Pacific & Western Bank of Canada Announces Results for Its First Quarter Ended January 31, 2015

Pacific & Western Bank of Canada (TSX:PWB):

FIRST QUARTER HIGHLIGHTS (1)
(compared to the same periods in the prior year unless otherwise noted)

• Income before income taxes of the Bank for the current quarter increased over 30% to $2.3 million from $1.8 million for the previous quarter and from $1.4 million for the same period a year ago.
• Net income for the current quarter was $1.7 million or $0.07 per share (basic and diluted) compared to $2.5 million or $0.13 per share (basic and diluted) for the previous quarter and $975,000 or $0.05 per share (basic and diluted) for the same period a year ago. Net income for the previous quarter included a positive income tax adjustment of $1.2 million.
• Net interest margin or spread for the current quarter was 2.15% compared to 2.16% for the previous quarter and 1.95% for the same period a year ago.
• Total assets increased to $1.52 billion from $1.45 billion at the end of previous quarter and $1.44 billion a year ago. This increase was due to total loans which grew to $1.31 billion from $1.22 billion at the end of the previous quarter and $1.14 billion a year ago.
• Credit quality remains strong with no gross impaired loans at January 31, 2015 and October 31, 2014 compared to $6,000 a year ago.
• At January 31, 2015, the Bank’s Common Equity Tier 1 (CET1) ratio was 10.97% compared to 11.25% at the end of the previous quarter and 11.54% a year ago. The Bank’s total capital ratio was 13.23% compared to 13.69% at October 31, 2014 and 12.64% 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

I am pleased to report that our Bank is continuing to grow steadily in all key areas. This is having a substantial positive effect on its earnings. During the quarter, total assets increased by 5% from $1.45 billion to $1.52 billion and pre-tax income increased by more than 25% over the previous quarter’s figure and more than 60% over the same quarter last year. Recently we completed another public offering of 7% preference shares bringing the total new capital raised in the last few months to $31 million. This new capital has provided our bank with significant capacity for profitable growth.

Loans and leases sourced through our Bulk Purchase Program during the quarter totaled $120 million, an almost 60% increase over the previous quarter, increasing the balance of these assets by 20% to $472 million. We purchase loans and leases from an increasing number of financiers who operate throughout Canada in a variety of industries. Our program provides much needed financing for small businesses and consumers in niche markets. We have developed state of the art systems to allow us to process large numbers of these small ticket assets. This business is rapidly becoming a significant portion of the Bank’s total assets and revenue stream.

Our well established Commercial Real Estate financing business, which primarily serves Southwestern Ontario, also grew modestly during the quarter with total loans increasing over the previous quarter bringing the total loans in this asset class to $644 million.

The bank’s net interest margin (2.2%) remained virtually static over the previous quarter and with the 5% increase in total assets gave rise to a 5% increase in net interest income over the previous quarter; however, total revenue for the quarter remained the same as the previous quarter’s at $8.4 million as the previous quarter’s figure included a $400,000 gain on the sale of a loan, about equivalent to this quarter’s increase in net interest income. Non-interest expenses of $5.5 million were incurred during the quarter about the same as that incurred in the same quarter a year ago and a 10% decline over the previous quarter. Net income for the quarter was $1.7 million versus the previous quarter’s figure of $2.5 million; however, the previous quarter benefited from $1.2 million income tax adjustment.

After working for several years to develop new markets and business lines, our bank has now entered an asset expansion phase in which it will realize significant economies of scale that will no doubt produce considerable earnings growth.

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 first quarter of fiscal 2015, dated March 2, 2015, should be read in conjunction with the unaudited interim consolidated financial statements for the period ended January 31, 2015, 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 Bank’s MD&A and the audited consolidated financial statements for the year ended October 31, 2014, 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, 2014, 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) 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.

Basel III Common Equity Tier 1, Tier 1 and Total Capital Adequacy Ratios

Basel III Common Equity Tier 1, Tier 1 and Total Capital Adequacy Ratios are determined in accordance with guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) (see Note 12 to the interim financial statements for additional information).

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.

Overview

Pacific & Western Bank of Canada (the “Bank”), provides commercial lending services to selected niche markets and raises its deposits through a diversified deposit broker network across Canada and from chequing accounts of trustees in the Canadian Bankruptcy industry. The Bank has operated as a Schedule I bank under the Bank Act (Canada)since August 1, 2002. Prior to that, the Bank had operated as a provincially licensed trust company since 1979. On August 27, 2013, the Bank’s common shares commenced trading on the Toronto Stock Exchange. The Bank is the principal subsidiary of PWC Capital Inc. (the “Corporation” or “PWC”) whose securities are also listed and trade on the Toronto Stock Exchange.

Income before income taxes of the Bank for the current quarter increased to $2.3 million from $1.8 million for the previous quarter and from $1.4 million for the same period a year ago. Net income for the current quarter was $1.7 million or $0.07 per share (basic and diluted) compared to $2.5 million or $0.13 per share (basic and diluted) for the previous quarter and $975,000 or $0.05 per share (basic and diluted) for the same period a year ago. Net income for the previous quarter included a positive income tax adjustment of $1.2 million.

Income before income taxes increased from the previous quarter and from a year ago as a result of an increase in net interest income due to growth in total assets. In addition, income before income taxes for the same quarter a year ago included restructuring charges of $434,000 related to the early repayment of subordinated debt.

Net interest income and net interest margin for the three months ended January 31, 2015 were $8.0 million and 2.15% respectively compared to $7.6 million and 2.16% for the previous quarter and $6.9 million and 1.95% for the same period a year ago. The increases in net interest income from previous periods were due to increased interest income in the current period as a result of asset growth and lower interest expense as a result of a lower cost of deposits. Net interest margin increased from a year ago as a result of growth in lending assets and a more optimal asset mix.

At January 31, 2015, total assets of the Bank were $1.52 billion compared to $1.45 billion at the end of the previous quarter and $1.44 billion a year ago. Total loans at the end of the current quarter increased to $1.31 billion from $1.22 billion at the end of the previous quarter and $1.14 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, which are held primarily for liquidity purposes, totalled $184 million at January 31, 2015 compared to $194 million at the end of the previous quarter and $272 million a year ago. Cash and securities decreased from the previous quarter and from a year ago as a result of lower funding requirements for deposits maturing in the coming months.

Despite the growth in loans, the Bank has maintained its high credit quality and strong underwriting standards with $nil gross impaired loans at the end of the current quarter and at the end of the previous quarter and $6,000 a year ago.

At January 31, 2015, the Bank continued to exceed the Common Equity Tier 1 (CET1) capital requirement of 7.0% with a CET1 ratio of 10.97% compared to 11.25% at the end of the previous quarter and 11.54% a year ago. The decrease in the CET1 ratio from previous periods was due to the growth in lending assets. At January 31, 2015, the Bank’s Tier 1 capital ratio was 12.10% compared to 12.43% at the end of the previous quarter and 11.54% a year ago. At January 31, 2015, its total capital ratio was 13.23% compared to 13.69% at the end of the previous quarter and 12.64% 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.

Total Revenue

Total revenue of the Bank consists of net interest income and other income. For the three months ended January 31, 2015, total revenue of the Bank was $8.4 million compared to $8.4 million for the previous quarter and $7.3 million for the same period last year. Total revenue in the previous quarter included a gain of $400,000 from the sale of a loan. There were no loan sales in the current quarter. Total revenue increased from a year ago as a result of an increase in net interest income in the current period.

Net Interest Income and Net Interest Margin

Net interest income of the Bank for the three months ended January 31, 2015 increased to $8.0 million from $7.6 million for the previous quarter and $6.9 million for the same period a year ago. Net interest margin for the three months ended January 31, 2015 was 2.15% compared to 2.16% for the previous quarter and increased from 1.95% for the same period a year ago. The increase from a year ago was due to a more optimal asset mix, growth in total assets and lower interest expense as a result of a lower cost of deposits.

Other Income

Other income of the Bank for the three months ended January 31, 2015, totalled $338,000 compared to $337,000 for the same period a year ago and $791,000 for the previous quarter. The change from the previous quarter was due to a gain of $400,000 from the sale of a loan. Other income in the current and previous periods consists primarily of fees from credit cards and gains from loan sales from time to time.

Non-Interest Expenses

Non-interest expenses, excluding restructuring charges, totalled $5.5 million for the current quarter compared to $6.2 million for the previous quarter and $5.5 million for the same period a year ago. Non-interest expenses in the previous quarter were higher due primarily to timing of expenses. As noted previously, restructuring charges in the same quarter a year ago relate to the repayment in December 2013 of subordinated debt of the Bank.

Income Taxes

The Bank’s statutory federal and provincial income tax rate is approximately 27%, similar to that of the previous periods. The effective rate is impacted by certain items not being taxable or deductible for income tax purposes as well as a positive adjustment in the previous quarter in the deferred tax asset relating to the recognition of previously unrecognized loss carryforwards discussed below.

For the current quarter, the provision (recovery) for income taxes was $651,000 compared to ($719,000) for the previous quarter and $380,000 for the same period a year ago. The recovery for income taxes in the previous quarter includes an increase to the deferred tax asset of $1.2 million relating to the recognition of previously unrecognized loss carryforwards as the result of reassessing the ability to generate future taxable income.

At January 31, 2015, the Bank has a deferred income tax asset of $7.9 million compared to $8.5 million at the end of the previous quarter and $8.3 million a year ago with the decrease a result of the drawdown of loss carryforwards due to the positive operating results over the past year, offset by the recognition of previously unrecognized loss carryforwards discussed previously. The deferred income tax asset is primarily a result of income tax losses totalling approximately $34.0 million from previous periods. The income tax loss carry-forwards in the Bank are not scheduled to begin expiring until 2027 if unutilized.

Comprehensive Income

Comprehensive income is comprised of net income for the period and other comprehensive income which consists of unrealized gains and losses on available-for-sale securities. Comprehensive income for the three months ended January 31, 2015 was $1.7 million compared to $2.5 million for the previous quarter and $1.0 million a year ago. Due to the current composition of the Bank’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 does not differ materially from net income.

Consolidated Balance Sheet

Total assets of the Bank at January 31, 2015, were $1.52 billion compared to $1.45 billion at the end of the previous quarter and $1.44 billion a year ago with the increase from the previous periods due primarily to an increase in total loans. Loans increased during the period to $1.31 billion from $1.22 billion at the end of the previous quarter and from $1.14 billion a year ago.

Cash and Securities

Cash and cash equivalents consist of deposits with Canadian financial institutions and government treasury bills with less than ninety days to maturity from the date of acquisition. Securities in the Bank’s treasury portfolio typically consist of Government of Canada and Canadian provincial and municipal bonds, term deposits and debt of other financial institutions. Cash and securities, which are held primarily for liquidity purposes, totalled $184 million or 12% of total assets compared to $194 million or 13% of total assets at the end of the previous quarter and $272 million or 19% of total assets a year ago. The level of cash and securities decreased from the previous quarter and a year ago as a result of lower funding requirements for deposits maturing in the coming months. The Bank expects to maintain the current level of cash and securities as a percentage of total assets in the coming months.

At January 31, 2015, unrealized gains in the Bank’s available-for-sale securities portfolio were $65,000 compared to unrealized gains of $26,000 at the end of the previous quarter and $92,000 a year ago. In addition, there was an unrealized loss of $115,000 at January 31, 2015 relating to a security the Bank classifies as held-to-maturity, compared to an unrealized loss of $129,000 at the end of the previous quarter. 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 are required to fully comply with the LCR in January 2015 with no phase-in.

Loans

At January 31, 2015 loans increased to $1.31 billion from $1.22 billion at the end of the previous quarter and from $1.14 billion a year ago. The increase from the previous quarter and from the previous year was due primarily to growth in commercial and consumer loan and lease receivables sourced through the bulk purchase program.

At January 31, 2015, the balances of individual loan categories compared to the end of the previous quarter and a year ago reflects a change in lending strategy where the Bank has reduced its focus on government financings due to market conditions, and emphasized commercial and consumer lending opportunities, particularly those sourced through its bulk purchase program. At January 31, 2015, the Bank experienced a decrease in commercial mortgages from a year ago which was due primarily to the timing of loan transactions.

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 $472 million at January 31, 2015 compared to $394 million at the end of the previous quarter, an increase of $78 million or 20%, and almost doubling from $237 million a year ago. The bulk purchase program, which consists of individual loan and lease receivables continues to be a key initiative for the Bank and the primary driver for growth of the Bank’s lending portfolio in the coming years. 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 Bank retains.

Overall, new lending for the quarter totalled $218 million compared to $189 million for the previous quarter and $139 million a year ago. Loan repayments for the quarter totalled $139 million compared to $144 million for the previous quarter and $162 million a year ago. At January 31, 2015, loan commitments, excluding those related to credit cards, totalled $224 million compared to $195 million at the end of the previous quarter and $127 million a year ago.

Residential mortgage exposures

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 Bank’s exposure to residential mortgages is not significant and at January 31, 2015 totalled $887,000 compared to $1.1 million at the end of the previous quarter and $1.2 million a year ago. The Bank did not have any HELOC’s outstanding at January 31, 2015 or a year ago.

Credit Quality

Despite the strong loan growth during the quarter, the Bank has maintained its high credit quality and strong underwriting standards and traditionally requires minimal provisions for credit losses. Gross impaired loans at January 31, 2015, were $nil, unchanged from the end of the previous quarter and compared to $6,000 a year ago. The provision (recovery) for credit losses in the current quarter was $502,000 compared to $400,000 for the previous quarter and ($51,000) a year ago. The provision for credit losses increased from previous periods due to an increase in the collective allowance as a result of the increase in loans, and a higher level of write-offs relating to the credit card program as the portfolio matures.

At January 31, 2015, the Bank’s collective allowance totalled $3.1 million compared to $2.9 million at the end of previous quarter and $2.9 million a year ago with the increase due primarily to growth in loans. Included in the Bank’s collective allowance at January 31, 2015 was $1.0 million relating to credit card receivables, compared to $962,000 at the end of the previous quarter and $858,000 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 Bank is of the view that any credit losses which exist but cannot be specifically identified at this time are adequately provided for. The Bank’s loan exposure to the province of Alberta and to the oil and gas industry is not significant and the Bank is not directly impacted by the recent decline in world oil prices.

Other Assets

Other assets totalled $30.0 million at January 31, 2015, compared to $27.7 million at the end of the previous quarter and $29.4 million a year ago. Included in other assets is the deferred income tax asset of $7.9 million compared to $8.5 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 $16.3 million compared to $14.1 million at the end of the previous quarter and $16.4 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 January 31, 2015, totalled $1.25 billion compared to $1.19 billion at the end of the previous quarter and $1.22 billion a year ago, and consist primarily of guaranteed investment certificates. Of the total amount of deposits outstanding, $18.5 million or approximately 1.5% of total deposits at the end of the current quarter were in the form of demand savings accounts compared to $19.3 million or 1.6% of total deposits at the end of the previous quarter and $21.6 million or approximately 1.8% of total deposits a year ago. In addition, the Bank 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 Bank identified another source, that being chequing accounts of trustees in the Canadian bankruptcy industry. The Bank developed banking software to enable this market to efficiently administer its chequing accounts. These services are being offered to trustees in the bankruptcy industry across Canada and at January 31, 2015, outstanding balances from this source totalled $83.8 million unchanged from the end of the previous quarter and compared to $51.6 million a year ago.

Other liabilities consist of accounts payable, accruals, holdbacks payable related to the bulk purchase program and securities sold under repurchase agreements. At January 31, 2015, other liabilities totalled $60.4 million compared to $42.2 million at the end of the previous quarter and $24.5 million a year ago with the increase from the previous periods due to the amount outstanding at the end of quarter relating to securities sold under repurchase agreements as noted below, and increased holdbacks associated with loan and lease receivables sourced through the bulk purchase program which have shown significant growth over the past year.

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. At January 31, 2015, the Bank had $15.0 million outstanding relating to securities sold under repurchase agreements compared to $nil at the end of the previous quarter and a year ago.

Securitization Liabilities

The Bank has securitization liabilities outstanding which relate to amounts payable to counterparties for cash received upon initiation of securitization transactions. At January 31, 2015, securitization liabilities totalled $43.6 million compared to $43.5 million at the end of the previous quarter and $43.5 million a year ago. The Bank 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 $39.8 million and restricted cash totalling $3.6 million are pledged as collateral for these liabilities.

Subordinated Notes Payable

Subordinated notes payable, net of issue costs, totalled $13.9 million at January 31, 2015 compared to $13.9 at the end of the previous quarter and $13.8 million a year ago. Excluding issue costs, subordinated notes payable consist of $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.

Shareholders’ Equity

At January 31, 2015, shareholders’ equity was $154.0 million compared to $152.5 million at the end of the previous quarter and $134.2 million a year ago. The increase from the previous quarter and from a year ago was due to earnings over the periods and proceeds received in the previous quarter from the issue of Series 1 Preferred Shares as discussed below.

Common shares outstanding at January 31, 2015 totalled 19,437,171, unchanged from the previous quarter and a year ago. Common share options totalled 40,000 at January 31, 2015, also unchanged from the previous quarter and a year ago.

On October 30, 2014, the Bank completed an offering of 1,461,460 Non-Cumulative 5-Year Rate Reset Series 1 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $13.6 million. For the initial period ending October 31, 2019, these Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors of the Bank. These preferred shares qualify as Tier 1 capital and fund continued growth for the Bank. See Note 8 (b) to the unaudited interim consolidated financial statements for additional information.

The Bank’s book value per common share at January 31, 2015 was $7.22 compared to $7.14 at the end of the previous quarter and $6.90 a year ago.

Updated Share Information

On February 26, 2015, the Bank issued 1,681,320 Non-Cumulative 6-Year Rate Reset Series 3 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $15.7 million. For the initial 6-year period ending April 30, 2021, these Series 3 Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors of the Bank. These preferred shares qualify as Additional Tier 1 Capital and will fund continued growth for the Bank.

As at March 2, 2015, there were no changes since January 31, 2015 in the number of outstanding common shares, Series 1 Preferred Shares and common share options.

Off-Balance Sheet Arrangements

As at January 31, 2015, the Bank 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 10 to the unaudited interim consolidated financial statements for more information.

Related Party Transactions

During the three months ended January 31, 2015, the Bank incurred management and other fees totalling $150,000 (January 31, 2014 - $300,000) to PWC and a subsidiary of PWC.

The Bank’s Board of Directors and Senior Executive Officers represent key management personnel. Under the IFRS definition, the Board of Directors of PWC is also considered key management personnel of the Bank. See Note 11 to the unaudited interim consolidated financial statements for additional information on related party transactions and balances.

Risk Management

The risk management policies and procedures of the Bank are provided in its annual MD&A for the year ended October 31, 2014, and are found on pages 37 to 43 of the Bank’s 2014 Annual Report.

Capital Management and Capital Resources

The Basel Committee on Banking Supervision has published 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 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.

Under the Basel III standards, total capital of the Bank was $159.5 million at January 31, 2015 compared to $158.3 million at the end of the previous quarter and $137.6 million a year ago. The increase in total capital from the previous periods was due primarily to earnings in the Bank during the periods and the issue of Series 1 Preferred Shares during the previous quarter. At January 31, 2015, the Bank exceeded the current regulatory capital requirements with a CET1 ratio of 10.97% compared to 11.25% at the end of the previous quarter and 11.54% a year ago. In addition, the Bank’s total capital ratio was 13.23% at January 31, 2015, compared to 13.69% at the end of the previous quarter and 12.64% a year ago.

At January 31, 2015, the Bank’s leverage ratio was 8.97%. Effective January 1, 2015 the previous Assets–to-Capital ratio was replaced by the Leverage Ratio which is prescribed under the Basel III Accord.

See Note 12 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 Bank’s sensitivity to changes in interest rates and its duration difference between assets and liabilities at January 31, 2015 has not changed significantly since October 31, 2014. As indicated by the above, at January 31, 2015, the impact on net interest income during a 12 month period of a 100 basis point increase would be approximately $3.2 million and the impact on net interest income of a 100 basis point decrease would be approximately ($3.2 million). Similarly at January 31, 2015, the impact on equity during a 60 month period of a 100 basis point increase would be approximately ($764,000) and the impact on equity of a 100 basis point decrease would be approximately $1.2 million. As indicated by the above, the duration difference between assets and liabilities shows that the Bank’s assets and liabilities would reprice at approximately the same time in the event of a change in interest rates.

Liquidity and Liquidity Management

The unaudited Consolidated Statement of Cash Flows for the Bank for the three months ended January 31, 2015 shows cash provided by (used in) operations of ($24.6 million) compared to $62.4 million for the same period last year. The Bank’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 Bank 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 Bank 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.

The Bank has established policies to ensure that its cash outflows and inflows are closely matched and that its sources of deposits are diversified between funding sources and over a wide geographic area. The Bank maintains a conservative investment profile by ensuring:

• all Bank investments are high quality and include government debt securities, bankers acceptances and Canadian bank debt;
• specific investment criteria and procedures are in place to manage the Bank's securities portfolio;
• regular review, monitoring and approval of the Bank's investment policies by the Risk Oversight Committee of the Board of Directors; and
• quarterly reporting to the Risk Oversight Committee on the composition of the Bank's securities portfolio.

Liquidity management is further supported by processes, which include but are not limited to:

• monitoring of liquidity levels;
• monitoring of liquidity trends and key risk indicators;
• scenario stress testing;
• monitoring the credit profile of the liquidity portfolio; and
• monitoring deposit concentration.

In order to manage its liquidity needs, the Bank has a liquidity risk management program that is comprised specifically of the following policies and procedures:

• Holding sufficient liquid assets which results in positive cumulative cash flow for a period of 31 to 60 days.
• Holding of high quality liquid securities at levels that represent no less than 8% of total assets. High quality liquid securities include federal, provincial and municipal debt as well as widely distributed debt of financial institutions.
• Maintaining liquid assets at no less than 75% of obligations payable within 90 days.
• On a weekly basis, monitoring its cash flow requirements using a liquidity forecasting template under a highly stressed scenario.
• On a monthly basis, testing liquidity using three specific disruption scenarios; specifically, industry specific disruption scenario, company specific liquidity disruption scenario and a systematic disruption scenario.
• Managing liquidity in accordance with guidelines specified by OSFI.

Contractual Obligations

Contractual obligations of the Bank as disclosed in its MD&A and audited consolidated financial statements for the year ended October 31, 2014, have not changed significantly as at January 31, 2015.

Capital Assets

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

Summary of Quarterly Results

The financial results of the Bank 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 increased in the first quarter of 2015 as a result of growth in total assets, specifically loan and lease receivables sourced through the bulk purchase program.

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. 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 Bank’s 2014 Audited Consolidated Financial Statements. There have been no material changes in accounting policies since October 31, 2014.

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 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank’s consolidated financial statements to the extent that it is probable that the Bank 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. The realization of the deferred income tax asset is dependent upon the Bank being able to generate taxable income in future years sufficient to offset the income tax losses.

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 Bank’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 income. The standard also includes an expected credit loss model and a general hedging model. The Bank has performed preliminary evaluations of the impact of IFRS 9, however the impact on the Bank’s consolidated financial statements can not be quantified at this time as it is dependent upon the nature of financial instruments held by the Bank when IFRS 9 becomes effective.

Controls and Procedures

During the most recent interim period, there have been no changes in the Bank’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 Bank’s internal control over financial reporting.

At January 31, 2015, an evaluation was carried out by management of the effectiveness of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and financial statement compliance with International Financial Reporting Standards. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer will file a certificate that the design and operating effectiveness of internal control over financial reporting were effective. These evaluations were conducted in accordance with the standards of the 2013 Internal Control - Integrated Framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a recognized control model, and the requirements of National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators.

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; commodity prices; 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 future results, please see pages 44 to 45 of our 2014 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 Bank or on its behalf.

PACIFIC & WESTERN BANK OF CANADA
Consolidated Balance Sheets
(Unaudited)

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

PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Income
(Unaudited)

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

PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Comprehensive Income
(Unaudited)

(1) Net of income tax expense for the three months of $10 (2014 – $16)

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

PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)

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

PACIFIC & WESTERN BANK OF CANADA
Consolidated Statements of Cash Flows
(Unaudited)

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

PACIFIC & WESTERN BANK OF CANADA
Notes to Interim Consolidated Financial Statements
(Unaudited)

Three month periods ended January 31, 2015 and 2014

1. Reporting entity:

Pacific & Western Bank of Canada (the “Bank”) 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 and preferred shares trade on the Toronto Stock Exchange, is involved in the business of providing commercial lending services to selected niche markets.

The Bank is incorporated and domiciled in Canada, and maintains its registered office at Suite 2002, 140 Fullarton Street, London, Ontario, Canada, N6A 5P2. It is the principal subsidiary of PWC Capital Inc. (“PWC”) whose shares also trade on the Toronto Stock Exchange. At January 31, 2015 PWC owned approximately 86% of the common shares of the Bank.

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 Bank’s audited Consolidated Financial Statements for the year ended October 31, 2014.

The interim Consolidated Financial Statements for the three months ended January 31, 2015 and 2014 were approved by the Audit Committee of the Board of Directors on March 2, 2015.

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 Bank’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 period. Areas where significant judgment was applied or estimates were developed include the calculation of the allowance for credit losses, assessments of 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 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 Bank in these interim Consolidated Financial Statements are the same as those applied by the Bank as at and for the year ended October 31, 2014 and are detailed in Note 3 of the Bank’s 2014 Audited Consolidated Financial Statements. There have been no material changes in accounting policies.

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, 2014 consolidated financial statements for more information.

5. Loans:

a) Portfolio analysis:

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

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

b) Allowance for credit losses:

The allowance for credit losses results from the following:

c) Impaired loans:

At January 31, 2015, there were no impaired loans (October 31, 2014 - $nil). At January 31, 2015, loans, other than credit card receivables, past due but not impaired totalled $nil (October 31, 2014 - $nil). At January 31, 2015, credit card receivables overdue by one day or more but not impaired totalled $2,839,000 (October 31, 2014 - $2,999,000).

6. Subordinated notes payable:

During the three months ended January 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 Income. There were no charges during the three months ended January 31, 2015.

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 $39,766,000 (October 31, 2014 - $39,982,000) and restricted cash of $3,591,000 (October 31, 2014 - $3,367,000) are pledged as collateral for these liabilities.

8. Share capital:

a) Common shares and contributed surplus:

At January 31, 2015, there were 19,437,171 (October 31, 2014 – 19,437,171) common shares outstanding.

During the three months ended January 31, 2015, the Bank recognized compensation expense of $6,000 (January 31, 2014 - $18,000) relating to the estimated fair value of stock options granted in prior periods. No stock options were granted during the current period.

b) Preferred shares:

On October 30, 2014 the Bank issued 1,461,460 Non-Cumulative 5-Year Rate Reset Series 1 Non-Viability Contingent Capital (NVCC) Preferred Shares for proceeds of $13,647,000. Issue costs of $1,325,000, net of income taxes of $358,000, were allocated directly to share capital. These shares are Basel III compliant, non-cumulative five year rate reset preferred shares which includes non-viability contingent capital provisions. At January 31, 2015, there were 1,461,460 (October 31, 2014 – 1,461,460) Series 1 preferred shares outstanding (see Note 15).

9. Other income:

10. Commitments and contingencies:

The amount of credit related commitments represents the maximum amount of additional credit that the Bank could be obligated to extend. Under certain circumstances, the Bank 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.

11. Related party transactions:

During the three months ended January 31, 2015, the Bank incurred management and other fees totalling $150,000 (January 31, 2014 - $300,000) to PWC and a subsidiary of PWC.

The Bank’s Board of Directors and Senior Executive Officers represent key management personnel. Under the IFRS definition, the Board of Directors of PWC is also considered key management personnel of the Bank.

The Bank issues mortgages and personal loans to employees and key management personnel. At January 31, 2015, amounts due from key management personnel totalled $2,332,000 (October 31, 2014 - $2,298,000) 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 ended January 31, 2015 was $20,000 (January 31, 2014 - $22,000). There were no provisions for credit losses related to loans issued to key management personnel for the three months ended January 31, 2015 and 2014.

12. Capital management:

a) Overview:

The Bank’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 Bank 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 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 qualifying amount 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 leverage ratio and the risk-based capital ratios.

During the period ended January 31, 2015, there were no material changes in the Bank’s management of capital.

b) Risk-Based Capital Ratios:

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

OSFI requires that all Canadian banks must comply with the Basel III standards on an “all-in” basis that became effective January 1, 2013 for purposes of determining its risk-based capital ratios. 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.

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) Leverage Ratio:

On January 1, 2015, the assets-to-capital multiple was replaced by the leverage ratio that is prescribed under the Basel III Accord. The leverage ratio is a supplementary measure to the risk-based capital requirements and is defined as the ratio of Tier 1 capital to its exposure measure. The Bank’s leverage ratio is calculated as follows:

The Bank was in compliance with the leverage ratio prescribed by OSFI throughout the period presented.

13. 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.

14. 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 Bank’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.

Changes in interest rates are the main cause of changes in the fair value of the Bank’s financial instruments. The carrying value of loans, deposits and subordinated notes payable are not adjusted to reflect increases or decreases in fair value due to interest rate changes as the Bank’s intention is to realize their value over time by holding them to maturity. See Note 23 to the October 31, 2014 consolidated financial statements for more information on fair values.

15. Subsequent Event:

On February 26, 2015, the Bank issued 1,681,320 Non-Cumulative 6-Year Rate Reset Series 3 Non-Viability Contingent Capital (NVCC) Preferred Shares for net proceeds of $15.7 million. For the initial 6-year period ending April 30, 2021, these Series 3 Preferred Shares yield 7% annually, payable quarterly as and when declared by the Board of Directors of the Bank. These preferred shares qualify as Additional Tier 1 Capital and will fund continued growth for the Bank.

Pacific & Western Bank of Canada (PWBank), a Schedule I chartered bank, is a branchless financial institution with over $1.5 billion in assets. PWBank specializes in providing commercial lending services to selected niche markets and receives its deposits through a diversified deposit broker network across Canada.

Pacific & Western Bank of Canada shares trade on the TSX under the symbol PWB.

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

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

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