News Column

PWC Capital Inc. Announces Results for Its Third Quarter Ended July 31, 2014

August 28, 2014

LONDON, Ontario--(BUSINESS WIRE)-- THIRD QUARTER SUMMARY (1)

(compared to the same periods in the prior year unless otherwise noted)

PWC Capital Inc.

  • Net income (loss) of PWC Capital Inc. (the “Corporation”) for the three months ended July 31, 2014, was ($2.5 million) or ($0.08) per share (basic and diluted) compared to ($2.2 million) or ($0.07) per share (basic and diluted) for the same period last year.
  • For the nine months ended July 31, 2014, net income (loss) was ($6.5 million) or ($0.21) per share (basic and diluted) compared to ($5.9 million) or ($0.20) per share (basic and diluted) for the same period last year.

    Pacific & Western Bank of Canada

  • Net interest margin or spread of the Bank for the current quarter increased to 1.94% from 1.91% a year ago. For the nine months ended July 31, 2014, net interest margin was 1.96%, a 15% increase from net interest margin of 1.71% for the same period a year ago.
  • Total revenue of the Bank for the three months ended July 31, 2014, increased to $7.3 million from $7.1 million last year. For the nine months ended July 31, 2014, total revenue increased to $22.1 million from $20.8 million for the same period a year ago.
  • Net income for the quarter was $1.0 million or $0.05 per share (basic and diluted) compared to $878,000 or $0.05 per share (basic and diluted) a year ago.
  • Net income for the nine months ended July 31, 2014 was $3.2 million or $0.16 per share (basic and diluted) compared to $2.0 million or $0.12 per share (basic and diluted) for the same period a year ago.
  • Credit quality remains strong with no gross impaired loans at July 31, 2014 compared to $1.8 million a year ago.
  • At July 31, 2014, the Bank’s Common Equity Tier 1 (CET1) ratio compared favourably to the industry with a ratio of 11.93% compared to 10.52% a year ago. In addition, the Bank’s total capital ratio was 13.27% at July 31, 2014 compared to 12.14% last year.

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

    PRESIDENT’S COMMENTS

    PWC Capital owns approximately 89% of Pacific & Western Bank of Canada and 100% of Versabanq Innovations. The Bank is by far our largest and most important investment and the value of PWC is of course highly dependent on the Bank’s value. We are pleased to tell you that our Bank’s net income for the nine months ended July 31, 2014 increased to $3.2 million, a 64% increase over the same period a year ago. Over the years we have spent a considerable amount of time and money to build a state of the art financial institution that could grow very rapidly in niche markets throughout Canada. We are now seeing the results of this investment. For example, the Bank’s Bulk Purchase Program increased from $188 million at previous year end to $345 million during the nine months ended July 31, 2014. Loans and leases purchased through this program present very little risk to our Bank and for the most part are processed by the Bank’s specialized systems and software. Our Bank also invented a custom banking solution for Trustees in Bankruptcy and is now rapidly gathering economical deposits from this industry. Deposit balances from this source more than doubled during the nine month period. Our Bank is designed to be many times its present size and the only real constraint to its growth is the size of the capital base. Accordingly, the Bank is planning to issue preference shares to accredited investors on similar terms as those recently issued by other banks. This new class of capital will allow our Bank to continue its rapid growth and increase its earnings to produce industry leading statistics in profitability.

    In order to provide additional cash for our holding company’s operations, subsequent to the quarter end I am pleased to advise that we reached agreement on a private placement of 4.7 million PWC common shares at .60 cents per share. This private placement together with the increasing profitability of our Bank is serving to enhance the value of our company.






    FINANCIAL HIGHLIGHTS

    (unaudited)       as at
          July 31   July 31     July 31   July 31
    ($CDN thousands except per share amounts ) 2014201320142013
    Pacific & Western Bank of Canada
    Balance Sheet Summary
    Cash and securities $ 145,659 $ 182,849 $ 145,659 $ 182,849
    Total loans 1,181,379 1,193,561 1,181,379 1,193,561
    Deposits 1,124,602 1,201,593 1,124,602 1,201,593
    Subordinated notes payable 13,840 20,297 13,840 20,297
    Shareholders' equity 136,382 125,014 136,382 125,014
    Capital ratios
    Assets-to-capital ratio 9.34 9.75 9.34 9.75
    Common Equity Tier 1 capital 128,755 116,491 128,755 116,491
    Risk-weighted assets 1,079,231 1,107,029 1,079,231 1,107,029
    Common Equity Tier 1 ratio 11.93% 10.52% 11.93% 10.52%
    Tier 1 risk-based capital ratio 11.93% 10.52% 11.93% 10.52%
      Total risk-based capital ratio   13.27%   12.14%   13.27%   12.14%
     
              for the three months ended   for the nine months ended
    Results of operations
    Net interest income $ 6,687 $ 6,733 $ 20,265 $ 18,759
    Net interest margin 1.94% 1.91% 1.96% 1.71%
    Other income 619 315 1,842 1,995
    Total revenue 7,306 7,048 22,107 20,754
    Provision for credit losses 303 154 519 399
    Non-interest expenses 5,588 5,381 16,704 16,822
    Restructuring charges - 287 434 789
    Net income1,0178783,2001,954
    Adjusted net income *1,0171,0883,5172,530
    Return on average total assets 0.29% 0.25% 0.31% 0.18%
    Gross impaired loans to total loans 0.00% 0.15% 0.00% 0.15%
      Provision for credit losses as a % of average loans   0.03%   0.01%   0.04%   0.03%
    PWC Capital Inc. (consolidated)
    Balance Sheet Summary
    Total assets $ 1,351,161 $ 1,404,354 $ 1,351,161 $ 1,404,354
    Notes payable and preferred share liabilities 118,572 124,938 118,572 124,938
    Shareholders' equity 8,875 15,660 8,875 15,660
    Results of operations
    Net income of the Bank $ 1,017 $ 878 $ 3,200 $ 1,954
    Additional interest expense on notes of PWC (1,663) (1,613) (4,849) (3,194)
    Interest expense relating to Class B
    Preferred Share dividends (1,247) (1,230) (3,735) (3,687)
    Net non-interest and other expenses of PWC 152 159 391 225
      Provision for income taxes   (737)   (387)   (1,510)   (1,160)
    Net loss$(2,478)$(2,193)$(6,503)$(5,862)
    Net loss of PWC available to:
    Preferred shareholders - - 66 66
        Common shareholders   (2,581)   (2,193)   (6,865)   (5,928)
    Net loss available to equity shareholders$(2,581)$(2,193)$(6,799)$(5,862)
    Loss per common share:
    Basic$(0.08)$(0.07)$(0.21)$(0.20)
        Diluted     $(0.08)$(0.07)   $(0.21)$(0.20)

    * Adjusted net income is a non-GAAP measure and is defined as net income for the period for the Bank

    prior to deducting restructuring charges on an after-tax basis.





    MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

    This management’s discussion and analysis (MD&A) of operations and financial condition for the third quarter of fiscal 2014, dated August 27, 2014, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2014, 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, 2013, 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, 2013, remain substantially unchanged.

    Basis of Presentation

    Non-GAAP and Additional GAAP Measures

    Net Interest Income and Net Interest Margin or Spread

    Most banks analyze profitability by net interest income (as presented in the Consolidated Statements of Income (Loss)) and net interest margin or spread. Net interest margin or spread is defined as net interest income as a percentage of average total assets. Net interest margin or spread does not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial institutions.

    Book Value Per Common Share

    Book value per common share is defined as shareholders’ equity less amounts relating to preferred shares recorded in equity, divided by the number of common shares outstanding.

    Adjusted Net Income

    Adjusted net income of Pacific & Western Bank of Canada (the “Bank”) is defined as net income for the period prior to deducting restructuring charges on an after-tax basis.

                           
    (thousands of Canadian dollars)   for the three months ended     for the nine months ended
      July 31   July 31July 31   July 31
          2014 2013 2014 2013
     
    Net income of the Bank $ 1,017 $ 878 $ 3,200 $ 1,954
     
    Restructuring charges, net of tax - 210 317 576
                 
    Adjusted net income   $ 1,017 $ 1,088 $ 3,517 $ 2,530




    Overview

    PWC Capital Inc. (the 'Corporation') is a holding company whose shares trade on the Toronto Stock Exchange. In April 2014, PWC Capital Inc. changed its name from Pacific & Western Credit Corp. Its principal subsidiary, the Bank, of which it owns approximately 89% of its issued common shares, provides commercial banking services to selected niche markets and operates as a Schedule I bank under the Bank Act (Canada). In August 2013, the Bank completed its initial public offering (IPO) and on August 27, 2013, its common shares commenced trading on the Toronto Stock Exchange.

    PWC Capital Inc.

    Net income (loss) of the Corporation for the three months ending July 31, 2014, was ($2.5 million) or ($0.08) per share (basic and diluted) compared to ($1.8 million) or ($0.06) per share (basic and diluted) for the previous quarter and ($2.2 million) or ($0.07) per share (basic and diluted) for the same period last year. Net loss for the current quarter includes interest expense totalling $1.25 million relating to dividends paid on the Corporation’s Class B Preferred Shares. 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.

    For the nine months ended July 31, 2014, net income (loss) was ($6.5 million) or ($0.21) per share (basic and diluted) compared to ($5.9 million) or ($0.20) per share (basic and diluted) for the same period last year. Net loss increased from last year despite increased earnings of the Bank due primarily to higher expenses of the Corporation including interest expense on notes payable. Net loss for the current nine month period includes interest expense totalling $3.7 million relating to dividends paid on the Corporation’s Class B Preferred Shares, with the amount unchanged from the same period a year ago.

    Pacific & Western Bank of Canada

    Net income of the Bank for the three months ending July 31, 2014, was $1.0 million compared to $1.2 million for the previous quarter and $878,000 for the same period a year ago. Net income for the previous quarter included a gain of $582,000 on the sale of a loan compared to a gain of $225,000 in the current quarter. Net income for the current quarter increased from the same period a year ago primarily due to the gain on the sale of a loan in the current quarter and restructuring charges of $287,000 recorded in the same period last year.

    For the nine months ended July 31, 2014, net income of the Bank was $3.2 million compared to $2.0 million for the same period a year ago. Net income for the current period includes restructuring charges of $434,000 compared to restructuring charges of $789,000 in the same period a year ago. Before deducting restructuring charges, adjusted net income was $3.5 million for the current period compared to $2.5 million last year with the increase due to a higher level of net interest income earned in 2014.

    Net interest income and net interest margin for the three months ended July 31, 2014 were $6.7 million and 1.94% respectively compared to $6.6 million and 1.93% for the previous quarter and $6.7 million and 1.91% for the same period a year ago. Net interest income and net interest margin for the nine months ended July 31, 2014 were $20.3 million and 1.96% respectively compared to $18.8 million and 1.71% for the same period a year ago with the increases due to a more optimal asset mix as well as a lower interest expense as a result of the repayment of subordinated notes over the past year.

    At July 31, 2014, total assets of the Bank were $1.36 billion compared to $1.39 billion at the end of the previous quarter and $1.41 billion a year ago. Lending assets at the end of the current quarter totalled $1.18 billion compared to $1.11 billion at the end of the previous quarter and $1.19 billion a year ago with the increase due primarily to growth in commercial and consumer loan and lease receivables sourced through the Bank’s bulk purchase program. Cash and securities at July 31, 2014, totalled $146 million compared to $250 million at the end of the previous quarter and $183 million a year ago. The level of cash and securities decreased from the previous quarter as a result of lower funding requirements for deposits maturing in the coming months compared to the end of the previous quarter.

    Credit quality remains strong with no gross impaired loans at the end of the current quarter compared to $nil at the end of the previous quarter and $1.8 million a year ago.

    At July 31, 2014, the Bank continued to exceed the CET1 capital requirement of 7.0% with a ratio of 11.93% compared to 12.21% at the end of the previous quarter and 10.52% a year ago. In addition, at July 31, 2014, the Bank’s Tier 1 capital ratio was also 11.93% compared to 12.21% at the end of the previous quarter and 10.52% a year ago. At July 31, 2014 its total capital ratio was 13.27% compared to 13.37% at the end of the previous quarter and 12.14% a year ago. Required minimum regulatory capital ratios are a Common Equity Tier 1 (CET1) capital ratio of 7.0%, a Tier 1 capital ratio of 8.5% and a total capital ratio of 10.5%, all of which include a 2.50% capital conservation buffer.

    Total Revenue

    Total revenue consists of net interest income and other income. For the three months ended July 31, 2014, total revenue of the Bank was $7.3 million compared to $7.5 million for the previous quarter and $7.1 million for the same period last year. Total revenue for the current quarter included a gain of $225,000 from the sale of a loan compared to a gain of $582,000 from loan sales in the previous quarter and $nil in the same period a year ago.

    For the nine months ended July 31, 2014, total revenue of the Bank was $22.1 million compared to $20.8 million for the same period last year. Total revenue for the current nine month period includes gains of $807,000 from the sale of loans compared to $1.0 million for the same period a year ago.

    Net Interest Income and Net Interest Margin

    Net interest income of the Bank for the three months ended July 31, 2014 was $6.7 million compared to $6.6 million for the previous quarter and $6.7 million for the same period last year. Net interest margin for the three months ended July 31, 2014 increased to 1.94% from 1.93% for the previous quarter and from 1.91% for the same period last year. For the nine months ended July 31, 2014, net interest income was $20.3 million compared to $18.8 million for the same period a year ago. This increase was due to a more optimal asset mix as well as a lower interest expense as a result of the repayment of subordinated notes over the past year. Net interest margin for the nine months ended July 31, 2014 increased to 1.96% from 1.71% for the same period last year with the increase due to the factors noted above.

    Other Income

    Other income for the three months ended July 31, 2014 was $619,000 compared to $886,000 for the previous quarter and $315,000 for the same period a year ago with the change from the previous quarter due primarily to a higher level of gains on the sale of loans in the previous quarter. For the nine months ended July 31, 2014, other income was $1.8 million compared to $2.0 million for the same period a year ago. Other income in the current and previous periods consists primarily of fees from credit cards and gains from loan sales as noted above. The Corporation expects that it may sell loans from time to time in the coming periods as market conditions warrant.

    Non-Interest Expenses

    Non-interest expenses of the Corporation, excluding restructuring charges, totalled $5.4 million for the current quarter compared to $5.4 million for the previous quarter and $5.2 million for the same period a year ago. For the nine months ended July 31, 2014, non-interest expenses of the Corporation, excluding restructuring charges, totalled $16.3 million compared to $16.6 million for the same period a year ago.

    As noted previously, during the nine months ending July 31, 2014, the Corporation incurred restructuring charges totalling $434,000 compared to $405,000 for the same period last year. Restructuring charges in the current period relate to the repayment of subordinated notes of the Bank in December 2013.

    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 periods. The effective rate is impacted by the tax benefit on operating losses in the Corporation on a non-consolidated basis not being recorded for accounting purposes and certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:

                           
    (thousands of Canadian dollars)     for the three months ended   for the nine months ended
        July 31   July 31July 31   July 31
            2014 2013 2014 2013
     
    Income tax on earnings of the Bank $ 398 $ 348 $ 1,250 $ 790
    Income tax on dividends paid by the Corporation 737 387 1,510 1,160
                     
            $ 1,135 $ 735 $ 2,760 $ 1,950




    For the three months ended July 31, 2014, the provision for income taxes was $1.14 million compared to $735,000 for the same period a year ago with the change due primarily to an increase in the level of income taxes the Corporation pays on dividends related to its Class B Preferred Shares. This income tax provision totalled $737,000 in the current period compared to $387,000 for the same period a year ago.

    For the nine months ended July 31, 2014, the provision for income taxes was $2.8 million compared to $2.0 million for the same period a year ago with the increase due to a higher level of earnings in the Bank and the increase in the level of income taxes the Corporation pays on dividends related to its Class B Preferred Shares. This income tax provision totalled $1.5 million in the current period compared to $1.2 million for the same period a year ago.

    At July 31, 2014, the Bank has a deferred income tax asset of $7.4 million compared to $8.3 million a year ago with the decrease due to the tax effect of operating results in the Bank over the past year. The deferred income tax asset is primarily a result of income tax losses totalling approximately $38.0 million from previous periods. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized. In addition, the Corporation has income tax loss carry-forwards which total approximately $55.0 million, the benefit of which has not been recorded. Loss carry-forwards totalling approximately $1.0 million will expire in 2014 if unutilized; the remaining $54.0 million of loss carry-forwards are not scheduled to begin expiring until 2026 if unutilized.

    Comprehensive Income (Loss)

    Comprehensive income (loss) is comprised of net income (loss) for the period and other comprehensive income (loss) which consists of unrealized gains and losses on available-for-sale securities. Comprehensive income (loss) for the three months ended July 31, 2014 was ($2.5 million) compared to ($1.8 million) for the previous quarter and ($2.2 million) a year ago. The change from previous periods is due to the net loss being greater in the current period. Comprehensive income (loss) for the nine months ended July 31, 2014 was ($6.5 million) compared to ($5.9 million) a year ago. Due to the current composition of the Corporation’s treasury portfolio which consists primarily of liquid securities, unrealized gains or losses in the portfolio are not significant and as a result, comprehensive income (loss) does not materially differ from net income (loss).

    Consolidated Balance Sheet

    Total assets of the Corporation at July 31, 2014, were $1.35 billion compared to $1.38 billion at the end of the previous quarter and $1.40 billion a year ago with the decrease from the previous quarter due primarily to a lower level of cash and securities. Lending assets increased during the period to $1.18 billion from $1.11 billion at the end of the previous quarter and compared to $1.19 billion a year ago.

    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, term deposits and debt of other financial institutions. Cash and securities, which are held primarily for liquidity purposes, totalled $147 million or 11% of total assets compared to $252 million or 18% of total assets at the end of the previous quarter and $185 million or 13% of total assets a year ago. The level of cash and securities decreased from the previous quarter as a result of lower funding requirements for deposits maturing in the coming months compared to the end of the previous quarter. The Corporation expects to maintain the current level of cash and securities as a percentage of total assets in the coming months.

    At July 31, 2014, unrealized gains in the Corporation’s available-for-sale securities portfolio were $27,000 compared to unrealized gains of $100,000 at the end of the previous quarter and $38,000 a year ago. In addition, there was an unrealized loss of $145,000 at July 31, 2014 relating to a security the Corporation classifies as held-to-maturity, compared to an unrealized loss of $210,000 at the end of the previous quarter and $559,000 a year ago. This unrealized loss is 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.

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

    Loans

    At July 31, 2014 loans totalled $1.18 billion compared to $1.11 billion at the end of the previous quarter, an increase of 7%, and compared to $1.19 billion a year ago. The increase from the previous quarter was due primarily to an increase in commercial and consumer loan and lease receivables sourced through the bulk purchase program.

    At July 31, 2014, the balances of individual loan categories remained comparable with those from the previous quarter with the exception of decreases in uninsured residential and commercial term mortgages and government financings, offset by increases in commercial and consumer loans and leases. The decrease in government financings was due to market conditions and the Corporation shifting its focus to commercial and consumer lending opportunities. The decrease in uninsured residential and commercial term mortgages was due primarily to several large repayments and loan sales in the current year. After delays in funding new construction loans due to the longer than normal winter season, loan fundings in this category have rebounded in the current quarter and outstanding balances have increased from previous quarters.

    Commercial and consumer loan and lease receivables sourced through the bulk purchase program showed significant growth during the quarter and from a year ago, totalling $345 million at July 31, 2014 compared to $279 million at the end of the previous quarter and $172 million a year ago. The bulk purchase program which consists of individual loan and lease receivables continues to be a key initiative for the Corporation and the primary driver for growth of the Corporation’s lending portfolio in the coming years.

    Overall, new lending for the quarter was very strong totalling $209 million compared to $170 million for the previous quarter and $152 million a year ago. Loan repayments, including loan sales, for the quarter totalled $124 million compared to $198 million for the previous quarter and $154 million a year ago. On a year-to-date basis, new lending totalled $518 million and loan repayments, including loan sales, totalled $493 million. At July 31, 2014, loan commitments, excluding those related to credit cards, totalled $161 million compared to $127 million at the end of the previous quarter and $129 million a year ago.

    Residential mortgage exposure

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

    Under OSFI’s definition, the Corporation’s exposure to residential mortgages is not significant and at July 31, 2014 totalled $1.1 million compared to $1.1 million at the end of the previous quarter and $1.7 million a year ago. The Corporation did not have any HELOC’s outstanding at July 31, 2014 or a year ago.

    Credit Quality

    The Corporation has maintained its high credit quality and strong underwriting standards and traditionally requires minimal provisions for credit losses. Gross impaired loans at July 31, 2014, were $nil, unchanged from the end of the previous quarter and compared to $1.8 million a year ago. The provision for credit losses in the current quarter was $303,000 compared to $267,000 for the previous quarter and $154,000 a year ago. For the nine months ended July 31, 2014, the provision for credit losses totalled $519,000 compared to $399,000 for the same period last year. The provision for credit losses increased from previous periods due to higher level of write-offs in the credit card program as the portfolio matures.

    At July 31, 2014, the Corporation’s collective allowance totalled $2.8 million compared to $2.9 million at the end of previous quarter and $3.2 million a year ago with the decrease due primarily to growth in commercial and consumer loan and lease receivables sourced through the bulk purchase program as a percentage of total lending assets. These loan and lease receivables normally attract a lower collective allowance due to the higher quality of the receivables comprising the portfolio. Included in the Corporation’s collective allowance at July 31, 2014 was $941,000 relating to credit card receivables, compared to $859,000 at the end of the previous quarter and $744,000 a year ago. The increase from a year ago was due to the growth and maturation of credit card balances.

    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 $23.1 million at July 31, 2014, compared to $23.1 million at the end of the previous quarter and $25.5 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $7.4 million compared to $7.8 million at the end of the previous quarter and $8.3 million a year ago. Also included in other assets are capital assets and prepaid expenses of $11.6 million compared to $11.6 million at the end of the previous quarter and $14.2 million a year ago.

    Deposits and Other Liabilities

    Deposits are used as a primary source of financing growth in assets and are raised primarily through a well established and well diversified deposit broker network across Canada. Deposits at July 31, 2014 totalled $1.12 billion compared to $1.16 billion at the end of the previous quarter and $1.20 billion a year ago, and consist primarily of guaranteed investment certificates. Of the total amount of deposits outstanding, $20.0 million or approximately 1.8% of total deposits at the end of the current quarter were in the form of savings accounts compared to $20.5 million or 1.8% of total deposits at the end of the previous quarter and $23.5 million or approximately 2.0% of total deposits a year ago. In addition, the Corporation has chequing accounts related to trustees in the bankruptcy industry as discussed below.

    In order to diversify its sources of deposits and reduce its cost of new deposits, the Corporation identified another source, that being chequing accounts of trustees in the Canadian bankruptcy industry. The Corporation developed banking software to enable this market to efficiently administer its chequing accounts and launched this product in April 2012. These services are being offered to trustees in the bankruptcy industry across Canada and at July 31, 2014, outstanding balances from this source totalled $76.3 million compared to $62.0 million at the end of the previous quarter and $14.7 million a year ago.

    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 July 31, 2014, the Corporation did not have any amounts outstanding relating to margin lines or securities sold under repurchase agreements nor were any amounts outstanding over the past year.

    Other liabilities consist primarily of accounts payable and accruals. At July 31, 2014, other liabilities totalled $39.9 million compared to $32.8 million at the end of the previous quarter and $18.7 million a year ago with the increase from the previous periods due to larger holdbacks associated with the loan and lease receivables sourced through the bulk financing program which have shown significant growth over the past year.

    Securitization Liabilities

    The Corporation has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At July 31, 2014, securitization liabilities totalled $43.6 million compared to $43.4 million at the end of the previous quarter and $43.5 million a year ago. The Corporation has not entered into any securitization transactions in the past 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 $40.2 million are pledged as collateral for these liabilities.

    Notes Payable

    Notes payable, net of issue costs, totalled $75.6 million at July 31, 2014 compared to $75.4 million at the end of the previous quarter and $82.7 million a year ago with the decrease from last year due primarily to the repayment of subordinated notes of the Bank. In addition, during the nine months ended July 31, 2014, the Corporation issued one year, unsecured notes totalling $988,000 bearing interest at 8.0% per annum and a five year unsecured note for $2.5 million, bearing interest at 6% per annum.

    Notes payable are comprised of Series C Notes with a par value of $61.7 million maturing in 2018 and other notes totalling $3.7 million maturing between 2014 and 2018. The Series C Notes bear interest at 9.00% per annum. The Series C Notes were modified effective August 27, 2013, in conjunction with the completion of the Bank’s IPO and its common shares being listed on the Toronto Stock Exchange. This modification allows the Corporation at its option, to pay interest on the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. 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. With this modification of the Series C Notes, $386,000, representing the equity element of the Series C Notes, net of applicable income taxes, was recorded in shareholders’ equity on the Consolidated Balance Sheets.

    During the three months ended July 31, 2014, as payment of the interest of $2.8 million due on the Series C Notes, the Corporation distributed 458,000 common shares of the Bank. This resulted in the Corporation’s ownership interest in the Bank reducing to 89% from 91% at the end of the previous quarter.

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

    Preferred Share Liabilities

    At July 31, 2014, 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 $43.0 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 $43.0 million will be adjusted over the remaining term to redemption until the amount is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement of Income (Loss), calculated using an effective interest rate of 11.8%.

    Shareholders’ Equity

    At July 31, 2014, shareholders’ equity was $8.9 million compared to $11.3 million at the end of the previous quarter and $15.7 million a year ago with the decrease due primarily to operating losses for the periods. Common shares outstanding at July 31, 2014 totalled 34,349,505 compared to 33,639,242 at the end of the previous quarter and 31,308,091 a year ago with the increase from the previous quarter due to 710,263 common shares issued as payment of the dividends on the Class B Preferred Shares.

    At July 31, 2014, 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.

    Common share options totalled 514,983 at July 31, 2014 compared to 517,983 at the end of the previous quarter. In addition, at July 31, 2014, there were 40,000 common share options outstanding in the Bank which is unchanged from the end of the previous quarter.

    The Corporation’s book value per common share at July 31, 2014 was $0.13 compared to $0.21 at the end of the previous quarter and $0.36 a year ago.

    Normal Course Issuer Bids

    On March 11, 2014, the Corporation obtained approval from the Toronto Stock Exchange to proceed with Normal Course Issuer Bids (NCIBs) for its common shares, Class B Preferred Shares and Series C Notes. All three NCIBs commenced on March 14, 2014 and will terminate on March 13, 2015, or such earlier date as the Corporation may complete its purchases pursuant to the NCIBs. The prices that the Corporation will pay for any common shares, Class B Preferred Shares and Series C Notes will be the market price of such shares or notes at the time of purchase.

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

  • Up to 2,450,000 of its common shares representing 9.99% of the public float. Daily purchases are limited to 25% of the average daily trading volume (ADTV), which is 3,551 common shares, other than block purchase exceptions.
  • Up to 190,000 of its Class B Preferred Shares representing 9.97% of the public float. Daily purchases are limited to 1,000 Class B Preferred Shares, other than block purchase exceptions.
  • Up to $3,300,000 of its Series C Notes representing 9.79% of the public float. Daily purchases are limited to 25% of the ADTV, which is $1,775 Series C Notes, other than block purchase exceptions.

    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 August 27, 2014, there were no changes since July 31, 2014 in the number of outstanding common shares, common share options and Class A or Class B Preferred Shares.

    Off-Balance Sheet Arrangements

    As at July 31, 2014, the Corporation does not have any significant off-balance sheet arrangements other than loan commitments and letters of credit resulting from normal course business activities. See Note 12 to the unaudited interim consolidated financial statements for more information.

    Related Party Transactions

    The Corporation’s and the Bank’s Board of Directors and Senior Executive Officers represent key management personnel. Other than key management personnel, the Corporation has no other related parties for which there were transactions or outstanding balances during the period. See Note 13 to the unaudited interim consolidated financial statements for details on related party transactions and balances.

    Risk Management

    The risk management policies and procedures of the Corporation are provided in its annual MD&A for the year ended October 31, 2013, and are found on pages 41 to 48 of the Corporation’s 2013 Annual Report.

    Capital Management and Capital Resources

    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 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 was $143.3 million at July 31, 2014 compared to $139.5 million at the end of the previous quarter and $134.4 million a year ago. The increase in total capital from the previous quarter was due primarily to earnings in the Bank during the period and changes in amounts of prescribed regulatory adjustments. At July 31, 2014, the Bank exceeded the current regulatory capital requirements with a CET1 ratio of 11.93% compared to 12.21% at the end of the previous quarter and 10.52% a year ago. In addition, the Bank’s total capital ratio was 13.27% at July 31, 2014 compared to 13.37% at the end of the previous quarter, exceeding the capital requirements that became effective January 1, 2014. The Bank’s assets-to-capital ratio at July 31, 2014 was 9.34 compared to 9.60 at the end of the previous quarter and 9.75 a year ago.

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

    Capital Assets

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

    Interest Rate Risk Management

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

                           
            July 31, 2014     July 31, 2013
         

    Increase 100

    bps

     

    Decrease 100

    bps

    Increase 100

    bps

     

    Decrease 100

    bps

     
    Impact on projected net interest
    income during a 12 month period $ 2,999 $ (2,966) $ 5,049 $ (4,997)
    Impact on reported equity
    during a 60 month period $ (1,701) $ 1,941 $ 2,906 $ (2,890)
                   
    Duration difference between assets and
    liabilities (months)     0.7       2.9  




    The change in exposure to a 100 basis point shift in interest rates in a 60 month period and the change in the duration difference between assets and liabilities from a year ago was due primarily to the decrease in cash and securities and lending assets as well as the change in the mix of lending assets, all of which resulted in a decrease in the duration of assets at the end of the current quarter. The duration of liabilities has remained relatively the same since last year.

    Liquidity

    PWC Capital Inc., on a non-consolidated basis, has sufficient funds on hand to meet its cash obligations for the current fiscal year. These obligations relate primarily to payments of interest on notes payable, the expected cash portion of dividends on Class B Preferred Shares and operational requirements. The Corporation on a non-consolidated basis may not be able to depend on funding to come from its subsidiary the Bank as regulatory requirements may restrict certain payments. As a result, the funding for the obligations beyond the current fiscal year is expected to come primarily from cash and proceeds from the sales of securities and borrowings.

    Subsequent to July 31st, 2014, the Corporation accepted a signed subscription agreement to issue 4,700,000 common shares at $0.60 per share for cash proceeds of $2,820,000. The closing of this transaction will occur upon receipt of regulatory approval.

    The unaudited Consolidated Statement of Cash Flows for the Corporation for the nine months ended July 31, 2014 shows cash provided by (used in) operations of ($68.0 million) compared to ($116.4 million) for the same period last year. The Corporation’s operating cash flow is primarily affected by the change in the balance of its deposits (a positive change in deposits has a positive impact on cash flow and a negative change in deposits has a negative impact on cash flow) as compared to the change in the balance of its loans (a positive change in loans has a negative impact on cash flow and a negative change in loans has a positive impact on cash flow). Based on factors such as liquidity requirements and opportunities for investment in loans and securities, the Corporation may manage the amount of deposits it receives and loans it funds in ways that result in the balances of these items giving rise to either negative or positive cash flow from operations. The Corporation will continue to fund its operations and meet contractual obligations as they become due from cash on hand and from managing the amount of deposits it receives as compared to the amount of loans it funds.

    Contractual Obligations

    Contractual obligations of the Corporation as disclosed in its MD&A and audited consolidated financial statements for the year ended October 31, 2013, have not changed significantly as at July 31, 2014.


    Summary of Quarterly Results

    ($CDN thousands except per share amounts)   2014     2013     2012
      Q3   Q2   Q1Q4   Q3   Q2   Q1Q4
     
    Results of operations:
    Total interest income $ 14,158 $ 13,980 $ 14,953 $ 15,212 $ 15,246 $ 14,779 $ 15,705 $ 15,624
    Interest expense 10,381 10,177 10,852 11,063 11,356 11,145 11,735 12,069
    Net interest income 3,777 3,803 4,101 4,149 3,890 3,634 3,970 3,555
    Other income 619 886 337 325 315 400 1,280 2,370
    Total revenue 4,396 4,689 4,438 4,474 4,205 4,034 5,250 5,925
    Provision for (recovery of) credit losses 303 267 (51) 125 154 266 (21) 28
    Non-interest expenses 5,436 5,369 5,508 5,932 5,222 5,828 5,547 6,426
    Restructuring charges - - 434 1,275 287 118 - -
    Income (loss) before income taxes (1,343) (947) (1,453) (2,858) (1,458) (2,178) (276) (529)
    Income tax provision (recovery) 1,135 858 767 177 735 393 822 2,165

    Net income (loss)

    $ (2,478) $ (1,805) $ (2,220) $ (3,035) $ (2,193) $ (2,571) $ (1,098) $ (2,694)
     
    Net income (loss) attributable to NCI 103 107 86 29 - - - -
    Net income (loss) attributable to:
    Preferred shareholders - - 66 - - - 66 -
    Common shareholders (2,581) (1,912) (2,372) (3,064) (2,193) (2,571) (1,164) (2,694)
    Earnings (loss) per share
    -basic $ (0.08) $ (0.06) $ (0.07) $ (0.10) $ (0.07) $ (0.09) $ (0.04) $ (0.10)
    -diluted $ (0.08) $ (0.06) $ (0.07) $ (0.10) $ (0.07) $ (0.09) $ (0.04) $ (0.10)




    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 interest expense are comparable between quarters and over the past eight quarters reflect seasonality occurring in residential construction lending in the Bank. Total interest income decreased during 2014 due primarily to a decrease in lending assets since last year as a result of several large loan repayments and loan sales which took place during the periods and a fewer number of days in the second quarter. Interest expense decreased in the first quarter of 2014 as a result of the repayment of $7 million in subordinated notes in the first quarter.

    Other income during the quarters shows variability due to the level of gains realized on the sale of loans. The other component of other income consists primarily of credit card fees which have been comparable over the quarters.

    Non-interest expenses reflect a strategy to reduce overhead expenses, primarily with respect to the credit card program and the timing of expenses. Restructuring charges in the first quarter of 2014 resulted from the write-off of unamortized issue costs related to the repayment of subordinated notes and in the fourth quarter of 2013, relate to expenses incurred from the IPO of the Bank.

    The provision for income taxes in each of the quarters 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 increase in the provision for income taxes in the current quarter reflects an increase in the provision relating to 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.

    Significant Accounting Policies and Use of Estimates and Judgments

    Significant accounting policies are detailed in Note 3 of the Corporation’s 2013 Audited Consolidated Financial Statements. There has been no change in accounting policies except that segment disclosure is no longer provided as the Corporation determined that credit card operations are not a significant part of its business. The impact of new standards adopted during the current period was not material.

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

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

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

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

    Financial Instruments

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

    Estimates of fair value are developed using a variety of valuation methods and assumptions. The Corporation follows a fair value hierarchy to categorize the inputs used to measure fair value for its financial instruments. The fair value hierarchy is based on quoted prices in active markets (Level 1), valuation techniques using inputs other than quoted prices but with observable market data (Level 2), or valuation techniques using inputs that are not based on observable market data (Level 3). Valuation techniques may require the use of inputs, transaction values derived from models and input assumptions sourced from pricing services. Valuation inputs are either observable or unobservable. The Corporation looks to external readily observable market inputs when available and may include certain prices and rates for shorter-dated Canadian yield curves and bankers acceptances. Unobservable inputs may include credit spreads, probability of default and recovery rates.

    Fair value measurements that fall into Level 2 of the fair value hierarchy include Canadian municipal bonds. For Canadian municipal bonds, fair value measurement is primarily based on quotes received from brokers that represent transaction prices in markets for identical instruments.

    Securities

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

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

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

    Loans

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

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

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

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

    (ii) observable market prices for the loan.

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

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

    Allowance for Credit Losses

    The Corporation maintains an allowance for credit losses which, in management's opinion, is adequate to absorb all credit related losses in its loan portfolio. The allowance for credit losses consists of both individual and collective allowances and is reviewed on a monthly basis. The allowance is presented as a component of loans on the Corporation’s consolidated balance sheets.

    The Corporation considers evidence of impairment for loans at both an individual asset and collective level. All individually significant loans are assessed for impairment first. All individually significant loans found not to be specifically impaired and all loans which are not individually significant are then collectively assessed for impairment by aggregating them into groups with similar credit risk characteristics.

    The collective impairment allowance is determined by reviewing factors including historical loss experience in portfolios of similar credit risk characteristics, current portfolio credit quality trends, probability of default and recovery rates, and business and economic conditions. Historical loss experience is adjusted based on current observable data to reflect effects of current conditions that did not affect the period in which the historical loss experience is based. The collective impairment allowance may also be adjusted by management using its judgment taking into account other observable and unobservable factors.

    Corporate Income Taxes

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

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

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

    The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income during the carry-forward period sufficient to offset the income tax losses and deductible temporary timing differences. While management is of the opinion that it is probable that the Bank will be able to realize the deferred income tax asset, there is no guarantee the Bank will be able to generate sufficient taxable income during the carry-forward period.

    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, 2015, with earlier application permitted. In July 2013, the IASB deferred the mandatory effective date for the adoption of IFRS 9 to a date yet to be determined and to allow entities to early adopt certain requirements in IFRS 9. 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 IASB has decided that IFRS 9 will be effective for annual periods beginning on or after January 1, 2018.

    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 the own credit requirement of 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 48 of our 2013 Annual Report.

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





    PWC CAPITAL INC.

    Consolidated Balance Sheets

    (Unaudited)

           
    (thousands of Canadian dollars)                
    July 31October 31July 31
    As at           2014 2013 2013
     
    Assets
     
    Cash and cash equivalents $ 98,044 $ 177,294 $ 96,772
    Securities (note 4) 48,642 39,891 88,479
    Loans, net of allowance for credit losses (note 5) 1,181,379 1,158,933 1,193,561
    Other assets 23,096 24,213 25,542
                     
                $ 1,351,161 $ 1,400,331 $ 1,404,354
     
    Liabilities and Equity
     
    Deposits $ 1,124,602 $ 1,187,404 $ 1,201,593
    Notes payable (note 6) 75,615 78,123 82,653
    Securitization liabilities (note 7) 43,567 43,410 43,511
    Other liabilities 39,929 23,876 18,652
    Preferred share liabilities (note 8)       42,957   42,448   42,285
    1,326,670 1,375,261 1,388,694
     
    Equity attributable to shareholders:
    Share capital (note 9) 29,155 26,671 25,623
    Retained earnings (deficit) (20,297) (13,432) (9,991)
    Accumulated other comprehensive income   17   22   28
    8,875 13,261 15,660
    Non-controlling interests         15,616   11,809   -
    24,491 25,070 15,660
                     
                $ 1,351,161 $ 1,400,331 $ 1,404,354


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







    PWC CAPITAL INC.

    Consolidated Statements of Loss

    (Unaudited)

         
    (thousands of Canadian dollars, except per share amounts)            
                  for the three months ended for the nine months ended
      July 31July 31July 31July 31
                2014 2013 2014 2013
     
    Interest income:
    Loans $ 12,624 $ 13,366 $ 38,095 $ 40,125
    Securities 779 666 2,330 2,153
    Loan fees         755   1,214   2,666   3,452
    14,158 15,246 43,091 45,730
    Interest expense:
    Deposits and other 7,120 7,956 21,647 24,167
    Notes payable 2,014 2,170 6,028 6,382
    Preferred share liabilities       1,247   1,230   3,735   3,687
    10,381 11,356 31,410 34,236
                       
    Net interest income 3,777 3,890 11,681 11,494
     
    Other income (note 10)         619   315   1,842   1,995
    Total revenue 4,396 4,205 13,523 13,489
     
    Provision for credit losses (note 5)     303   154   519   399
    4,093 4,051 13,004 13,090
    Non-interest expenses:
    Salaries and benefits 2,789 2,685 8,173 8,223
    General and administrative 2,293 2,118 7,062 7,158
    Premises and equipment       354   419   1,078   1,216
    5,436 5,222 16,313 16,597
    Restructuring charges (note 6)     -   287   434   405
    5,436 5,509 16,747 17,002
                       
    Loss before income taxes (1,343) (1,458) (3,743) (3,912)
     
    Income taxes (note 11) 1,135 735 2,760 1,950
                       
    Net loss         $ (2,478) $ (2,193) $ (6,503) $ (5,862)
     
    Net income attributable to non-controlling interests 103 - 296 -
    Net income (loss) attributable to shareholders of PWC:
    Preferred shareholders - - 66 66
      Common shareholders       (2,581)   (2,193)   (6,865)   (5,928)
    (2,581) (2,193) (6,799) (5,862)
                       
    Net loss         $ (2,478) $ (2,193) $ (6,503) $ (5,862)
     
    Basic loss per share $ (0.08) $ (0.07) $ (0.21) $ (0.20)
     
    Diluted loss per share $ (0.08) $ (0.07) $ (0.21) $ (0.20)
     
    Weighted average number of common shares outstanding   33,879,000   30,395,000   33,062,000   29,688,000


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







    PWC CAPITAL INC.

    Consolidated Statements of Comprehensive Income (Loss)

    (Unaudited)

     
    (thousands of Canadian dollars)                    
                  for the three months ended   for the nine months ended
      July 31   July 31July 31   July 31
                2014 2013 2014 2013
     
    Net loss $ (2,478) $ (2,193) $ (6,503) $ (5,862)
     
    Other comprehensive loss, net of tax

    Net unrealized gains (losses) on assets held as

    available-for-sale (1)

    (54) (1) (5) (18)

    Amount transferred to net loss on disposal of

    available-for-sale assets (2)

      -   (1)     -   (26)
    (54) (2) (5) (44)
                       
    Comprehensive loss       $ (2,532) $ (2,195) $ (6,508) $ (5,906)
     
    Total comprehensive income (loss) attributable to:
    Shareholders $ (2,630) $ (2,195) $ (6,804) $ (5,906)
      Non-controlling interests       98   -   296   -
                $ (2,532) $ (2,195) $ (6,508) $ (5,906)

    (1) Net of income tax benefit for three months of $20 (2013 – $nil) and nine months of $2 (2013 – $7)

    (2) Net of income tax benefit for three months of $nil (2013 – $nil) and nine months of $nil (2013 – $10)



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







    PWC CAPITAL INC.

    Consolidated Statements of Changes in Equity

    (Unaudited)

     
    (thousands of Canadian dollars)                    
                  for the three months ended   for the nine months ended
    July 31   July 31July 31   July 31
                2014 2013 2014 2013
     
    Common shares (note 9(a)):
     
    Balance, beginning of the period $ 21,486 $ 17,104 $ 19,295 $ 14,914
    Issued on payment of Class B preferred share dividends 674 674 2,022 2,022
    Issued during the period, net of issue costs - 842 843 1,684
                       
    Balance, end of the period       $ 22,160 $ 18,620 $ 22,160 $ 18,620
     
    Common share warrants:
     
    Balance, beginning of the period $ - $ - $ - $ 2,003
    Amount transferred to contributed surplus on expiry - - - (2,003)
                       
    Balance, end of the period       $ - $ - $ - $ -
     
    Preferred shares (note 9(a)):
     
    Class A preferred shares              
    Balance, beginning and end of the period   $ 1,061 $ 1,061 $ 1,061 $ 1,061
     
    Class B preferred shares              
    Balance, beginning and end of the period   $ 3,187 $ 3,187 $ 3,187 $ 3,187
     
    Contributed surplus (note 9(b)):
     
    Balance, beginning of the period $ 2,784 $ 2,748 $ 2,743 $ 724
    Fair value of stock options granted 18 7 59 28
    Amount transferred from common share warrants - - - 2,003
                       
    Balance, end of the period       $ 2,802 $ 2,755 $ 2,802 $ 2,755
     
    Series C notes (note 6):              
    Balance, beginning and end of the period   $ 386 $ - $ 386 $ -
     
    Other equity
     
    Balance, beginning of the period $ - $ - $ - $ -
    Loss on distribution of subsidiary shares (note 6) (441) - (441) -
                       
    Balance, end of the period       $ (441) $ - $ (441) $ -
     
    Total share capital       $ 29,155 $ 25,623 $ 29,155 $ 25,623
     
    Retained earnings (deficit):
     
    Balance, beginning of the period $ (17,716) $ (7,798) $ (13,432) $ (4,063)
    Net loss attributable to shareholders of PWC (2,581) (2,193) (6,799) (5,862)
    Dividends paid - - (66) (66)
                       
    Balance, end of the period       $ (20,297) $ (9,991) $ (20,297) $ (9,991)
     
    Accumulated other comprehensive income net of taxes:
     
    Balance, beginning of the period $ 66 $ 30 $ 22 $ 72
    Other comprehensive loss (54) (2) (5) (44)
    Change in non-controlling interests 5 - - -
                       
    Balance, end of the period       $ 17 $ 28 $ 17 $ 28
     
    Total shareholders' equity       $ 8,875 $ 15,660 $ 8,875 $ 15,660
     
    Non-controlling interests:
     
    Balance, beginning of the period $ 12,010 $ - $ 11,809 $ -
    Net income attributable to non-controlling interests 103 - 296 -
    Impact of subsidiary shares distributed (note 6) 3,509 - 3,509 -
    Other comprehensive loss attributable to non-controlling interests (5) - - -
    Other (1) - 2 -
                       
    Balance, end of the period       $ 15,616 $ - $ 15,616 $ -
                       
    Total equity         $ 24,491 $ 15,660 $ 24,491 $ 15,660


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







    PWC CAPITAL INC.

    Consolidated Statements of Cash Flows

    (Unaudited)

     
    (thousands of Canadian dollars)          
        July 31   July 31
    For the nine months ended   2014 2013
     
    Cash provided (used in):
     
    Operations:
    Net loss $ (6,503) $ (5,862)
    Items not involving cash:
    Provision for credit losses 519 399
    Income tax provision 2,760 790
    Stock-based compensation 59 28
    Gain on sale of loans (807) (1,009)
    Interest income (43,091) (45,730)
    Interest expense 31,410 34,236
    Restructuring charges 434 405
    Interest received 42,571 44,192
    Interest paid (29,664) (35,959)
    Income taxes paid - (1,031)
    Mortgages and loans (21,778) 17,557
    Deposits (59,715) (115,705)
    Change in other assets and liabilities   15,812   (8,752)
    (67,993) (116,441)
    Investing:
    Purchase of securities (34,894) (27,985)
    Proceeds from sale and maturity of securities   26,372   106,814
    (8,522) 78,829
    Financing:
    Proceeds of notes issued 3,488 -
    Repayment of notes by subsidiary (7,000) -
    Proceeds of shares issued, net of costs 843 1,684
    Dividends paid       (66)   (66)
    (2,735) 1,618
                 
    Decrease in cash and cash equivalents (79,250) (35,994)
     
    Cash and cash equivalents, beginning of the period 177,294 132,766
                 
    Cash and cash equivalents, end of the period $ 98,044 $ 96,772
     
    Cash and cash equivalents is represented by:
    Cash $ 38,285 $ 96,772
    Cash equivalents 59,759 -
                 
    Cash and cash equivalents, end of the period $ 98,044 $ 96,772


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





    PWC CAPITAL INC.

    Notes to Interim Consolidated Financial Statements

    (Unaudited)

    Three and nine month periods ended July 31, 2014 and 2013

    1.Reporting entity:

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

    The Corporation’s principal subsidiary is Pacific & Western Bank of Canada (“PWB” or the “Bank”) which operates as a Schedule I bank under the Bank Act (Canada) and is regulated by the Office of the Superintendent of Financial Institutions (OSFI). The Bank, whose common shares commenced trading on the Toronto Stock Exchange on August 27, 2013, is involved in the business of providing commercial lending services to selected niche markets.

    2.Basis of preparation:

    a) Statement of compliance:

    These interim Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and have been prepared in accordance with International Accounting Standard (IAS) 34 – Interim Financial Reporting and do not include all of the information required for full annual financial statements. These interim Consolidated Financial Statements should be read in conjunction with the Corporation’s audited Consolidated Financial Statements for the year ended October 31, 2013.

    The interim Consolidated Financial Statements for the three and nine months ended July 31, 2014 and 2013 were approved by the Audit Committee of the Board of Directors on August 27, 2014.

    b) Basis of measurement:

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

    c) Functional and presentation currency:

    These interimConsolidated 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 interimConsolidated 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, 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, 2013 and are detailed in Note 3 of the Corporation’s 2013 Audited Consolidated Financial Statements. There have been no changes in accounting policies except that segment disclosure is no longer provided as the Corporation determined that credit card operations are not a significant part of its business. The impact of new standards adopted during the current period was not material.

    4.Securities:

    Portfolio analysis:

                       
          July 31   October 31   July 31
            2014 2013 2013
     
    Available-for-sale securities
    Securities issued or guaranteed by:
    Canadian federal government $ - $ 5,025 $ 28,360
    Canadian provincial governments 9,486 18,724 18,609
    Canadian municipal governments 606 892 965
    Term deposits     25,926   50   25,329
    Total available-for-sale securities $ 36,018 $ 24,691 $ 73,263
     
    Held-to-maturity security
    Debt of other financial insitutions $ 12,624 $ 15,200 $ 15,216
    Total securities   $ 48,642 $ 39,891 $ 88,479


    All available-for-sale securities are carried at fair value based on quoted market prices (Level 1) except for Canadian municipal bonds and term deposits which fall into Level 2 of the fair value hierarchy. See Note 3 (c) of the October 31, 2013 consolidated financial statements for more information.

    5.Loans:

    a) Portfolio analysis:

                     
        July 31   October 31   July 31
          2014 2013 2013
     
    Residential mortgages
    Insured $ 22,980 $ 24,094 $ 24,921
    Uninsured 244,788 273,436 247,403
    Securitized mortgages 40,348 41,028 41,245
    Government financing 103,726 129,782 143,419
    Commercial and consumer loans 560,927 564,382 616,553
    Commercial and consumer leases 176,671 92,234 90,433
    Other loans 3,992 3,948 3,869
    Credit card receivables   26,635   28,934   26,226
    1,180,067 1,157,838 1,194,069
     
    Allowance for credit losses:
    Collective (2,807) (3,275) (3,235)
      Individual     -   -   (1,662)
    (2,807) (3,275) (4,897)
               
    1,177,260 1,154,563 1,189,172
     
    Accrued interest 4,119 4,370 4,389
               
    Total loans, net of allowance for credit losses $ 1,181,379 $ 1,158,933 $ 1,193,561




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

                     
        July 31   October 31   July 31
          2014 2013 2013
     
    Residential mortgages $ 618 $ 575 $ 564
    Commercial, consumer and government loans 1,223 1,879 1,919
    Other loans 25 12 8
    Credit card receivables         941   809   744
          $ 2,807 $ 3,275 $ 3,235


    The Corporation holds collateral against the majority of its loans in the form of mortgage interests over property, other registered securities over assets, cash held for holdbacks on the bulk purchase program, and guarantees.

    b) Allowance for credit losses:

    The allowance for credit losses results from the following:

                         
          July 31   July 31
    2014 2013
    For the three months ended   Collective Individual

    Total

    Allowance

    Total

    Allowance

     
    Balance, beginning of the period $ 2,862 $ - $ 2,862 $ 4,924
    Provision for credit losses 303 - 303 154
    Write-offs (358) - (358) (181)
                 
    Balance, end of the period   $ 2,807 $ - $ 2,807 $ 4,897
     
                         
    July 31July 31
    2014 2013
    for the nine months ended   Collective Individual Total Allowance Total Allowance
     
    Balance, beginning of the period $ 3,275 $ - $ 3,275 $ 4,862
    Provision for credit losses 519 - 519 399
    Write-offs (987) - (987) (364)
                 
    Balance, end of the period   $ 2,807 $ - $ 2,807 $ 4,897




    c) Impaired loans

                   
        July 31, 2014
       

    Gross

    impaired

     

    Individual

    allowance

     

    Net

    impaired

     
    Residential mortgages $ - $ - $ -
    Other loans     -   -   -
        $ - $ - $ -
     
                   
    July 31, 2013
       

    Gross

    impaired

    Individual

    allowance

    Net

    impaired

     
    Residential mortgages $ 1,749 $ 1,662 $ 87
    Other loans     6   -   6
        $ 1,755 $ 1,662 $ 93


    Interest income recognized on impaired loans for the three and nine months ended July 31, 2014 was $nil (July 31, 2013 - $40,000) and $nil (July 31, 2013 - $117,000) respectively.

    At July 31, 2014, loans, other than credit card receivables, past due but not impaired, totalled $nil (October 31, 2013 - $nil). At July 31, 2014, credit card receivables overdue by one day or more but not impaired totalled $2,786,000 (October 31, 2013 - $2,342,000).

    6.Notes payable:

                         
              July 31   October 31   July 31
              2014 2013 2013

    Ten year term Series C Notes unsecured, maturing 2018, net

    of issue costs of $nil (October 31, 2013 - $nil, July 31, 2013 -

    $1,065), effective interest of 10.85%

    $ 58,102 $ 57,591 $ 58,156
     

    Ten year term, unsecured, callable, subordinated notes

    payable by the Bank to an unrelated party, maturing between

    2019 and 2021, net of issue costs of $660 (October 31, 2013 -

    $1,168, July 31, 2013 - $1,203), effective interest of 10.06%

    13,840 20,332 20,297
     

    Notes payable, unsecured, maturing between 2014 and 2018,

    net of issue costs of $15 (October 31, 2013 - $nil, July 31,

    2013 - $nil) effective interest of 7.95%

    3,673 200 4,200
                   
              $ 75,615 $ 78,123 $ 82,653


    The Series C Notes, with a face value of $61.7 million, were modified effective August 27, 2013 in conjunction with the completion of the Bank’s Initial Public Offering (IPO) and its common shares being listed on the Toronto Stock Exchange. This modification allows the Corporation at its option, to pay interest on the Series C Notes either in cash or in-kind in the form of common shares of the Bank held by the Corporation. 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.

    During the three months ended July 31, 2014, as payment of the $2.8 million interest due on the Series C Notes, the Corporation distributed 458,000 common shares of the Bank. This resulted in the Corporation’s ownership interest in the Bank reducing to 89% from the 91% interest at the end of the previous quarter.

    During the nine months ended July 31, 2014, the Bank repaid $7,000,000 in subordinated notes which had a carrying value of $6,566,000. The difference of $434,000 relating to unamortized note issue costs was included in restructuring charges.

    In addition, during the nine months ended July 31, 2014, the Corporation issued one year, unsecured notes totalling $988,000 bearing interest at 8.0% per annum for net proceeds of $944,000 and a five year unsecured note for $2,500,000 bearing interest at 6% per annum.

    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 $40,195,000 (October 31, 2013 - $40,832,000) are pledged as collateral for these liabilities.

    8.Preferred share liabilities:

    At July 31, 2014, the Corporation has outstanding 1,909,458 (October 31, 2013 - 1,909,458) Class B Preferred Shares with a total face value of $47.7 million (October 31, 2013$47.7 million) less issue costs of $1.9 million (October 31, 2013$2.1 million). As these Class B Preferred Shares carry certain redemption features and are convertible into common shares of the Corporation, an amount of $43.0 million (October 31, 2013$42.4 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, 2013$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 in 2019 for approximately $47.7 million, the preferred share liability amount of $43.0 million (October 31, 2013$42.4 million) is being adjusted over the remaining term to redemption, until the amount is equal to the estimated redemption amount. The adjustment is included in interest expense in the Consolidated Statement Loss calculated using the effective interest rate of 11.8%.

    9.Share capital:

    a) Share capital

                       
          Stock Options
           

    Common

    shares

    outstanding

    Number  

    Weighted-

    average

    exercise

    price

     
    Outstanding, October 31, 2013 31,744,646 517,183 $ 6.73
    Issued for cash proceeds 705,013 - -
    Issued pursuant to Class B Preferred Share dividend 1,899,846 - -
    Expired       - (2,200)   8.76
    Outstanding, July 31, 2014   34,349,505 514,983 $ 6.72


    At July 31, 2014, there were 314,572 (October 31, 2013 - 314,572) Class A Preferred Shares outstanding and 1,909,458 (October 31, 2013 - 1,909,458) Class B Preferred Shares outstanding.

    b) Stock-based compensation

    During the three and nine months ended July 31, 2014, the Corporation recognized compensation expense of $18,000 (July 31, 2013 - $7,000) and $59,000 (July 31, 2013 - $28,000) respectively, relating to the estimated fair value of stock options granted in prior periods by the Corporation and the Bank.

    No stock options were granted during the current period. During the nine months ended July 31, 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.

    The Corporation recorded amounts in the Consolidated Statement of Loss relating to DSU’s for the three and nine months ended July 31, 2014 of $31,000 recovery (July 31, 2013 - $nil) and $164,000 recovery (July 31, 2013 - $139,000 expense) respectively. During the three and nine months ended July 31, 2014, the Corporation did not issue any DSU’s (July 31, 2013 – nil) and it settled 239,040 DSU’s (July 31, 2013 – nil) to its retired directors with 43,332 common shares of the Bank held by the Corporation. At July 31, 2014 there were 204,547 (July 31, 2013 – 443,587) DSU’s of the Corporation outstanding.

    10.Other income:

                       
          for the three months ended   for the nine months ended
    July 31   July 31July 31   July 31
        2014 2013 2014 2013
     
    Gain on sale of loans $ 225 $ - $ 807 $ 1,009
    Credit card non-interest revenue 378 306 991 823
    Other income 16 9 44 163
               
        $ 619 $ 315 $ 1,842 $ 1,995


    11. Income taxes:

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

                           
              for the three months ended   for the nine months ended
          July 31   July 31July 31   July 31
            2014 2013 2014 2013
     
    Income tax on earnings of the Bank $ 398 $ 348 $ 1,250 $ 790
    Income tax on dividends paid by the Corporation 737 387 1,510 1,160
                   
            $ 1,135 $ 735 $ 2,760 $ 1,950


    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 amounts with respect to the letters of credit are not necessarily indicative of credit risk as many of these arrangements are contracted for a limited period of usually less than one year and will expire or terminate without being drawn upon.

                 
      July 31October 31July 31
      2014 2013 2013
     
    Loan commitments $ 160,997 $ 141,251 $ 129,009
    Undrawn credit card lines 159,614 147,990 139,481
    Letters of credit 42,143 38,565 20,529
           
      $ 362,754 $ 327,806 $ 289,019


    Cash totalling $10,408,000 (October 31, 2013 - $10,380,000) is pledged as collateral against liabilities and off-balance sheet items.

    13.Related party transactions:

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

    The Corporation issues both mortgages and personal loans to employees and key management personnel. At July 31, 2014 amounts due from key management personnel totalled $2,013,000 (October 31, 2013 - $2,100,000) 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 nine months ended July 31, 2014 was $18,000 (July 31, 2013 - $9,000) and $54,000 (July 31, 2013 - $28,000) respectively. There was no provision for credit losses related to loans issued to key management personnel for the three and nine months ended July 31, 2014 and 2013.

    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 principal subsidiary is Pacific & Western Bank of Canada, (the “Bank”) and as a result, the following discussion on capital management is with respect to the capital management of the Bank. 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 (deficit) 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 three and nine months ended July 31, 2014 there were no material changes in the Bank’s management of capital.

    b) Risk-Based Capital Ratio:

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

    OSFI requires that all Canadian banks must comply with the Basel III standards on an “all-in” basis for purposes of determining its risk-based capital ratios. The required minimum regulatory capital ratios are a 7.0% Common Equity Tier 1 (CET1) capital ratio and effective January 1, 2014, an 8.5% Tier 1 capital ratio and 10.5% total capital ratio, all of which include a 2.50% 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 ratios.

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

                             
        July 31, 2014   July 31, 2013
              "All-in"   "Transitional" "All-in"   "Transitional"
     
    Common Equity Tier 1 (CET1) capital
    Directly issued qualifying common share capital $ 142,332 $ 142,332 $ 133,965 $ 133,965
    Retained earnings (deficit) (5,969) (5,969) (8,979) (8,979)
      Accumulated other comprehensive income   19   19   28   28
    CET1 capital before regulatory adjustments 136,382 136,382 125,014 125,014
      Total regulatory adjustments to CET1   (7,627)   (1,526)   (8,523)   -
    Common Equity Tier 1 capital   $ 128,755 $ 134,856 $ 116,491 $ 125,014
     
    Additional Tier 1 (AT1) capital
      Directly issued qualifying AT1 instruments   -   -   -   -
    Tier 1 capital     $ 128,755 $ 134,856 $ 116,491 $ 125,014
     
    Tier 2 capital
    Directly issued capital instruments subject to
      phase out from Tier 2     $ 14,500 $ 14,500 $ 21,500 $ 21,500
    Tier 2 capital before regulatory adjustments 14,500 14,500 21,500 21,500
      Total regulatory adjustments to Tier 2 capital   -   -   (3,545)   -
    Tier 2 capital       $ 14,500 $ 14,500 $ 17,955 $ 21,500
    Total capital       $ 143,255 $ 149,356 $ 134,446 $ 146,514
    Total risk-weighted assets   $ 1,079,231 $ 1,085,333 $ 1,107,029 $ 1,119,096
    Capital ratios
    CET1 Ratio 11.93% 12.43% 10.52% 11.17%
    Tier 1 Capital Ratio 11.93% 12.43% 10.52% 11.17%
      Total Capital Ratio       13.27%   13.76%   12.14%   13.09%




    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 total regulatory capital. The Bank’s assets-to-capital multiple is calculated as follows:

               
      July 31   July 31
        2014 2013
     
    Total assets (on and off-balance sheet) $ 1,395,705 $ 1,427,871
    Capital
    Common shares $ 142,332 $ 133,965
    Retained earnings (deficit) (5,969) (8,979)
    Accumulated other comprehensive income 19 28
    Subordinated notes 14,500 21,500
    Regulatory adjustments   (1,526)   -
    Total regulatory capital $ 149,356 $ 146,514
     
    Assets-to-capital ratio   9.34   9.75


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

    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 net interest margin, net interest income and the economic value of assets, liabilities and shareholders’ equity. The following table provides the duration difference between the Bank’s assets and liabilities and the potential 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 shareholders’ equity over a 60 month period if no remedial actions are taken.

                         
            July 31, 2014   July 31, 2013
         

    Increase 100

    bps

     

    Decrease 100

    bps

    Increase 100

    bps

     

    Decrease 100

    bps

     
    Impact on projected net interest
    income during a 12 month period $ 2,999 $ (2,966) $ 5,049 $ (4,997)
    Impact on reported equity
    during a 60 month period $ (1,701) $ 1,941 $ 2,906 $ (2,890)
                 
    Duration difference between assets and
    liabilities (months)     0.7     2.9  




    16.Fair Value of Financial Instruments:

    Fair values are based on management’s best estimates of market conditions and valuation policies at a certain point in time. The estimates are subjective and involve particular assumptions and matters of judgment and as such, may not be reflective of future fair values. The Corporation’s loans and deposits lack an available market as they are not typically exchanged. Therefore, they are not necessarily representative of amounts realizable upon immediate settlement. See Note 24 to the October 31, 2013 consolidated financial statements for more information on fair values.

                             
        July 31, 2014   October 31, 2013
      Fair value   Fair value   Fair value   Fair value
    Book of assets over (under) Book of assets over (under)
      Value and liabilities book value Value and liabilities book value
     
    Assets
     
    Cash and cash equivalents $ 98,044 $ 98,044 $ - $ 177,294 $ 177,294 $ -
    Securities 48,642 48,497 (145) 39,891 39,456 (435)
    Loans 1,181,379 1,181,706 327 1,158,933 1,157,047 (1,886)
    Other financial assets 3,677 3,677 - 2,869 2,869 -
                 
      $ 1,331,742 $ 1,331,924 $ 182 $ 1,378,987 $ 1,376,666 $ (2,321)
     
    Liabilities
     
    Deposits $ 1,124,602 $ 1,130,498 $ 5,896 $ 1,187,404 $ 1,190,127 $ 2,723
    Notes payable 75,615 63,650 (11,965) 78,123 77,041 (1,082)
    Securitization liabilities 43,567 46,890 3,323 43,410 46,325 2,915
    Other financial liabilities 39,929 39,929 - 23,876 23,876 -
    Preferred share liabilities 42,957 30,236 (12,721) 42,448 39,393 (3,055)
                 
      $ 1,326,670 $ 1,311,203 $ (15,467) $ 1,375,261 $ 1,376,762 $ 1,501



    17.Subsequent Event:

    Subsequent to July 31, 2014, the Corporation accepted a signed subscription agreement to issue 4,700,000 common shares at $0.60 per share for cash proceeds of $2,820,000. The closing of this transaction will occur upon receipt of regulatory approval.











    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.

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

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

    To receive company news releases, please contact:

    Wade MacBain at wadem@pwccapital.com (519) 488-1280




    PWC Capital Inc.

    Investor Relations:

    519-488-1280

    wadem@pwccapital.com

    or

    Public Relations & Media:

    Tel Matrundola, 519-488-1280

    Vice-President

    telm@pwccapital.com

    Visit our website at: http://pwccapital.com


    Source: PWC Capital Inc.


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