excluding restructuring charges totalling $502,000 incurred during the current quarter, net income would have been $327,000.
  • Net income for the Bank for the six months ended April 30, 2013 was $1.1 million compared to $2.9 million for the same period a year ago. Net income a year ago included gains from the sales of securities which totaled $5.2 million after income taxes. Excluding restructuring charges, net income for the current period would have been $1.4 million.

PRESIDENT'S COMMENTS

I am pleased with our second quarter results. Our Bank's net interest income continued to recover with net interest income of $6.1 million for the second quarter compared to $5.9 million earned in the previous quarter and $4.3 million earned in the same quarter a year ago.  This increase can be mainly attributed to a significant increase in spread, which improved by 65% over the same period last year to 1.77% this quarter.  Credit quality remained strong as always, with no loans being in arrears at the end of the quarter.  Unlike previous quarters, total revenue for the current quarter was not buoyed by gains from the sale of assets but included debt restructuring charges and other costs relating to reductions in staff. Our head count at the end of the current quarter reduced to 74 full time staff from 83 at the end of 2012. Although it is possible that our Bank may still periodically realize gains from sales of assets, its primary source of revenue is now derived from sustainable net interest income from its growing loan and lease portfolio.  Overall our Bank's spread figures have now returned to pre-liquidity crisis levels and are well in line with the large banks.

Our three new programs continue to grow.  Bulk financing assets increased by 14% during the quarter to $138 million, however the loss incurred on our credit card program increased slightly from $491,000 in the previous quarter to $579,000.  Our trustee deposits initiative continues to gain acceptance as new trustees are continuing to move their banking to us throughout Canada.  Overall, we are pleased with the progress that we are making on the bulk financing and trustee deposits programs, but we did expect the credit card's results to be closer to breakeven by now. We are contemplating some modifications to this program to accelerate it to a profitable state.

On January 28th, we announced our plans to reorganize our group's capital structure.  Key elements of this plan are to list our Bank on the Toronto Stock Exchange and for our Series C Note holders to accept the Bank's common shares in lieu of cash interest payments beginning June 30th, 2014. I am pleased that our Series C Note holders voted in favor of this proposal, allowing us to convert $30 million of subordinated debt holdings of our Bank into common shares of the Bank.  This will save the Bank approximately $3 million in interest expense per year and considerably increases its capital position. The Bank's CET1 ratio now compares favorably with the large banks and provides considerable room for growth. Over the years the Bank has been our primary investment and I am very pleased with the progress we have made in the past few years in increasing its intrinsic value. We plan to list the Bank on the Toronto Stock Exchange this quarter to enhance its ability to raise capital directly.  This will also increase its visibility and perception of value which should be reflected positively in PWC's  share value. 

These are exciting times for us shareholders. Our Bank has now been reconfigured so that it is able to earn ever increasing, sustainable spread income and has reduced its vulnerability to external factors. With the favorable vote by our Series C Note holders, PWC has significantly reduced its cash outflow requirements and is in a position to seek out other investment opportunities to further enhance shareholder value.

FINANCIAL HIGHLIGHTS                                
(unaudited)         as at      as at
              April 30     April 30      April 30     April 30
($CDN thousands except per share amounts)     2013     2012     2013     2012
Pacific & Western Bank of Canada                                
Balance Sheet Summary                                  
  Cash and securities       $ 167,153     $ 439,619     $ 167,153     $ 439,619
  Total loans           1,195,325       1,211,379       1,195,325       1,211,379
  Average loans           1,184,306       1,223,446       1,202,818       1,180,272
  Total assets           1,390,015       1,681,259       1,390,015       1,681,259
  Deposits           1,189,000       1,468,220       1,189,000       1,468,220
  Subordinated notes payable       20,263       49,732       20,263       49,732
  Shareholder's equity         124,138       95,091       124,138       95,091
Capital ratios (2012 based on Basel II)                                
  Assets-to-capital ratio         9.69       11.12       9.69       11.12
  Common Equity Tier 1 ratio       10.34%        n/a        10.34%        n/a 
  Tier 1 risk-based capital ratio       10.34%       8.64%       10.34%       8.64%
  Total risk-based capital ratio        11.94%       13.20%       11.94%       13.20%
              for the three months ended       for the six months ended
Results of operations                                  
  Net interest income       $ 6,097     $ 4,274     $ 12,026     $ 9,046
  Spread            1.77%       1.07%       1.66%       1.15%
  Other income           400       3,939       1,680       7,344
  Debt and other restructuring costs       (502)       -       (502)       -
  Provision for credit losses       266       -       245       184
  Total revenue           5,729       8,213       12,959       16,206
  Net income (loss) before income taxes       (32)       2,150       1,518       4,848
  Net income (loss)         (39)       1,110       1,076       2,948
  Return on average total assets       -0.01%       0.28%       0.15%       0.37%
  Gross impaired loans to total loans       0.14%       0.14%       0.14%       0.14%
  Provision for credit losses as a % of average loans       0.02%       0.00%       0.02%       0.02%
Segmented operations summary                                
  Commercial Lending income before income taxes     $ 540     $ 2,045     $ 2,146     $ 4,369
  Loan spread           2.17%       1.97%       2.20%       2.02%
  Results from Credit Card Operations     $ (579)     $ (935)     $ (1,070)     $ (1,421)
  Credit card receivables       $ 23,819     $ 9,657     $ 23,819     $ 9,657
Pacific & Western Credit Corp., (consolidated)                                
Results of operations                                   
  Net income (loss) of the Bank     $ (39)     $ 1,110     $ 1,076     $ 2,948
  Deduct interest expense on notes of the Corporation       (849)       (658)       (1,581)       (1,272)
  Net non-interest expenses of the Corporation       (67)       338       66       (125)
  Provision for income taxes       (386)       (433)       (773)       (887)
  Net income (loss) before the following:       (1,341)       357       (1,212)       664
  Interest expense relating to Class B                                
    Preferred Share dividends       (1,230)       (1,268)       (2,457)       (2,428)
  Net loss of the Corporation available to                                 
     common shareholders     $ (2,571)     $ (911)     $ (3,669)     $ (1,764)
  Loss per common share:                                
     Basic         $ (0.09)     $ (0.03)     $ (0.13)     $ (0.07)
     Diluted         $ (0.09)     $ (0.03)     $ (0.13)     $ (0.07)

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 2013, dated June 5, 2013, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended April 30, 2013, included herein which have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A should also be read in conjunction with the Corporation's MD&A and the audited consolidated financial statements for the year ended October 31, 2012, all of which are available on SEDAR at www.sedar.com. Except as discussed below, all other factors discussed and referred to in the MD&A for the year ended October 31, 2012, remain substantially unchanged.

Overview

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

Pacific & Western Credit Corp.

Net income (loss) of the Corporation for the three months ending April 30, 2013 was ($2.6 million) or ($0.09) per share (($0.09) diluted) compared to ($1.1 million) or ($0.04) per share (($0.04) diluted) for the previous quarter and ($911,000) or ($0.03) per share (($0.03) diluted) for the same period last year. Prior to the deduction of dividends on Class B Preferred Shares, net income (loss) for the three months ending April 30, 2013 was ($1.3 million) compared to $129,000 for the previous quarter and $357,000 for the same period a year ago. These dividends are recorded as interest expense in the consolidated financial statements as the preferred shares carry certain redemption features and are classified as preferred share liabilities on the Consolidated Balance Sheet.

Net income (loss) of Pacific & Western Credit Corp. for the six months ended April 30, 2013 was ($3.7 million) or ($0.13) per share (($0.13) diluted) compared to ($1.8 million) or ($0.07) per share (($0.07) diluted) for the same period a year ago. Prior to the deduction of dividends on Class B Preferred Shares, which are recorded as interest expense for accounting purposes, net income (loss) of the Corporation for the current quarter was ($1.2 million) compared to $664,000 for the same period a year ago. The results of the Corporation were impacted by the results of the Bank as discussed below.

On January 28, 2013, the Corporation announced its plans for the Bank to complete an initial public offering (IPO) of its common shares. Upon completion of the IPO the Bank's common shares will be listed on the Toronto Stock Exchange (TSX). Following completion of the IPO of the Bank, it is expected that the Corporation will hold at least 90% of the issued and outstanding common shares of the Bank.

The Corporation also announced that it would be seeking approval from its Series C Note holders to modify its Series C Notes. At a Note holder meeting held on March 7, 2013, this approval was received. This modification to the Series C Notes allows the Corporation, at its option, at June 30, 2014, provided the Bank has completed its IPO and the Bank's common shares have been listed on the TSX, to satisfy all interest obligations of the Corporation's outstanding Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation.

Pacific & Western Bank of Canada

Net income (loss) of the Bank for the three months ending April 30, 2013 was ($39,000) compared to $1.1 million for the previous quarter and $1.1 million for the same period a year ago. Included in net income for the previous quarter were pre-tax gains of $1.0 million on the sale of loans and in the same period a year ago were pre-tax gains of $3.9 million realized on the sale of securities. There were no gains realized on the sale of securities or loans in the current quarter. In addition, the current quarter included restructuring charges of $502,000 relating to the retirement of subordinated notes payable to the parent company and severance costs incurred as a result of reductions in staff complement. Excluding these restructuring charges, net income for the current quarter would have been $327,000.

Net income of the Bank for the six months ended April 30, 2013 was $1.1 million compared to $2.9 million for the same period a year ago. Included in net income for the same period a year ago were pre-tax gains of $7.1 million on the sale of securities. There were no gains realized on the sale of securities in the current period. Excluding restructuring charges, net income for the six months ended April 30, 2013 would have been $1.4 million.

Net interest income and spread for the three months ended April 30, 2013 increased to $6.1 million and 1.77% respectively from $5.9 million and 1.59% for the previous quarter and $4.3 million and 1.07% for the same period a year ago. For the six months ended April 30, 2013, net interest income and spread increased to $12.0 million and 1.66% respectively from $9.0 million and 1.15% a year ago.

At April 30, 2013, total assets of the Bank were $1.39 billion compared to $1.43 billion at the end of the previous quarter and $1.68 billion a year ago. The decrease in total assets from the last quarter and a year ago was due primarily to a lower level of cash and cash equivalents held at the end of the current quarter and a lower level of lending assets caused primarily by loan sales over the past year.   Cash and cash equivalents decreased from the previous year due to a lower level of deposits maturing in the coming months.

Credit quality remains strong, with gross impaired loans totalling $1.7 million at April 30, 2013 compared to $1.7 million a year ago and net impaired loans of $98,000 compared to $57,000 a year ago. At April 30, 2013, the ratio of gross impaired loans as a percentage of total loans was 0.14% compared to 0.14% last year.

The Basel Committee on Banking Supervision published the Basel III rules supporting more stringent global standards on capital adequacy and liquidity (Basel III). The Office of the Superintendent of Financial Institutions (OSFI) requires all Canadian banks to comply with the new Basel III standards on an "all in" basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. Required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio at January 1, 2013, and at January 1, 2014 an 8.5% Tier 1 capital ratio and 10.5% total capital, all of which include a 2.50% capital conservation buffer. At April 30, 2013, the Bank significantly exceeded the new CET1 capital requirement of 7.0% with a ratio of 10.34%. In addition, its Tier 1 capital ratio was 10.34%; the total capital ratio was 11.94% and the assets-to-capital ratio at April 30, 2013 was 9.69.

Total Revenue

Total revenue consists of net interest income, other income (charges) and provisions for credit losses.  For the three months ended April 30, 2013 total revenue of the Bank was $5.7 million compared to $7.2 million in the previous quarter and $8.2 million for the same period last year. Total revenue decreased from a year ago due primarily to pre-tax gains totalling $3.9 million from the sale of preferred shares last year compared to $nil in the current quarter. In addition, included in other income (charges) for the current quarter are restructuring charges totalling $502,000 relating to the retirement of subordinated notes payable to the parent company and severance costs incurred as a result of reductions in staff complement. The impact of these items was reduced by an increase of $1.8 million in net interest income compared to the same quarter last year. Compared to the previous quarter, total revenue of the Bank decreased due primarily to the restructuring charges incurred in the current quarter and the gain of $1.0 million realized on the sale of lending assets in the previous quarter compared to $nil in the current quarter.

For the six months ending April 30, 2013, total revenue of the Bank was $13.0 million compared to $16.2 million a year ago with the decrease due primarily to gains totalling $7.1 million from the sale of preferred shares in the first six months a year ago compared to $nil in the current period. This decrease was partially offset by an increase in net interest income of the Bank which grew to $12.0 million in the current period from $9.0 million a year ago.

The provision for (recovery of) credit losses, which is also included in total revenue, was a provision of $266,000 in the current quarter compared to a recovery of $21,000 for the previous quarter and a provision of $nil for the same period a year ago. Included in the provision for (recovery of) credit losses in the current quarter was an amount totalling $230,000 relating to credit card receivables.

For the six months ended April 30, 2013, the provision for credit losses was $245,000 compared to $184,000 for the same period a year ago. Included in the provision for credit losses in the current period was an amount totalling $395,000 related to credit card receivables.

Net Interest Income and Net Interest Margin

Net interest income of the Bank for the three months ended April 30, 2013 increased to $6.1 million from $5.9 million for the previous quarter and from $4.3 million for the same period a year ago with the increase due primarily to loans that matured during the period being replaced with loans with larger spreads. An additional factor was a decrease in interest expense as rates on new deposits compared to a year ago are lower and subordinated notes payable to the parent company were repaid during the second quarter. Net interest margin or spread for the three months ended April 30, 2013 increased to 1.77% from 1.59% for the previous quarter and from 1.07% last year due to the factors noted above.

On a year-to-date basis, net interest income of the Bank increased to $12.0 million from $9.0 million a year ago and net interest margin or spread increased to 1.66% from 1.15% a year ago due to the factors noted above.

Other Income

Other income of the Corporation for the three months ended April 30, 2013 was $282,000 compared to $1.3 million for the previous quarter and $3.9 million for the same period a year ago. Other income for the current quarter includes non-interest revenue of $261,000 from credit cards and restructuring charges of $118,000 relating to severance costs as a result of reductions of staff complement. While restructuring charges of the Bank totalled $502,000, an amount of $384,000 related to intercompany debt charges and eliminated upon consolidation with the parent company. Other income for the previous quarter included gains of $1.0 million on the sale of loans and non-interest revenue of $257,000 from credit cards. Other income for the same period last year included gains of $3.9 million from the sale of preferred shares held in the treasury portfolio. In the previous year, the Corporation sold all of its remaining preferred shares of other financial institutions in order to minimize the impact on regulatory capital of mark-to-market adjustments on the preferred shares as regulatory capital included unrealized gains and losses on available-for-sale securities.

On a year-to-date basis, other income of the Corporation totalled $1.6 million compared to $7.3 million with the difference due primarily to gains totalling $7.1 million on the sale of preferred shares compared to $nil in the current period. Gains from the sale of loans totalled $1.0 million for the current period compared to $nil a year ago and non-interest revenue from credit cards for the current period totalled $518,000 compared to $116,000 for the same period a year ago. Non-interest revenue from credit cards increased in the current period due to increases in credit card receivables and credit card operations for the same period a year ago being for a shorter period of time as the credit card was launched on January 2, 2012.

Non-Interest Expenses

Non-interest expenses of the Corporation, including those relating to credit card operations, totalled $5.8 million for the current quarter compared to $5.5 million for the previous quarter and $5.7 million for the same period a year ago. The increase in non-interest expenses from the previous quarter was due primarily to timing of expenses. On a year-to-date basis, non-interest expenses of the Corporation were $11.4 million for the current period compared to $11.5 million for the same period last year.

Income Taxes

The Corporation's statutory federal and provincial income tax rate and that of the Bank is approximately 27%, similar to that of the previous period. The effective rate is impacted by the tax benefit on operating losses in the parent company not being recorded for accounting purposes and certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:

                                   
          for the three months ended       for the six months ended
          April 30       April 30       April 30       April 30
          2013       2012       2013       2012
                                   
Income tax on earnings       $ 7     $ -     $ 442     $ -
Income tax on dividends paid by the Corporation         386       433       773       887
Tax on gain on sale of securities         -       1,040       -       1,900
        $ 393     $ 1,473     $ 1,215     $ 2,787

For the current quarter, the provision for income taxes was $393,000 compared to $1.5 million a year ago and includes an income tax provision of $386,000 in the parent company relating to income tax on dividends paid by the Corporation on its Class B Preferred Shares. The income tax provision for the same quarter last year included a provision of $1.0 million relating to gains on the sale of securities and a provision of $433,000 in the parent company relating to the income tax on dividends paid by the Corporation on its Class B Preferred Shares. On a year-to-date basis, the provision for income taxes was $1.2 million compared to $2.8 million for the same period last year. This decrease was due primarily to an income tax provision of $1.9 million on the sale of securities in the previous period compared to $nil in the current period, slightly offset by an income tax provision of $442,000 on earnings of the Bank.

At April 30, 2013, the deferred income tax asset in the Bank was $8.7 million compared to $10.4 million a year ago with the decrease due to the tax effect of operating results over the past year, the recording of an income tax adjustment totalling $1.9 million in the previous year less tax rate adjustments recorded last year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $46 million from previous periods, the benefit of which was recorded at the time. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

In addition, the Corporation has income tax loss carry-forwards of the parent company which total approximately $39 million, the benefit of which has not been recorded. These loss carry-forwards are scheduled to begin expiring in 2014 if unutilized.

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

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of the net income (loss) for the period and other comprehensive income (loss) which consists primarily of unrealized gains and losses on available-for-sale securities. Comprehensive loss for the three months ended April 30, 2013 was $2.6 million compared to $3.4 million a year ago. The change from a year ago is due to the net loss in the current period being greater than that a year ago and amounts of unrealized gains on available-for-sale securities recorded in comprehensive income (loss) in previous years being reversed through other comprehensive income (loss) when realized during the three months ended April 30, 2012. On a year-to-date basis, comprehensive loss was $3.7 million compared to $6.2 million for the same period a year ago with the change due to the same factors as that described above.

Segment Analysis 

Commercial Lending  

The commercial lending segment consists of the operations of the Bank related to issuing mortgages, loans and leases. The commercial lending segment is supported by deposit taking, treasury and administrative activities of the Bank. For the three months ended April 30, 2013, net income of the commercial lending segment totalled $540,000 compared to $2.0 million a year ago with the difference due primarily to the restructuring charges in the Bank totalling $502,000 in the current quarter and gains from the sale of preferred shares for the same period a year ago which totalled $3.9 million compared to $nil in the current quarter. On a year-to-date basis, net income of the commercial lending segment totalled $2.1 million compared to $4.4 million for the same period a year ago with the difference due to the factors noted above.

Net interest income from commercial lending for the three months ended April 30, 2013, totalled $5.8 million compared to $4.3 million last year with the increase due primarily to a decrease in interest expense and increased yields on new loans. For the six months ended April 30, 2013, net interest income from commercial lending totalled $11.5 million compared to $9.1 million for the same period a year ago.

Credit quality relating to the commercial lending segment remains strong with provisions for credit losses for the three months ended April 30, 2013 totalling $36,000 compared to a recovery of $58,000 for the same period last year. For the six months ended April 30, 2013, the provision for credit losses was a recovery of $150,000 compared to a $64,000 provision for the same period a year ago.

For the three months ended April 30, 2013, non-interest expenses for the commercial lending segment totalled $4.9 million compared to $5.1 million a year ago and on a year-to-date basis, non-interest expenses totalled $9.8 million compared to $9.9 million for the same period a year ago.

Credit Card Operations 

This segment consists of income and expenses related to the Bank's private label credit card program which was launched on January 2, 2012.  As at April 30, 2013, credit card receivables totalled $23.8 million compared to $24.9 million at the end of the previous quarter and $9.7 million a year ago. For the three months ended April 30, 2013, costs to operate the credit card program exceeded revenues by $579,000 compared to $491,000 for the previous quarter and $935,000 for the same period a year ago. For the six months ended April 30, 2013, costs to operate the credit card program exceeded revenues by $1.1 million compared to $1.4 million for the same period a year ago.

Net interest income from credit card operations for the three months ending April 30, 2013, totalled $269,000 compared to $241,000 for the previous quarter and ($2,000) a year ago. For the six months ended April 30, 2013, net interest income from credit card operations totalled $488,000 compared to ($6,000) for the same period a year ago. Net interest income from credit card operations continues to be impacted by incentive programs with low or no interest rates used to generate the issue of new cards.  For the three months ended April 30, 2013, non-interest revenue from credit card operations in the form of credit card fees totalled $261,000 compared to $102,000 a year ago and for the six month period, non-interest revenue from credit card operations totalled $518,000 compared to $116,000 for the same period a year ago.

For the three months ending April 30, 2013, the Bank recorded a provision for credit losses of $230,000 relating to credit card receivables compared to $58,000 a year ago and consists of adjustments to the collective allowance and write-offs of credit card balances. For the six months ended April 30, 2013, the provision for credit card losses totalled $395,000 compared to $120,000 for the same period last year. At April 30, 2013, the collective allowance relating to credit card receivables totalled $555,000 compared to $120,000 a year ago.

Non-interest expenses relating to credit card operations totalled $879,000 for the current quarter compared to $977,000 for the same period last year and on a year-to-date basis, non-interest expenses totalled $1.7 million compared to $1.4 million last year. These expenses consist of salaries and benefits, expenses for activities carried out by external parties to administer processing of the credit cards and marketing and promotional costs and general and administrative expenses.

Corporate Head Office Operations

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

Consolidated Balance Sheet

Total assets of the Corporation at April 30, 2013, were $1.39 billion compared to $1.43 billion at the end of the previous quarter and $1.68 billion a year ago with the change due primarily to decreases in cash and securities. Cash and cash equivalents declined from the previous year due to a lower level of deposits maturing in the coming months compared to the previous year.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian chartered banks, government treasury bills and bankers acceptances with less than ninety days to maturity from the date of acquisition. Securities in the Corporation's treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, bankers' acceptances and corporate debt. Cash and securities, which are held primarily for liquidity management purposes, totalled $169.5 million or 12.2% of total assets compared to $234.9 million or 16.4% of total assets at the end of the previous quarter and $440.8 million or 26.2% of total assets a year ago. The decrease in cash and securities as a percentage of total assets was a result of the Corporation shifting its strategy to hold larger amounts of cash and cash equivalents as a proportion of its treasury portfolio rather than holding securities that were not as liquid to earn additional investment income.  The Corporation changed its strategy in order to adapt to changes in global regulatory liquidity requirements.

At April 30, 2013, net unrealized gains in the Corporation's available-for-sale securities portfolio were $41,000 compared to net unrealized gains of $4.0 million a year ago with the decrease due to preferred shares with unrealized gains a year ago being sold. In addition there was an unrealized loss of $545,000 at April 30, 2013 compared to an unrealized loss of $806,000 at the end of the previous quarter relating to a security the Corporation classifies as held-to-maturity. This unrealized loss was due to changes in interest rates rather than due to changes in credit risk and management is of the opinion that no impairment charge is required at this time.

Loans

Loans totalled $1.20 billion at April 30, 2013, compared to $1.17 billion at the end of the previous quarter and $1.21 billion a year ago with the decrease from a year ago due primarily to the sale of loans which the Corporation undertook to assist it in managing its capital levels in preparation for the new regulatory guidelines which took effect in January 2013.  The Corporation does not expect to see significant loan sales during the remainder of the year.

New lending for the quarter totalled $117.9 million compared to $95.0 million a year ago and loan repayments for the quarter totalled $93.6 million compared to $119.0 million a year ago. On a year-to-date basis, new lending totalled $254.0 million compared to $200.0 million last year and loan repayments totalled $269.0 million for the first six months of fiscal 2013 compared to $171.2 million last year. Loan repayments for the current six month period include loan sales totalling $37 million.

At April 30, 2013, the Corporation's bulk financing portfolio, which consists of loans and leases acquired through its bulk financing initiative, totalled $137.8 million compared to $121.1 million at the end of the previous quarter, an increase of 14%, and $80.7 million a year ago, an increase of 70%. The bulk financing program continues to be a key initiative for the Corporation and is expected to be the primary area of growth in the Corporation's lending portfolio. The Corporation continues to enter into agreements with vendors for the program and expects to see continued growth in the coming months.

Credit Quality

Gross impaired loans at April 30, 2013, totalled $1.7 million or 0.14% of total loans virtually unchanged from the end of the previous quarter and a year ago. The Corporation has maintained its high credit quality and strong underwriting standards and requires minimal provisions for credit losses. Provisions for (recovery of) credit losses in the current quarter totalled $266,000 compared to ($21,000) in the previous quarter and $nil a year ago. For the six months ended April 30, 2013, provisions for credit losses totalled $245,000 compared to $184,000 for the same period a year ago. The change in the provision for credit losses from a year ago was due to additional provisions related to credit card receivables.

At April 30, 2013, the Corporation's collective allowance totalled $3.3 million compared to $3.0 million a year ago. Included in the Corporation's collective allowance at April 30, 2013 was $555,000 relating to credit card receivables compared to $120,000 a year ago.  The Corporation's individual allowance for credit losses totalled $1.6 million compared to $1.6 million a year ago and net impaired loans at April 30, 2013 totalled $98,000 compared to $57,000 a year ago. Based on results from ongoing stress testing of the loan portfolio under various scenarios, and the secured nature of the existing loan portfolio, the Corporation is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for.

Other Assets 

Other assets totalled $24.8 million at April 30, 2013 compared to $25.4 million at the end of the previous quarter and $28.8 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.7 million compared to $10.4 million last year and capital assets and prepaid expenses of $13.3 million at April 30, 2013 compared to $14.9 million last year.

Deposits and Other Liabilities

Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at April 30, 2013 totalled $1.19 billion compared to $1.23 billion at the end of the previous quarter and $1.47 billion a year ago, and consist primarily of guaranteed investment certificates. The decrease in total deposits from a year ago is due to the decrease in total assets, specifically the level of cash and securities. Of the total amount of deposits, $39.2 million or approximately 3.3% of total deposits at the end of the current quarter were in the form of demand deposits compared to $34.6 million or approximately 2.3% of total deposits a year ago, with the remaining deposits having fixed terms.

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

An additional source of financing growth in assets and a source of liquidity is the use of margin lines and securities sold under repurchase agreements. From time to time, the Corporation uses these sources of short-term financing when the cost of borrowing is less than the interest rates that would have to be paid on new deposits. At April 30, 2013, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding a year ago.

Other liabilities consist primarily of accounts payable and accruals and the fair value of derivatives. At April 30, 2013, other liabilities totalled $16.2 million compared to $14.1 million at the end of the previous quarter and $28.2 million a year ago with the change due to a decrease in the fair value of derivatives as interest rate swap contracts were unwound during the previous quarter. See Interest Rate Risk Management in this Management's Discussion and Analysis for more information.

Securitization Liabilities 

The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At April 30, 2013, the amount of securitization liabilities totalled $43.4 million compared to $43.3 million a year ago. The Corporation has not entered into any securitization transactions in the current fiscal year nor does it expect to in the remainder of the year.

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020. Securitized insured mortgages with a carrying value of $41.2 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $82.5 million at April 30, 2013 compared to $77.9 million a year ago with the increase due primarily to additional notes issued during the past year by the Corporation. Excluding issue costs, notes payable consist of Series C Notes totalling $61.7 million maturing in 2018, a five year note in the amount of $4.0 million bearing interest at 6% and a short term note in the amount of $200,000. The Series C Notes bear interest at 9.00% per annum.

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

As noted previously, on January 28, 2013, the Corporation announced that it would be seeking approval from its Series C Note holders to modify its Series C Notes. At a Note holder meeting held on March 7, 2013, this approval was received. This modification to the Series C Notes allows the Corporation at its option, at June 30, 2014, provided the Bank has completed its IPO and the Bank's common shares have been listed on the TSX, to satisfy all interest obligations of the Corporation's outstanding Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation.

Preferred Share Liabilities

At April 30, 2013, the Corporation had 1,909,458 Class B Preferred Shares outstanding with a total value of $47.7 million before deducting issue and conversion costs. As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.1 million, net of issue and conversion costs has been classified on the Corporation's Consolidated Balance Sheet as Preferred Share Liabilities.  In addition, an amount of $3.2 million, net of income taxes and issue costs, has been included in Shareholders' Equity on the Corporation's Consolidated Balance Sheet. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $42.1 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The increase is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 11.8%.

Shareholders' Equity

At April 30, 2013, shareholders' equity was $16.3 million compared to $18.3 million at the end of previous quarter and $21.9 million a year ago with the decrease due primarily to operating losses. Common shares outstanding at April 30, 2013 totalled 30,139,732 compared to 27,173,439 a year ago with the change due to 1,792,686 common shares issued since last year as part of the dividends on the Class B Preferred Shares and 1,173,607 common shares issued under private placements. Common share options outstanding totalled 532,083 at the end of the quarter compared to 1,163,033 a year ago with the change due to the issue of 50,000 common share options and 680,950 common share options which expired during the past year.

At April 30, 2013, there were 314,572 Class A Preferred Shares outstanding, unchanged from a year ago and 1,909,458 Class B Preferred Shares outstanding, also unchanged from a year ago. In November, 2012, 6,202,370 warrants to acquire common shares and common share warrants expired.

The Corporation's book value per common share at April 30, 2013 was $0.40 compared to $0.47 at the end of the previous quarter and $0.51 a year ago. Assuming the outstanding Class B Preferred Shares are converted into common shares on the basis of $5.00 per share, the Corporation's book value per common share at April 30, 2013 would be $1.45 per share.

Reduction of Stated Capital

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

Updated Share Information

As at June 5, 2013, there were no changes since April 30, 2013 in the number of outstanding common shares, common share options and Class A or Class B Preferred Shares.

Risk Management

The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2012, and are found on pages 47 to 52 of the Corporation's 2012 Annual Report.

Capital Management

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

  • Increased focus on tangible common equity.

  • All forms of non-common equity such as the Bank's conventional subordinated notes must be non-viability contingent capital (NVCC) compliant. NVCC compliant means the subordinated notes must include a clause that would require conversion to common equity in the event that OSFI deems the institution to be insolvent or a government is ready to inject a "bail out" payment.

  • Changes in the risk-weighting of certain assets.

  • Additional capital buffers.

  • New requirements for levels of liquidity and new liquidity measurements.

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

Under the Basel III standards, total capital of the Bank totalled $133.1 million at April 30, 2013 compared to $125.0 million at the end of the previous quarter. The Bank exceeded the new capital requirements with a CET1 ratio of 10.34% compared to 7.81% at the end of the previous quarter. The increase in the Bank's CET1 ratio was due to $30.0 million of common shares of the Bank being issued to the parent company in March 2013 after the Bank had redeemed $30.0 million of subordinated notes payable to the parent company. In addition, the Bank's total capital ratio was 11.94% at April 30, 2013 compared to 11.45% at the end of the previous quarter and its assets-to-capital ratio at April 30, 2013 was 9.69 compared to 10.37 at the end of the previous quarter.

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

Interest Rate Risk Management

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

                                 
        April 30, 2013       April 30, 2012
        Increase 100
bps
      Decrease 100
bps
      Increase 100
bps
      Decrease 100
bps
                                 
Sensitivity of projected net interest                                
  income during a 12 month period     $ 4,919     $ (4,872)     $ 5,295     $ (5,261)
Sensitivity of projected net interest                                
  income during a 60 month period     $ 3,059     $ (2,907)     $ (579)     $ 896
                                 
Duration difference between assets and                                
  liabilities (months)       3.4               1.2        

The change in exposure to a decrease of 100 basis points in interest rates in a 60 month period from a year ago was due primarily to the change in the composition of the Bank's treasury portfolio through the sale of longer term securities over the past with the proceeds being invested in cash or short term liquid securities as well as the Corporation unwinding interest rate swaps during the previous quarter.

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

Liquidity

At April 30, 2013, Pacific & Western Credit Corp., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations for the next 12 months. These obligations relate primarily to payments of interest on notes payable and the expected cash portion of dividends on Class B Preferred Shares. The funding for the obligations beyond the next 12 months is expected to come primarily from cash and proceeds from sales of securities.

Summary of Quarterly Results

                                                               
(thousands of dollars except per share amounts)     2013     2012     2011
    Q2     Q1     Q4     Q3     Q2     Q1     Q4     Q3
                                                               
Results of operations:                                                              
Total interest income    $ 14,779     $ 15,705     $ 15,264     $ 15,356     $ 14,928     $ 15,021     $ 14,798     $ 14,644
Interest expense     11,145       11,735       12,069       12,244       12,581       12,022       12,374       12,969
Net interest income     3,634       3,970       3,555       3,112       2,347       2,999       2,424       1,675
Provision for (recovery of) credit losses     266       (21)       28       249       -       184       118       37
Other income     282       1,280       2,370       3,573       3,939       3,405       8,649       255
Total revenue     3,650       5,271       5,897       6,436       6,286       6,220       10,955       1,893
Non-interest expenses     5,828       5,547       6,426       6,162       5,724       5,759       6,680       5,582
Income (loss) before income taxes     (2,178)       (276)       (529)       274       562       461       4,275       (3,689)
Income tax provision (recovery)     393       822       2,165       888       1,473       1,314       5,558       (154)
  Net income (loss)   $ (2,571)     $ (1,098)     $ (2,694)     $ (614)     $ (911)     $ (853)     $ (1,283)     $ (3,535)
Earnings (loss) per share                                                              
    - basic   $ (0.09)     $ (0.04)     $ (0.10)     $ (0.02)     $ (0.03)     $ (0.03)     $ (0.05)     $ (0.17)
    - diluted   $ (0.09)     $ (0.04)     $ (0.10)     $ (0.02)     $ (0.03)     $ (0.03)     $ (0.05)     $ (0.17)

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

Other income during the quarters shows variability due to the level of gains realized in previous quarters on the sale of preferred shares held in the Corporation's treasury portfolio and in the fourth quarter of 2012 and first quarter of 2013 from the sale of loans. The provisions for credit losses recorded in the third quarter of 2012 and the current quarter were due primarily to adjustments in the collective allowance relating to credit card receivables.

Non-interest expenses decreased in the first quarter of 2013 as a result of a strategy to reduce overhead expenses but increased in the current quarter due primarily to the timing of expenses. Non-interest expenses increased in the fourth quarter of 2012 as a result of expenses being incurred totalling approximately $1.3 million relating to professional and consulting fees and increased costs relating to credit card operations.

The provision for income taxes in each of the first two quarters of 2013 reflects the effective statutory income tax rate of the Bank applied to earnings and includes income taxes on dividends paid by the Corporation on its Class B Preferred Shares. The provision for income taxes in the fourth quarter of 2012 included an income tax adjustment of $1.9 million relating to a change in the estimate of previously recognized deferred income tax assets. The income tax provision in the third quarter of 2012 decreased from previous quarters as a result of a recovery for income taxes relating to a change in corporate income tax rates substantively enacted during that quarter.

Significant Accounting Policies and Use of Estimates and Judgments

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

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

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

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

Future Change in Accounting Policies

IFRS 9: Financial instruments (IFRS 9)

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

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

Controls and Procedures

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

Forward-Looking Statements

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

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

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

(thousands of Canadian dollars)                            
              April 30       October 31       April 30
As at             2013       2012       2012
                               
Assets                              
                               
Cash and cash equivalents         $ 80,872     $ 132,766     $ 378,115
Securities (note 4)           88,614       167,227       62,720
Loans, net of allowance for credit losses (note 5)           1,195,325       1,210,311       1,211,379
Other assets            24,750       24,953       28,791
                               
            $ 1,389,561     $ 1,535,257     $ 1,681,005
                               
Liabilities and Shareholders' Equity                            
                               
Deposits            $ 1,189,000     $ 1,317,298     $ 1,468,220
Notes payable (note 6)           82,491       82,172       77,874
Securitization liabilities (note 7)           43,383       43,356       43,330
Other liabilities            16,225       32,711       28,167
Preferred share liabilities (note 8)           42,130       41,823       41,534
              1,373,229       1,517,360       1,659,125
                               
Shareholders' equity :                            
  Share capital (note 9)           24,100       21,888       70,171
  Retained earnings (deficit)           (7,798)       (4,063)       (51,227)
  Accumulated other comprehensive income            30       72       2,936
              16,332       17,897       21,880
                               
            $ 1,389,561     $ 1,535,257     $ 1,681,005

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

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

(thousands of Canadian dollars, except per share amounts)                                  
            for the three months ended       for the six months ended
            April 30       April 30       April 30       April 30
            2013       2012       2013       2012
                                     
Interest income:                                  
  Loans       $ 13,146     $ 12,989     $ 26,759     $ 25,716
  Securities         663       1,155       1,487       2,407
  Loan fees         970       784       2,238       1,826
            14,779       14,928       30,484       29,949
                                     
Interest expense:                                  
  Deposits and other         7,835       9,290       16,211       18,134
  Notes payable         2,080       2,023       4,212       4,041
  Preferred share liabilities         1,230       1,268       2,457       2,428
            11,145       12,581       22,880       24,603
                                     
Net interest income         3,634       2,347       7,604       5,346
                                     
Other income (note 10)         282       3,939       1,562       7,344
Net interest and other income          3,916       6,286       9,166       12,690
                                     
Provision for credit losses (note 5)         266       -       245       184
Net interest and other income after provision for credit losses         3,650       6,286       8,921       12,506
                                     
Non-interest expenses:                                  
  Salaries and benefits         2,790       2,546       5,353       5,337
  General and administrative         2,659       2,649       5,225       5,181
  Premises and equipment         379       529       797       965
            5,828       5,724       11,375       11,483
                                     
Income (loss) before income taxes         (2,178)       562       (2,454)       1,023
                                     
Income taxes (note 11)         393       1,473       1,215       2,787
                                     
Net loss       $ (2,571)     $ (911)     $ (3,669)     $ (1,764)
                                     
Basic earnings (loss) per share        $ (0.09)     $ (0.03)     $ (0.13)     $ (0.07)
                                     
Diluted earnings (loss) per share        $ (0.09)     $ (0.03)     $ (0.13)     $ (0.07)
                                     
Weighted average number of common shares outstanding         29,819,000       26,941,000       29,329,000       26,685,000
                                     

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

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

(thousands of Canadian dollars)                                  
            for the three months ended       for the six months ended
            April 30       April 30       April 30       April 30
            2013       2012       2013       2012
                                     
Net loss       $ (2,571)     $ (911)     $ (3,669)     $ (1,764)
                                     
Other comprehensive income (loss), net of tax                                  
  Net unrealized gains (losses) on assets held as
available-for-sale (1)
        (32)       94       (17)       648
  Amount transferred to income or loss on disposal
of available-for-sale assets (2)
        (25)       (2,582)       (25)       (5,080)
            (57)       (2,488)       (42)       (4,432)
                                     
Comprehensive loss       $ (2,628)     $ (3,399)     $ (3,711)     $ (6,196)

(1)     Net of income tax benefit (expense) for three months of $12 (2012 - ($35)) and six months of $6 (2012-($240))
(2)     Net of income tax benefit (expense) for three months of $9 (2012 - $955) and six months of $9 (2012-$1,879)

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

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

(thousands of Canadian dollars)                                
        for the three months ended       for the six months ended
        April 30       April 30       April 30       April 30
        2013       2012       2013       2012
                                 
Common shares (note 9):                                
                                 
Balance, beginning of the period     $ 16,430     $ 62,560     $ 14,914     $ 61,886
Issued on payment of Class B preferred share dividends       674       673       1,348       1,347
Issued during the period       -       -       842       -
Issue costs       -       (25)       -       (25)
                                 
Balance, end of the period     $ 17,104     $ 63,208     $ 17,104     $ 63,208
                                 
Common share warrants:                                
                                 
Balance, beginning of the period     $ -     $ 2,003     $ 2,003     $ 2,003
Amount transferred to contributed surplus on expiry       -       -       (2,003)       -
                                 
Balance, end of the period     $ -     $ 2,003     $ -     $ 2,003
                                 
Preferred shares (note 9):                                
                                 
Class A preferred shares                                
Balance, beginning and end of the period     $ 1,061     $ 1,061     $ 1,061     $ 1,061
                                 
Class B preferred shares                                
Balance, beginning and end of the period     $ 3,187     $ 3,187     $ 3,187     $ 3,187
                                 
Contributed surplus (note 9):                                
                                 
Balance, beginning of the period     $ 2,731     $ 706     $ 724     $ 688
Fair value of stock options granted       17       6       21       24
Amount transferred from common share warrants       -       -       2,003        
                                 
Balance, end of the period     $ 2,748     $ 712     $ 2,748     $ 712
                                 
Retained earnings (deficit):                                
                                 
Balance, beginning of the period     $ (5,227)     $ (50,316)     $ (4,063)     $ (49,397)
Net loss       (2,571)       (911)       (3,669)       (1,764)
Dividends paid       -       -       (66)       (66)
                                 
Balance, end of the period     $ (7,798)     $ (51,227)     $ (7,798)     $ (51,227)
                                 
Accumulated other comprehensive income net of taxes:                                
                                 
Balance, beginning of the period     $ 87     $ 5,424     $ 72     $ 7,368
Other comprehensive income (loss)       (57)       (2,488)       (42)       (4,432)
                                 
Balance, end of the period     $ 30     $ 2,936     $ 30     $ 2,936
                                 
Total shareholders' equity     $ 16,332     $ 21,880     $ 16,332     $ 21,880

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

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

(thousands of Canadian dollars)                    
              April 30         April 30
For the six months ended         2013         2012
                         
Cash provided (used in):                    
                         
Operations:                      
  Net loss       $ (3,669)     $   (1,764)
  Items not involving cash:                    
    Provision for credit losses         266         184
    Change in derivative financial instruments         -         (96)
    Deferred income taxes         442         1,900
    Stock-based compensation         23         24
    Gain on disposal of securities         (14)         (7,143)
    Gain on sale of lending assets         (1,009)         -
    Interest income         (30,484)         (29,949)
    Interest expense          22,880         24,603
  Mortgages and loans         15,625         (66,010)
  Interest received          28,229         29,086
  Interest paid          (29,896)         (21,539)
  Deposits         (128,298)         198,490
  Income taxes paid          (773)         (887)
  Change in other assets and liabilities         (4,678)         376
              (131,356)         127,275
Investing:                    
  Purchase of securities         (21,864)         -
  Proceeds from sale and maturity of securities         100,549         56,007
              78,685         56,007
Financing:                    
  Proceeds of shares issued         843         -
  Dividends paid         (66)         (66)
              777         (66)
                         
(Decrease) Increase in cash and cash equivalents         (51,894)         183,216
                         
Cash and cash equivalents, beginning of the period         132,766         194,899
                         
Cash and cash equivalents, end of the period       $ 80,872     $   378,115
                         
Cash and cash equivalents is represented by:                    
                         
  Cash         $ 70,475     $   138,192
  Cash equivalents         10,397         239,923
                         
Cash and cash equivalents, end of the period       $ 80,872     $   378,115

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


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

Three and six month periods ended April 30, 2013 and 2012


1. Reporting entity:

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

The Corporation's wholly-owned and principal subsidiary is Pacific & Western Bank of Canada ("PWB" or the "Bank") which operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI).  Pacific & Western Bank of Canada is involved in the business of providing financial solutions to clients in selected niche markets.

2. Basis of preparation:

a) Statement of compliance

These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Corporation's audited Consolidated Financial Statements for the year ended October 31, 2012.

The interim Consolidated Financial Statements for the three and six months ended April 30, 2013 and 2012 were approved by the Board of Directors on June 5, 2013.

b) Basis of measurement:

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

c) Functional and presentation currency

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

d) Use of estimates and judgments

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

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

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

3. Significant accounting policies:

The accounting policies applied by the Corporation in these interim Consolidated Financial Statements are the same as those applied by the Corporation as at and for the year ended October 31, 2012 and are detailed in Note 3 of the Corporation's 2012 Audited Consolidated Financial Statements. There have been no changes in accounting policies nor any significant new policies adopted during the current period.

4. Securities:

Portfolio analysis:

                                   
              April 30       October 31           April 30
              2013       2012           2012
                                   
Available-for-sale securities                                  
Securities issued or guaranteed by:                                  
  Canadian federal government       $     28,335     $ 76,841     $     19,752
  Canadian provincial governments             18,559       48,526           -
  Canadian municipal governments             1,247       1,581           3,964
Corporate debt             25,241       25,012           13,971
Corporate equity             -       -           9,734
Total available-for-sale securities       $     73,382     $ 151,960     $     47,421
                                   
Held-to-maturity security                                  
Corporate debt       $     15,232     $ 15,267     $     15,299
Total securities       $     88,614     $ 167,227     $     62,720

5. Loans:

a) Portfolio analysis:

                           
          April 30       October 31       April 30
          2013       2012       2012
                           
Residential mortgages                          
  Insured       $ 27,176     $ 35,966     $ 36,733
  Uninsured         253,466       230,129       207,044
Securitized mortgages         41,464       41,894       42,340
Government financing         148,509       172,326       188,033
Corporate loans         621,731       630,738       635,721
Corporate leases         75,314       71,131       87,184
Other loans         4,413       5,080       4,719
Credit card receivables         23,819       23,397       9,657
          1,195,892       1,210,661       1,211,431
                           
Allowance for credit losses:                          
  Collective         (3,302)       (3,283)       (2,979)
  Individual         (1,622)       (1,579)       (1,633)
          (4,924)       (4,862)       (4,612)
                           
          1,190,968       1,205,799       1,206,819
                           
Accrued interest         4,357       4,512       4,560
                           
Total loans, net of allowance for credit losses       $ 1,195,325     $ 1,210,311     $ 1,211,379

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

                                         
                    April 30       October 31           April 30
                    2013       2012           2012
                                         
Residential mortgages             $     523     $ 600     $     514
Corporate and government loans                   2,204       2,307           2,307
Other loans                   20       24           38
Credit card receivables                   555       352           120
              $     3,302     $ 3,283     $     2,979

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

b) Allowance for credit losses:

The allowance for credit losses results from the following:

                                   
                          April 30       April 30
                          2013       2012
                          Total       Total
For the three months ended         Collective       Individual       Allowance       Allowance
                                     
Balance, beginning of the period       $ 3,166     $ 1,583     $ 4,749     $ 4,603
Provision for credit losses         227       39       266       -
Recoveries (write-offs)         (91)       -       (91)       9
                                   
Balance, end of the period       $ 3,302     $ 1,622     $ 4,924     $ 4,612
                                   
                                   
                          April 30       April 30
                          2013       2012
                          Total       Total
For the six months ended         Collective       Individual       Allowance       Allowance
                                   
Balance, beginning of the period       $ 3,283     $ 1,579     $ 4,862     $ 4,387
Provision for credit losses         168       77       245       184
Recoveries (write-offs)         (149)       (34)       (183)       41
                                   
Balance, end of the period       $ 3,302     $ 1,622     $ 4,924     $ 4,612

c)  Impaired loans:

                             
            April 30, 2013
            Gross
impaired
      Individual
allowance
      Net impaired
                             
Residential mortgages         $ 1,709     $ 1,622     $ 87
Other loans           11       -       11
          $ 1,720     $ 1,622     $ 98
                             
                             
            April 30, 2012
            Gross
impaired
      Individual
allowance
      Net impaired
                             
Residential mortgages         $ 1,656     $ 1,633     $ 23
Other loans           34       -       34
          $ 1,690     $ 1,633     $ 57

Impaired loans at April 30, 2013 include foreclosed real estate held for sale with a gross carrying value of $111,000 (2012 - $159,000) and a related allowance of $111,000 (2012 - $120,000). Real estate held for sale is measured at the lower of cost and fair value, less costs to sell.

Interest income recognized on impaired loans for the three and six months ended April 30, 2013 was $39,000 (2012 - $37,000) and $77,000 (2012 - $73,000) respectively. An individual allowance has been recognized on the impaired loans to reflect the estimated recoverable amounts for impaired loans.

At April 30, 2013, loans, other than credit card receivables, past due but not impaired, totalled $nil (2012 - $32,000). At April 30, 2013, credit card receivables overdue by one day or more but not impaired totalled $1,524,000 (2012 - $487,000).

6. Notes payable:

                                     
                April 30       October 31           April 30
                2013       2012           2012
                                     
Ten year term Series C Notes unsecured, maturing 2018, net of
issue costs of $1,105 (October 31, 2012 -$1,183, April 30,
2012 - $1,257) , effective interest of 10.56%
        $     58,028     $ 57,774     $     57,538
                                     
Ten year term, unsecured, $11.5 million callable, subordinated
notes payable by the Bank to a third party, maturing between
2019 and 2021, net of issue costs of $1,237 (October 31, 2012 -
$1,302, April 30, 2012 - $1,364), effective interest of 10.92%  
               20,263       22,198           20,136
                                     
Notes payable, unsecured, effective interest of 6.05%                4,200       2,200           200
                                     
          $     82,491     $ 82,172     $     77,874

At a Note holder meeting held on March 7, 2013, the Corporation received approval to modify its Series C Notes.  This modification to the Series C Notes allows the Corporation, at its option, at June 30, 2014, provided the Bank has completed its IPO and the Bank's common shares have been listed on the TSX, to satisfy all interest obligations of the Corporation's outstanding Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. It also modified the Series C Note indenture to make, at the option of the holder, the Series C Notes convertible into common shares of the Bank held by the Corporation.

7. Securitization liabilities:

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

The amounts payable to counterparties bear interest at rates ranging from 1.97% - 3.95% and mature between 2016 and 2020.  Securitized insured mortgages with a carrying value of $41,240,000 (2012 - $42,033,000) are pledged as collateral for these liabilities.

8. Preferred share liabilities:

At April 30, 2013, the Corporation has outstanding 1,909,458 (2012 - 1,909,458) Class B Preferred Shares with a total face value of $47.7 million (October 31, 2012 - $47.7 million, April 30, 2012 - $47.7 million) less issue costs of $2.2 million (October 31, 2012 - $2.3 million, April 30, 2012 - $2.4 million).  As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $42.1 million (October 31, 2012 - $41.8 million, April 30, 2012 - $41.5 million), net of issue costs, has been classified on the Corporation's Consolidated Balance Sheets as a preferred share liability.  In addition, an amount of $3.2 million (October 31, 2012 - $3.2 million, April 30, 2012 - $3.2 million) representing the equity element of the Class B Preferred Shares, net of issue costs, has been classified in share capital on the Consolidated Balance Sheets.

As the preferred shares must be redeemed by the Corporation for approximately $47.7 million, the preferred share liability amount of $42.1 million (October 31, 2012 - $41.8 million, April 30, 2012 - $41.5 million) is being adjusted over the remaining term to redemption, until the amount is equal to the estimated redemption amount.  The increase is included in interest expense in the Consolidated Statement of Income (Loss) calculated using the effective interest rate of 11.8%.

9. Share capital:

                           
                  Stock Options
          Common
shares
outstanding
      Number       Weighted-
average
exercise
price
                           
Outstanding, October 31, 2012          28,522,491       1,163,033     $ 4.77
Granted         -       50,000       1.26
Issued for cash proceeds         652,587       -       -
Issued pursuant to Class B Preferred Share dividend         964,654       -       -
Expired         -       (680,950)       2.86
Outstanding, April 30, 2013          30,139,732       532,083     $ 6.88

At April 30, 2013, there were 314,572 (2012 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (2012 - 1,909,458) Class B Preferred Shares outstanding.  In November 2012, 6,202,370 warrants to acquire common shares and common share warrants expired.

The Corporation recognized compensation expense relating to the estimated fair value of stock options granted for the three and six months ended April 30, 2013 of $18,000 (2012 - $6,000) and $23,000 (2012 - $24,000) respectively. During the three and six months ended April 30, 2013, 50,000 options were granted to an officer who is a member of the Corporation's key management personnel. These options are exercisable into common shares at $1.26 per share and expire in February, 2023. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.53%, (ii) expected option life of 60 months and (iii) expected volatility of 65.45%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.70 per option.

During the six months ended April 30, 2012, 50,000 options were granted to an officer who is a member of the Corporation's key management personnel. These options are exercisable into common shares at $1.90 per share and expire in January, 2022. The fair value of the options was estimated using the Black-Scholes option pricing model based on the following assumptions: (i) risk-free interest rate of 1.31%, (ii) expected option life of 60 months and (iii) expected volatility of 57.71%. The forfeiture rate for these options was estimated at 0%. The fair value of options granted was estimated at $0.95 per option.  No additional options were issued during the three months ended April 30, 2012.

During the three months ended April 30, 2013, the Corporation issued 16,891 DSU's (2012 - nil) to its directors, with a total of 144,131 DSU's (2012 - 128,574) issued for the six months ended April 30, 2013. The amounts recorded in the Consolidated Statement of Income (Loss) relating to DSU's for the three and six months ended April 30, 2013 was $152,000 expense (2012 - $111,000 recovery) and $139,000 expense (2012 - $213,000 expense) respectively.  At April 30, 2013 there were 443,587 (2012 - 299,456) DSU's outstanding.

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

10. Other income:

                                   
          for the three months ended       for the six months ended
          April 30       April 30       April 30       April 30
          2013       2012       2013       2012
                                   
Gain on sale of securities       $ -     $ 3,944     $ -     $ 7,143
Gain on sale of loans         -       -       1,009       -
Credit card non-interest revenue         261       102       518       116
Other income (charges)         139       -       153       (11)
Mark-to-market adjustment for derivatives         -       (107)       -       96
Restructuring costs         (118)       -       (118)       -
                                   
        $ 282     $ 3,939     $ 1,562     $ 7,344

11. Income taxes:

The Corporation's statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous period. The effective rate is impacted by the tax benefit on operating losses in the parent company not being recorded for accounting purposes and certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:

                                   
          for the three months ended       for the six months ended
          April 30       April 30       April 30       April 30
          2013       2012       2013       2012
                                   
Income tax on earnings       $ 7     $ -     $ 442     $ -
Income tax on dividends paid by the Corporation         386       433       773       887
Tax on gain on sale of securities         -       1,040       -       1,900
        $ 393     $ 1,473     $ 1,215     $ 2,787

12. Commitments and contingencies:

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

                                     
                          April 30         April 30
                          2013         2012
                                     
Loan commitments                     $   152,803     $   236,565
Undrawn credit card lines                         136,516         73,081
Letters of credit                         21,876         27,100
                                     
                      $   311,195     $   336,746

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
                          2013         2012
                                     
Collateral related to derivative transactions                     $   3,958     $   15,439
Collateral related to letters of credit                         9,282         9,180
                                     
                      $   13,240     $   24,619

13. Related party transactions:

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

The Corporation issues both mortgages and personal loans to employees and Senior Executive Officers. At April 30, 2013 amounts due from Senior Executive Officers totalled $905,000 (2012 - $945,000) and are unsecured.

The interest rates charged on these loans are similar to those charged in an arms-length transaction. Interest income earned on the above loans for the three and six months ended April 30, 2013 was $9,000 (2012 - $10,000) and $19,000 (2012 - $21,000) respectively. There was no provision for credit losses related to loans issued to key management personnel for the three and six months ended April 30, 2013 and 2012.

14. Capital management:

a) Overview:

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

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

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

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

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

During the period ended April 30, 2013 there were no material changes in the Bank's management of capital.

b) Risk-Based Capital Ratio:

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

OSFI requires that all Canadian banks must comply with the Basel III standards on an "all-in" basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. The required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.50% capital conservation buffer. The Basel III rules provide for "transitional" adjustments whereby certain aspects of the new rules will be phased in between 2013 and 2019. The only available transition allowed by OSFI for capital ratios is related to the 10 year phase out of non-qualifying capital instruments. However, OSFI has allowed Canadian banks to calculate their asset to capital ratios on a transitional basis between 2013 and 2019.

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

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

                     
          April 30, 2013
          "All-in"     "Transitional"
                     
Common Equity Tier 1 (CET1) capital                  
  Directly issued qualifying common share capital       $ 133,965     $ 133,965
  Retained earnings (deficit)         (9,857)       (9,857)
  Accumulated other comprehensive income         30       33
CET1 before regulatory adjustments         124,138       124,141
  Regulatory adjustments applied to CET1          (8,888)       -
Total Common Equity Tier 1 capital       $ 115,250     $ 124,141
                     
Additional Tier 1 capital                   
  Directly issued qualifying Additional Tier 1 instruments         -       -
Total Tier 1 capital        $ 115,250     $ 124,141
                     
Tier 2 capital                  
  Directly issued capital instruments subject to phase out from Tier 2       $ 21,500     $ 21,500
Tier 2 capital before regulatory adjustments         21,500       21,500
  Regulatory adjustments applied to Tier 2         (3,686)       -
Total Tier 2 capital       $ 17,814     $ 21,500
Total capital        $ 133,064     $ 145,641
Total risk-weighted assets       $ 1,114,380     $ 1,126,954
Capital ratios                  
  CET1 Ratio         10.34%       11.02%
  Tier 1 Capital Ratio         10.34%       11.02%
  Total Capital Ratio         11.94%       12.92%

c) Assets-to-Capital Multiple:

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

                         
                        April 30
                        2013
                         
Total assets (on and off-balance sheet)                     $ 1,411,891
Capital                        
  Common shares                     $ 133,965
  Retained earnings (deficit)                       (9,857)
  Accumulated other comprehensive income                       33
  Subordinated notes (leverageable amount)                       21,500
Total regulatory capital                     $ 145,641
                         
Assets-to-capital ratio                       9.69

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

15. Interest rate position:

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

                                   
          April 30, 2013       April 30, 2012
          Increase 100
bps
      Decrease 100
bps
      Increase 100
bps
      Decrease 100
bps
                                   
Sensitivity of projected net interest                                  
  income during a 12 month period       $ 4,919     $ (4,872)     $ 5,295     $ (5,261)
Sensitivity of projected net interest                                  
  income during a 60 month period       $ 3,059     $ (2,907)     $ (579)     $ 896
                                   
Duration difference between assets and                                  
  liabilities (months)         3.4               1.2        

16. Segmented information:

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

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

Operating segment financial results are based on internal financial reporting documents which are provided to the Corporation's chief decision makers. The financial results for all segments are presented on a consolidated basis. Transactions between segments have been eliminated.

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

                                             
For the three months ended         April 30, 2013
            Commercial
lending
      Credit card
lending (1) 
      Corporate
head office
      Intersegment
eliminations 
      Total
Net interest income       $ 5,828     $ 269     $ (2,780)     $ 317     $ 3,634
Other income (charges)         (363)       261       -       384       282
Net interest income and other income         5,465       530       (2,780)       701       3,916
Provision for credit losses         36       230       -       -       266
Net interest and other income (loss) after                                          
  provision for credit losses         5,429       300       (2,780)       701       3,650
Non-interest expenses         4,882       879       367       (300)       5,828
Income (loss) before income taxes         547       (579)       (3,147)       1,001       (2,178)
Income tax expense         7       -       386       -       393
Net income (loss)       $ 540     $ (579)     $ (3,533)     $ 1,001     $ (2,571)
                                             
                                             
For the three months ended         April 30, 2012
          Commercial
lending
      Credit card
lending (1)
      Corporate
head office
      Intersegment
eliminations
       Total
Net interest income       $ 4,276     $ (2)     $ (2,758)     $ 831     $ 2,347
Other income         3,837       102       -       -       3,939
Net interest income and other income         8,113       100       (2,758)       831       6,286
Provision for (recovery of) credit losses         (58)       58       -       -       -
Net interest and other income (loss) after                                          
  provision for credit losses         8,171       42       (2,758)       831       6,286
Non-interest expenses         5,086       977       (54)       (285)       5,724
Income (loss) before income taxes         3,085       (935)       (2,704)       1,116       562
Income tax expense (recovery)         1,040       -       433       -       1,473
Net income (loss)       $ 2,045     $ (935)     $ (3,137)     $ 1,116     $ (911)
                                             
                                           
For the six months ended         April 30, 2013
          Commercial
lending
      Credit card
lending (1)
      Corporate
head office
      Intersegment
eliminations
      Total 
Net interest income       $ 11,538     $ 488     $ (5,546)     $ 1,124     $ 7,604
Other income         660       518       -       384       1,562
Net interest income and other income (charges)         12,198       1,006       (5,546)       1,508       9,166
Provision for (recovery of) credit losses         (150)       395       -       -       245
Net interest and other income (loss) after                                           
  provision for credit losses         12,348       611       (5,546)       1,508       8,921
Non-interest expenses         9,760       1,681       534       (600)       11,375
Income (loss) before income taxes         2,588       (1,070)       (6,080)       2,108       (2,454)
Income tax expense         442       -       773       -       1,215
Net income (loss)       $ 2,146     $ (1,070)     $ (6,853)     $ 2,108     $ (3,669)
                                             
Total assets       $ 1,366,196     $ 23,819     $ 642     $ (1,096)     $ 1,389,561
Total liabilities       $ 1,265,877     $ -     $ 107,380     $ (28)     $ 1,373,229
                                           
                                           
For the six months ended         April 30, 2012
          Commercial
lending
      Credit card
lending (1)
      Corporate
head office
      Intersegment
eliminations
       Total
Net interest income       $ 9,052     $ (6)     $ (5,342)     $ 1,642     $ 5,346
Other income         7,228       116       -       -       7,344
Net interest income and other income (charges)         16,280       110       (5,342)       1,642       12,690
Provision for credit losses         64       120       -       -       184
Net interest and other income (loss) after                                           
  provision for credit losses         16,216       (10)       (5,342)       1,642       12,506
Non-interest expenses         9,947       1,411       710       (585)       11,483
Income (loss) before income taxes         6,269       (1,421)       (6,052)       2,227       1,023
Income tax expense         1,900       -       887       -       2,787
Net income (loss)       $ 4,369     $ (1,421)     $ (6,939)     $ 2,227     $ (1,764)
                                             
Total assets       $ 1,671,602     $ 9,657     $ 842     $ (1,096)     $ 1,681,005
Total liabilities       $ 1,586,168     $ -     $ 103,774     $ (30,817)     $ 1,659,125

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

17. Comparative numbers:

Upon completion of its transition to IFRS, the Corporation revised the classification of certain of its financial instruments and changed an election under IFRS1.  This resulted in a decrease in securities of $14,020,000, an increase in loans of $17,661,000, a decrease in other assets of $983,000, and an increase in Accumulated Other Comprehensive Income of $2,658,000 compared to what was previously recorded in its interim consolidated financial statements for the period ended April 30, 2012.

18. Subsidiary company information:

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

Consolidated balance sheets                                
                April 30       October 31       April 30
                2013       2012       2012
                                 
Cash and cash equivalents             $ 78,539     $ 129,466     $ 376,899
Securities               88,614       167,227       62,720
Loans, net of allowance for credit losses               1,195,325       1,210,311       1,211,379
Other assets               27,537       27,164       30,261
              $ 1,390,015     $ 1,534,168     $ 1,681,259
                                 
Deposits             $ 1,189,000     $ 1,317,298     $ 1,468,220
Subordinated notes payable               20,263       49,815       49,732
Securitization liabilities               43,383       43,356       43,330
Other liabilities               13,231       30,595       24,886
                1,265,877       1,441,064       1,586,168
                                 
Shareholder's equity               124,138       93,104       95,091
                                 
              $ 1,390,015     $ 1,534,168     $ 1,681,259
                                 
                                 

Consolidated statements of income                                      
              for the three months ended       for the six months ended
              April 30       April 30       April 30       April 30
              2013       2012       2013       2012
                                       
Interest income           $ 14,776     $ 14,924     $ 30,471     $ 29,932
Interest expense             8,679       10,650       18,445       20,886
Net interest income             6,097       4,274       12,026       9,046
Other income  (charges)             400       3,939       1,680       7,344
Debt and other restructuring costs             (502)       -       (502)       -
Net interest income and other income             5,995       8,213       13,204       16,390
Provision for credit losses             266       -       245       184
Net interest and other income after                                       
  provision for credit losses             5,729       8,213       12,959       16,206
Non-interest expenses             5,761       6,063       11,441       11,358
Income (loss) before income taxes             (32)       2,150       1,518       4,848
Income taxes             7       1,040       442       1,900
Net income (loss)           $ (39)     $ 1,110     $ 1,076     $ 2,948

Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.3 billion in assets.  PWBank specializes in providing commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.

Pacific & Western Bank of Canada is wholly owned by Pacific & Western Credit Corp., whose shares trade on the TSX under the symbol PWC.

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

To receive company news releases, please contact:
Wade MacBain at wadem@pwbank.com (519) 675-4201

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

 

 

SOURCE: Pacific & Western Credit Corp.

For further information:

Visit our website at:  http://www.pwbank.com

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Pacific & Western Credit Corp.

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