PWC Capital Inc. Announces Results for Its Fourth Quarter Ended October 31, 2014

PWC Capital Inc. (TSX:PWC):

FOURTH 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 October 31, 2014, was ($1.0 million) or ($0.04) per share (basic and diluted) compared to ($3.0 million) or ($0.10) per share (basic and diluted) for the same period last year.
• For the year ended October 31, 2014, net income (loss) was ($7.5 million) or ($0.24) per share (basic and diluted) compared to ($8.9 million) or ($0.30) per share (basic and diluted) for the same period last year. Net income (loss) for the current periods improved as a result of increased earnings of Pacific & Western Bank of Canada (“the Bank”) as discussed below.

Pacific & Western Bank of Canada

• Net income for the quarter increased to $2.5 million from a loss of $190,000 a year ago and for the year ended October 31, 2014, increased to $5.7 million from $1.8 million for the same period a year ago.
• Net interest margin or spread for the Bank for the current quarter increased by 11% to 2.16% from 1.95% a year ago. For the year ended October 31, 2014, net interest margin increased by 12% to 1.96%, from 1.75% for the same period a year ago.
• Total revenue of the Bank for the three months ended October 31, 2014, increased to $8.4 million from $7.2 million last year. For the year ended October 31, 2014, total revenue increased to $30.5 million from $28.0 million for the same period a year ago.
• Credit quality remains strong with no gross impaired loans at October 31, 2014 compared to $7,000 a year ago.
• At October 31, 2014, the Bank’s Common Equity Tier 1 (CET1) ratio compared favourably to the industry with a ratio of 11.25% compared to 11.29% a year ago. In addition, the Bank’s total capital ratio increased to 13.69% at October 31, 2014 from 12.99% last year.
• On October 30, 2014, the Bank completed an offering of 1,461,460 non-cumulative 5 year rate reset Series 1 Preferred Shares for net proceeds of $13.6 million. These preferred shares qualify as Additional Tier 1 capital and will fund continued growth for the Bank.

(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 17 million of Pacific & Western Bank of Canada common shares (89%) and 100% of Versabanq Innovations common shares. The Bank is by far our largest and most important investment and the value of PWC is highly dependent on the Bank’s value.

I am pleased to report that our Bank has completed a very successful year. Significant progress was made in all key areas resulting in Net Income more than tripling over the previous year.

Loans and leases acquired and warehoused through our Bank’s Bulk Purchase Program more than doubled over the previous year, with the year end balance reaching $395 million. Pacific & Western Bank purchases loans and leases from an increasing number of financiers who operate throughout Canada in a variety of industries. This program provides much needed financing for small businesses and consumers in niche markets. The Bank has developed state of the art systems to allow it to process large numbers of these small ticket assets and expects this business will become a major portion of the its total assets and revenue stream.

The Commercial Real Estate financing business, despite getting off to a slow start due to the unusually cold winter and spring in Southern Ontario, hit its targets and again made a significant contribution to our Bank’s overall profitability.

The custom banking solution developed for Trustees in Bankruptcy also grew rapidly during the year. The Bank now has over 1000 accounts with balances totaling over $125 million. This new channel of deposits is not only diversifying its deposit base, but is also lowering its cost of funds. It is now exploring other niche markets that may benefit from its state of the art custom banking services.

The Bank’s Consumer financing business made a modest profit in the quarter with its Home Hardware credit card and is close to initiating a point of sale financing pilot that we hope will lead to a significant source of consumer loans in underserved niche markets across Canada.

Total revenue for the quarter increased significantly to $8.4 million versus $7.3 million earned in the previous quarter and total revenue for the year increased by 9% to $30.5 million. Net interest margin increased to 2.16% in the quarter, and for the year increased by 12% to 1.96%. Non-interest expenses remained static year over year at $22.9 million. Net income for the quarter benefited from an income tax adjustment and at $2.5 million was more than double earned in the previous quarter. Net income for the year was $5.7 million versus the previous year’s $1.8 million. Earnings per share increased significantly from $0.11 cents to $0.29 cents over last year.

We have designed a highly leverageable Bank that, through utilization of specialized software and well-experienced staff, is able to rapidly acquire loans, leases and deposits with minimal costs. By targeting niche markets that are not well served by the larger banks, our Bank is able to earn excellent margins without accepting much risk. Recently, the Bank completed a public offering of 7% preference shares that has provided additional T1 capital to fuel asset and earnings growth. These are exciting times for Pacific & Western Bank.

Although I am very pleased with our Bank’s rapidly improving profitably, which in time will no doubt increase to a level that will be sufficient to offset the additional interest and other expenses that our company has, we are presently examining strategies that could accelerate PWC’s return to profitably.

FINANCIAL HIGHLIGHTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

This management’s discussion and analysis (MD&A) of operations and financial condition for the fourth quarter of fiscal 2014, dated December 3, 2014, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 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 Measure

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.

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, Pacific and Western Bank of Canada (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 October 31, 2014, was ($1.0 million) or ($0.04) per share (basic and diluted) compared to ($2.5 million) or ($0.08) per share (basic and diluted) for the previous quarter and ($3.0 million) or ($0.10) 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 the Corporation’s Class B Preferred Shares. This amount is 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 year ended October 31, 2014, net income (loss) was ($7.5 million) or ($0.24) per share (basic and diluted) compared to ($8.9 million) or ($0.30) per share (basic and diluted) last year. Net loss for the current year includes interest expense totalling $5.0 million relating to the Corporation’s Class B Preferred Shares. Net income (loss) for the current periods improved as a result of increased earnings of the Bank.

Pacific & Western Bank of Canada

Net income (loss) of the Bank for the three months ending October 31, 2014, was $2.5 million compared to $1.0 million for the previous quarter and ($190,000) for the same period a year ago. Net income for the current quarter increased from the previous quarter and from the same period a year ago due primarily to an increase in net interest income and a positive adjustment relating to the recognition of previously unrecognized deferred income tax asset of the Bank in the current quarter.

For the year ended October 31, 2014, net income of the Bank was $5.7 million compared to $1.8 million for the same period a year ago. Net income for the current year increased from last year due primarily to an increase in net interest income in the current period, a positive adjustment relating to the recognition of previously unrecognized deferred income tax asset of the Bank and restructuring charges totalling $2.1 million last year compared to $434,000 this year. Restructuring charges in the current year relate to the repayment in December 2013 of subordinated debt of the Bank and in the previous year to the repayment of subordinated debt and costs relating to the Bank’s Initial Public Offering (“IPO”).

Net interest income and net interest margin for the three months ended October 31, 2014 were $7.6 million and 2.16% respectively compared to $6.7 million and 1.94% for the previous quarter and $6.9 million and 1.95% for the same period a year ago. Net interest income and net interest margin for the year ended October 31, 2014 were $27.9 million and 1.96% respectively compared to $25.7 million and 1.75% for the same period a year ago. The increases in net interest income and net interest margin were due to a more optimal asset mix and lower interest expense as a result of the repayment of subordinated notes over the past two years and a lower cost of deposits.

At October 31, 2014, total assets of the Bank were $1.45 billion compared to $1.36 billion at the end of the previous quarter and $1.40 billion a year ago. Total loans at the end of the current quarter increased to $1.22 billion from $1.18 billion at the end of the previous quarter and $1.16 billion a year ago with the increase due primarily to growth in commercial and consumer loan and lease receivables sourced through the bulk purchase program. Cash and securities, which are held primarily for liquidity purposes, totalled $194 million at October 31, 2014, compared to $146 million at the end of the previous quarter and $216 million a year ago. The level of cash and securities increased from the previous quarter as a result of loan repayments primarily in the Bank’s land and construction portfolio and proceeds received from the sale of a loan. Cash and securities decreased from a year ago primarily due to lower funding requirements for deposits maturing in the coming months compared to a year ago.

The Bank has maintained its high credit quality and strong underwriting standards with $nil gross impaired loans at the end of the current quarter compared to $nil at the end of the previous quarter and $7,000 a year ago.

At October 31, 2014, the Bank continued to exceed the Common Equity Tier 1 (CET1) capital requirement of 7.0% with a ratio of 11.25% compared to 11.93% at the end of the previous quarter and 11.29% a year ago. At October 31, 2014, the Bank’s Tier 1 capital ratio was 12.43% compared to 11.93% at the end of the previous quarter and 11.29% a year ago. At October 31, 2014, its total capital ratio was 13.69% compared to 13.27% at the end of the previous quarter and 12.99% a year ago. Required minimum regulatory capital ratios are a 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.

On October 30, 2014, the Bank completed an offering of 1,461,460 non-cumulative 5 year rate reset Series 1 Preferred Shares for net proceeds of $13.6 million. These preferred shares qualify as Tier 1 capital and will fund continued growth for the Bank.

Total Revenue

Total revenue consists of net interest income and other income. For the three months ended October 31, 2014, total revenue of the Bank increased to $8.4 million from $7.3 million for the previous quarter and $7.2 million for the same period last year. Total revenue increased from previous periods as a result of increases in net interest income in the current period. Total revenue for the current quarter also included a gain of $400,000 from the sale of a loan compared to a gain of $225,000 in the previous quarter and $nil in the same period a year ago.

For the year ended October 31, 2014, total revenue of the Bank was $30.5 million compared to $28.0 million for the same period last year. Total revenue for the current year increased due to an increase in net interest income. Total revenue for the current year includes gains of $1.2 million from the sale of loans compared to $1.0 million last year.

Net Interest Income and Net Interest Margin

Net interest income of the Bank for the three months ended October 31, 2014 increased to $7.6 million from $6.7 million for the previous quarter and $6.9 million for the same period last year. Net interest margin for the three months ended October 31, 2014 also increased, to 2.16% from 1.94% for the previous quarter and from 1.95% for the same period last year. For the year ended October 31, 2014, net interest income increased to $27.9 million from $25.7 million for the same period a year ago. These increases were 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 and a lower cost of deposits. Net interest margin for the year ended October 31, 2014 increased to 1.96% from 1.75% for the same period last year with the increase due to the factors noted above.

Other Income

Other income for the three months ended October 31, 2014 totalled $791,000 compared to $619,000 for the previous quarter and $325,000 for the same period a year ago with the change from the previous periods due primarily to a higher amount of gains on the sale of loans in the current quarter. For the year ended October 31, 2014, other income was $2.6 million compared to $2.3 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.

Non-Interest Expenses

Non-interest expenses of the Corporation, excluding restructuring charges of the Bank, totalled $6.4 million for the current quarter compared to $5.4 million for the previous quarter and $5.9 million for the same period a year ago. Non-interest expenses for the current period increased from previous periods due primarily to timing of expenses. For the year ended October 31, 2014, non-interest expenses of the Corporation, excluding restructuring charges, totalled $22.7 million compared to $22.5 million for the same period a year ago.

As noted previously, during the year ending October 31, 2014, the Corporation incurred restructuring charges totalling $434,000 compared to $1.7 million last year. Restructuring charges in the current year relate to the repayment in December 2013 of subordinated debt of the Bank and in the previous year to the repayment of subordinated debt and costs relating to the Bank’s IPO.

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, a positive adjustment in the deferred tax asset relating to the recognition of previously unrecognized loss carryforwards of the Bank in the current quarter 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 October 31, 2014, the provision (recovery) for income taxes was ($283,000) compared to $177,000 for the same period a year ago with the change due primarily to an increase to the deferred income tax asset of $1.2 million in the Bank and an increased tax provision in the Bank on its earnings which were higher in the current period. The valuation adjustment was the result of reassessing the ability to generate future taxable income to utilize loss carryforwards.

For the year ended October 31, 2014, the provision for income taxes was $2.5 million compared to $2.1 million for the same period a year ago with the change due to the positive valuation adjustment of $1.2 million and increased tax provision in the Bank on its earnings which were higher in the current year.

At October 31, 2014, the Bank has a deferred income tax asset of $8.5 million compared to $8.7 million a year ago with the net decrease a result of the drawdown of loss carryforwards due to the positive operating results over the past year, offset by the valuation adjustment discussed above. The deferred income tax asset is primarily a result of income tax losses totalling approximately $36.0 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 $58.0 million, the benefit of which has not been recorded. These 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 October 31, 2014 was ($1.0 million) compared to ($2.5 million) for the previous quarter and ($3.0 million) a year ago. The change from previous periods is due to the net loss being less in the current period. Comprehensive income (loss) for the year ended October 31, 2014 was ($7.5 million) compared to ($8.9 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 October 31, 2014, were $1.44 billion compared to $1.35 billion at the end of the previous quarter and $1.40 billion a year ago with the increase from the previous quarter due primarily to an increase in total loans. Lending assets increased during the period to $1.22 billion from $1.18 billion at the end of the previous quarter and from $1.16 billion a year ago.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian financial institutions, 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 $196 million or 14% of total assets compared to $147 million or 11% of total assets at the end of the previous quarter and $217 million or 16% of total assets a year ago. The level of cash and securities increased from the previous quarter as a result of loan repayments primarily in the real estate construction portfolio and proceeds from the sale of a loan. Cash and securities decreased from a year ago primarily as a result of lower funding requirements for deposits maturing in the coming months compared to the end of the previous year. The Corporation expects to maintain the current level of cash and securities as a percentage of total assets in the coming months.

At October 31, 2014, unrealized gains in the Corporation’s available-for-sale securities portfolio were $26,000 compared to unrealized gains of $27,000 at the end of the previous quarter and $33,000 a year ago. In addition, there was an unrealized loss of $129,000 at October 31, 2014 relating to a security the Corporation classifies as held-to-maturity, compared to an unrealized loss of $145,000 at the end of the previous quarter and an unrealized loss of $435,000 a year ago. This unrealized loss is due to factors other than 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 January 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 October 31, 2014 loans increased to $1.22 billion from $1.18 billion at the end of the previous quarter and from $1.16 billion a year ago. The increase from the previous quarter and from the previous year was due primarily to an increase in commercial and consumer loan and lease receivables sourced through the bulk purchase program.

At October 31, 2014, the balances of individual loans compared to a year ago reflected a change in lending strategy where the Corporation has reduced its focus on government financings due to market conditions, and emphasized commercial and consumer lending opportunities, particularly those commercial loans and leases sourced through its bulk financing initiative. At October 31, 2014, the Corporation also experienced a decrease in commercial mortgages from a year ago which was due primarily to several large repayments and a loan sale in the fourth quarter, and a slower than normal construction season caused by delays in funding new construction loans due to a longer than normal winter season.

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 $381 million at October 31, 2014 compared to $345 million at the end of the previous quarter and $188 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 totalled $189 million compared to $209 million for the previous quarter and $153 million a year ago. Loan repayments for the quarter, including loan sales, totalled $144 million compared to $124 million for the previous quarter and $188 million a year ago. For the current year, new lending totalled $707 million and loan repayments, including loan sales, totalled $637 million. At October 31, 2014, loan commitments, excluding those related to credit cards, totalled $195 million compared to $161 million at the end of the previous quarter and $141 million a year ago.

Residential mortgage exposure
In accordance with the Office of the Superintendent of Financial Institutions (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 October 31, 2014 totalled $1.1 million compared to $1.1 million at the end of the previous quarter and $1.2 million a year ago. The Corporation did not have any HELOC’s outstanding at October 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 October 31, 2014, were $nil, unchanged from the end of the previous quarter and compared to $7,000 a year ago. The provision for credit losses in the current quarter was $400,000 compared to $303,000 for the previous quarter and $125,000 a year ago. For the year ended October 31, 2014, the provision for credit losses totalled $919,000 compared to $524,000 for the same period last year. The provision for credit losses increased from previous periods due to a higher level of write-offs relating to the credit card program as the portfolio matures.

At October 31, 2014, the Corporation’s collective allowance totalled $2.9 million compared to $2.8 million at the end of previous quarter and $3.3 million a year ago with the decrease due primarily to commercial and consumer loan and lease receivables sourced through the bulk purchase program becoming a larger 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 and the level of cash holdbacks that the Corporation retains related to the portfolio. Included in the Corporation’s collective allowance at October 31, 2014 was $962,000 relating to credit card receivables, compared to $941,000 at the end of the previous quarter and $809,000 a year ago. The increase from a year ago was due to the 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 October 31, 2014, compared to $23.1 million at the end of the previous quarter and $24.2 million a year ago. Included in other assets is the deferred income tax asset of the Bank of $8.5 million compared to $7.4 million at the end of the previous quarter and $8.7 million a year ago. Also included in other assets are capital assets and prepaid expenses of $10.8 million compared to $11.6 million at the end of the previous quarter and $12.7 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 October 31, 2014, totalled $1.19 billion compared to $1.12 billion at the end of the previous quarter and $1.19 billion a year ago, and consist primarily of guaranteed investment certificates. Of the total amount of deposits outstanding, $19.3 million or approximately 1.6% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $20.0 million or 1.8% of total deposits at the end of the previous quarter and $22.6 million or approximately 1.9% 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 October 31, 2014, outstanding balances from this source totalled $83.8 million compared to $76.3 million at the end of the previous quarter and $35.4 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 October 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 of accounts payable, accruals and holdbacks payable on the bulk purchase program. At October 31, 2014, other liabilities totalled $46.6 million compared to $39.9 million at the end of the previous quarter and $23.9 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 October 31, 2014, securitization liabilities totalled $43.5 million compared to $43.6 million at the end of the previous quarter and $43.4 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 $40.0 million and restricted cash totalling $3.4 million are pledged as collateral for these liabilities.

Notes Payable

Notes payable, net of issue costs, totalled $75.8 million at October 31, 2014 compared to $75.6 million at the end of the previous quarter and $78.1 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 year ended October 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 year ended October 31, 2014, as payment of the interest of $2.8 million due on the Series C Notes, the Corporation distributed 458,000 common shares it owned of the Bank. This resulted in the Corporation’s ownership interest in the Bank decreasing 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 October 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 $43.1 million, net of issue and conversion costs, has been classified on the Corporation’s Consolidated Balance Sheet as Preferred Share Liabilities. In addition, an amount of $3.2 million, net of income taxes and issue costs, has been included in shareholders’ equity on the Corporation’s Consolidated Balance Sheet. As the Class B Preferred Shares must be redeemed by the Corporation in 2019 for $47.7 million, the preferred share liability amount of $43.1 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 October 31, 2014, shareholders’ equity was $10.2 million compared to $8.9 million at the end of the previous quarter and $13.3 million a year ago with the change due to common shares issued by the Corporation on a private placement basis and operating losses incurred by the Corporation during the periods. During the three months ended October 31, 2014, the Corporation issued through a private placement 4,700,000 common shares at $0.60 per share for cash proceeds of $2,820,000.

Common shares outstanding at October 31, 2014 totalled 40,145,504 compared to 34,349,505 at the end of the previous quarter and 31,744,646 a year ago with the increase from the previous quarter due to 4,700,000 issued under the private placement and 1,095,999 shares issued as payment of the dividends on the Class B Preferred Shares.

At October 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 471,773 at October 31, 2014, compared to 514,983 at the end of the previous quarter. In addition, at October 31, 2014, there were 40,000 common share options of the Bank outstanding which is unchanged from the end of the previous quarter.

Normal Course Issuer Bids

On November 5th, 2014, the Corporation amended the Normal Course Issuer Bids (NCIBs) that were approved on March 11th, 2015, for its common shares, Class B Preferred Shares and Series C Notes. The amendment permits purchases through the facilities of alternative trading systems, as well as through the facilities of the TSX. All other aspects of the NCIBs remain unchanged. Security holders may obtain copies of the amended Notices of Intention to make a Normal Course Issuer Bid without charge by contacting the Corporation.

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 December 3, 2014, there were no changes since October 31, 2014 in the number of outstanding common shares, common share options and Class A Preferred Shares. At December 3rd, there were 1,902,758 Class B Preferred Shares outstanding, as a result of 6,700 Class B preferred shares being purchased and cancelled under the Normal Course Issuer Bid.

Off-Balance Sheet Arrangements

As at October 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 $158.3 million at October 31, 2014 compared to $143.3 million at the end of the previous quarter and $143.0 million a year ago. The increase in total capital from the previous periods was due primarily to earnings in the Bank during the periods, the issue of Series 1 Preferred Shares during the current quarter and changes in amounts of prescribed regulatory adjustments. At October 31, 2014, the Bank exceeded the current regulatory capital requirements with a CET1 ratio of 11.25% compared to 11.93% at the end of the previous quarter and 11.29% a year ago. In addition, the Bank’s total capital ratio was 13.69% at October 31, 2014, compared to 13.27% at the end of the previous quarter and exceeding the capital requirements that became effective January 1, 2014. The Bank’s assets-to-capital multiple at October 31, 2014 was 9.00 compared to 9.34 at the end of the previous quarter and 9.33 a year ago.

Effective January 1, 2015 the Assets–to-Capital ratio will be replaced by a Leverage Ratio that is prescribed under the Basel III Accord. Based on preliminary estimates, the Bank has determined that it will meet the requirements of the new Leverage Ratio.

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

Interest Rate Risk Management

The Bank is subject to interest rate risk which is the risk that a movement in interest rates could negatively impact 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.

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 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 does not depend on funding to come from its subsidiary, the Bank, other than normal dividends that may be declared from time to time by the Bank. As a result, the funding for the obligations beyond the current year is expected to come primarily from cash and proceeds from the sales of securities and borrowings.

The unaudited Consolidated Statement of Cash Flows for the Corporation for the year ended October 31, 2014 shows cash provided by (used in) operations of ($34.9 million) compared to ($91.5 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 October 31, 2014.

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.

Summary of Quarterly Results

The financial results of the Corporation for each of the last eight quarters are summarized above. The results, particularly total interest income and net interest income, are comparable between quarters and over the past eight quarters reflect seasonality occurring primarily in residential construction lending. Total interest income decreased slightly in 2014 due primarily to a decrease in commercial mortgages as a result of several large loan repayments and loan sales that took place during the periods. An additional factor was a slower than normal construction season in 2014 caused by delays in funding new construction loans due to a longer than normal winter season.

Interest expense decreased in the 2014 as a result of a lower cost of deposits and the repayment of $7.0 million in subordinated notes.

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 control 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.

The provision for income taxes in each of the quarters reflects the effective statutory income tax rate applied to earnings (losses). The provision for income taxes in the fourth quarter of 2014 includes a positive income tax adjustment of $1.2 million relating to a change in the estimate of previously recognized deferred income tax asset of the Bank.

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 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.

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 included in loans on the 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.

The collective allowance is determined by separating loans into categories that are considered to have common risk elements and reviewing factors such as current portfolio credit quality trends, exposure at default, probability of default and loss given default rates and business and economic conditions. The collective 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 July, 2014, the IASB issued the final revised IFRS 9 standard which addresses classification, measurement and impairment of financial instruments and hedge accounting. IFRS 9 will be effective for the Corporation’s fiscal year beginning on November 1, 2018, although early adoption is permitted. IFRS 9 specifies that financial assets be classified into one of three categories: financial assets measured at amortized cost, financial assets measured at fair value through profit or loss or financial assets measured at fair value through other comprehensive loss. The standard also includes an expected credit loss model and a general hedging model. The Corporation has performed preliminary evaluations of the impact of IFRS 9, however the impact on the Corporation’s consolidated financial statements cannot be quantified at this time as it is dependent upon the nature of financial instruments held by the Corporation when IFRS 9 becomes effective.

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)

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

PWC CAPITAL INC.
Consolidated Statements of Loss
(Unaudited)

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

PWC CAPITAL INC.
Consolidated Statements of Comprehensive Loss
(Unaudited)

(1) Net of income tax benefit for three months of $nil (2013 – $1) and year of $2 (2013 – $8)
(2) Net of income tax benefit for three months of $nil (2013 – $nil) and year 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)

PWC CAPITAL INC.
Consolidated Statements of Changes in Equity - continued
(Unaudited)

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

PWC CAPITAL INC.
Consolidated Statements of Cash Flows
(Unaudited)

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

PWC CAPITAL INC.
Notes to Interim Consolidated Financial Statements
(Unaudited)

Three month period and year ended October 31, 2014 and 2013

1. Reporting entity:

PWC Capital Inc. (the “Corporation” or “PWC”), 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 months and year ended October 31, 2014 and 2013 were approved by the Audit Committee of the Board of Directors on December 3, 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 interim Consolidated Financial Statements are presented in Canadian dollars which is the Corporation’s functional currency. Except as indicated, the financial information presented has been rounded to the nearest thousand.

d) Use of estimates and judgments:

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

All available-for-sale securities are carried at fair value based on quoted market prices (Level 1) except for term deposits and Canadian municipal debt 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:

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

The Corporation holds security against the majority of its loans in the form of mortgage interests over property, other registered securities over assets, cash held for holdbacks on commercial and consumer loans and leases, and guarantees.

b) Allowance for credit losses:

The allowance for credit losses results from the following:

c) Impaired loans:

At October 31, 2014, there were no impaired loans (October 31, 2013 - $7,000). At October 31, 2014, loans, other than credit card receivables, past due but not impaired, totalled $nil (October 31, 2013 - $nil). At October 31, 2014, credit card receivables overdue by one day or more but not impaired totalled $2,999,000 (October 31, 2013 - $2,342,000).

6. Notes payable:

During the year ended October 31, 2014, as payment of the $2.8 million interest due on the Series C Notes, the Corporation distributed 458,000 common shares it held of the Bank. This resulted in the Corporation’s ownership interest in the common shares of the Bank reducing to 89% from 91%.

During the year ended October 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 the Consolidated Statements of Loss.

In addition, during the year ended October 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.

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.

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 $39,982,000 (October 31, 2013 - $40,832,000) and restricted cash of $3,367,000 (October 31, 2013 - $2,497,000) are pledged as collateral for these liabilities.

8. Preferred share liabilities:

At October 31, 2014, the Corporation has outstanding 1,909,458 (October 31, 2013 - 1,909,458) Class B Preferred Shares with a face value of $47.7 million (October 31, 2013 – $47.7 million) less unamortized issue costs of $1.8 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 $43.1 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 $43.1 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 of Loss calculated using an effective interest rate of 11.8%.

9. Share capital:

a) Share capital:

At October 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 months and year ended October 31, 2014, the Corporation recognized compensation expense of $15,000 (October 31, 2013 - $64,000) and $74,000 (October 31, 2013 - $92,000) 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 by the Corporation or the Bank during the current periods.

The Corporation recorded amounts in the Consolidated Statement of Loss relating to DSU’s for the three months and year ended October 31, 2014 of $7,000 recovery (October 31, 2013 - $23,000 recovery) and $172,000 recovery (October 31, 2013 - $116,000 expense) respectively. During the three months and year ended October 31, 2014, the Corporation did not issue any DSU’s (October 31, 2013 – 144,131). During the year the Corporation settled 282,567 DSU’s (October 31, 2013 – nil) to its retired directors with 51,222 common shares it held of the Bank. At October 31, 2014 there were 161,020 (October 31, 2013 – 443,587) DSU’s of the Corporation outstanding.

c) Share transactions of the Bank:

On October 30, 2014 the Bank issued 1,461,460 Series 1 preferred shares for proceeds of $13,647,000 net of issue costs of $1,325,000 and income taxes of $358,000. These shares are Basel III compliant, non-cumulative five year rate reset preferred shares which includes non-viability contingent capital provisions. As a result, these preferred shares qualify as Additional Tier 1 capital.

10. Other income:

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, a positive adjustment in the deferred tax asset relating to the recognition of previously unrecognized loss carryforwards of the Bank and certain items not being taxable or deductible for income tax purposes. The provision for income taxes consists of the following items:

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.

13. Related party transactions:

The Corporation’s and the Bank’s Board of Directors and the Corporation’s 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 October 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 months and year ended October 31, 2014 was $18,000 (October 31, 2013 - $18,000) and $72,000 (October 31, 2013 - $79,000) respectively. There were no provisions for credit losses related to loans issued to key management personnel for the three months and year ended October 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), preferred shares (Additional 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 October 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 2.5% 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.

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:

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:

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

Effective January 1, 2015, the assets-to-capital multiple will be replaced by a Leverage Ratio that is prescribed under the Basel III Accord. Based on preliminary estimates, the Bank has determined that it will meet the requirements of the new Leverage Ratio.

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.

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.

Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.4 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.

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